Vestin Realty Mortgage II (VRTB) 10-Q 2012 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, 2012

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.)

8880 W. SUNSET ROAD, SUITE 200, LAS VEGAS, NEVADA 89148

(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 (Section 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 [   ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

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 14, 2012, there were 12,084,179 shares of the Company’s Common Stock outstanding.

TABLE OF CONTENTS

		Page
Part I	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	1
	Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011	1
	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011	2
	Consolidated Statements of Other Comprehensive Income (Loss) (unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011	3
	Consolidated Statement of Equity (unaudited) for the Nine Months Ended September 30, 2012	4
	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2012 and 2011	5
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 4.	Controls and Procedures	43
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 6.	Exhibits	44
	SIGNATURES	45
	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, 2012			December 31, 2011
	(Unaudited)
Assets
Cash and cash equivalents	$	2,109,000		$	9,226,000
Investment in marketable securities - related party		732,000			592,000
Interest and other receivables, net of allowance of $3,016,000 at September 30, 2012 and $5,468,000 at December 31, 2011		22,000			14,000
Notes receivable, net of allowance of $20,807,000 at September 30, 2012 and $17,250,000 at December 31, 2011		--			--
Real estate held for sale		9,159,000			10,767,000
Investment in real estate loans, net of allowance for loan losses of $3,573,000 at September 30, 2012 and $26,247,000 at December 31, 2011		27,140,000			31,777,000
Due from related parties		188,000			110,000
Investment in MVP Realty Advisors, LLC		534,000			--
Assets held for sale		57,661,000			--
Other assets		214,000			149,000
Total assets	$	97,759,000		$	52,635,000
LIABILITIES AND EQUITY
Liabilities
Accounts payable and accrued liabilities	$	724,000		$	753,000
Note payable		74,000			25,000
Liabilities related to assets held for sale		46,650,000			--
Deferred gain on sale of Hawaii Funeral Services, LLC		30,000			102,000
Total liabilities		47,478,000			880,000
Commitments and contingencies
Stockholders’ equity
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued		--			--
Treasury stock, at cost, no shares at September 30, 2012 and 189,378 shares at December 31, 2011		--			(190,000	)
Common stock, $0.0001 par value; 100,000,000 shares authorized; 12,056,000 shares issued and outstanding at September 30, 2012 and 12,720,783 shares issued and 12,531,405 outstanding at December 31, 2011		1,000			1,000
Additional paid-in capital		270,150,000			271,005,000
Accumulated deficit		(221,082,000	)		(219,070,000	)
Accumulated other comprehensive income		149,000			9,000
Total stockholders’ equity before non-controlling interest – related party		49,218,000			51,755,000
Non-controlling interest – related party		1,063,000			--
Total equity		50,281,000			51,755,000
Total liabilities and stockholders’ equity	$	97,759,000		$	52,635,000

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

-1-

VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
	For The Three Months Ended						For The Nine Months Ended
	9/30/2012			9/30/2011			9/30/2012			9/30/2011
Revenues
Interest income from investment in real estate loans	$	427,000		$	259,000		$	1,008,000		$	1,016,000
Gain related to pay off of real estate loan, including recovery of allowance for loan loss		31,000			100,000			1,268,000			133,000
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable		79,000			--			226,000			--
Other		--			42,000			--			100,000
Total revenues		537,000			401,000			2,502,000			1,249,000
Operating expenses
Management fees - related party		242,000			274,000			791,000			823,000
Provision for loan loss		50,000			955,000			815,000			955,000
Interest expense		2,000			60,000			2,000			178,000
Professional fees		166,000			247,000			753,000			927,000
Consulting		49,000			63,000			161,000			134,000
Insurance		73,000			73,000			219,000			230,000
Other		26,000			92,000			143,000			225,000
Total operating expenses		608,000			1,764,000			2,884,000			3,472,000
Loss from operations		(71,000	)		(1,363,000	)		(382,000	)		(2,223,000	)
Non-operating income (loss)
Interest income from banking institutions		--			1,000			1,000			6,000
Recovery from settlement with loan guarantor		203,000			--			746,000			--
Settlement income		90,000			--			90,000			--
Gain on sale of marketable securities		--			--			15,000			--
Discounted professional fees		--			--			--			1,620,000
Settlement expense		--			--			(66,000	)		--
Total non-operating income, net		293,000			1,000			786,000			1,626,000
Provision for income taxes		--			--			--			--
Income (loss) from continuing operations		222,000			(1,362,000	)		404,000			(597,000	)
Discontinued operations, net of income taxes
Net gain on sale of real estate held for sale		--			64,000			12,000			74,000
Expenses related to real estate held for sale		(252,000	)		(258,000	)		(1,094,000	)		(657,000	)
Write-downs on real estate held for sale		--			(708,000	)		(1,420,000	)		(1,321,000	)
Income from asset held for sale, net of income taxes		95,000			--			95,000			--
Income from Hawaiian cemeteries and mortuaries, net of income taxes		--			862,000			--			1,739,000
Total loss from discontinued operations		(157,000	)		(40,000	)		(2,407,000	)		(165,000	)
Net income (loss)		65,000			(1,402,000	)		(2,003,000	)		(762,000	)
Allocation to noncontrolling interest – related party		9,000			328,000			9,000			661,000
Net income (loss) attributable to common stockholders	$	56,000		$	(1,730,000	)	$	(2,012,000	)	$	(1,423,000	)
Basic and diluted income (loss) per weighted average common share
Continuing operations		0.02			(0.11	)		0.03			(0.05	)
Discontinued operations		(0.01	)		(0.02	)		(0.20	)		(0.06	)
Total basic and diluted income (loss) per weighted
average common share	$	0.01		$	(0.13	)	$	(0.17	)	$	(0.11	)
Dividends declared per common share	$	--		$	--		$	--		$	--
Weighted average common shares outstanding		12,273,764			12,969,862			12,444,897			13,082,341

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

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VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(UNAUDITED)
	For The Three Months Ended						For The Nine Months Ended
	9/30/2012			9/30/2011			9/30/2012			9/30/2011
Net income (loss)	$	65,000		$	(1,402,000	)	$	(2,003,000	)	$	(762,000	)
Unrealized holding gain (loss) on available-for-sale securities – related party		231,000			(60,000	)		140,000			68,000
Unrealized loss on marketable securities on assets held for sale		--			(4,171,000	)		--			(3,113,000	)
Comprehensive income (loss)		296,000			(5,633,000	)		(1,863,000	)		(3,807,000	)
Net (income) attributable to noncontrolling interest		(9,000	)		(328,000	)		(9,000	)		(661,000	)
Comprehensive income (loss) attributable to Vestin Realty Mortgage II, Inc.	$	287,000		$	(5,961,000	)	$	(1,872,000	)	$	(4,468,000	)

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

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VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENT OF EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
(UNAUDITED)
	Treasury Stock			Common Stock
	Shares		Amount	Shares		Amount		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)	Non-Controlling Interest – Related Party			Total
Stockholders' Equity at December 31, 2011	189,378	$	(190,000)	12,531,405	$	1,000	$	271,005,000	$	(219,070,000)	$	9,000		--	$	51,755,000
Net income (loss)										(2,012,000)			9,000			(2,003,000)
Unrealized Loss on Marketable Securities – Related Party												140,000				140,000
Comprehensive Loss																(1,863,000)
Non-controlling interest – related party													1,054,000			1,054,000
Purchase treasury stock	475,405		(665,000)	(475,405	)											(665,000)
Retire treasury stock	(664,783)		855,000					(855,000)								--
Stockholders' Equity at September 30, 2012 (Unaudited)	--	$	--	12,056,000	$	1,000	$	270,150,000	$	(221,082,000)	$	149,000	1,063,000		$	50,281,000

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

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VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
	For the Nine Months Ended
	09/30/2012			09/30/2011
Cash flows from operating activities:
Net loss	$	(2,003,000	)	$	(762,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Recovery of allowance for doubtful notes receivable		(226,000	)		(91,000	)
Gain related to recovery of allowance for loan loss		(1,268,000	)		(133,000	)
Gain related to recovery from settlement with loan guarantor		(746,000	)
Provision for loan loss		815,000			956,000
Gain on sale of real estate held for sale		(12,000	)		--
Gain on proceeds from settlement		(90,000	)		--
Gain on sale of marketable securities		(15,000	)		--
Amortized interest income		--			(26,000	)
Provision for doubtful accounts related to receivable included in other expense		--			1,117,000
Write-downs on real estate held for sale		1,420,000			1,321,000
Change in operating assets and liabilities:
Interest and other receivables		(9,000	)		988,000
Assets held for sale, net of liabilities		(95,000	)		(580,000	)
Due to/from related parties		(78,000	)		668,000
Deferred gain on sale of Hawaii Funeral Services, LLC		(72,000	)		--
Other assets		154,000			186,000
Accounts payable and accrued liabilities		(27,000	)		(3,487,000	)
Net cash provided by (used in) operating activities		(2,252,000	)		157,000
Cash flows from investing activities:
Investments in real estate loans		(22,886,000	)		(6,895,000	)
Proceeds from loan payoffs		15,159,000			2,071,000
Purchase of investments in real estate loans from
VRM I		(300,000	)		--
related parties		(70,000	)		--
Sale of investments in real estate loans to
VRM I		1,000,000			--
Related parties		--			300,000
Third parties		3,193,000			1,905,000
Proceeds from notes receivable		226,000			91,000
Proceeds from settlement from loan guarantor		746,000			--
Proceeds from settlement		90,000			--
Investment in MVP Realty Advisors, LLC		(534,000	)		--
Proceeds from sale of real estate held for sale		207,000			160,000
Investment in asset held for sale		(900,000	)		--
Proceeds on nonrefundable extension fees on real estate held for sale		24,000			--
Purchase of marketable securities		(1,011,000	)		--
Purchase of marketable securities – related party		--			(6,000	)
Sale of marketable securities		1,026,000			--
Net cash used in investing activities		(4,030,000	)		(2,374,000	)
Cash flows from financing activities:
Principal payments on notes payable		(170,000	)		(149,000	)
Cash used for pay down on secured borrowings		--			(1,088,000	)
Purchase of treasury stock		(665,000	)		(638,000	)
Distributions to holder of noncontrolling interest – related party		--			(387,000	)
Net cash used in financing activities		(835,000	)		(2,262,000	)
NET CHANGE IN CASH		(7,117,000	)		(4,479,000	)
Cash and cash equivalents, beginning of period		9,226,000			7,884,000
Cash and cash equivalents, end of period	$	2,109,000		$	3,405,000

