**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C.**  **20549**





**FORM
      10-K**





(Mark
      one)





[   ]
      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF
      1934





For
      the
      year ended ______________________





Or





[X]
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT
      OF 1934





For
      the
      transition period from July
      1, 2005 to March
      31, 2006





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.
                EmployerIncorporation
                or Organization)
            
            Identification
                No.)




8379
      WEST
      SUNSET ROAD, LAS VEGAS, NEVADA  89113


(Address
      of principal executive offices) (Zip Code)





Registrant’s
      telephone number, including area code 702.227.0965





Securities
      registered pursuant to Section 12(b) of the Act:


NONE





Securities
      registered pursuant to Section 12(g) of the Act:


NONE





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
      [   ] No [X]





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes
      [   ] No [X]





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 if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (Sec 229.405 of this chapter) is not contained herein, and will
      not be contained, to the best of the registrant’s knowledge, in definitive proxy
      or information statements incorporated by reference in Part III of this Form
      10-K or any amendment to this Form 10-K. [   ]





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.  (Check one):





Large
                accelerated filer [   ]
            Accelerated
                filer [X]
            Non-accelerated
                filer [   ]





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


Yes
      [   ] No [X]





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of the last
      business day of the registrant’s most recently completed second fiscal
      quarter.





Not
      applicable.





As
      of
      June 7, 2006 there were 29,838,442 shares of the Company’s Common Stock
      outstanding.


*Table
          of Contents*


**EXPLANATORY
      NOTE**





On
      March
      31, 2006, Vestin Fund II, LLC, a Nevada limited liability company ("Fund II"),
      merged into Vestin Realty Mortgage II, Inc., a Maryland corporation (the
      "Registrant"). The Registrant was formed in January 2006 for the sole purpose
      of
      effecting the merger. Prior to the merger, the Registrant did not have any
      material assets or operations. This report is filed by the Registrant as the
      successor to Fund II which had a June 30 fiscal year end. Accordingly, this
      report has been filed for the nine month transition period ended March 31,
      2006.
      Due to the merger, the Registrant's fiscal year end is December 31 st .
















*Table
          of Contents*


**TABLE
      OF CONTENTS**




**Page**PART
                  IITEM
                  1.
              BUSINESS
              4ITEM
                  1A.
              RISK
                  FACTORS
              14ITEM
                  1B.
              UNRESOLVED
                  STAFF COMMENTS
              25ITEM
                  2.
              PROPERTIES
              25ITEM
                  3.
              LEGAL
                  PROCEEDINGS
              25ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS
              27PART
                  IIITEM
                  5.
              MARKET
                  FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
                  MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
              27ITEM
                  6.
              SELECTED
                  FINANCIAL DATA
              28ITEM
                  7.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
              29ITEM
                  7A.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK
              45ITEM
                  8.
              FINANCIAL
                  STATEMENTS AND SUPPLEMENTARY
                  DATA
              45ITEM
                  9.
              CHANGES
                  IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE
              46ITEM
                  9A.
              CONTROL
                  AND PROCEDURES
              46ITEM
                  9B.
              OTHER
                  INFORMATION
              49PART
                  IIIITEM
                  10.
              DIRECTORS
                  AND EXECUTIVE OFFICERS OF
                  REGISTRANT
              49ITEM
                  11.
              EXECUTIVE
                  COMPENSATION
              53ITEM
                  12.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT AND RELATED STOCKHOLDER MATTERS
              53ITEM
                  13.
              CERTAIN
                  RELATIONSHIPS AND RELATED
                  TRANSACTIONS
              54ITEM
                  14.
              PRINCIPAL
                  ACCOUNTING FEES AND SERVICES
              55PART
                  IVITEM
                  15.
              EXHIBITS
                  AND FINANCIAL STATEMENT
                  SCHEDULES
              56EXHIBIT
                  INDEX
              56SIGNATURES
              57BALANCE
                  SHEETS
              F-3STATEMENTS
                  OF OPERATIONS
              F-4STATEMENTS
                  OF STOCKHOLDERS' EQUITY
              F-5STATEMENTS
                  OF CASH FLOWS
              F-6NOTES
                  TO FINANCIAL STATEMENTS
              F-8SUPPLEMENTARY
                  INFORMATION
              F-31




*Table
          of Contents*


**PARTI**





Note
      Regarding Forward Looking Statements





This
      report and other written reports and oral statements made from time to time
      by
      us may contain forward looking statements. Such forward looking statements
      may
      be identified by the use of such words as “expects,” “plans,” “estimates,”
“forecasts,” “projects,” “anticipates,” “believes” and words of similar meaning.
      Forward looking statements are likely to address such matters as our business
      strategy, future operating results, future sources of funding for real estate
      loans brokered by us, future economic conditions and pending litigation
      involving us. Some of the factors which could affect future results are set
      forth in the discussion under “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations — Factors Affecting Our Operating
      Results.”





**ITEM
      1.**  **BUSINESS**





**General**





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





We
      invest
      in loans secured by real estate through deeds of trust or mortgages (hereafter
      referred to as “deeds of trust”). We commenced operations in June
      2001.





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





Our
      Manager is Vestin Mortgage, Inc. (the “Manager” or “Vestin Mortgage”), a Nevada
      corporation and licensed mortgage broker engaged in the business of brokerage,
      placement and servicing of commercial loans secured by real property. Our
      Manager is a wholly owned subsidiary of Vestin Group, Inc., a Delaware
      corporation (“Vestin Group”) wholly owned by Michael V. Shustek, the CEO and
      director of the Manager. Through its subsidiaries, Vestin Group is engaged
      in
      asset management, real estate lending and other financial services.





Pursuant
      to a Management Agreement, the Manager controls the daily operating activities
      of the Company, including the power to assign duties, to determine how to invest
      our assets, to sign bills of sale, title documents, leases, notes, security
      agreements, mortgage investments and contracts, and to assume direction of
      the
      business operations. As a result, our operating results are dependent upon
      the
      Manager’s ability and performance in managing our operations and servicing our
      assets.





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


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          4
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          of Contents*


**Real
      Estate Loan Objectives**





We
      generally invest in real estate loans throughout the areas in which Vestin
      Mortgage and its correspondents have experience. As of March 31, 2006 our loans
      were in the following states; Arizona, California, Hawaii, Nevada, New York,
      North Carolina, Oklahoma, Oregon, Texas, Washington and Wisconsin. The loans
      we
      invest in are selected for us by Vestin Mortgage from among loans originated
      by
      Vestin Mortgage or non-affiliated mortgage brokers. When Vestin Mortgage or
      a
      non-affiliated mortgage broker originates a loan for us, that entity identifies
      the borrower, processes the loan application, makes or invests in the loan
      and
      brokers or sells the loan to us. We believe that our loans are attractive to
      borrowers because of the expediency of Vestin Mortgage’s loan approval process,
      which takes about ten to twenty days.





