The following is a financial review and analysis of our financial condition and results of operations for the year ended December 31, 2008, December 31, 2007, and the twelve months ended December 31, 2006. This discussion should be read in conjunction with our financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this report on Form 10-K and our reports on Form 10-Q, Part I, Item 2 Management's Discussion and Analysis of Financial Conditions and Results of Operations for the quarters ended March 31, 2008, June 30, 2008 and September 30, 2008.

FORWARD-LOOKING STATEMENTS

Certain statements in this report, including, without limitation, matters discussed under this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with the consolidated financial statements, related notes, and other detailed information included elsewhere in this report on Form 10-K. We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as "believes," "anticipates," "expects," "intends," "plans," "projects," "estimates," "assumes," "may," "should," "will," or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements. These forward-looking statements are based on our current beliefs, intentions and expectations.

These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described in Part I Item 1A Risk Factors of this Annual Report on Form 10-K and in our other securities filings with the Securities and Exchange Commission ("SEC"). Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and involve inherent risks and uncertainties. Our estimates of the value of collateral securing our loans may change, or the value of the underlying property could decline subsequent to the date of our evaluation. As a result, such estimates are not guarantees of the future value of the collateral. The forward-looking statements contained in this report are made only as of the date hereof. We undertake no obligation to update or revise information contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

RESULTS OF OPERATIONS

OVERVIEW

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

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

Our recent operating results have been adversely affected by increases in allowances for loan losses and increases in non-performing assets. This negative trend accelerated sharply during the year ended December 31, 2008. We recognized a provision for loan losses of approximately $12.3 million for the year ended December 31, 2008. Recognition of this provision was driven largely by the increase in non-performing assets, coupled with the deteriorating economic situation that has driven down real estate values and limited the availability of credit to our borrowers who had anticipated securing take-out financing to repay our loan. As of December 31, 2008, we had 16 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 $19.9 million, net of allowance for loan losses of approximately $15.4 million. These loans have been placed on non-accrual of interest status and are the subject of pending foreclosure proceedings.

Non-performing assets, net of allowance for loan losses, totaled approximately $23.5 million or 62% of our total assets as of December 31, 2008, as compared to approximately $15.5 million or 24% of our total assets as of December 31, 2007. At December 31, 2008, non-performing assets consisted of approximately $3.6 million of real estate held for sale and approximately $19.9 million of non-performing loans, net of allowance for loan losses. None of the real estate held for sale as of December 31, 2008 was generating any income from rentals or other sources. See Note F - Real Estate Held for Sale and Note D - Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

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

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

As of December 31, 2008, we had loans with common guarantors. For additional information regarding loans with common guarantors see Note C - Financial Instruments and Concentrations of Credit Risk of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Report Form 10-K.

As of March 4, 2009, one performing loan, totaling $1.2 million, subsequently became delinquent in interest payments. Our manager has commenced foreclosure proceedings, and is proceeding with legal action to enforce the personal guarantees. However, no assurance can be given at this time that full payment will be received on this newly delinquent loan.

As of December 31, 2008, our loan-to-value ratio was 84.75%, net of allowances for loan losses, on a weighted average basis generally using appraisals prepared on an "as-if developed basis" in connection with the loan origination. Additional marked increases in loan defaults accompanied by a rapid decline in real estate values, as evidenced by updated appraisals generally prepared on an "as-is-basis," will have a material adverse effect upon our financial condition and operating results. The current loan-to-value ratio is primarily a result of declining real estate values, which have eroded the market value of our collateral.

As of December 31, 2008, we have provided a specific reserve allowance for 14 non-performing loans and 7 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 financials statements in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

Our capital, subject to a 3% reserve, will constitute the bulk of the funds we have available for investment in real estate loans. We do not have any arrangements in place to materially increase the funds we will have available to invest from any other sources. See discussion under - "Capital and Liquidity."

As of December 31, 2008, our loans were in the following states: Arizona, California, Hawaii, Nevada, Oklahoma, Oregon, Texas and Washington.

SUMMARY OF FINANCIAL RESULTS

The Year Ended December 31, 2008

Total Revenues: For the year ended December 31, 2008, total revenues were approximately $3.0 million compared to approximately $4.9 million during the year ended December 31, 2007, a decrease of approximately $1.9 million or 38%. Revenues were primarily affected by the following factors:

· Interest income from investments in real estate loans decreased to approximately $2.6 million during the year ended December 31, 2008, compared to approximately $4.4 million during the same period in 2007, primarily due to the increase in non-performing loans referred to above. Our revenue is also dependent upon the balance of our investment in real estate loans and the interest earned on these loans. As of December 31, 2008, our investment in real estate loans was approximately $46.1 million compared to our investment in real estate loans of approximately $53.7 million as of December 31, 2007. This decline is largely attributable to the increase in non-performing assets, which has reduced the amount of cash available for investment in new loans and the increase of real estate owned properties acquired through the foreclosures of our investments in real estate loans. For additional information see Note D- Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Report Form 10-K.