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

-5-

VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
	For the Nine Months Ended
	09/30/2012			09/30/2011
Supplemental disclosures of cash flows information:
Interest paid	$	2,000		$	178,000
Non-cash investing and financing activities:
Transfer of fully allowed interest receivable and related allowance to real estate held for sale	$	2,334,000		$	--
Retirement of treasury stock	$	(855,000	)	$	--
Transfer of fully allowed interest receivable to notes receivable	$	907,000		$	--
Adjustment to accrued interest and related allowance	$	(789,000	)	$	--
Investments in real estate loans and related allowances transferred to note receivable	$	6,642,000		$	--
Investment in real estate loans by purchase of secured borrowings	$	--		$	1,320,000
Real estate held for sale acquired through foreclosure, net of prior allowance	$	32,000		$	160,000
Note payable relating to prepaid D & O insurance	$	219,000		$	219,000
Unrealized gain on marketable securities of assets held for sale	$	--		$	(3,113,000	)
Other real estate owned acquired through deed in lieu, net of prior allowance	$	8,963,000		$	--
Unrealized gain (loss) on marketable securities - related party	$	(140,000	)	$	68,000

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

-6-

VESTIN REALTY MORTGAGE II, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

NOTE A — ORGANIZATION

Vestin Realty Mortgage II, Inc. (“VRM II”) formerly Vestin Fund II, LLC (“Fund II”) invests 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 (“Management Agreement”) as “Mortgage Assets”).  In addition we may invest in, acquire, manage or sell real property or acquire entities involved in the ownership or management of real property.  We commenced operations in June 2001.  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 operated as a real estate investment trust (“REIT”) through December 31, 2011.  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 were required to have a December 31 fiscal year end.  We announced on March 28, 2012 that we terminated our election to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), effective for the tax year ending December 31, 2012.  Under the Code, we will not be able to make a new election to be taxed as a REIT during the four years following December 31, 2012.  Pursuant to our charter, upon the determination by the Board of Directors that we should no longer qualify as a REIT, the restrictions on transfer and ownership of shares set forth in Article VII of our charter ceased to be in effect and, accordingly, shares of the Company’s stock are no longer be subject to such restrictions.

Vestin Group, Inc. (“Vestin Group”), a Delaware corporation, owns a significant majority of Vestin Mortgage, LLC, a Nevada limited liability company, which is our manager (the “manager” or “Vestin Mortgage”). On January 7, 2011, Vestin Mortgage converted from a corporation to a limited liability company.  Michael Shustek, the CEO and managing member of our manager and CEO, President and a director of us, wholly owns Vestin Group, which is engaged in asset management, real estate lending and other financial services through its subsidiaries.  Our manager, prior to June 30, 2006, also operated as a licensed Nevada mortgage broker and was generally engaged in the business of brokerage, placement and servicing of commercial loans secured by real property.  Since February 14, 2011, the business of brokerage and placement of real estate loans have been performed by affiliated or non-affiliated mortgage brokers, including Advant Mortgage, LLC (“MVP Mortgage”), a licensed Nevada mortgage broker, which is wholly owned by Mr. Shustek.

Pursuant to a management agreement, our manager is responsible for managing our operations and implementing our business strategies on a day-to-day basis.  Consequently, our operating results are dependent to a significant extent upon our manager’s ability and performance in managing our operations and servicing our loans.

Our board of directors has recommended that we change our manager by appointing VRM Management LLC ("Vestin Managment") as its new manager.  VRM Management is a newly formed Nevada limited liability company which is 90% owned by our Chairman and Chief Executive Officer, Michael Shustek and 10% owned by Craig Burr.  Mr. Burr is an attorney who has been engaged in the private practice of law in Las Vegas, Nevada for more than 19 years.  The current employees and officers of Vestin Mortgage would join VRM Management and would continue to render services to us through this new entity.

The terms of the proposed management agreement with VRM Management are identical to our current Management Agreement with Vestin Mortgage.  In addition, VRM Management will be subject to the continuing oversight of our board of directors to be the same extent as Vestin Mortgage.

-7-

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”) and Vestin Fund III, LLC (“Fund III”).  VRM I has investment objectives similar to ours, and Fund III is in the process of an orderly liquidation of its assets.

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.  Strategix Solutions also provides accounting and financial reporting services to VRM I and Fund III.  Our CFO and other members of our accounting staff are employees of Strategix Solutions.  Strategix Solutions is managed by LL Bradford and Company, LLC ("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 are currently or were previously officers of our manager.  As used herein, “management” means our manager, its manager, its executive officers and the individuals at Strategix Solutions who perform accounting and financial reporting services on our behalf.

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”).  In the opinion of management, all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented have been included.  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 2011 annual report filed on Form 10-K.

Management Estimates

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

Cash and Cash Equivalents

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

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 fully allowed for on impaired loans and is recognized on a cash basis method.

-8-

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”) as defined by Accounting Standards Codifications 310-40.  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 first as a reduction to the allowance for loan losses.  Generally, subsequent recoveries of amounts previously charged off are recognized 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.

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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.

Discontinued Operations

We have reclassified for all periods presented in the accompanying consolidated statements of operations, the amounts related to discontinued operations and real estate held for sale, in accordance with the applicable accounting criteria.  In addition, the assets and liabilities related to the discontinued operations are reported separately in the accompanying consolidated balance sheets as real estate held for sale, assets held for sale, and liabilities related to assets held for sale.

Real Estate Held for Sale

Real estate held for sale (“REO”) 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.  We generally seek to sell properties acquired through foreclosure as quickly as circumstances permit, taking into account current economic conditions.  The carrying values of REO are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.

Management classifies real estate as REO 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.

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Real Estate Held For Sale – Seller-Financed

We occasionally finance sales of foreclosed properties (“seller-financed REO”) to third parties.  In order to record a sale of real estate when we provide financing, the buyer of the real estate is required to make minimum initial and continuing investments.  Minimum initial investments range from 10% to 25% based on the type of real estate sold.  In addition, there are limits on commitments and contingent obligations incurred by a seller in order to record a sale.

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

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

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

Classification of Operating Results from Real Estate Held for Sale

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 REO are separately identified in the accompanying consolidated statements of operations.

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 (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 Lenders 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.

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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 prices as of September 30, 2012 and December 31, 2011.  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.

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.

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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 months ended September 30, 2012 and 2011.

Common Stock Dividends

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; however, we do not expect reinstatement of dividends in the foreseeable future.

Treasury Stock

On June 7, 2012, our Board of Directors approved the adoption of a prearranged stock repurchase plan intended to qualify for the safe harbor under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan”). The 10b5-1 Plan will become effective on the third business day following the earliest to occur of (i) completion of the proposed acquisition by the Company of VRM I in a stock for stock merger pursuant to a definitive merger agreement dated May 30, 2012 (the “Merger Agreement”), (ii) a vote by our shareholders or VRM I to reject the proposed merger or (iii) termination of the Merger Agreement by VRM I.  The 10b5-1 Plan will terminate twelve months after its effective date, unless terminated sooner in accordance with its terms. Purchases may be made in the open market or through privately negotiated transactions in support of the Company’s stock repurchase plan. Purchases in the open market will be made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. The Company is authorized to purchase up to $5,200,000 of its common stock pursuant to the 10b5-1 Plan.  During the nine months ended September 30, 2012 we purchased 475, 405 shares of treasury stock and retired 664,783.

Segments

We are currently authorized to operate two reportable segments, investments in real estate loans and investments in real property.  As of September 30, 2012, we had not commenced investing in real property.

Our objective is to invest approximately 97% of our assets in real estate loans and real estate investments, while maintaining approximately 3% as a working capital cash reserve.  Current market conditions have impaired our ability to be fully invested in real estate loans and real estate investments.  As of September 30, 2012, approximately 28% of our assets, net of allowance for loan losses, are classified as investments in real estate loans.

Principles of Consolidation

Our consolidated financial statements include the accounts of VRM II, Vestin TRS II, Inc., our wholly owned subsidiary, 1701 Commerce, LLC and Hawaii Funeral Service, LLC, in which we had a controlling interest through December 1, 2011. Our consolidated financial statements also included the accounts of the funeral merchandise and service trusts, cemetery merchandise and service trusts, and cemetery perpetual care trusts (“Trusts”) in which we had a variable interest and HFS was the primary beneficiary through December 1, 2011. Intercompany balances and transactions have been eliminated in consolidation.

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Business Combinations

In December 2007, the Financial Accounting Standards Board (FASB) revised the authoritative guidance for business combinations, establishing principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired (including goodwill), the liabilities assumed, and any noncontrolling interest in the acquiree. Subsequently, on April 1, 2009, the FASB amended and clarified certain aspects of its authoritative guidance on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. We apply the FASB authoritative guidance to all business combinations for which the acquisition date is on or after January 1, 2009, and to certain future income tax effects related to our prior business combinations, should they arise.

Noncontrolling Interests

The FASB issued authoritative guidance for noncontrolling interests in December 2007, which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as an unconsolidated investment, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, the guidance requires consolidated net income to be reported at amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest.

Income Taxes

The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements.  Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized.  In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.  A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition.  In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods.  Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

Financial instruments consist of cash, interest and other receivables, notes receivable, accounts payable and accrued liabilities, due to/from related parties and notes payable.  The carrying values of these instruments approximate their fair values due to their short-term nature.  Marketable securities – related party and investment in real estate loans are further described in Note K – Fair Value.

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Financial instruments with concentration of credit and market risk include cash, interest and other receivables, marketable securities - related party, notes receivable, accounts payable and accrued liabilities, due to/from related parties, notes payable, and loans secured by deeds of trust.

We maintain cash deposit accounts and certificates of deposit that, at times, may exceed federally-insured limits.  To date, we have not experienced any losses.  As of September 30, 2012 and December 31, 2011, we had no funds in excess of the federally-insured limits.  Additionally as of September 30, 2012 and December 31, 2011, the assets held for sale included no cash deposits held in excess of federally insured limits.

As of September 30, 2012, 58% and 24% of our loans were in Nevada and California respectively, compared to 36%, 28%, 19%, and 15% in Nevada, Arizona, Texas, and California, at December 31, 2011, 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, 2012, the aggregate amount of loans to our three largest borrowers represented approximately 40% of our total investment in real estate loans.  These real estate loans consisted of commercial and land loans, secured by properties located in Nevada and California, with a first lien position.  Their interest rates are between 8% and 11%, and the aggregate outstanding balance is approximately $12.4 million.  As of September 30, 2012, our largest loan, totaling approximately $6.7 million, is secured by property located in California, is a performing loan with an interest rate of 11%, and is a result of troubled debt restructuring.  The other two loans, secured by property in Nevada, each have an interest rate of 8% and are considered performing.  At December 31, 2011, the aggregate amount of loans to our three largest borrowers represented approximately 53% of our total investment in real estate loans.  These real estate loans consisted of commercial and land loans, secured by property located in Arizona, Texas and California, with a first lien position on the California loan and second lien positions on the Arizona and Texas loans.  Their interest rates ranged between 8% and 15%, and the aggregate outstanding balance was approximately $30.7 million.