As
      a
      non-conventional lender, we are more willing to invest in real estate loans
      to
      borrowers that conventional lenders would not deem to be creditworthy. Because
      of our increased willingness to fund riskier loans, borrowers are willing to
      pay
      us an interest rate that is two to five points above the rates generally charged
      by conventional lenders. We invest a significant amount of our funds in loans
      in
      which the real property being developed is not generating any income to the
      borrower. The “balloon payment” loans and bridge loans in which we invest are
      riskier because the borrower’s repayment depends on its ability to refinance the
      loan or develop the property so it can refinance the loan.





Our
      principal investment objectives are to:





·
            Produce
                revenues from the interest income on our real estate
                loans;





·
            Provide
                cash distributions from the net income generated by our real estate
                loans;





·
            Reinvest,
                to the extent permissible, payments of principal and sales (net of
                expenses).





**Acquisition
      and Investment Policies**





We
      seek
      to invest approximately 97% of our assets in real estate loans. Approximately
      3%
      will be held as a working capital cash reserve. As of March 31, 2006,
      approximately 69% of our assets are classified as investments in real estate
      loans.





Generally
      the collateral on our real estate loans is the real property that the borrower
      is purchasing or developing with the funds that we make available. We sometimes
      refer to these real properties as the security properties. While we may invest
      in other types of loans, most of the loans in which we invest have been made
      to
      real estate developers with a lesser proportion of loans involving land
      loans.





Our
      real
      estate investments are not insured or guaranteed by any government
      agency.





Vestin
      Mortgage continuously evaluates prospective investments, selects the loans
      in
      which we invest and makes all investment decisions on our behalf in its sole
      discretion. In evaluating prospective real estate loan investments, Vestin
      Mortgage considers such factors as the following:





·
            The
                ratio of the amount of the investment to the value of the property
                by
                which it is secured, or the loan-to-value
                ratio;





·
            The
                potential for capital appreciation or depreciation of the property
                securing the investment;





·
            Expected
                levels of rental and occupancy rates, if applicable;





·
            Potential
                for rental increases, if applicable;





·
            Current
                and projected revenues from the property if applicable;


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          5
          -
 *Table
          of Contents*





·
            The
                status and condition of the record title of the property securing
                the
                investment;





·
            Geographic
                location of the property securing the investment;
                and





·
            The
                financial condition of the borrowers and their principals, if any,
                who
                guarantee the loan.





Vestin
      Mortgage may obtain our loans from non-affiliated mortgage brokers and previous
      borrowers and by solicitation of new borrowers in those states where
      permissible. We may purchase existing loans that were originated by third party
      lenders and acquired by Vestin Mortgage to facilitate our purchase of the loans.
      Vestin Mortgage will sell the loans to us for no greater than Vestin Mortgage’s
      cost, not including its service fees and compensation. There are no specific
      requirements or guidelines governing Vestin Mortgage’s discretion in determining
      which real estate loans it will place with us and which it will place with
      other
      funding sources.





When
      selecting real estate loans for us, Vestin Mortgage adheres to the following
      guidelines, which are intended to control the quality of the collateral given
      for our loans:





1. *Priority of Loans.* Generally,
      our assets are secured by first deeds of trust. First deeds of trust are loans
      secured by a full or divided interest in a first deed of trust secured by the
      property. Other loans that we invest in on the security property will not be
      junior to more than one other loan. As of March 31, 2006, approximately 99.82%
      of the principal amount of our outstanding interest in loans was secured by
      first deeds of trust.





2. *Loan-to-Value Ratio.* The
      amount of our loan combined with the outstanding debt secured by a senior loan
      on a security property generally does not exceed the following percentage of
      the
      appraised value of the security property at origination:





**Type
                of Secured Property**
            **Loan-to-Value
                Ratio**Residential
            75%Unimproved
                Land
            60%
                 (of anticipated as-if development value)Acquisition
                and Development
            60%
                 (of anticipated as-if development value)Commercial
                Property
            75%
                 (of anticipated as-if development value)Construction
            75%
                 (of anticipated post-development value)Leasehold
                Interest
            75%
                (of value of leasehold interest)





We
      may
      deviate from these guidelines under certain circumstances. For example, Vestin
      Mortgage, in its discretion, may increase any of the above loan-to-value ratios
      if a given loan is supported by credit adequate to justify a higher
      loan-to-value ratio, including personal guarantees. Occasionally, our collateral
      may include personal property attached to the real property as well as real
      property. We do not have specific requirements with respect to the projected
      income or occupancy levels of a property securing our investment in a particular
      loan. These loan-to-value ratios will not apply to financing offered by us
      to
      the purchaser of any real estate acquired through foreclosure, or to refinance
      an existing loan that is in default when it matures. In those cases, Vestin
      Mortgage, in its sole discretion, shall be free to accept any reasonable
      financing terms it deems to be in our best interest. The target loan-to-value
      ratio for our loan portfolio as a whole is approximately 70%.


-
          6
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 *Table
          of Contents*


Loan
      to
      value ratios are based on appraisals that the Manager receives at the time
      of
      loan underwriting and may not reflect subsequent changes in value estimates.
      Such appraisals, which may have been commissioned by the borrower and also
      may
      precede the placement of the loan with us, are generally dated no greater than
      12 months prior to the date of loan origination. The appraisals may be for
      the
      current estimate of the “as-if developed” value of the property, which
      approximates the post-construction value of the collateralized property assuming
      that such property is developed. “As-if developed” values on raw land loans or
      acquisition and development loans often dramatically exceed the immediate sales
      value and may include anticipated zoning changes, and successful development
      by
      the purchaser; upon which development is dependent on availability of financing.
      As most of the appraisals will be prepared on an “as-if developed” basis, if a
      loan goes into default prior to any development of a project, the market value
      of the property may be substantially less than the appraised value. As a result,
      there may be less security than anticipated at the time the loan was originally
      made. If there is less security and a default occurs, we may not recover the
      full amount of the loan.





We
      or the
      borrower retain appraisers who are licensed or qualified as independent
      appraisers and certified by or hold designations from one or more of the
      following organizations: the Federal National Mortgage Association, the Federal
      Home Loan Mortgage Corporation, the National Association of Review Appraisers,
      the Appraisal Institute, the Society of Real Estate Appraisers, M.A.I., Class
      IV
      Savings and Loan appraisers or from among appraisers with other qualifications
      acceptable to Vestin Mortgage. However, appraisals are only estimates of value
      and cannot be relied on as measures of realizable value. An employee or agent
      of
      Vestin Mortgage will review each appraisal report and will conduct a physical
      inspection for each property. A physical inspection includes an assessment
      of
      the subject property, the adjacent properties and the neighborhood, but
      generally does not include entering any structures on the property.





3. *Construction
      Real Estate Loans.* We
      invest
      in construction loans other than home improvement loans on residential property,
      when the loan-to-value ratio does not exceed 75% of the appraised, completed
      value of the security property at origination.





4. *Terms
      of Real Estate Loans.* Our
      loans
      as of March 31, 2006 range from a six month term to a sixty-eight month term,
      including approved extensions. Most of our loans are for a term of 12 months.
      Our original loan agreements, however, permit extensions to the term of the
      loan
      by mutual consent. Such extensions are generally provided on loans where the
      original term was 12 months or less and where a borrower requires additional
      time to complete a construction project or negotiate take out
      financing.





