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

FORWARD-LOOKING STATEMENTS

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

RESULTS OF OPERATIONS

OVERVIEW

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

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

Our recent operating results have been adversely affected by increases in allowances for loan losses and increases in non-performing assets. This negative trend accelerated sharply during the year ended December 31, 2008 and continues to affect our operations. As of June 30, 2009, we had 13 loans considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due). These loans are currently carried on our books at a value of approximately $56.3 million, net of allowance for loan losses of approximately $43.5 million. These loans have been placed on non-accrual of interest status and are the subject of pending foreclosure proceedings.

Non-performing assets, net of allowance for loan losses, totaled approximately $75.9 million or 47% of our total assets as of June 30, 2009, as compared to approximately $98.1 million or 49% of our total assets as of December 31, 2008. At June 30, 2009, non-performing assets consisted of approximately $19.6 million of real estate held for sale and approximately $56.3 million of non-performing loans, net of allowance for loan losses. One of the real estate held for sale properties generated net income from rentals totaling $55,000, during the six months ended June 30, 2009. See Note F - Real Estate Held for Sale and Note D - Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

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

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

As of June 30, 2009, our loan-to-value ratio was 74.09%, net of allowances for loan losses, on a weighted average basis generally using updated appraisals. Additional marked increases in loan defaults accompanied by additional declines in real estate values, as evidenced by updated appraisals generally prepared on an "as-is-basis," will have a material adverse effect upon our financial condition and operating results. The current loan-to-value ratio is primarily a result of declining real estate values, which have eroded the market value of our collateral.

As of June 30, 2009, we have provided a specific reserve allowance for 11 non-performing loans and 9 performing loans based on updated appraisals of the underlying collateral and our evaluation of the borrower for these loans, obtained by our manager. For further information regarding allowance for loan losses, refer to Note D - Investments in Real Estate Loans in the notes to our consolidated financial statements in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

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

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

SUMMARY OF FINANCIAL RESULTS

                                           For the Three Months                 For the Six Months
                                              Ended June 30,                      Ended June 30,
                                          2009              2008              2009              2008

Total revenues                        $   2,376,000     $   5,916,000     $   4,524,000     $  13,072,000
Total operating expenses                 19,518,000        24,867,000        25,331,000        26,970,000
Non-operating income                      9,686,000         1,639,000         9,629,000         1,824,000
Loss from real estate held for sale      (7,064,000 )     (11,291,000 )      (9,749,000 )     (13,256,000 )

Loss before provision for income
taxes                                   (14,520,000 )     (28,603,000 )     (20,927,000 )     (25,330,000 )

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

Net loss                              $ (14,520,000 )   $ (28,603,000 )   $ (20,927,000 )   $ (25,330,000 )

Basic and diluted loss per common
share                                 $       (1.05 )   $       (1.92 )   $       (1.52 )   $       (1.70 )
Dividends declared per common share   $          --     $        0.17     $          --     $        0.49
Weighted average common shares           13,785,040        14,881,563        13,786,939        14,878,568
Weighted average term of
outstanding loans, including
extensions                                23 months         17 months         23 months         17 months

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

Total Revenues: For the three months ended June 30, 2009, total revenues were approximately $2.4 million compared to approximately $5.9 million for the same period in 2008, a decrease of approximately $3.5 million or 60% compared to the same period in 2008 due in significant part to the following factors:

· Interest income from investments in real estate loans was approximately $2.2 million during the three months ended June 30, 2009 compared to approximately $5.4 million during the same period in 2008. Our revenue is dependent upon the balance of our investment in real estate loans and our ability to collect the interest earned on these loans. As of June 30, 2009, our investment in real estate loans was approximately $181.8 million. As of June 30, 2008, our investment in real estate loans was approximately $287.6 million. The decline in interest income is largely attributable to the increase in non-performing assets, which has reduced the amount of cash available for investment in new loans and the increase of real estate owned properties acquired through the foreclosures of our investments in real estate loans. As of June 30, 2009, approximately $99.8 million (55%), prior to allowances for loan losses, of our loans were non-performing compared to approximately $122.0 million (42%) as of June 30, 2008. For additional information on our loan portfolio, see Note D - Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements of this Quarterly Report Form 10-Q.