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 and 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, 2012 and December 31, 2011, two and four loans, respectively, totaling approximately $3.5 and $11.0 million, respectively, had a common guarantor.  These loans represented approximately 11.3% and 19.0%, respectively, of our portfolio’s total value as of September 30, 2012 and December 31, 2011.  All two and four loans, respectively, were considered performing as of September 30, 2012 and December 31, 2011.

As of September 30, 2012 and December 31 2011, four and nine loans totaling approximately $5.7 million and $6.2 million, respectively, representing approximately 18.4% and 10.7%, respectively, of our portfolio’s total value, had a common guarantor.  At September 30, 2012 and December 31, 2011 all loans were considered performing.

As of September 30, 2012 four loans totaling approximately $8.1 million representing approximately 26.2% of our portfolio’s total value had a common guarantor.  As of September 30, 2012 all loans were considered performing.

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NOTE D — INVESTMENTS IN REAL ESTATE LOANS

As of September 30, 2012 and December 31, 2011, most of our loans provided for interest only payments with a “balloon” payment of principal payable and any accrued interest payable in full at the end of the term. As of September 30, 2012, three loans had a variable interest rate adjusted quarterly at a rate of prime plus 3.30% (6.55% as of September 30, 2012).

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, 2012 and December 31, 2011, we had no investments in real estate loans that had interest reserves.

Loan Portfolio

As of September 30, 2012, we had five available real estate loan products consisting of commercial, construction, acquisition and development, land and residential.  The effective interest rates on all product categories range from 4.5% to 15% which includes performing loans that are being fully or partially accrued and will be payable at maturity.  Revenue by product will fluctuate based upon relative balances during the period.

Investments in real estate loans as of September 30, 2012, 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
Commercial		16	$	20,533,000		8.89	%		66.85	%		65.17	%
Land		3		10,180,000		10.73	%		33.15	%		55.90	%
Total		19	$	30,713,000		9.50	%		100.00	%		62.00	%

Investments in real estate loans as of December 31, 2011, 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
Residential		1	$	385,000		8.00	%		0.66	%		61.41	%
Commercial		19		40,050,000		10.97	%		69.02	%		71.43	%
Construction		1		6,656,000		8.00	%		11.47	%		89.49	%
Land		3		10,933,000		10.75	%		18.85	%		64.15	%
Total		24	$	58,024,000		10.57	%		100.00	%		71.10	%

* 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, 2012 and December 31, 2011, was 9.88% and 6.79%, 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.

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The following is a schedule of priority of real estate loans as of September 30, 2012, and December 31, 2011:

Loan Type	Number of Loans		September 30, 2012 Balance*		Portfolio Percentage			Number of Loans		December 31, 2011 Balance*		Portfolio Percentage
First deeds of trust		17		29,877,000		97.28	%		18		28,684,000		49.43	%
Second deeds of trust		2		836,000		2.72	%		6		29,340,000		50.57	%
Total		19		30,713,000		100.00	%		24		58,024,000		100.00	%

* Please see Balance Sheet Reconciliation below.

During July 2012, we, VRM I and other affiliated entities modified a loan with a total of approximately $2.8 million, of which our portion was $1.7 million.  The terms of the modification resulted in a first trust deed loan of approximately $1.4 million, of which our portion is approximately $1.1 million, and a second trust deed loan of approximately $1.4 million, of which our portion is approximately $0.2 million.  As of September 30, 2012, approximately $0.5 million of the first trust deed has been sold to third-party investors.

The following is a schedule of contractual maturities of investments in real estate loans as of September 30, 2012:

Non-performing and past due loans	$	2,450,000
October 2012 – December 2012		5,759,000
January 2013 – March 2013		3,244,000
April 2013 – June 2013		8,569,000
July 2013 – September 2013		10,369,000
Thereafter		322,000
Total	$	30,713,000

The following is a schedule by geographic location of investments in real estate loans as of September 30, 2012 and December 31, 2011:

	September 30, 2012 Balance *		Portfolio Percentage			December 31, 2011 Balance *		Portfolio Percentage
Arizona	$	--		--		$	16,108,000		27.76	%
California		7,334,000		23.88	%		8,564,000		14.76	%
Colorado		--		--			895,000		1.54	%
Michigan		2,160,000		7.03	%		--		--
Nevada		17,845,000		58.10	%		21,114,000		36.39	%
Ohio		322,000		1.05	%		323,000		0.56	%
Oregon		--		--			46,000		0.08	%
Texas		1,151,000		3.75	%		10,974,000		18.91	%
Utah		1,901,000		6.19	%		--		--
Total	$	30,713,000		100.00	%	$	58,024,000		100.00	%

* Please see Balance Sheet Reconciliation below.

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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, 2012 Balance			December 31, 2011 Balance
Balance per loan portfolio	$	30,713,000		$	58,024,000
Less:
Allowance for loan losses (a)		(3,573,000	)		(26,247,000	)
Balance per consolidated balance sheets	$	27,140,000		$	31,777,000

(a) Please refer to Specific Reserve Allowances below.

Non-Performing Loans

As of September 30, 2012, we had one loan 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) compared to five loans as of December 31, 2011.  This reduction was a result of receiving a payoff on one loan, a first position lender foreclosed on a fully allowed for second position loan, we extended another loan to a borrower in exchange for a principal payment which funds were borrowed from a related party and lastly, we foreclosed on a non-performing loan which is now reported as real estate held for sale..  This loan is currently carried on our books at a value of approximately $0.5 million, net of allowance for loan losses of approximately $2.0 million.  We are a minority participant in this multiparty participating loan whereby the borrower and loan servicer have filed suit against the previous owner of the underlying property to recind the acquisition, among other claims.  The trial is scheduled for January 2012.  As of November 14, 2012, this loan balance has not been charged off.

At September 30, 2012, the following loan was non-performing:

Loan Type	Number Of Non-Performing Loans		Balance at September 30, 2012		Allowance for Loan Losses			Net Balance at September 30, 2012
Commercial		1	$	2,450,000	$	(2,000,000	)	$	450,000
Total		1	$	2,450,000	$	(2,000,000	)	$	450,000

At December 31, 2011, the following loan was non-performing:

Loan Type	Number Of Non-Performing Loans		Balance at December 31, 2011		Allowance for Loan Losses			Net Balance at December 31, 2011
Commercial		4	$	22,114,000	$	(19,570,000	)	$	2,544,000
Land		1		7,450,000		--			7,450,000
Total		5	$	29,564,000	$	(19,570,000	)	$	9,994,000

Asset Quality and Loan Reserves

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

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The conclusion that a real estate loan is uncollectible or that 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.

Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses on an individual loan basis; we do not have a general allowance for loan losses.  Additions to the allowance for loan losses are made by charges to the provision for loan loss.  As of September 30, 2012, our ratio of total allowance for loan losses to total loans with an allowance for loan loss was 54%.  The following is a breakdown of allowance for loan losses related to performing loans and non-performing loans as of September 30, 2012 and December 31, 2011:

	As of September 30, 2012
	Balance		Allowance for loan losses **			Balance, net of allowance
Non-performing loans – no related allowance	$	--	$	--		$	--
Non-performing loans – related allowance		2,450,000		(2,000,000	)		450,000
Subtotal non-performing loans		2,450,000		(2,000,000	)		450,000
Performing loans – no related allowance		24,025,000		--		$	24,025,000
Performing loans – related allowance		4,238,000		(1,573,000	)		2,665,000
Subtotal performing loans		28,263,000		(1,573,000	)		26,690,000
Total	$	30,713,000	$	(3,573,000	)	$	27,140,000

	As of December 31, 2011
	Balance		Allowance for loan losses **			Balance, net of allowance
Non-performing loans – no related allowance	$	--	$	--		$	--
Non-performing loans – related allowance		29,564,000		(19,570,000	)		9,994,000
Subtotal non-performing loans		29,564,000		(19,570,000	)		9,994,000
Performing loans – no related allowance		17,064,000		--			17,064,000
Performing loans – related allowance		11,396,000		(6,677,000	)		4,719,000
Subtotal performing loans		28,460,000		(6,677,000	)		21,783,000
Total	$	58,024,000	$	(26,247,000	)	$	31,777,000

** Please refer to Specific Reserve Allowances below.

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Our manager evaluated our loans and, based on current estimates with respect to the value of the underlying collateral, believes that such collateral is sufficient to protect us against further losses of principal.  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.

Specific Reserve Allowances

As of September 30, 2012, we have provided a specific reserve allowance for one non-performing loan and three performing loans based on updated appraisals of the underlying collateral and/or our evaluation of the borrower.  The following table is a roll-forward of the allowance for loan losses for the nine months ended September 30, 2012 and 2011 by loan type.  We will continue to evaluate our position in these loans.

Loan Type	Balance at 12/31/2011		Specific Reserve Allocation		Loan Pay Downs			Write-off			Transfers to REO or Notes Receivable			Balance at 9/30/2012
Commercial	$	22,392,000	$	815,000	$	(14,295,000	)	$	(3,250,000	)	$	(2,973,000	)	$	2,689,000
Construction		2,971,000		--		--			--			(2,971,000	)		--
Land		884,000		--		--			--			--			884,000
Total	$	26,247,000	$	815,000	$	(14,295,000	)	$	(3,250,000	)	$	(5,944,000	)	$	3,573,000

Loan Type	Balance at 12/31/2010		Specific Reserve Allocation		Sales, Loan Pay Downs and Write Downs			Settlements			Transfers to REO or Notes Receivable			Balance at 9/30/2011
Commercial	$	23,106,000		496,000	$	(133,000	)	$	(1,414,000	)	$	(3,940,000	)	$	18,115,000
Construction		10,027,000		--		--			--			(2,736,000	)		7,291,000
Land		424,000		460,000		--			--			--			884,000
Total	$	33,557,000	$	956,000	$	(133,000	)	$	(1,414,000	)	$	(6,676,000	)	$	26,290,000

Troubled Debt Restructuring

As of September 30, 2012 and December 31, 2011, we had one and seven loans, totaling approximately $0.6 million and $30.8 million, respectively, which met the definition of a Troubled Debt Restructuring or TDR.  When the Company modifies the terms of an existing loan that is considered 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.  Impairment on these loans is generally determined by the lesser of the value of the underlying collateral or the present value of expected future cash flows.  During the previous 12 months there have been no loans that became TDR loans.  The following is a breakdown of our TDR loans that were considered performing and non-performing as of September 30, 2012 and December 31, 2011:

As of September 30, 2012
	Total				Performing				Non-Performing
Loan Type	Number of Loans		Fund Balance		Number of Loans		Fund Balance		Number of Loans		Fund Balance
Commercial		1	$	638,000		1	$	638,000		--	$	--
Total		1	$	638,000		1	$	638,000		--	$	--

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As of December 31, 2011
	Total				Performing				Non-Performing
Loan Type	Number of Loans		Fund Balance		Number of Loans		Fund Balance		Number of Loans		Fund Balance
Commercial		5	$	16,740,000		3	$	2,821,000		2	$	13,919,000
Construction		1		6,655,000		1		6,655,000		--		--
Land		1		7,450,000		1		7,450,000		--		--
Total		7	$	30,845,000		5	$	16,926,000		2	$	13,919,000

· Commercial – As of September 30, 2012 and December 31, 2011, we had 16 and 19 commercial loans, respectively, one and five of which, respectively, were modified pursuant to TDR.  On January 1, 2011, the principal amount of one of the non-performing loans was reduced by approximately $0.8 million.  Interest only payments were due monthly from September 2010 until August 2011, at which point payments of interest and principal started and will continue until September 2013.  The interest rate was adjusted from 12% to 4.5%.  As of September 30, 2012 this loan was considered performing.  During April 2011 we reduced the interest rate on one loan from 15% to 10%.