As
      of
      March 31, 2006, all of our loans provided for payments of interest only with
      a
“balloon” payment of principal payable in full at the end of the term, with the
      exception of two of our loans which include principal and interest payments.
      As
      of March 31, 2006, these two loans had a balance of approximately $18,650,000
      and had terms ranging from twelve to thirty-six months. In addition, we invest
      in real estate loans which require borrowers to maintain interest reserves
      funded from the principal amount of the loan for a period of time. At March
      31,
      2006, we had $8.5 million in investments in real estate loans which had interest
      reserves where the total outstanding principal was approximately $14.7 million,
      including participating lenders. These loans had interest reserves of
      approximately $1.6 million, of which our portion is $0.8 million. At June 30,
      2005, we had $48 million in investments in real estate loans that had interest
      reserves where the total outstanding principal was approximately $67 million,
      including participating lenders. These loans had interest reserves of
      approximately $3.7 million, of which our portion was $1.8 million.





5. *Escrow
      Conditions.* Our
      loans
      will often be funded by us through an escrow account held by a title insurance
      company, subject to the following conditions:





·
            Borrowers
                will obtain title insurance coverage for all loans, providing title
                insurance in an amount at least equal to the principal amount of
                the loan.
                Title insurance insures only the validity and priority of our deed
                of
                trust, and does not insure us against loss by other causes, such
                as
                diminution in the value of the security
                property.





·
            Borrowers
                will obtain fire and casualty insurance for all loans secured by
                improved
                real property, covering us in an amount sufficient to cover the
                replacement cost of
                improvements.


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·
            All
                insurance policies, notes, deeds of trust or loans, escrow agreements,
                and
                any other loan documents for a particular transaction will cover
                us as a
                beneficiary.





6. *Purchase
      of Real Estate Investments from Affiliates.* We
      may
      acquire real estate loans from our affiliates, including Vestin Mortgage, for
      a
      price not in excess of the par value of the note, plus allowable fees and
      expenses, but without allowance of any other compensation for the
      loans.





7. *Note
      Hypothecation.* We
      may
      also acquire real estate loans secured by assignments of secured promissory
      notes. These real estate loans must satisfy our stated investment standards,
      including our loan-to-value ratios, and also may not exceed 80% of the principal
      amount of the assigned note upon acquisition. For example, if the property
      securing a note we acquire is commercial property, the total amount of
      outstanding debts secured by the property must not exceed 75% of the appraised
      value of the property, and the real estate loan will not exceed 80% of the
      principal amount of the assigned note. For real estate loans secured by
      promissory notes, we will rely on the appraised value of the underlying
      property, as determined by an independent written appraisal which was conducted
      within the then-preceding twelve months. If an appraisal was not conducted
      within that period, then we will arrange for a new appraisal to be prepared
      for
      the property prior to acquisition of the loan.





8. *Participation.* We
      participate in loans with other lenders, including affiliates as permitted
      by
      the NASAA Guidelines, by providing funds for or purchasing an undivided interest
      in a loan meeting our investment guidelines described above. Typically, we
      participate in loans if:





·
            We
                did not have sufficient funds to invest in an entire
                loan;





·
            We
                are seeking to increase the diversification of our loan portfolio;
                or





·
            Vestin
                Mortgage originated a loan that fit within our investment guidelines
                but
                it would constitute more than 20% of our anticipated capital contribution
                or otherwise be disproportionately large given our then existing
                portfolio.





Loans
      in
      which third party investors have participated through inter-creditor agreements
      (“Inter-creditor Agreements”) are accounted for as secured borrowings in
      accordance with SFAS 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* (“SFAS
      140”). The Inter-creditor Agreements provide us additional funding sources for
      real estate loans whereby a third party investor (the “Investor”) may
      participate on a non-pari passu basis in certain real estate loans with us
      and/or Fund I and/or Fund III (collectively, the “Lead Lenders”). In the event
      of borrower non- performance, the Inter-creditor Agreements generally provide
      that the Lead Lenders must repay the Investor’s loan amount either by (i)
      continuing to remit to the Investor the interest due on the participated loan
      amount; (ii) substituting an alternative loan acceptable to the Investor; or
      (iii) repurchasing the participation from the Investor for the outstanding
      balance plus accrued interest.





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.





As
      of
      March 31, 2006, 83% of our loans were loans in which we participated with other
      lenders, most of whom are our affiliates.





9. *Diversification.* We
      voluntarily comply with NASAA Guidelines unless a majority of our unaffiliated
      board members determines that it is in our best interests not to comply with
      such guidelines. The NASAA Guidelines provide that we neither invest in or
      make
      real estate loans on any one property which would exceed, in the aggregate,
      an
      amount equal to 20% of our capital nor may we invest in or make real estate
      loans to or from any one borrower which would exceed, in the aggregate, an
      amount greater than 20% of our capital As of March 31, 2006, our single largest
      loan accounted for 10.43% of our stockholders’ equity. The loan yields interest
      at 8.00% per annum and, as of March 31, 2006, the outstanding balance of the
      loan was approximately $28.9 million.


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10. *Reserve
      Fund.* We
      have
      established contingency working capital reserves of approximately 3% of our
      capital to cover our unexpected cash needs.





11. *Credit
      Evaluations.* When
      reviewing a loan proposal, Vestin Mortgage determines whether a borrower has
      sufficient equity in the security property. Vestin Mortgage may also consider
      the income level and creditworthiness of a borrower to determine its ability
      to
      repay the real estate loan.





12. *Sale
      of Real Estate Loan Investments.* Although
      Vestin Mortgage has no plans to do so, Vestin Mortgage may sell our real estate
      loans or interest in our loans to either affiliates or non-affiliated parties
      when Vestin Mortgage believes that it is advantageous to us to do so. However,
      we do not expect that the loans will be marketable or that a secondary market
      will ever develop for them.





**Real
      Estate Loans to Affiliates**





We
      will
      not invest in real estate loans made to Vestin Mortgage, Vestin Group or any
      of
      our affiliates. However, we may acquire an investment in a real estate loan
      payable by Vestin Mortgage when Vestin Mortgage has assumed the obligations
      of
      the borrower under that loan, through a foreclosure on the
      property.





**Purchase
      of Loans from Vestin Mortgage and Its Affiliates**





In
      addition to those loans Vestin Mortgage selects for us, we purchase loans that
      were originated by Vestin Mortgage or other parties and first held for Vestin
      Mortgage’s own portfolio, as long as the loan is not in default and otherwise
      satisfies all of our lending criteria. This requirement also applies to any
      loan
      originated by an affiliate of Vestin Mortgage, such as Vestin Group, Michael
      Shustek, Chief Executive Officer of Vestin Group or another principal of Vestin
      Mortgage. However, we will not acquire a loan from or sell a loan to a real
      estate program in which Vestin Mortgage has an interest except in compliance
      with NASAA Guidelines. We voluntarily comply with NASAA Guidelines unless a
      majority of our unaffiliated board members determines that it is in our best
      interests not to comply with such guidelines. The NASAA Guidelines, however,
      will not apply if a majority of our unaffiliated directors determines that
      it is
      in our best interests to deviate from the NASAA Guidelines.