· Included in other income during the three months ended June 30, 2008, we recognized approximately $0.3 million from a settlement with a prior borrower. During the same period in 2009, no similar income was recorded.

Total Operating Expenses: For the three months ended June 30, 2009, total operating expenses were approximately $19.5 million compared to approximately $24.9 million during the three months ended June 30, 2008, a decrease of approximately $5.3 million or 22%. Expenses were primarily affected by the following factors:

· During the three months ended June 30, 2009, we recognized a provision for loan loss totaling approximately $15.3 million, compared to approximately $22.3 million for the same period in 2008. It is premature at this time for us to determine whether or not the reduction in provision for loan loss during the three months ended June 30, 2009, as compared to the same period in 2008, is indicative of a trend. See "Specific Reserve Allowances" in Note D - Investments in Real Estate Loans of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

· We recognized approximately $0.9 million of interest expense during the three months ended June 30, 2009, related to the Junior Subordinated Notes issued, during June 2007, in connection with the trust preferred financing, compared to approximately $1.3 million during the same period in 2008. The total amount of outstanding Junior Subordinated Notes has been reduced as we have retired a significant portion of the Notes. In April 2009, we exchanged $20 million of the Junior Subordinated notes for certain replacement securities, which we acquired for approximately $10.0 million. This exchange resulted in a gain of approximately $9.7 million. In addition, we incurred approximately $0.9 million in loan fees relating to the financing and purchase of these Junior Subordinated notes.

· During the three months ended June 30, 2009, we recognized approximately $0.4 million of interest expenses related to secured borrowings held during the period compared to approximately $0.1 million for the same period in 2008.

· Professional fees increased approximately $0.9 million during three months ended June 30, 2009, compared to the same period in 2008, primarily due to legal fees relating to the legal actions that have been filed against us in connection with the REIT conversion. During the quarter ended June 30, 2009, we received subject to a reservation of rights payment of approximately $1.5 million from our D&O insurance carrier in respect of legal fees incurred in the defense of such actions. No assurance can be made regarding future reimbursement of legal fees. See Note O - Legal Matters Involving The Company of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Total Non-Operating Income: During the three months ended June 30, 2009, total non-operating income was approximately $9.7 million compared to non-operating income of $1.6 million during the three months ended June 30, 2008, an increase of $8.0 million or 491%. The increase in income is due to the recognition of a gain of approximately $9.7 million, relating to the retirement of $20 million of Junior Subordinated Notes at a discount. During the three months ended June 30, 2008 we recognized a gain of approximately $1.6 million, relating to the purchase of outstanding Junior Subordinated Notes at a discount to the face amount of such debt.

Total Loss from Real Estate Held for Sale: For the three months ended June 30, 2009, total losses from real estate held for sale were approximately $7.1 million compared to approximately $11.3 million for the three months ended June 30, 2008, a decrease of approximately $4.2 million or 37% due in significant part to the following factors:

· We wrote down approximately $6.4 million on six properties held for sale during the three months ended June 30, 2009, compared to approximately $11.0 million on four properties held for sale during the three months ended June 30, 2008. These write-downs resulted from declining real estate values which adversely impacted the value of the properties we acquired through foreclosure. For additional information see Note F - Real Estate Held For Sale of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

· We recorded a net loss of approximately $0.2 million on the sale of three real estate held for sale properties during the three months ended June 30, 2009. No sales of real estate held for sale were made during the three months ended June 30, 2008. For additional information see Note F - Real Estate Held For Sale of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Comparison of Operating Results for the six months ended June 30, 2009, to the six months ended June 30, 2008.

Total Revenues: For the six months ended June 30, 2009, total revenues were approximately $4.5 million compared to approximately $13.1 million during the six months ended June 30, 2008, a decrease of approximately $8.5 million or 65%. Revenues were primarily affected by the following factor in addition to the factors discussed above in Total Revenues for the three months ended June 30, 2009:

· Interest income from investments in real estate loans decreased to approximately $4.3 million during the six months ended June 30, 2009, compared to approximately $12.5 million during the same period in 2008, primarily due to the increase in non-performing loans referred to above. For additional information see Note D - Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Interim Report Form 10-Q

Total Operating Expenses: For the six months ended June 30, 2009, total operating expenses were approximately $25.3 million compared to approximately $27.0 million during the six months ended June 30, 2008, a decrease of approximately $1.6 million or 6%. Expenses were primarily affected by the following factors in addition to the factors discussed above in Total Operating Expenses for the three months ended June 30, 2009:

· We recognized approximately $2.2 million of interest expense during the six months ended June 30, 2009 related to the junior subordinated notes issued in connection with the trust preferred financing, compared to approximately $2.6 million during the same period in 2008.