The reduction in TDR loans was a result of a first position lender foreclosed on a fully allowed for second position loan, reclassifying second position loans as fully allowed for notes receivable due to receiving payoffs on the first position loans releasing the collateral and accepting a deed-in-lieu on another property which is now reported as assets held for sale.

For additional information, see “Non-Performing Loans” of this Note D – Investments in Real Estate Loans and Note J – “Notes Receivable”.

Extensions

As of September 30, 2012, our manager had granted extensions on six outstanding loans totaling approximately $16.9 million of which our portion was approximately $15.2 million, pursuant to the terms of the original loan agreements, which permit extensions by mutual consent, or as part of a TDR.  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.

NOTE E — INVESTMENT IN MARKETABLE SECURITIES

As of September 30, 2012 and December 31, 2011, we owned 538,178 shares of VRM I’s common stock, representing approximately 8.50% of the total outstanding shares. The closing price of VRM I’s common stock on September 30, 2012, was $1.36 per share.

During the three months ended September 30, 2012, the trading price for VRM I’s common stock ranged from $0.91 to $1.45 per share.  We will continue to evaluate our investment in marketable securities on a quarterly basis.

During January 2012, we purchased 60,000 shares of Annaly Capital Management Inc. This company is a publicly traded REIT and the shares were deemed to be part of our 3% working capital reserve.  During February 2012, we sold all of our shares for a gain of $15,000.

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NOTE F — REAL ESTATE HELD FOR SALE

At September 30, 2012, we held five properties with a total carrying value of approximately $9.2 million, which were acquired through foreclosure and recorded as investments in REO.  Our REO 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.

During May 2012, we, VRM I and Fund III foreclosed on a loan with a balance of approximately $6.0 million, of which our portion was approximately $46,000. The property includes 23 cottage units in a retirement community located in Eugene, Oregon.

During April 2012, we, VRM I and Fund III sold a property to an unrelated third party for approximately $0.5 million, of which our portion was approximately $0.2 million.  This transaction resulted in a net gain for us of approximately $2,000.  A consultation fee of approximately $17,000 was paid to our manager.

In August, 2011, VREO XVIII, LLC, an entity owned by us, VRM I and VF III entered into a purchase and sale agreement to sell one of the REO assets.  The terms of the sale provided for an all cash transaction in the amount of $2 million, with a closing to occur within 60 days.  The date of closing was extended several times, but ultimately, the transaction cancelled, as the purchaser was unable to obtain financing.  In 2012, non-refundable extension fees in the amount of $30,000 were collected, of which our portion was approximately $24,000.

As of September 30, 21012, four of our five REO properties consisted of raw land which did not have operations.  The following is a summary of the results of total operations, including our 2% interest in these operations, one REO which has operations for the period from May 1, 2012 (foreclosure) through September 30, 2012:

	For The Three Months Ended September 30, 2012			For The Period from May 1, 2012 (foreclosure) through September 30, 2012
Revenue	$	124,000		$	266,000
Expenses		(85,000	)		(148,000	)
Net Income	$	39,000		$	118,000

We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.

Beginning balance, January 1, 2012	$	10,767,000
Real estate held for sale acquired through foreclosure		32,000
Proceeds on nonrefundable extension fee		(24,000	)
Write down		(1,420,000	)
Sale		(196,000	)
Ending balance, September 30, 2012	$	9,159,000

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NOTE G — ASSETS HELD FOR SALE

On February 7, 2012, we, VRM I and VF III entered into a Deed in Lieu Agreement with a borrower resolving the foreclosure of our secured loan which had matured on December 31, 2011, with a principal balance, net of allowance for loan loss of approximately $9.9 million, of which our portion was approximately $9.0 million.  Pursuant to the Deed in Lieu Agreement, our subsidiary 1701 Commerce, LLC (“1701 Commerce”) received a deed to the property which had secured the loan.  The property, which is being operated as the Sheraton – Forth Worth, Texas, is the subject of litigation relating to the validity, priority, nature, and extent of liens claimed by other parties that may secure claims ranging from approximately $41 million to $48 million. We dispute both the validity of certain claimed liens and the amount of the claimed secured debt in part and as of this time intend to pursue our objections and disputes as to such matters.  On March 26, 2012, 1701 Commerce filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of Texas, Ft. Worth Division, to reorganize its financial affairs and to avoid a pending foreclosure of the property that had been scheduled by a mortgage lien holder and to preserve and protect 1701 Commerce’s equity and the interests of the other creditors of the property.  Due to the uncertainty and disputes involving this property, we recorded this investment as Other Real Estate Owned on the balance sheet until August 23, 2012 when the Bankruptcy Court issued an order allowing the bankruptcy to proceed despite a motion to dismiss it and required 1701 Commerce to deposit $1 million as additional collateral with the court which was funded by us, VRM I and VF III, and gave 1701 Commerce until November 24, 2012, which has now been extended indefinitely to obtain confirmation of a reorganization plan.  We hold an interest of approximately 90%, VRM I holds an interest of approximately 8% and Fund III holds an interest of approximately 2% in 1701 Commerce.  Pursuant to the order issued on August 23, 2012, we include the operations through consolidation into our financial statements from this date forward.

On September 24, 2012, 1701 Commerce entered into an asset purchase agreement to sell its assets in consideration of $55 million. Pursuant to the agreement, an earnest money deposit of $250,000 is currently maintained by a title company. Following the Bankruptcy Court’s approval of the sale of the assets to the buyer, the buyer has a 60 day due diligence period to review and approve the assets to be acquired. Upon the satisfaction of all conditions included in the agreement, subject to payment of certain approved claims and court approval, the balance of the purchase price will be paid in cash to 1701 Commerce. Pursuant to this agreement, this asset will be reported as an asset held for sale. As of the date of this report, management estimates the net realizable value to approximate the net assets held for sale.

Effective January 1, 2009, we adopted FASB's accounting standard related to business combination which required acquisition method of accounting to be used for all business combinations and for an acquirer to be identified for each business combination. This accounting standard requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. It also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with the standard).

Our acquisition of 1701 Commerce was accounted for in accordance with this standard and the Company has allocated the purchase price of 1701 Commerce based upon the estimated fair value of the net assets acquired and liabilities assumed and the fair value of the noncontrolling interest measured at the acquisition date. The estimated fair value of 1701 Commerce at the time of the acquisition totaled $9.9 million.

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We performed a preliminary allocation as of the date the order was issued by the Bankruptcy Court, August 23, 2012, as follows:

Cash	$	1,252,000
Receivables		902,000
Inventory		55,000
Other current assets		297,000
Property and equipment		52,578,000
Other assets		1,413,000
Accounts payable and accrued liabilities		(7,281,000	)
Notes payable		(39,300,000	)
Net assets	$	9,916,000

In addition, we estimated the fair value of the non-controlling interest at $1.0 million, which is 8% owned by VRM I and 2% by Fund III.

Assets and groups of assets and liabilities which comprise disposal groups are classified as “held for sale” when all of the following criteria are met: a decision has been made to sell, the assets are available for sale immediately, the assets are being actively marketed at a reasonable price in relation to the current fair value, a sale has been or is expected to be concluded within twelve months of the balance sheet date, and significant changes to the plan to sell are not expected. Assets held for sale are not depreciated.

Additionally, the operating results and cash flows related to these assets and liabilities are included in discontinued operations in the consolidated statements of operations and consolidated statements of cash flows for the year ended September 30, 2012.

The following is a summary of net assets held for sale through September 30, 2012:

Assets:
Cash	$	1,530,000
Cash – restricted		1,000,000
Receivables		790,000
Inventory		57,000
Current assets		281,000
Property and equipment		52,589,000
Other assets		1,414,000
Total assets	$	57,661,000
Liabilities:
Accounts payable and accrued liabilities	$	7,595,000
Notes payable		39,055,000
Total liabilities		46,650,000
Net assets held for sale	$	11,011,000

The following is a summary of the results of operations related to the assets held for sale for the period from September 1, 2012 (foreclosure) through September 30, 2012:

Revenue	$	1,099,000
Expenses		(1,004,000	)
Net Income	$	95,000

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NOTE H — 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 nine months ended September 30, 2012 and 2011 were $0.8 million, during each period.

As of September 30, 2012 and December 31, 2011, our manager owned 92,699 of our common shares, representing approximately 0.77% of our total outstanding common stock for both periods.

As of September 30, 2012 and December 31, 2011, we had receivables from our manager of approximately $19,000.

During January 2012, we paid our manager approximately $550,000 of management fees for services to be performed from January through June 2012.  As of September 30, 2012, there is no prepaid balance.  A discount of 7% has been applied to the July 2012 payment.

Integrated Financial Associates, Inc. (“IFA”) entered into an Intercreditor Agreement (“Intercreditor Agreement”) with us in connection with a note of $23.1 million (the “Note”) of which our portion was $3.0 million. Pursuant to the Intercreditor Agreement, in the event that our interest in the Note was not repaid in full, IFA would be responsible to pay a monthly fee equal to one percent of the unpaid amount plus interest at the rate of 15% per annum. We are to receive the 15% interest per annum and our Manager has a claim to the monthly fee equal to one percent of the unpaid amount. IFA breached the Intercreditor Agreement and we obtained, on November 9, 2010, a judgment against IFA in the amount of approximately $4.0 million, plus, among other things, additional monthly fees and default interest. During March 2011, IFA filed a Chapter 11 bankruptcy petition. During May 2012, we entered into a Purchase and Sale Agreement (“Sale Agreement”) with TPKT, LLC (“TPKT”), owned by certain principals of IFA, whereby we agreed to assign our interest in the claim and judgment in exchange for $1,050,000 and the first $1,250,000 plus certain other amounts received on our portion of the Note. During May 2012, the outstanding fee due to our Manager was approximately $1.6 million. In order to resolve our Manager’s claim, our Manager received $500,000 in connection with the purchase by TPKT and waived any right to receive any amounts paid on our portion of the Note.