· During the year ended December 31, 2008, we earned $43,000 in revenue from principal payments on notes receivable that were fully reserved, compared to $281,000 during the same period in 2007.

· During the year ended December 31, 2008, we recognized approximately $0.4 million from a settlement with a prior borrower.

Total Operating Expenses: For the year ended December 31, 2008, total operating expenses were approximately $14.4 million compared to approximately $3.2 million during the year ended December 31, 2007, an increase of approximately $11.2 million or 347%. Expenses were primarily affected by the following factors:

· Operating expenses increased primarily as a result of the recognition of provision for loan losses totaling approximately $12.3 million, compared to approximately $1.3 million for the same period in 2007. See "Specific Loan Allowance" in Note D - Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Report Form 10-K. During the year ended December 31, 2008, we foreclosed on seven loans, totaling approximately $8.4 million with expenses of $57,000, and classified the collateralized properties as real estate held for sale. See Note F - Real Estate Held for Sale of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Report Form 10-K

· Professional fees increased $71,000 during the year ended December 31, 2008 compared to the same period in 2007, 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 M - Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Report Form 10-K.

· Other expenses increased approximately $0.1 million or 24% for the year ended December 31, 2008, as a result of expenses related to non-performing loans.

Total Non-Operating Income (Loss): For the year ended December 31, 2008, total non-operating loss was approximately $2.0 million compared to non-operating income of approximately $0.4 million during the year ended December 31, 2007, a decline of approximately $2.4 million or 547%. This is decline is primarily due to the following factors:

· During the year ended December 31, 2008, we recorded a loss on sale of real estate loan of $75,000 as a result of the sale on a non-performing loan, Silver Star Destinations, LLC, to an unrelated third party for approximately $9.9 million, of which our portion was approximately $0.3 million. At the time of the sale, the loan was carried at approximately $0.3 million, which included an allowance for loan loss of approximately $0.4 million.

· During the year ended December 31, 2008, we recognized an other-than-temporary impairment of our marketable securities-related party, totaling approximately $2.2 million. In addition, we experienced a decrease of $43,000 or 29% of interest income from banking institutions due to a decrease in cash balances referred to above.

Total Loss from Real Estate Held for Sale: For the year ended December 31, 2008, total losses from real estate held for sale were approximately $8.1 million compared to income of approximately $0.7 million during year ended December 31, 2007, a decrease of approximately $8.8 million or 1226% due in significant part to the following factors:

· We wrote down approximately $7.8 million on eight properties held for sale during the year ended December 31, 2008. These write downs resulted from declining real estate values which adversely impacted the value of the properties we acquired through foreclosure. As of December 31, 2008, we had seven properties held for sale totaling approximately $3.6 million compared to one property held for sale as of December 31, 2007 totaling approximately $3.5 million For additional information see Note F - Real Estate Held For Sale of the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Report Form 10-K.

· We recorded a gain on sale of real estate held for sale related to seller financed loans of approximately $1.3 million during the year ended December 31, 2007, as a result of two seller financed loans being paid in full. Upon the sale of real estate held for sale where we provide financing, GAAP requires the new borrower to have a certain percentage equity ownership (ranging from 10% to 25%) to allow us to record the sale of the property. In addition, the borrower must maintain a minimum commitment in the property on a continuing basis. Therefore, until the borrower meets these requirements, the proceeds received from the borrower are recorded as a deposit liability or applied to the balance of the real estate held for sale - seller financed, depending on the guidelines established by GAAP. We have no real estate held for sale - seller financed as of December 31, 2008 and no related income during the year ended December 31, 2008.

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 year ended December 31, 2008, we declared cash dividends approximately $0.16 per common share. For tax purposes, approximately $0.02 per common share is classified as ordinary dividends and the balance of approximately $0.14 per common share is classified as non-dividend distributions.

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 I, 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 I, 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 I, 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.