· During the six months ended June 30, 2009, we recognized approximately $0.8 million of interest expenses related to secured borrowings held during the period compared to approximately $0.1 million for the same period in 2008.

· During the six months ended June 30, 2009, we recognized a provision for loan loss totaling approximately $16.6 million, compared to approximately $22.3 million for the same period in 2008. It is premature at this time for us to determine whether or not the reduction in provision for loan loss during the six months ended June 30, 2009, as compared to the same period in 2008, is indicative of a trend. See "Specific Loan Allowance" in Note D - Investments in Real Estate Loans of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

· Professional fees increased approximately $2.9 million during six months ended June 30, 2009, compared to the same period in 2008, primarily due to the legal fees relating to the legal actions that have been filed against us in connection with the REIT conversion. See Note O - Legal Matters Involving The Company of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Total Non-Operating Income: For the six months ended June 30, 2009, total non-operating income was approximately $9.6 million compared to approximately $1.8 million during the six months ended June 30, 2008, an increase of approximately $7.8 million or 428%. This increase is mainly due to the purchase of debt noted above.

Total Loss from Real Estate Held for Sale: For the six months ended June 30, 2009, total losses from real estate held for sale were approximately $9.7 million compared to approximately $13.3 million during the six months ended June 30, 2008, a decrease of approximately $3.6 million or 26%. The loss from real estate held for sale is due to the write-down on nine real estate held for sale properties, of approximately $8.9 million, during the six months ended June 30, 2009. During the six months ended June 30, 2008, total write-downs on real estate held for sale was approximately $12.8 million.

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

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

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

                                                               For the Six
                                                               Months Ended
                                                              June 30, 2009
      Net loss, as reported                                   $  (20,927,000 )
      Add (deduct):
      Provision for loan loss                                     16,604,000
      Write-down on real estate held for sale                      8,917,000
      Net tax loss on foreclosure of real estate loans           (17,935,000 )
      Book loss on sale of real estate held for sale                 228,000
      Net Tax loss on sale of real estate held for sale             (357,000 )
      Book loss (gain) on sale of real estate loan                  (110,000 )
      Tax loss on sale of real estate loan                       (14,837,000 )
      Recovery of allowance for doubtful notes receivable            (14,000 )
      Provision for doubtful accounts related to receivable           53,000
      Total taxable loss                                         (28,378,000 )
      Less : Taxable income attributable to TRS II, Inc.              56,000

      Estimated REIT taxable loss                             $  (28,322,000 )

CAPITAL AND LIQUIDITY

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

During the six months ended June 30, 2009, net cash flows used by operating activities approximated $4.5 million. Operating cash flows were adversely impacted by the decrease in interest income, related to the decrease in our investments in real estate loans, of approximately $8.1 million during the six months ended June 30, 2009, compared to the same period in 2008. In addition, we incurred approximately $8.9 million in write-downs on real estate held for sale and approximately $16.6 million in provisions for loan losses during the six months ended June 30, 2009. These write-downs and allowances represent the decreases in the fair value of these properties, which are expected to affect the amount of proceeds we will receive from future sales of these assets. Cash flows related to investing activities consisted of cash provided by loan payoffs, sales of real estate loans and proceeds for sales of real estate held for sale of approximately $23.7 million and cash used for new investments and purchases of real estate loans totaling approximately $17.4 million. Cash flows from financing activities consisted of a notes payable of approximately $4.0 million and payment on notes payable of approximately $13.1 million. Financing activities also consisted of a purchase of treasury stock totaling $42,000.

At June 30, 2009, we had approximately $5.7 million in cash, $0.5 million in marketable securities - related party and approximately $161.2 million in total . . .