During May 2012, our manager received total consultation fee of approximately $17,000, related to the sale of an REO property owned by us, VRM I and Fund III.

Transactions with Other Related Parties

As of September 30, 2012 and December 31, 2011, we owned 538,178 common shares of VRM I, representing approximately 8.5% of their total outstanding common stock for both periods.

As of September 30, 2012 and December 31, 2011, VRM I owned 537,078 of our common shares, representing approximately 4.3% of our total outstanding common stock for both periods.

As of September 30, 2012 and December 31, 2011, we had receivables from VRM I of approximately $0.1 million, primarily related to legal fees.

As of December 31, 2011, Fund III owned 114,117 of our common shares, representing approximately 0.9% of our total outstanding common stock.  On June 11, 2012, our Chairman and Chief Executive Officer, Michael Shustek purchased these shares from Fund III.

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As of September 30, 2012, we had receivables from Fund III of approximately $73,000.  As of December 31, 2011, we had a payable to Fund III of approximately $13,000.

NOTE I — INVESTMENT IN MVP REALTY ADVISORS

Together with MVP Capital Partners LLC, which is owned by our Chairman and Chief Executive Officer, Michael Shustek, we have formed a Nevada limited liability company, MVP Realty Advisors, LLC (“MVPRA”).  MVPRA intends to act as the advisor to MVP REIT, Inc., a recently formed Maryland corporation which was organized to invest in real estate and loans secured by real estate (“MVP REIT “).  On April 16, 2012, MVP Realty Trust filed a registration statement with the Securities and Exchange Commission, which was declared effective by the Securities and Exchange Commission on September 25, 2012.  MVP REIT is organized as a publically registered, non-traded real estate investment trust (“REIT”).  Under the terms of an Advisory Agreement between MVPRA and MVP Realty Trust, MVPRA is entitled to certain fees for advisory and other management services rendered to MVP Realty Trust.

During April 2012, we contributed $1,000 for a 40% interest in MVPRA.  Mr. Shustek, through a wholly owned company named MVP Capital Partners, LLC (“MVPCP”), contributed $1,500 for a 60% interest in MVPRA.  We and MVPCP anticipate providing additional funds to MVPRA, either in the form of capital contributions or loans.  The amount and nature of such funding arrangements cannot be determined at this time. As of September 30, 2012, we and MVPCP have loaned approximately $534,000 and approximately $1.6 million, respectively to MVPRA related to MVP REIT, Inc.  

Under the terms of the Operating Agreement which governs MVPRA, any loans we may make to MVPRA must be paid in full and we shall have received distributions of profits equal to our capital contributions prior to MVPCP receiving any distributions from MVPRA.

Our participation in MVPRA was approved by the independent members of our Board of Directors.

NOTE J — NOTES RECEIVABLE

During January 2012 we, VRM I and Fund III rewrote one of our existing loans.  The interest rate of this loan was changed from 3% paying monthly with 5% accruing to 7% paid monthly.  The amount of the loan allowance of approximately $3.0 million and the interest currently accrued on the existing loan, which was fully allowed for, of approximately $1.0 million was moved to notes receivable.  In April 2012, we received a payment on the new loan which was less than the amount owed.  The difference of approximately $0.8 million was recorded as a loan allowance as of June 30, 2012 and was reclassified to note receivable during April, 2012.

During April 2012, we, VRM I and Fund III received a payment in full satisfaction of an investment in real estate loan secured by a first deed of trust.  The remaining balance due on the second deed of trust was previously fully allowed for, of approximately $0.7 million was moved to notes receivable and remains fully allowed for.  We receive monthly payments of approximately $33,000.  As of September 30, 2012 the balance is approximately $0.5 million.

During February 2012, we, VRM I and Fund III received a payment in full satisfaction of an investment in real estate loan secured by a first deed of trust and a partial payment of an investment in real estate loan secured by a second deed of trust on the same real estate.  The remaining balance due on the second deed of trust was previously fully allowed for, of approximately $1.3 million was moved to notes receivable and remains fully allowed for.  During March 2012 a payment of approximately $50,000 was received and recognized as gain related to pay off of notes receivable, including recovery of allowance for notes receivable.  Additionally, we receive monthly payments of approximately $3,000.  As of September 30, 2012 the balance is approximately $1.2 million.

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On February 29, 2012, we made a loan to TNP Strategic Retail Operating Partnership, LP, a Delaware limited-partnership, in the amount of $1,040,000 evidenced by a promissory note (“Note”) and secured by the separate and unconditional guaranty (“Guaranty”) of TNP Strategic Retail Trust, Inc., a Maryland corporation (“TNP Trust”).  The unpaid principal balance on the Note bore interest at a rate of 9.0% per annum until May 31, 2012, at which time the loan matured.  The Guaranty was secured by an absolute assignment to VRM II of all of TNP Trust’s right, title and interest in and to 25% of all net proceeds received by TNP Trust in connection with TNP Trust’s public offering of stock after payment of sales commission, fees and expenses payable in connection therewith.  This loan was paid in full on May 17, 2012.

NOTE K — FAIR VALUE

As of September 30, 2012, financial assets and liabilities utilizing Level 1 inputs included investment in marketable securities - related party.  We had no assets or liabilities utilizing Level 2 inputs, and assets and liabilities utilizing Level 3 inputs included investments in real estate loans.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  Accordingly, our degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, 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.

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.

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The following table presents the valuation of our financial assets and liabilities as of September 30, 2012 and December 31, 2011, 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 09/30/2012		Carrying Value on Balance Sheet at 09/30/2012
Assets
Investment in marketable securities - related party	$	732,000	$	--	$	--	$	732,000	$	732,000
Investment in real estate loans	$	--	$	--	$	27,240,000	$	27,240,000	$	27,140,000

	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 12/31/2011		Carrying Value on Balance Sheet at 12/31/2011
Assets
Investment in marketable securities - related party	$	592,000	$	--	$	--	$	592,000	$	592,000
Investment in real estate loans	$	--	$	--	$	30,646,000	$	30,646,000	$	31,777,000

The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2012 to September 30, 2012:

	Investment in real estate loans
Balance on January 1, 2012	$	30,646,000
Change in temporary valuation adjustment included in net income (loss)
Increase in allowance for loan losses		(815,000	)
Purchase and additions of assets
Transfer of allowance on real estate loans to real estate held for sale		14,000
Transfer of allowance on real estate loan to asset held for sale		1,705,000
Reduction of allowance on real estate loans due to loan payments		4,239,000
Reduction of allowance on real estate loans following settlement of loan		11,565,000
New mortgage loans and mortgage loans acquired		20,285,000
Write-off of allowance on uncollectible loan		3,250,000
Transfer of allowance on real estate loans converted to unsecured notes receivable		2,715,000
Sales, pay downs and reduction of assets
Transfer of real estate loan to real estate held for sale		(45,000	)
Transfer of real estate loan to asset held for sale		(10,669,000	)
Collections and settlements of principal and sales of investment in real estate loans		(19,351,000	)
Reduction of loan balance following settlement of loan		(11,565,000	)
Write-off of uncollectible loan		(3,250,000	)
Conversion of real estate loans to unsecured notes receivable		(2,715,000	)
Temporary change in estimated fair value based on future cash flows		1,231,000
Balance on September 30, 2012, net of temporary valuation adjustment	$	27,240,000

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The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2011 to September 30, 2011:

	Assets
	Investment in real estate loans			Assets under secured borrowings
Balance on January 1, 2011	$	26,624,000		$	1,320,000
Change in temporary valuation adjustment included in net income (loss)
Increase in allowance for loan losses		(967,000	)		--
Purchase and additions of assets
Transfer of allowance on real estate loans to real estate held for sale		2,736,000			--
New mortgage loans and mortgage loans acquired		8,215,000			(1,320,000	)
Reduction of allowance on real estate loans due to loan payment		144,000			--
Transfer of allowance on real estate loans converted to unsecured notes receivable		3,940,000			--
Sales, pay downs and reduction of assets
Collections and settlements of principal and sales of investment in real estate loans		(4,276,000	)		--
Conversion of real estate loans to unsecured notes receivable		(3,940,000	)		--
Transfer of real estate loans to real estate held for sale		(2,896,000	)		--
Temporary change in estimated fair value based on future cash flows		(136,000	)		--
Transfer to Level 1		--			--
Transfer to Level 2		--			--
Balance on September 30, 2011, net of temporary valuation adjustment	$	29,444,000		$	--

	Liabilities
	Secured borrowings
Balance on January 1, 2011	$	1,088,000
Payment on secured borrowings		(1,088,000	)
Balance on September 30, 2011	$	--

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NOTE L — RECENT ACCOUNTING PRONOUNCEMENTS

Adopted

On January 1, 2012, the Company adopted changes issued by the Financial Accounting Standards Board (FASB) to conform to existing guidance regarding fair value measurement and disclosure between GAAP and International Financial Reporting Standards. These changes both clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and amend certain principles or requirements for measuring fair value or for disclosing information about fair value measurements. The clarifying changes relate to the application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, and disclosure of quantitative information about unobservable inputs used for Level 3 fair value measurements. The amendments relate to measuring the fair value of financial instruments that are managed within a portfolio; application of premiums and discounts in a fair value measurement; and additional disclosures concerning the valuation processes used and sensitivity of the fair value measurement to changes in unobservable inputs for those items categorized as Level 3, a reporting entity’s use of a nonfinancial asset in a way that differs from the asset’s highest and best use, and the categorization by level in the fair value hierarchy for items required to be measured at fair value for disclosure purposes only. Other than the additional disclosure requirements, the adoption of these changes had no impact on the Consolidated Financial Statements.

On January 1, 2012, the Company adopted changes issued by the FASB to the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. Management elected to present the two-statement option. Other than the change in presentation, the adoption of these changes had no impact on the Consolidated Financial Statements.

In December 2011, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update No. 2011-10 (“ASU 2011-10”), Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate—a Scope Clarification (a consensus of the FASB Emerging Issues Task Force). ASU 2011-10 clarifies when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance for Real Estate Sale (Subtopic 360-20). The provisions of ASU 2011-10 are effective for public companies for fiscal years and interim periods within those years, beginning on or after June 15, 2012. The adoption of ASU 2011-10 is not expected to materially impact our consolidated financial statements.