**Types
      of Loans We Invest In**





We
      primarily invest in loans which are secured by first or second trust deeds
      on
      real property. Such loans fall into the following categories: raw and unimproved
      land, acquisition and development, construction, commercial and residential
      loans. The following discussion sets forth certain guidelines the manager
      intends to follow in allocating our investments among the various types of
      loans. Our manager, however, may change these guidelines at its discretion,
      subject to review by our board of directors. Actual investments will be
      determined by our manager pursuant to the terms of the management agreement,
      and
      the actual percentages invested among the various loan categories may vary
      from
      the guidelines below.





**Raw
      and Unimproved Land Loans**





Generally
      15% to 25% of the loans invested in by us may be loans made for the purchase
      or
      development of raw, unimproved land. Generally, we determine whether to invest
      in these loans based upon the appraised value of the property and the borrower’s
      actual capital investment in the property. We will generally invest in loans
      for
      up to 60% of the as-if developed appraised value of the property and we
      generally require that the borrower has invested in the property actual capital
      expenditures of at least 25% of the property’s value. As-if developed values on
      raw and unimproved land loans often dramatically exceed the immediate sales
      value and may include anticipated zoning changes, and successful development
      by
      the purchaser, upon which development is dependent on availability of financing.
      As of March 31, 2006, approximately 22% of our loans were in this
      category.


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**Acquisition
      and Development Loans**





Generally
      10% to 25% of the loans invested in by us may be acquisition and development
      loans. Such loans enable borrowers to acquire and/or complete the basic
      infrastructure and development of their property prior to the construction
      of
      buildings or structures. Such development may include installing utilities,
      sewers, water pipes, and/or streets. We will generally invest in loans with
      a
      face value of up to 60% of the appraised value of the property. Loan to value
      ratios on acquisition and development loans are calculated using as-if developed
      appraisals. Such appraisals have the same valuation limitations as raw and
      unimproved land loans, described above. As of March 31, 2006, approximately
      21%
      of our loans were in this category.





**Construction
      Loans**





Generally
      10% to 70% of our loans may be construction loans. Such loans provide funds
      for
      the construction of one or more structures on developed land. Funds under this
      type of loan will generally not be forwarded to the borrower until work in
      the
      previous phase of the project has been completed and an independent inspector
      has verified certain aspects of the construction and its costs. We will
      typically require material and labor lien releases by the borrower per completed
      phase of the project. We will review the appraisal of the value of the property
      and proposed improvements, and will generally finance up to 75% of the appraised
      value of the property and proposed improvements. Such appraisals have the same
      valuation limitations as raw and unimproved land loans, described above. As
      of
      March 31, 2006, approximately 6% of our loans were in this
      category.





**Commercial
      Property Loans**





Generally
      20% to 50% of the loans we invest in may be commercial property loans. Such
      loans provide funds to allow commercial borrowers to acquire income-producing
      property or to make improvements or renovations to the property in order to
      increase the net operating income of the property so that it may qualify for
      institutional refinancing. Generally, we review the property appraisal and
      generally invest in loans for up to 75% of such appraised value of the property.
      As of March 31, 2006 approximately 51% of our loans were in this
      category.





**Residential
      Loans**





A
      small
      percentage of the loans invested in by us may be residential loans. Such loans
      facilitate the purchase or refinance of one to four family residential property
      units provided the borrower uses one of the units on the property as such
      borrower’s principal residence. We will generally invest in loans for up to 75%
      of the value of the property. As of March 31, 2006, we did not have any loans
      in
      this category.





**Collateral**





The
      types
      of collateral that will secure the loans include first deeds of trust, second
      deeds of trust or a leasehold interest.





**First
      Deed of Trust**





Most
      of
      our loans are secured by first deeds of trust. Thus as a lender, we will have
      rights as a first priority lender of the collateralized property. As of March
      31, 2006, approximately 99.82% of our loans were secured by first deeds of
      trust.





**Second
      Deed of Trust**





Up
      to 10%
      of our loans may be secured by second deeds of trust. In a second priority
      loan,
      the rights of the lender (such as the right to receive payment on foreclosure)
      will be subject to the rights of the first priority lender. In a wraparound
      loan, the lender’s rights will be comparably subject to the rights of a first
      priority lender, but the aggregate indebtedness evidenced by the loan
      documentation will be the first priority loan plus the new funds the lender
      invests. The lender would receive all payments from the borrower and forward
      to
      the senior lender its portion of the payments the lender receives. As of March
      31, 2006, approximately 0.18% of our loans were secured by a second deed of
      trust.


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**Prepayment
      Penalties and Exit Fees**





Generally,
      the loans we invest in will not contain prepayment penalties or exit fees.
      If
      our loans are at a high rate of interest in a market of falling interest rates,
      the failure to have a prepayment penalty provision or exit fee in the loan
      allows the borrower to refinance the loan at a lower rate of interest, thus
      providing a lower yield to us on the reinvestment of the prepayment proceeds.
      However, these loans will usually be written with relatively high minimum
      interest rates, which we would expect to minimize the risk of lower yields.
      As
      of March 31, 2006, none of our loans had a prepayment penalty and one of our
      loans had an exit fee.





**Extensions
      to Term of Loan**





Our
      original loan agreements permit extension to the term of the loan by mutual
      consent. Such extension is generally provided on loans where the original term
      was 12 months or less and where a borrower requires additional time to complete
      a construction project or negotiate take out financing. However, we only grant
      extensions when a borrower is in full compliance with the terms of the loan,
      including, but not limited to, the borrower’s obligation to make interest
      payments on the loan. As of March 31, 2006, approximately 39% of our loans
      received an extension to terms of the loan.





**Interest
      Reserves**





We
      may
      invest in loans that include a commitment for an interest reserve, which is
      usually established at loan closing. The interest reserve may be advanced by
      us
      or other lenders with the amount of the borrower’s indebtedness increased by the
      amount of such advances. At March 31, 2006, we had $8.5 investments in real
      estate loans which had interest reserves where the total outstanding principal
      was approximately $14.7 million, including participating lenders. These loans
      had interest reserves of approximately $1.6 million, of which our portion is
      $0.8 million.





**Balloon
      Payment**





As
      of
      March 31, 2006, all of our loans provided for payments of interest only with
      a
“balloon” payment of principal payable in full at the end of the term, with the
      exception of two of our loans which include principal and interest payments.
      As
      of March 31, 2006, these two loans had a balance of approximately $18,650,000
      and had terms ranging from twelve to thirty-six months. There are no specific
      criteria used in evaluating the credit quality of borrowers for real estate
      loans requiring balloon payments. Furthermore, a substantial period of time
      may
      elapse between the review of the financial statements of the borrower and the
      date when the balloon payment is due. As a result, there is no assurance that
      a
      borrower will have sufficient resources to make a balloon payment when due.
      To
      the extent that a borrower has an obligation to pay real estate loan principal
      in a large lump sum payment, its ability to repay the loan may be dependent
      upon
      its ability to sell the property, obtain suitable refinancing or otherwise
      raise
      a substantial amount of cash. As a result, these loans can involve a higher
      risk
      of default than loans where the principal is paid at the same time as the
      interest payments.