In addition to satisfying the 90% taxable income distribution rule referred to above, the amount of distribution we make is ultimately based on distributing 100% of the REIT taxable income in order to limit any tax liability. The distribution of this additional 10% of REIT taxable income is typically made in the following tax year as IRC section 858 allows us to carry back dividends made, for example, in 2008 to 2007, for the purposes of zeroing out our 2007 REIT taxable income. As a result, included in the dividends of approximately $1.1 million declared during the year ended December 31, 2008 is approximately $0.2 million that was used to reduce our 2007 REIT taxable income to zero.

The table below reconciles the differences between reported net income and total estimated taxable income and estimated REIT taxable income for the year ended December 31, 2008:

                                                              For the
                                                            Year Ended
                                                         December 31, 2008
      Net loss, as reported                             $       (21,530,000 )
      Add (deduct):
      Provision for loan losses                                  12,327,000
      Write down on real estate held for sale                     7,820,000
      Net tax loss on foreclosure of real estate
      loans                                                      (3,388,000 )
      Book loss on sale of real estate held for sale                 97,000
      Tax loss on sale of real estate held for sale                (284,000 )
      Book loss on sale of real estate loan                          75,000
      Tax loss on sale of real estate loan                         (441,000 )
      Recovery of allowance for doubtful notes
      receivable                                                    (43,000 )
      Provision for doubtful accounts related to
      receivable                                                     68,000
      Payment on accrued legal expenses                            (272,000 )
      Impairment of marketable securities-related
      party                                                       2,181,000
      Non-dividend distribution from VRM II                        (103,000 )
      Tax loss on receivables deemed uncollectable                  (41,000 )
      Total taxable loss                                         (3,534,000 )
      Less: Taxable income attributable to TRS I,
      Inc.                                                          (38,000 )

      Estimated REIT taxable loss (prior to
      deductions for dividends paid)                    $        (3,572,000 )

The Year Ended December 31, 2007

Total Revenues: For the year ended December 31, 2007, total revenues increased by approximately $242,000 or 5.2% compared to the same period in 2006, due in significant part to the following factors:

· During the year ended December 31, 2007, we earned approximately $0.3 million from principal payments on notes receivable that were fully reserved compared to $15,000 earned during the same period in 2006.

· Interest income from investment in real estate loans totaled approximately $4.4 million during the year ended December 31, 2007, compared to approximately $4.6 million during the same period in 2006. This decrease was primarily due to the increase in non-performing loans to approximately $16.9 million as of December 31, 2007 compared to approximately $12.7 million as of December 31, 2006.

Total Operating Expenses: For the year ended December 31, 2007, total operating expenses were approximately $3.2 million compared to approximately $4.6 million during the twelve months ended December 31, 2006, a decrease of approximately $1.4 million or 30.2%. Expenses were primarily affected by the following factors:

· Our operating expenses are impacted materially by the recognition of loan losses. During the year ended December 31, 2007, we recognized provisions for loan losses of approximately $1.3 million related to the following; a performing land loan for property located in Glendale, Arizona, a performing commercial loan on a 100 unit condominium/apartment project in North Las Vegas, Nevada, a non-performing loan secured by various real estate collateral, including a 248 unit apartment complex in Oklahoma City, Oklahoma, and a non-performing loan secured by 25 acres for proposed 122 single-family subdivision in Brawley, California. During the twelve months ended December 31, 2006, we recognized a provision for loan loss of $3.0 million related to the loans secured by 4 cemeteries and 8 mortuaries in Hawaii.

· Professional fees increased approximately $0.3 million during the year ended December 31, 2007, compared to the same period in 2006, primarily due to the accrual of approximately $0.3 million in legal fees relating to the legal actions that have been filed against us in connection with the REIT conversion and RightStar.

Non-operating income: For the year ended December 31, 2007, total income for other non-operating income totaled approximately $0.4 million, primarily consisting of approximately $0.3 million in dividend income from a related party and approximately $0.1 million in bank interest income.

Total Income from Real Estate Held for Sale: For the year ended December 31, 2007, total income from real estate held for sale was approximately $0.7 million compared to approximately $0.2 million during the same period in 2006. The total income was primarily due to the following factors:

· We recorded a gain on sale of real estate held for sale related to seller financed loans of approximately $1.3 million during the year ended December 31, 2007 compared to approximately $0.2 million during the same period in 2006, as a result of a seller financed loan being paid in full.

· During the year ended December 31, 2007, our manager evaluated the carrying value and estimated liabilities associated with real estate owned located in Cathedral City, CA. Based on these estimates, our write downs on real estate held for sale for this property totaled approximately $0.2 million. We also recognized expenses related to real estate held for sale for this property which totaled approximately $0.4 million for the year ended December 31, 2007.

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.

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 I, 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 . . .