NOTE M — LEGAL MATTERS INVOLVING THE MANAGER

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

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

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The Vestin Group and Fund III were defendants in a civil action filed by Birkeland Family, LLC III and Birkeland Family, LLC V (“Plaintiffs”) in District Court for Clark County, Nevada.  The Plaintiffs alleged as causes of action against Vestin Group and Fund III:  Breach of Contract and Breach of the Implied Covenant of Good Faith and Fair Dealing regarding the sale of the office building commonly described as 8379 W. Sunset Road, Las Vegas, Nevada.  The action sought monetary, punitive and exemplary damages.  On January 18, 2011, summary judgment was granted in favor of Fund III, with the Court finding that Fund III was not part of the lease and, therefore, could not be held liable for damages.  The Manager is still involved in this civil action. Fund III is attempting to recover legal fees associated with this matter.  A judgment has been entered against Vestin Group in the amount of approximately $4.2 million.  Vestin Group has appealed this judgment.

VRM II, Vestin Mortgage and Michael V. Shustek (“Defendants”) were defendants in a civil action filed by 88 sets of plaintiffs representing approximately 138 individuals (“Plaintiffs”), in District Court for Clark County, Nevada (the “Nevada Lawsuit”).  The Plaintiffs alleged, 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 sought monetary and punitive damages.  The court dismissed the claim for punitive damages.  On September 8, 2010, the parties agreed to settle the case.  The Settlement Agreement provides for the settlement and complete release of all claims against the Defendants.  The settlement was made without admission of liability by Defendants.

For additional information, see Note N – Legal Matters Involving the Company

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

NOTE N — LEGAL MATTERS INVOLVING THE COMPANY

We, VRM I and Vestin Mortgage (“Defendants”) were defendants in a breach of contract class action filed in San Diego Superior Court by certain plaintiffs who alleged, among other things, that they were wrongfully denied roll-up rights in connection with the merger of Fund I into VRM I and Fund II into VRM II.  The court certified a class of all former Fund I unit holders and Fund II unit holders who voted against the mergers of Fund I into VRM I and Fund II into VRM II.  The trial began in December 2009 and concluded in January 2010.  On February 11, 2010, the Defendants were notified of a Tentative Statement of Decision, in their favor issued by the Superior Court for the State of California in San Diego following a trial.  In the Tentative Statement, the Court found that there was no roll-up and therefore no breach of contract.  The Court entered final judgment for the Defendants on March 18, 2010.  Defendants and Plaintiffs agreed to a post-judgment settlement by which Plaintiffs agreed not to appeal the judgment in consideration of a waiver by the Defendants of any claim to recover actual court costs from the Plaintiffs.  The Court granted final approval of this settlement of post-judgment rights on July 9, 2010.

We, Vestin Mortgage and Michael V. Shustek (“Defendants”) were defendants in a civil action filed by 88 sets of plaintiffs representing approximately 138 individuals (“Plaintiffs”), in District Court for Clark County, Nevada (the “Nevada Lawsuit”).  The Plaintiffs alleged, 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 sought monetary and punitive damages.  The court dismissed the claim for punitive damages.  On September 8, 2010, the parties agreed to settle the case.  The Settlement Agreement provides for the settlement and complete release of all claims against the Defendants.  The settlement was made without admission of liability by Defendants.

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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 operations in any particular period.

In July, 2012, we along with our Manager, VRM I, Vestin Group, Vestin Originations and Michael Shustek entered into a Settlement Agreement and Mutual Release ("Settlement Agreement") with the State of Hawaii and The Huntington National Bank as successor trustee to the Rightstar Trusts.  Under the Settlement Agreement, we and VRM I  were entitled to receive a portion of certain net proceeds from certain claims from third parties through litigation, settlement or otherwise. The parties agreed that to mutually release each other from any claims and in lieu of such amounts due under the Settlement Agreement, within ten (10) business days after the later of (a) The Huntington Bank's receipt of the first tranche of certain trust recovery proceeds or (b) entry of a final and non-appealable decision or order approving settlement with each of certain other persons, the sum of $145,000.00 shall be disbursed from the first tranche of trust recovery proceeds to us and VRM I.  All other amounts payable under the Settelemtn Agreement were assigned to the Rightstar Trusts and The Huntington Bank all rights, obligations and claims we or VRM I has or ever can, shall or may have or claim to have arising out of or related to the Rightstar Trusts, or which were asserted or which could have been asserted in such cases.  We and VRM I also released any and all interest in the amounts set aside from the sale of the property at 485 Waiale Street, Wailuku, Hawaii. Finally we agreed to purchase all 447,226 shares in Vestin Fund II, LLC currently owned by the Rightstar trusts for $1.40 per share, which purchase is to be consummated within seven (7) days following Court approval of the settlement.  The settlement was approved by the Court on August 3, 2012.  As of September 30, 2012 the $145,000 has been paid and the shares have been repurchased.

On February 7, 2012, we, VRM I and VF III entered into a Deed in Lieu Agreement with a borrower resolving the foreclosure of our secured loan which had matured on December 31, 2011, with a principal balance, net of allowance for loan loss of approximately $9.9 million, of which our portion was approximately $9.0 million.  Pursuant to the Deed in Lieu Agreement, our subsidiary 1701 Commerce, LLC (“1701 Commerce”) received a deed to the property which had secured the loan.  The property, which is being operated as the Sheraton – Forth Worth, Texas, is the subject of litigation relating to the validity, priority, nature, and extent of liens claimed by other parties that may secure claims ranging from approximately $41 million to $48 million. We dispute both the validity of certain claimed liens and the amount of the claimed secured debt in part and as of this time intend to pursue our objections and disputes as to such matters.  On March 26, 2012, 1701 Commerce filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of Texas, Ft. Worth Division, to reorganize its financial affairs and to avoid a pending foreclosure of the property that had been scheduled by a mortgage lien holder and to preserve and protect 1701 Commerce’s equity and the interests of the other creditors of the property.  Due to the uncertainty and disputes involving this property, we recorded this investment as Other Real Estate Owned on the balance sheet until August 23, 2012 when the Bankruptcy Court issued an order allowing the bankruptcy to proceed despite a motion to dismiss it and required 1701 Commerce to deposit $1 million as additional collateral with the court which was funded by us, VRM I and VF III, and gave 1701 Commerce until November 24, 2012, which has now been extended indefinitely to obtain confirmation of a reorganization plan.  We hold an interest of approximately 90%, VRM I holds an interest of approximately 8% and Fund III holds an interest of approximately 2% in 1701 Commerce.  Pursuant to the order issued on August 23, 2012, we include the operations through consolidation into our financial statements from such date forward.

On September 24, 2012, 1701 Commerce entered into an asset purchase agreement to sell its assets in consideration of $55 million. Pursuant to the agreement, an earnest money deposit of $250,000 is currently maintained by a title company. Following the Bankruptcy Court’s approval of the sale of the assets to the buyer, the buyer has a 60 day due diligence period to review and approve the assets to be acquired. Upon the satisfaction of all conditions included in the agreement, subject to payment of certain approved claims and court approval, the balance of the purchase price will be paid in cash to 1701 Commerce. Pursuant to this agreement, this asset will be reported as an asset held for sale. As of the date of this report, management estimates the net realizable value to approximate the net assets held for sale.

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NOTE O — INCOME TAXES

We operated as a REIT through December 31, 2011. We announced on March 28, 2012 that we have terminated our election to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), effective for the tax year ending December 31, 2012.

The components of the provision for income tax benefit are as follows for the nine months ended:

	9/30/2012			9/30/2011
Current taxes
Federal	$	--		$	--
State		--			--
Total current taxes		--			--
Change in deferred taxes		(715,000	)		--
Change in valuation allowance		715,000			--
Provision for income tax expense (benefit)	$	--		$	--

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at September 30, 2012:

Deferred tax assets:
Provision for loan losses	$	1,215,000
Write down on real estate held for sale		3,851,000
Recovery of allowance for doubtful notes receivable		5,305,000
Net operating loss carry forward		64,143,000
Total deferred tax assets		74,514,000
Valuation allowance		(74,514,00	)
Deferred tax assets, net of valuation allowance	$	--

The effective tax rate used for calculation of the deferred taxes as of September 30, 2012 was 34%.  The Company has established a valuation allowance against deferred tax assets of $74,514,000 due to the uncertainty regarding realization, comprised primarily of a reserve against the deferred tax assets attributable to the net operating loss carry forward timing differences.

As of December 31, 2011 we were organized and conducted 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.

NOTE P— SUBSEQUENT EVENTS

During October 2012, we sold an REO property to an unrelated third party for approximately $0.2 million.  This transaction resulted in a net gain for us of approximately $0.1 million.  A consultation fee of approximately $3,000 was paid to a related party.

During October 2012, we paid a retainer to legal counsel of $420,000 on behalf of 1701 Commerce (See Note G) in anticipation of legal and expert witness expenses.

Subsequent to September 30, 2012 through the date of this report, we have loaned an additional $0.5 million to MVPRA for use in connectionwith MVP REIT.

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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, 2012 and 2011.  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, 2011.

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 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 the mortgage brokers we utilize are less strict than those used by many institutional real estate lenders.  In addition, one of our competitive advantages is our ability to approve loan applications more quickly than many institutional lenders.  As a result, in certain cases, we may make real estate loans that are riskier than real estate loans made by many institutional lenders such as commercial banks.  However, in return, we seek a higher interest rate and our manager takes steps to mitigate the lending risks such as imposing a lower loan-to-value ratio.  While we may assume more risk than many institutional real estate lenders, in return, we seek to generate higher yields from our real estate loans.

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

Our 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.  See Note F – Real Estate Held for Sale and “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.

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We believe that the current level of our non-performing assets is a direct result of the deterioration of the economy and credit markets several years ago.  As the economy weakened and credit became more difficult to obtain, many of our borrowers who develop and sell commercial real estate projects were unable to complete their projects, obtain takeout financing or were otherwise adversely impacted.  While the general economy has improved, the commercial real estate markets in many of the areas where we make loans continue to suffer from depressed conditions.  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.

Continued weakness in the commercial real estate markets and the weakness in lending may continue to have an adverse impact upon our markets.  This may result in further 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 additional 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.

During the nine months ended September 30, 2012, we funded 13 loans totaling approximately $22.9 million.  During the nine months ended September 30, 2011, we funded five loans totaling approximately $3.7 million.  As of September 30, 2012, our loan-to-value ratio was 62.0%, net of allowances for loan losses, on a weighted average basis generally using updated appraisals.  Additional 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 on our financial condition and operating results.