**Repayment
      of Loans on Sale of Properties**





We
      may
      require a borrower to repay a real estate loan upon the sale of the property
      rather than allow the buyer to assume the existing loan. We will require
      repayment if we determine that repayment appears to be advantageous to us based
      upon then-current interest rates, the length of time that the loan has been
      held
      by us, the creditworthiness of the buyer and our objectives. We will invest
      our
      net proceeds from any capital transaction in new real estate loans, hold the
      net
      proceeds as cash or distribute them to our members. These net proceeds will
      also
      include the principal of a loan deemed to be repaid for tax purposes as a result
      of the nature of a loan modification or loan extension. Our operating agreement
      provides that whether we choose to distribute the proceeds or reinvest them,
      our
      members will be deemed to have received a distribution of capital and
      recontributed the same amount to us. Capital transactions include payments
      of
      principal, foreclosures and prepayments of loans to the extent classified as
      a
      return of capital under the Internal Revenue Code and any other disposition
      of a
      loan or property.


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**Variable
      Rate Loans**





Occasionally
      we may acquire variable rate loans. Variable rate loans originated by Vestin
      Mortgage may use as indices the one and five year Treasury Constant Maturity
      Index, the Prime Rate Index and the Monthly Weighted Average Cost of Funds
      Index
      for Eleventh District Savings Institutions (Federal Home Loan Bank Board).
      Vestin Mortgage may negotiate spreads over these indices of 2.5% to 5.5%,
      depending upon market conditions when the loan is made. As of March 31, 2006,
      we
      did not hold any variable rate loans, and all of the loans in the real estate
      loans portfolio were fixed rate loans.





It
      is
      possible that the interest rate index used in a variable rate loan will rise
      (or
      fall) more slowly than the interest rate of other loan investments available
      to
      us. Vestin Mortgage attempts to minimize this interest rate differential by
      tying variable rate loans to indices that are sensitive to fluctuations in
      market rates. Additionally, most variable rate loans originated by Vestin
      Mortgage contain provisions under which the interest rate cannot fall below
      the
      initial rate.





Variable
      rate loans generally have interest rate caps. We anticipate that the interest
      rate cap will be a ceiling that is 2% to 4% above the starting rate with a
      floor
      rate equal to the starting rate. For these loans there is the risk that the
      market rate may exceed the interest cap rate.





Variable
      rate loans of five to ten year maturities are not assumable without the prior
      consent of Vestin Mortgage. We do not expect to invest in or purchase a
      significant amount of other assumable loans. To minimize our risk, any borrower
      assuming an existing real estate loan will be subject to the same underwriting
      criteria as the original borrower.





**Borrowing**





We
      may
      incur indebtedness to:





·
            Make
                distributions to enable us to comply with REIT distribution
                requirements;





·
            Finance
                our investments in real estate
                loans;





·
            Prevent
                a default under real estate loans that are senior to our real estate
                loans;





·
            Discharge
                senior real estate loans if this becomes necessary to protect our
                investment in real estate loans; or





·
            Operate
                or develop a property that we acquired under a defaulted
                loan.





Our
      indebtedness will not exceed 70% of the fair market value of our real estate
      loans. This indebtedness may be with recourse to our assets.





In
      addition, we may enter into structured arrangements with other lenders in order
      to provide them with a senior position in real estate loans which we might
      jointly fund. For example, we might establish a wholly-owned special purpose
      corporation which would borrow funds from an institutional lender under an
      arrangement where the resulting real estate loans would be assigned to a trust,
      and the trust would issue a senior certificate to the institutional lender
      and a
      junior certificate to the special purpose corporation. This would assure the
      institutional lender of repayment in full prior to our receipt of any repayment
      on the jointly funded real estate loans.





**Competition**





Generally,
      real estate developers depend upon the timely completion of a project to obtain
      a competitive advantage when selling their properties. We have sought to attract
      real estate developers by offering expedited loan processing, which generally
      provides quick loan approval and funding of a loan. As a result, we have
      established a market niche as a non-conventional real estate
      lender.


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We
      consider our direct competitors to be the providers of non-conventional real
      estate loans, that is, lenders who offer short-term, equity-based loans on
      an
      expedited basis for higher fees and rates than those charged by conventional
      lenders. In addition, there has been an increase in competition from
      conventional real estate lenders and real estate loan investors, such as
      commercial banks, thrifts, conduit lenders, insurance companies, mortgage
      brokers, pension funds and other financial institutions that offer conventional
      real estate loans. No particular competitor dominates the market. Many of the
      companies against which we compete have substantially greater financial,
      technical and other resources than us. Competition in our market niche depends
      upon a number of factors, including price and interest rates of the loan, speed
      of loan processing, cost of capital, reliability, quality of service and support
      services.





**Regulation**





We
      will
      be managed by Vestin Mortgage, subject to the oversight of our board of
      directors, pursuant to the terms and conditions of our Management Agreement.
      Vestin Mortgage’s operates as a mortgage broker are subject to extensive
      regulation by federal, state and local laws and governmental authorities. Vestin
      Mortgage conducts its real estate loan business under a license issued by the
      State of Nevada Mortgage Lending Division. Under applicable Nevada law, the
      division has broad discretionary authority over Vestin Mortgage’s activities,
      including the authority to conduct periodic regulatory audits of all aspects
      of
      Vestin Mortgage’s operations.





We
      and
      Vestin Mortgage are also subject to the Equal Credit Opportunity Act of 1974,
      which prohibits creditors from discriminating against loan applicants on the
      basis of race, color, sex, age or marital status, and the Fair Credit Reporting
      Act of 1970, which requires lenders to supply applicants with the name and
      address of the reporting agency if the applicant is denied credit. We are also
      subject to various other federal and state securities laws regulating the
      issuance and sale of securities, as well as the Employee Retirement Income
      Security Act of 1974.





The
      NASAA
      Guidelines have been adopted by various state agencies charged with protecting
      the interest of the investors. Administrative fees, loan fees, and other
      compensation paid to Vestin Mortgage and its affiliates would be generally
      limited by the NASAA Guidelines. These guidelines also include certain
      investment procedures and criteria which are required for new loan investments.
      We are not required to comply with NASAA Guidelines; however, we voluntarily
      do
      so unless a majority of our unaffiliated directors determine that it is in
      our
      best interest to diverge from NASAA Guidelines.





Because
      our business is regulated, the laws, rules and regulations applicable to us
      are
      subject to regular modification and change. There can be no assurance that
      laws,
      rules or regulations will not be adopted in the future that could make
      compliance much more difficult or expensive, restrict our ability to broker
      or
      service loans, further limit or restrict the amount of commissions, interest
      and
      other charges earned on loans brokered by us, or otherwise adversely affect
      our
      business or prospects.