As of September 30, 2012, we have provided a specific reserve allowance for one non-performing loan and three performing loans based on updated appraisals of the underlying collateral and our evaluation of the borrower for these loans, obtained by our manager.  For further information regarding allowance for loan losses, refer to “Specific Reserve Allowance” 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, 2012, our loans were in the following states: California, Michigan, Nevada, Ohio, Texas and Utah.

At our annual meeting held on December 15, 2011, a majority of the shareholders voted to amend our Bylaws to expand our investment policy to include investments in and acquisition, management and sale of real property or the acquisition of entities involved in the ownership or management of real property. A majority of the shareholders also voted to amend our charter to change the terms of our existence from its expiration date of December 31, 2020 to perpetual existence. As a result, we will begin to acquire, manage, renovate, reposition, sell or otherwise invest in real property or acquire entities involved in the ownership or management of real property.

We, along with VRM Merger Sub, Inc. (a subsidiary we wholly own) and VRM I announced on May 30, 2012 that we have entered into a definitive merger agreement pursuant to which VRM Merger Sub will merge with and into VRM I in a stock-for-stock merger, with VRM I surviving the transaction as our wholly owned subsidiary.  Under the terms of the transaction, which has been approved by the boards of directors of both companies, stockholders of VRM I (other than us) will receive a fixed ratio of 0.82 share of our common stock for each share of VRM I common stock they own.  If the transaction is approved by our shareholders and the shareholders of VRM I, upon closing, VRM I stockholders will own approximately 30% of our common stock.  Pursuant to the terms of the agreement, one member of the VRM I Board of Directors will replace an existing Director on our Board of Directors.  A registration statement relating to the stock to be issued by us in the proposed transaction has been filed with the SEC and is pending a declaration of effectiveness by the SEC.  The transaction is subject to customary approvals and closing conditions and requires the approval of the VRM I stockholders (with respect to the merger) and our stockholders (with respect to the issuance of our common stock).

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Our board of directors has recommended that we change our manager by appointing VRM Management LLC as its new manager.  VRM Management is a newly formed Nevada limited liability company which is 90% owned by our Chairman and Chief Executive Officer, Michael Shustek and 10% owned by Craig Burr.  Mr. Burr is an attorney who has been engaged in the private practice of law in Las Vegas, Nevada for more than 19 years.  The current employees and officers of Vestin Mortgage would join VRM Management and would continue to render services to us through this new entity.

The terms of the proposed management agreement with VRM Management are identical to our current Management Agreement with Vestin Mortgage.  In addition, VRM Management will be subject to the continuing oversight of our board of directors to be the same extent as Vestin Mortgage.

SUMMARY OF FINANCIAL RESULTS

Comparison of operating results for the three months ended September 30, 2012, to the three months ended September 30, 2011.

Total Revenue:	2012		2011		$ Change			% Change
Interest income from investment in real estate loans	$	427,000	$	259,000	$	168,000			65	%
Gain related to pay off of real estate loan, including recovery of allowance for loan loss		31,000		100,000		(69,000	)		(69	%)
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable		79,000		--		79,000			100	%
Other income		--		42,000		(42,000	)		(100	%)
Total	$	537,000	$	401,000	$	136,000			34	%

Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans.  Interest income was adversely affected by the level of modified loans and the reduction in new lending activity during the first three quarters of 2011.  We experienced an increase in new lending activity in the second half of 2011and first half of 2012, which has produced an overall increase in interest income for third quarter 2012.  It is premature at this time to predict whether or not the increase in lending activity in the second half of 2011 and first three quarters of 2012 will be sustained in the future.  Scheduled payments on fully reserved notes receivable and loans resulted in an increase in gain related to payoff of real estate loan.

For additional information see Note D – Investments in Real Estate Loans and Note J - Notes Receivable of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Operating Expenses:	2012		2011		$ Change			% Change
Management fees – related party	$	242,000	$	274,000	$	(32,000	)		(12	%)
Provision for loan loss		50,000		955,000		(905,000	)		(95	%)
Interest expense		2,000		60,000		(58,000	)		(97	%)
Professional fees		166,000		247,000		(81,000	)		(33	%)
Insurance		49,000		63,000		(14,000	)		(22	%)
Consulting		73,000		73,000		--			--
Other		26,000		92,000		(66,000	)		(72	%)
Total	$	608,000	$	1,764,000	$	(1,156,000	)		(66	%)

Operating expenses were 66% lower during the three months ended September 30, 2012 than during the same three months in 2011.  Provision for loan loss expense change is due to what appears to be a more stabilized real estate market.  Interest expense decreased during the three months ended September 30, 2012 due to the decreased balance of secured borrowings which were paid off in 2011.  Professional fees have decreased due to a significant decrease in pending litigation.

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Non-operating Income (Loss):	2012		2011		$ Change			% Change
Interest income from banking institutions	$	--	$	1,000	$	(1,000	)		(100	%)
Settlement income		90,000		--		90,000			100	%
Recovery from settlement with loan guarantor		203,000		--		203,000			100	%
Total	$	293,000	$	1,000	$	292,000			292	%

During January 2011, we, VRM I and Fund III were awarded unsecured claims up to $3.6 million from a bankruptcy settlement with a guarantor of certain loans. Pursuant to the terms of the settlement, we received payment of approximately $203,000 during July 2012.  In July, 2012, we along with our Manager, VRM II, Vestin Group, Vestin Originations and Michael Shustek entered into a Settlement Agreement and Mutual Release with the State of Hawaii and The Huntington National Bank as successor trustee to the Rightstar Trusts.  Under the Settelement Agreement, we and VRM I were entitled to receive a portion of certain net proceeds from certain claims from third parties through litigation, settlement or otherwise.  The agreement resulted in payments to claimants of $145,000, of which our portion was approximately $90,000.

See Note N — 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.

Discontinued Operations, net of income taxes:	2012			2011			$ Change			% Change
Net gain on sale of real estate held for sale	$	--		$	64,000		$	(64,000	)		(100	%)
Expenses related to real estate held for sale		(252,000	)		(258,000	)		6,000			2	%
Write down on real estate held for sale		--			(708,000	)		708,000			100	%
Income from assets held for sale, net of income taxes		95,000			862,000			(767,000	)		(89	%)
Total	$	(157,000	)	$	(40,000	)	$	(117,000	)		(293	)%

Discontinued operations were 293% lower during the three months ended September 30, 2012 than during the same three months in 2011.  We received income from assets held for sale during the three months ended September 30, 2012 for a different asset held for sale than in the same period 2011.  During the three months ended September 30, 2011, we recorded net gains on sale of real estate held for sale for properties sold in prior periods due to payments on settlement agreements.  There was no such income during the same period in 2012.  No write-down on real estate was necessary for the three months ended September 30, 2012 compared to write-downs in of $708,000 during the same period in 2011.

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, 2012, to the nine months ended September 30, 2011.

Total Revenue:	2012		2011		$ Change			% Change
Interest income from investment in real estate loans	$	1,008,000	$	1,016,000	$	(8,000	)		(1	%)
Gain related to pay off of real estate loan, including recovery of allowance for loan loss		1,268,000		133,000		1,135,000			848	%
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable		226,000		--		226,000			100	%
Other income		--		100,000		(100,000	)		(100	%)
Total	$	2,502,000	$	1,249,000	$	1,253,000			100	%

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Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans.  Interest income has been adversely affected by the level of modified loans and the reduction in new lending activity during the first three quarters of 2011.  We experienced an increase in new lending activity in the second half of 2011 and first three quarters of 2012 and we anticipate that the activity in our loan portfolio will produce an overall increase in interest income for 2012.  It is premature at this time to predict whether or not the increase in lending activity in the second half of 2011 and first three quarters of 2012 will be sustained in the future.  Scheduled payments on fully reserved notes receivable and loans resulted in an increase in gain related to payoff of real estate loan and other income.  During May 2012, we, VRM I and Fund III sold our portions of a fully reserved loan of $14.0 million, of which our portion was $12.6 million to a third party.  We received a payment of approximately $1.0 million.

For additional information see Note D – Investments in Real Estate Loans and Note J - Notes Receivable of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Operating Expenses:	2012		2011		$ Change			% Change
Management fees – related party	$	791,000	$	823,000	$	(32,000	)		(4	%)
Provision for loan loss		815,000		955,000		(140,000	)		15	%
Interest expense		2,000		178,000		(176,000	)		(99	%)
Professional fees		753,000		927,000		(174,000	)		(19	%)
Consulting fees		161,000		134,000		27,000			20	%
Insurance		219,000		230,000		(11,000	)		(5	%)
Other		143,000		225,000		(82,000	)		(36	%)
Total	$	2,884,000	$	3,472,000	$	(588,000	)		(17	%)

Operating expenses were 17% lower during the nine months ended September 30, 2012 partially as a result of a decrease in provision for loan losses compared to the nine months ended September 30, 2011.  Interest expense decreased during the nine months ended September 30, 2012 due to the decreased balance of secured borrowings which were paid off in 2011.  Professional fees have decreased due to a significant decrease in pending litigation.  Consulting fees have increased due to credit review by a third party.

See “Specific Loan Allowance” in Note D – Investments in Real Estate Loans and Note N – Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Non-operating Income (Loss):	2012			2011		$ Change			% Change
Interest income from banking institutions	$	1,000		$	6,000	$	(5,000	)		(83	%)
Settlement income		90,000			--		90,000			100	%
Recovery from settlement with loan guarantor		746,000			--		746,000			100	%
Gain on sale of marketable securities		15,000			--		15,000			100	%
Discounted professional fees		--			1,620,000		(1,620,000	)		(100	%)
Settlement expense		(66,000	)		--		(66,000	)		(100	%)
Total	$	786,000		$	1,626,000	$	(840,000	)		(52	%)

During the nine months ended September 30, 2012 we settled two lawsuits which resulted in an expense of approximately $66,000.  In addition, we received from the plaintiff 14,374 shares of the company’s stock that was held as treasury stock, but since retired.  The purchase and subsequent sale of marketable securities occurred during the nine months ended September 30, 2012, resulting in a gain of approximately $15,000.  No such transactions occurred in the nine months ended September 30, 2011.  During the nine months ended September 30, 2011 we received approximately $1.6 million in discounts related to past legal bills.  There was no similar discount received in 2012.  In addition, during January 2011, we, VRM I and Fund III were awarded unsecured claims up to $3.6 million from a bankruptcy settlement with a guarantor of certain loans. Pursuant to the terms of the settlement, we received payment of approximately $543,000 during April 2012 and $203,000 in July 2012.  In July, 2012, we along with our Manager, VRM II, Vestin Group, Vestin Originations and Michael Shustek entered into a Settlement Agreement and Mutual Release with the State of Hawaii and The Huntington National Bank as successor trustee to the Rightstar Trusts.  Under the Settlement Agreement, we and VRM II  were entitled to receive a portion of certain net proceeds from certain claims from third parties through litigation, settlement or otherwise.  The agreement resulted in payments to claimants of $145,000, with our portion was approximately $90,000.

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See Note N — 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.

Discontinued Operations, net of income taxes:	2012			2011			$ Change			% Change
Net gain on sale of real estate held for sale	$	12,000		$	74,000		$	(62,000	)		(84	%)
Expenses related to real estate held for sale		(1,094,000	)		(657,000	)		(437,000	)		(67	%)
Write-downs on real estate held for sale		(1,420,000	)		(1,321,000	)		(99,000	)		(7	%)
Income from assets held for sale, net of income taxes		95,000			1,739,000			(1,644,000	)		(95	%)
Total	$	(2,407,000	)	$	(165,000	)	$	(2,242,000	)		(1359	%)

Expenses related to discontinued operations increased by approximately $2.2 million during the nine months ended September 30, 2012 compared to the same three months in 2011.  This variance is primarily due to receiving income from two different assets held for sale during the three months ended September 30, 2012 and 2011.  Expenses related to real estate held for sale increased due to acquiring two properties during 2012.  The increase in expenses related to real estate held for sale is due to attorney fees for the bankruptcy and other operating expenses for 1701 Commerce.  During the nine months ended September 30, 2011 we recorded net gains on sale of real estate held for sale for properties sold in prior periods due to payments on settlement agreements, with gains higher than during the same time period in 2012.  Write downs on real estate held for sale were higher during the nine months ended September 30, 2012 than they were during the same time period in 2011.

See Note F — Real Estate Held For Sale and Note G – Assets 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.

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 assets.  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 the aggregate capital received by Fund II and us from the sale of shares or membership units.

During the nine months ended September 30, 2012, net cash flows used in operating activities were approximately $2.3 million.  Operating cash flows were used for the payment of normal operating expenses such as management fees, accounting fees, legal bills and expenses related to real estate held for sale.  Cash flows related to investing activities consisted of cash used by loan investments in new real estate loans of approximately $22.9 million and an investment in MVP Realty Advisors of approximately $0.5 million. In addition, cash flows related to investing activities consisted of cash provided by loan payoffs and sale of investments in real estate loans to third parties of approximately $18.4 million, proceeds from the sale of REO and nonrefundable extension fees on REO of approximately $0.2 million, proceeds of $0.7 million from unsecured claims awarded from settlement with guarantor and proceeds from notes receivable of approximately $1.3 million.  In addition, the Bankruptcy Court issued an order to deny the dismissal of the bankruptcy and required 1701 Commerce to deposit $1 million as additional collateral with the court, of which our portion is $0.9 million.  Cash flows used in financing activities consisted of cash for payments on notes payable of approximately $0.2 million and purchase of 14,374 shares of treasury stock from a plaintiff in a lawsuit of approximately $0.4 million.

At September 30, 2012, we had approximately $2.1 million in cash, $0.7 million in marketable securities – related party and approximately $97.8 million in total assets.  We intend to meet short-term working capital needs through a combination of proceeds from loan payoffs, loan sales, sales of real estate held for sale and/or borrowings.  We believe we have sufficient working capital to meet our operating needs during the next 12 months.

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During April 2012, we contributed $1,000 for a 40% interest in MVPRA.  Mr. Shustek, through a wholly owned company named MVP Capital Partners, LLC (“MVPCP”), contributed $1,500 for a 60% interest in MVPRA.  We and MVPCP anticipate providing additional funds to MVPRA, either in the form of capital contributions or loans.  The amount and nature of such funding arrangements cannot be determined at this time. As of September 30, 2012, we and MVPCP have loaned approximately $0.5 million and approximately $1.6 million, respectively to MVPRA related to MVP REIT, Inc.

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 foreseeable future.

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.

On June 7, 2012, our Board of Directors approved the adoption of a prearranged stock repurchase plan intended to qualify for the safe harbor under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan”). The 10b5-1 Plan will become effective on the third business day following the earlier of (i) completion of the proposed acquisition by the Company of VRM I in a stock for stock merger pursuant to a definitive merger agreement dated May 30, 2012 (the “Merger Agreement”), (ii) a vote by our shareholders or VRM I to reject the proposed Merger or (iii) termination of the Merger Agreement by VRM I.  The 10b5-1 Plan will terminate twelve months after its effective date, unless terminated sooner in accordance with its terms. Purchases may be made in the open market or through privately negotiated transactions in support of our stock repurchase plan. Purchases in the open market will be made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. We are authorized to purchase up to $5,200,000 of its common stock pursuant to the 10b5-1 Plan.  During the nine months ended September 30, 2012 we purchased 475, 405 shares of treasury stock and retired 664,783.

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 14, 2012, we have met our 3% reserve requirement.

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 4.5% to 15%.  Revenue by product will fluctuate based upon relative balances during the period.  We had investments in 18 real estate loans, as of September 30, 2012, with a balance of approximately $30.7 million as compared to investments in 24 real estate loans as of December 31, 2011, with a balance of approximately $58.0 million.

For additional information on our investments in real estate loans, refer to Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

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Asset Quality and Loan Reserves

As a commercial real estate lender willing to invest in riskier loans, rates of delinquencies, foreclosures or losses on our loans could be higher than those generally experienced in the commercial mortgage lending industry during this period of economic slowdown and 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 from 2007 through 2009 reduced the availability of credit for many prospective borrowers.  While credit markets have generally improved, the commercial real estate markets in our principal areas of operation have not recovered, thereby resulting in continuing constraints on the availability of credit in these markets.  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.

OFF-BALANCE SHEET ARRANGEMENTS

As of September 30, 2012, we do not have any interests in off-balance sheet special purpose entities nor do we have any interests in non-exchange traded commodity contracts.

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 H – Related Party Transactions 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.

CRITICAL ACCOUNTING ESTIMATES

Revenue Recognition

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

The following table presents a sensitivity analysis, averaging the balance of our loan portfolio at the end of the last six quarters, to show the impact on our financial condition at September 30, 2012, 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	$	460,000
Weighted average interest rate assumption increased by 5.0% or 500 basis points	$	2,302,000
Weighted average interest rate assumption increased by 10.0% or 1,000 basis points	$	4,604,000
Weighted average interest rate assumption decreased by 1.0% or 100 basis points	$	(460,000	)
Weighted average interest rate assumption decreased by 5.0% or 500 basis points	$	(2,302,000	)
Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points	$	(4,604,000	)

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.

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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, 2012, 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	$	307,000
Allowance for loan losses assumption increased by 5.0% of loan portfolio	$	1,536,000
Allowance for loan losses assumption increased by 10.0% of loan portfolio	$	3,071,000
Allowance for loan losses assumption decreased by 1.0% of loan portfolio	$	(307,000	)
Allowance for loan losses assumption decreased by 5.0% of loan portfolio	$	(1,536,000	)
Allowance for loan losses assumption decreased by 10.0% of loan portfolio	$	(3,071,000	)

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 and MVP Mortgage generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.

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

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

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

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

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

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

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Real Estate Held for Sale and Other Real Estate Owned

Real estate held for sale and other real estate owned includes real estate acquired through foreclosure or deed in lieu 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.  The carrying values of real estate held for sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note L – Recent Accounting Pronouncements 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.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting during the third quarter of 2012, that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Please refer to Note M – Legal Matters Involving the Manager and Note N – Legal Matters Involving the Company 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 for information regarding our legal proceedings, which are incorporated herein by reference.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

The following is a summary of our stock purchases during the three months ended September 30, 2012, as required by Regulation S-K, Item 703.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of (or Approximate Dollar Value) of Shares that May Yet Be Purchase Under the Plans or Programs
July 1 – July 31, 2012		--	$	--		--	$	2,461,802
August 1 – August 31, 2012		--		--		--		2,461,802
September 1 – September 30, 2012		--		--		--		2,461,802
Total		--	$	--		--	$	2,461,802

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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
2.2(12)		Membership Interest Purchase Agreement between VRM I, VRM II and NorthStar Hawaii, LLC
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
10.1 (1)		Form of Management Agreement between Vestin Mortgage, LLC 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, LLC, 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
10.9 (13)		Deed in Lieu
14 (3)		Vestin Realty Mortgage II, Inc. Code of Business Conduct and Ethics
21.1 (2)		List of subsidiaries of the Registrant
31.1		Section 302 Certification of Michael V. Shustek
31.2		Section 302 Certification of Eric Bullinger
32		Certification Pursuant to 18 U.S.C. Sec. 1350
101		The following material from the Company's quarterly report on Form 10-Q for the three and nine months ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2012 (unautdited) and December 31, 2011, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011 (unaudited), (iii) Cosolidated Statements of Other Comprehensive Inocme for the three and nine months ended September 30, 2012 and 2011 (unaudited), (iv) Consolidated Statement of Equity for the nine months ended September 30, 2012 (unaudited), (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited), and (vi) Notes to the Consolidated Financial Statements (unaudited).
(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)
(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)
(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)
(12)	Incorporated herein by reference to the Current Report on Form 8-K/A filed on November 14, 2011 (File No. 000-51892)
(13)	Incorporated herein by reference to the Current Report on Form 10-K filed on March 16, 2012 (File No. 000-51892)

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SIGNATURES

Pursuant to the requirements 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 14, 2012
By:	/s/ Eric Bullinger
	Eric Bullinger
	Chief Financial Officer
Date:	November 14, 2012

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Exhibit 31.1

CERTIFICATIONS

I, Michael V. Shustek, certify that:

1. I have reviewed this Form 10-Q of Vestin Realty Mortgage II, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 14, 2012

/s/ Michael V. Shustek

Michael V. Shustek

Chief Executive Officer

Vestin Realty Mortgage II, Inc.

Exhibit 31.2

CERTIFICATIONS

I, Eric Bullinger, certify that:

1. I have reviewed this Form 10-Q of Vestin Realty Mortgage II, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 14, 2012

/s/ Eric Bullinger

Eric Bullinger

Chief Financial Officer

Vestin Realty Mortgage II, Inc.

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

Michael V. Shustek, as Chief Executive Officer of Vestin Realty Mortgage II, Inc. (the “Registrant”), and Eric Bullinger, as Chief Financial Officer of the Registrant, hereby certify, pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Registrant’s Report on Form 10-Q for the nine months ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: November 14, 2012

/s/ Michael V. Shustek

Michael V. Shustek

Chief Executive Officer

Vestin Realty Mortgage II, Inc.

Date: November 14, 2012

/s/ Eric Bullinger

Eric Bullinger

Chief Financial Officer

Vestin Realty Mortgage II, Inc.