**Employees**





We
      have
      two employees. Our Manager, Vestin Mortgage, and its parent company, Vestin
      Group, Inc., have provided and will continue to provide all of the employees
      necessary for our operations. As of March 31, 2006, those entities had a total
      of 35 full-time and no part-time employees. All employees are at-will employees
      and none are covered by collective bargaining agreements.





**Available
      Information**





Our
      Internet website address is www.vestinrealtymortgage2.com .
      We make
      available free of charge through www.vestinrealtymortgage2.com our
      Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
      on
      Form 8-K and all amendments to those reports as soon as reasonably practicable
      after such material is electronically filed with or furnished to the United
      States Securities and Exchange Commission (“SEC”). Information contained on our
      website does not constitute a part of this Report on Form 10-K.


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**ITEM
      1A.**  **RISKS**





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





**RISKS
      RELATED TO OUR BUSINESS**





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





Our
      ability to achieve our investment objectives and to make distributions depends
      upon our manager’s performance in obtaining, processing, making and brokering
      loans for us to invest in and determining the financing arrangements for
      borrowers. Stockholders have no opportunity to evaluate the financial
      information or creditworthiness of borrowers, the terms of mortgages, the real
      property that is our collateral or other economic or financial data concerning
      our loans. We pay our manager an annual management fee of up to 0.25% based
      on
      total capital contributions made to us. This fee is payable regardless of the
      performance of our loan portfolio. Our manager has no fiduciary obligations
      to
      our stockholders, is not required to devote its employees full time to our
      business and may devote time to business interests competitive to our
      business.





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





We
      invest
      in real estate loans throughout the areas in which our manager and its
      correspondents have experience. As of March 31, 2006, our loans were in the
      following states; Arizona, California, Hawaii, Nevada, New York, North Carolina,
      Oklahoma, Oregon, Texas, Washington and Wisconsin. Depending on the market
      and
      on our company’s performance, we plan to expand our investments throughout the
      United States. However, our manager has limited experience outside of the
      Southwest. Real estate markets vary greatly from location to location and the
      rights of secured real estate lenders vary considerably from state to state.
      Our
      manager’s limited experience in most U.S. real estate markets may impact its
      ability to make prudent investment decisions on our behalf. Accordingly, where
      our manager deems it necessary, it plans to utilize independent real estate
      advisors and local legal counsel located in markets where it lacks experience
      for consultation prior to making investment decisions. Stockholders will not
      have an opportunity to evaluate the qualifications of such advisors and no
      assurance can be given that they will render prudent advice to our
      manager.





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





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


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**Any
      borrowing by us will increase risk and may reduce the amount we have available
      to distribute to stockholders.**





We
      may
      borrow funds to expand our capacity to invest in real estate loans. We may
      borrow up to 70% of the fair market value of our outstanding real estate loans
      at any time. Any such borrowings will require us to carefully manage our cost
      of
      funds. No assurance can be given that we will be successful in this effort.
      Should we be unable to repay the indebtedness and make the interest payments
      on
      the loans, the lender will likely declare us in default and require that we
      repay all amounts owing under the loan facility. Even if we are repaying the
      indebtedness in a timely manner, interest payments owing on the borrowed funds
      may reduce our income and the distributions.





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





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





**Defaults
      on our real estate loans will decrease our revenues and
      distributions.**





We
      are in
      the business of investing in real estate loans and, as such, we are subject
      to
      risk of defaults by borrowers. Our performance will be directly impacted by
      any
      defaults on the loans in our portfolio. As a non-conventional lender willing
      to
      invest in loans to borrowers who may not meet the credit standards of
      conventional lenders, the rate of default on our loans could be higher than
      those generally experienced in the real estate lending industry. Any sustained
      period of increased defaults could adversely affect our business, financial
      condition, liquidity and the results of our operations. We seek to mitigate
      the
      risk by estimating the value of the underlying collateral and insisting on
      low
      loan-to-value ratios. However, we cannot be assured that these efforts will
      fully protect us against losses on defaulted loans. Any subsequent decline
      in
      real estate values on defaulted loans could result in less security than
      anticipated at the time the loan was originally made, which may result in our
      not recovering the full amount of the loan. Any failure of a borrower to repay
      loans or interest on loans will reduce our revenues and distributions and the
      value of common stock. Our weighted average loan-to-value ratio as of March
      31,
      2006 was 64.6% as compared to 66.2% for the fiscal years ended June 30, 2005.
      Our appraisals are generally dated within 12 months of the date of loan
      origination and may not reflect a decrease in the value of the real estate
      due
      to events subsequent to the date of the appraisals.





As
      of
      March 31, 2006, we had in our portfolio approximately $26.6 million in
      delinquent loans, net of allowance for loan losses, and $38.4 million of real
      estate held for sale for a total of $65.1 million in non-performing assets,
      which represented approximately 23.4% of our total capital. As of March 31,
      2006, we also had $22.9 million of seller financed real estate held for sale
      and
      had received approximately $1.4 million in payments from borrowers on the loans
      associated with these properties. We do not believe that a rising interest
      rate
      environment will increase or accelerate our delinquency rate because all of
      our
      loans are short term, with fixed interest rates.


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





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





**We
      depend upon our real estate security to secure our real estate loans, and we
      may
      suffer a loss if the value of the underlying property
      declines.**





We
      depend
      upon our real estate security to protect us on the loans that we make. We depend
      upon the skill of independent appraisers to value the security underlying our
      loans. However, notwithstanding the experience of the appraisers, they may
      make
      mistakes, or the value of the real estate may decrease due to subsequent events.
      Our appraisals are generally dated within 12 months of the date of loan
      origination and may have been commissioned by the borrower. Therefore, the
      appraisals may not reflect a decrease in the value of the real estate due to
      events subsequent to the date of the appraisals. In addition, most of the
      appraisals are prepared on an as-if developed basis, which approximates the
      post-construction value of the collateralized property assuming such property
      is
      developed. As-if developed values on raw land loans or acquisition and
      development loans often dramatically exceed the immediate sales value and may
      include anticipated zoning changes, selection by a purchaser against multiple
      alternatives and successful development by the purchaser, upon which development
      is dependent on availability of financing. As most of the appraisals will be
      prepared on an as-if developed basis, if the loan goes into default prior to
      completion of the project, the market value of the property may be substantially
      less than the appraised value. As a result, there may be less security than
      anticipated at the time the loan was originally made. If there is less security
      and a default occurs, we may not recover the full amount of our loan, thus
      reducing the amount of funds available to distribute.





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





The
      loans
      we invest in or purchase generally require the borrower to make a “balloon
      payment” on the principal amount upon maturity of the loan. A balloon payment is
      a large principal balance that is payable after a period of time during which
      the borrower has repaid none or only a small portion of the principal balance.
      As of March 31, 2006, all of our loans required balloon payments at the end
      of
      their terms. Loans with balloon payments are riskier than loans with even
      payments of principal over an extended time period like 15 or 30 years because
      the borrower’s repayment depends on its ability to sell the property profitably,
      obtain suitable refinancing or otherwise raise a substantial amount of cash
      when
      the loan comes due. There are no specific criteria used in evaluating the credit
      quality of borrowers for loans requiring balloon payments. Furthermore, a
      substantial period of time may elapse between the review of the financial
      statements of the borrower and the date when the balloon payment is due. As
      a
      result, there is no assurance that a borrower will have sufficient resources
      to
      make a balloon payment when due.





**Our
      loans are not guaranteed by any governmental agency.**





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


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





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





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





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





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





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





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





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





·
            Required
                licensing and regulatory approvals may complicate our ability to
                foreclose
                or to sell a foreclosed property where our collateral includes an
                operating business. We have recently experienced difficulties in
                foreclosing on RightStar loans discussed below because of the need
                to
                obtain a license from the State of Hawaii to operate funeral homes
                and
                cemeteries;





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





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





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





We
      intend
      to own real property only if we foreclose on a defaulted loan and purchase
      the
      property at the foreclosure sale. Acquiring a property at a foreclosure sale
      may
      involve significant costs. If we foreclose on the security property, we expect
      to obtain the services of a real estate broker and pay the broker’s commission
      in connection with the sale of the property. We may incur substantial legal
      fees
      and court costs in acquiring a property through contested foreclosure and/or
      bankruptcy proceedings. In addition, significant expenditures, including
      property taxes, maintenance costs, mortgage payments, insurance costs and
      related charges, must be made on any property we own regardless of whether
      the
      property is producing any income.





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


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**A
      prolonged economic slowdown, lengthy or severe recession or significant increase
      in interest rates could harm our business.**





The
      risks
      associated with our business are more acute during periods of economic slowdown
      or recession because these periods can be accompanied by decreased demand for
      consumer credit and declining real estate values. As a non-conventional lender
      willing to invest in riskier loans, rates of delinquencies, foreclosures and
      losses on our loans could be higher than those generally experienced in the
      mortgage lending industry during periods of economic slowdown or recession.
      Furthermore, if interest rates were to increase significantly, the costs of
      borrowing may become too expensive, which may negatively impact the refinance
      market by reducing demand for real estate lending. For the nine months ended
      March 31, 2006, loan originations accounted for all but one loan funded during
      that period as there was one loan refinanced during the period. For the fiscal
      year ended June 30, 2005, loan originations accounted for all loans funded
      during that period as there were no loan refinances during the period. Any
      sustained period of increased delinquencies, foreclosures or losses or a
      significant increase in interest rates could adversely affect our ability to
      originate, purchase and securitize loans, which could significantly harm our
      business, financial condition, liquidity and results of operations.





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





As
      of
      March 31, 2006, none of our loans had a prepayment penalty and only one loan
      had
      an exit fee. Based on our manager’s historical experience, we expect that at
      least 90% of our loans will continue to not have a prepayment penalty. Should
      interest rates decrease, our borrowers may prepay their outstanding loans with
      us in order to receive a more favorable rate. This may reduce the amount of
      funds we have available to distribute.





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





One
      of
      the results of interest rate fluctuations is that borrowers may seek to extend
      their low-interest-rate loans after market interest rates have increased. This
      creates two risks for us:





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





·
            If,
                at a time of relatively low interest rates, a borrower should prepay
                obligations that have a higher interest rate from an earlier period,
                we
                will likely not be able to reinvest the funds in mortgage loans earning
                that higher rate of interest. In the absence of a prepayment fee,
                we will
                receive neither the anticipated revenue stream at the higher rate
                nor any
                compensation for its loss. This is a risk if the loans we invest
                in do not
                have prepayment penalties or exit
                fees.





Our
      results will also reflect other economic conditions, such as a particular
      industry migrating to or from one of the states into which we make
      loans.


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**We
      face competition for real estate loans that may reduce available yields and
      fees
      available.**





Our
      competitors consist primarily of conventional real estate lenders and real
      estate loan investors, including commercial banks, insurance companies, mortgage
      brokers, pension funds and other institutional lenders. Many of the companies
      against which we and our manager compete have substantially greater financial,
      technical and other resources than either our company or our manager. If our
      competition decreases interest rates on their loans or makes funds more easily
      accessible, yields on our loans could decrease and the costs associated with
      making loans could increase, both of which would reduce our revenues and the
      distributions.





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





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





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





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





**Our
      manager will face conflicts of interest arising from our fee
      structure.**





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





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





Fund
      II
      paid Vestin Mortgage a total of approximately $820,000 for the nine months
      ended
      March 31, 2006 and approximately $1,060,000 and $1,025,000 for the years ended
      June 30, 2005 and 2004, respectively, for managing Fund II. In addition, Vestin
      Mortgage was paid a total of approximately $10.3 million, $14.3 million and
      $19.5 million in fees directly from borrowers for the nine months ended March
      31, 2006 and the years ended December 31, 2005 and 2004, respectively. The
      total
      amount paid to Vestin Mortgage represents fees earned by Vestin Mortgage for
      loans originated for all of its managed funds, including Fund I, Fund II, Fund
      III and inVestin Nevada. Fund II represented approximately 71% of the funds
      managed by Vestin Mortgage as of March 31, 2006.


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





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





**UNITED
      STATES FEDERAL INCOME TAX RISKS RELATING TO OUR REIT
      QUALIFICATION**





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





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





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





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





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





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





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


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





As
      of
      March 31, 2006, we held six properties with a total carrying value of
      approximately $38.4 million recorded as investments in real estate held for
      sale. As of March 31, 2006, we also held interests in three properties with
      a
      total carrying value of approximately $22.9 million, which were sold in
      transactions in which we or an affiliate provided the financing and which were
      recorded as seller financed real estate held for sale. United States generally
      accepted accounting principals (“GAAP”) requires us to include these properties
      in real estate held for sale until the borrower has met and maintained a certain
      percentage of equity ownership. The real estate held for sale and the seller
      financed real estate held for sale collectively constituted approximately 19.86%
      of our assets as of March 31, 2006. In addition, both of the seller financed
      real estate held for sale properties are assisted living facilities, which
      cannot be operated by a taxable REIT subsidiary.





**Taxable
      REIT subsidiaries are subject to corporate-level tax, which may devalue Vestin
      Realty Mortgage II’s common stock relative to other companies.**





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





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





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





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





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





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





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


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**RISK
      OF OWNERSHIP OF OUR COMMON STOCK**





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





The
      market price of our common stock since trading commenced on May 1, 2006 has
      ranged from $1.00 to $7.00. We believe the price of our stock have been affected
      by, among other things, selling pressure form stockholders seeking immediate
      liquidity and our recent operating losses. Our stock price may be highly
      volatile and be subject to wide fluctuations. In addition, the trading volume
      in
      our common stock may fluctuate and cause significant price variations to occur.
      Our company will be dissolved on December 31, 2020 unless the holders of a
      majority of our common stock determine otherwise. As we move closer to the
      dissolution date, we expect to stop making new loans and we expect that our
      stock price will approach our book value per share.





We
      cannot
      be assured that the market price of our common stock will not fluctuate or
      decline significantly in the future. Some of the factors, many of which are
      beyond our control, that could negatively affect our stock price or result
      in
      fluctuations in the price or trading volume of our common stock
      include:





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





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





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





·
            Changes
                in market valuations of similar
                companies;





·
            Changes
                in tax laws affecting REITs;





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





·
            General
                market and economic conditions.





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





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





**We
      are the subject of a pending SEC investigation which may depress the price
      of
      our stock.**





The
      Staff
      of the SEC conducted an investigation of Fund II as well as Fund I, Fund III,
      Vestin Mortgage, Vestin Capital and Vestin Group. The Staff has notified us,
      Fund I, Fund III, our manager, Vestin Capital and Michael Shustek, the principal
      executive officer of our manager and Vestin Capital, or collectively the Vestin
      Entities, that they intend to seek authority to bring an enforcement proceeding
      against the Vestin Entities alleging violations of Section 17(a) of the
      Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934
      and
      Rule 10b-5 thereunder based upon certain sales practices employed for a period
      of time by the Vestin Entities. Specifically, the Staff has advised that they
      believe certain slides used at sales seminars held to promote the sale of Fund
      II and Fund III units included disclosure regarding distributions to
      stockholders of Fund I and Fund II that were misleading. The Vestin Entities
      are
      engaged in discussions with the Staff regarding the proposed recommendation
      and
      any remedies that might be sought by the Staff. Based upon these discussions,
      we
      currently believe that neither we nor Fund I nor Fund III will be named as
      parties in any enforcement recommendation or any order entered as a result
      of a
      settlement. These settlement negotiations are ongoing and, at this time, we
      do
      not know if a mutually acceptable settlement will be reached.


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We
      believe that this investigation has harmed our business by causing certain
      potential borrowers, co-lenders and others to decline to do business with us.
      As
      a result, our operating results have suffered and may continue to suffer in the
      future. Moreover, the terms of any settlement or any allegations of misconduct
      which might be filed if a settlement cannot be reached could further impair
      our
      ability to conduct our business. Any remedies that the SEC may seek could prove
      disruptive to our business. Concerns regarding these uncertainties may depress
      our stock price while this matter is pending. The nature of any charges made
      by
      the SEC or remedies sought by the SEC may cause further harm to the market’s
      perception of our future performance and could cause our stock price to
      decline.





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





Our
      charter and bylaws and Maryland corporate law contain a number of provisions
      (as
      further described under “Material Provisions of Maryland Law and of our Charter
      and Bylaws” and “Comparison of Rights of Unitholders of Fund II and Stockholders
      of Vestin Realty Mortgage II”) that could delay, defer or prevent a transaction
      or a change in control of us that might involve a premium price for holders
      of
      our common stock or otherwise be in their best interests,
      including:





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





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





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





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


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





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





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





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





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





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





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





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


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





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





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





**ITEM
      1B.**  **UNRESOLVED
      STAFFCOMMENTS**





None.





**ITEM
      2.**  **PROPERTIES**





Our
      Manager, Vestin Mortgage, operates from its executive offices at 8379 West
      Sunset Road, Las Vegas, Nevada 89113. We do not have any separate
      offices.





Our
      Manager shares office facilities of approximately 42,000 square feet with its
      parent corporation, Vestin Group, which in turn leases its principal executive
      offices from Vestin Fund III, LLC (“Vestin Fund III”). The lease agreement
      governing this property expires in March 2014.





**ITEM
      3.**  **LEGAL
      PROCEEDINGS**





**Legal
      Matters Involving Our Manager**





Vestin
      Group, Vestin Mortgage, and Del Mar Mortgage, Inc., a company wholly owned
      by
      Michael V. Shustek, the sole shareholder and CEO of Vestin Group, are defendants
      in a civil action entitled Desert Land, LLC et al. v. Owens Financial Group,
      Inc. et al (the “Action”). The Action is based upon allegations that Del Mar
      Mortgage, Inc. and/or Vestin Mortgage charged unlawful fees on various loans
      arranged by them. Desert Land sought in excess of $10 million in monetary
      damages. On April 10, 2003, the United States District Court for the District
      of
      Nevada (the “Court”) entered judgment jointly and severally in favor of Desert
      Land against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. Judgment
      was predicated upon the Court’s finding that Del Mar Mortgage, Inc. received an
      unlawful penalty fee from the plaintiffs.





The
      defendants subsequently filed a motion for reconsideration. The Court denied
      the
      motion and, on August 13, 2003, held that Vestin Group, Vestin Mortgage, and
      Del
      Mar Mortgage, Inc. are jointly and severally liable for the judgment in the
      amount of $5,683,312 (which amount includes prejudgment interest and attorney’s
      fees). On August 27, 2003, the Court stayed execution of the judgment against
      Vestin Group and Vestin Mortgage based upon the posting of a bond in the amount
      of $5,830,000. Mr. Shustek personally posted a cash bond without any cost or
      obligation to Vestin Group and Vestin Mortgage. Additionally, Del Mar Mortgage,
      Inc. has indemnified Vestin Group and Vestin Mortgage for any losses and
      expenses in connection with the Action, and Mr. Shustek has guaranteed the
      indemnification with his cash bond. On September 12, 2003, all of the defendants
      held liable to Desert Land appealed the judgment to the United States Court
      of
      Appeals for the Ninth Circuit, which heard the case on October 18, 2005. On
      November 15, 2005, the Ninth Circuit vacated the judgment of the District Court
      and dismissed the state law claims against the defendants without prejudice
      on
      the basis that the District Court lacked subject matter jurisdiction in the
      case. On November 29, 2005, Desert Land petitioned the Ninth Circuit Court
      for
      rehearing with a suggestion that the matter be heard en banc. On December 16,
      2005, the District Court issued an Order releasing the bond, and on January
      6,
      2006, the Ninth Circuit denied Desert Land’s petition and the matter remains
      dismissed.


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On
      November 21, 2005, Desert Land filed a complaint in the state courts of Nevada,
      which complaint is substantially similar to the original complaint previously
      filed by Desert Land in the United States District Court, with the exception
      of
      claiming Nevada State Law violations and seeking Nevada State Law remedies
      rather than claiming Federal Law violations and seeking Federal Law remedies.
      On
      March 6, 2006, Desert Land amended the state court complaint to name Fund I
      as a
      defendant. Desert Land alleges that one or more of the defendants have
      transferred assets to other entities without receiving reasonable value
      therefore; alleges plaintiffs are informed and believe that defendants have
      made
      such transfers with the actual intent to hinder, delay or defraud Desert Land;
      that such transfers made the transferor insolvent and that sometime between
      February 27 and April 1, 2003, Vestin Group transferred $1.6 million to us
      for
      that very purpose. The state court complaint further alleges that Desert Land
      is
      entitled to avoid such transfers and that pursuant to NRS 112.20, Desert Land
      is
      entitled to an injunction to enjoin defendants from further disposition of
      assets.





Most
      recently, on or about April 6, 2006, Desert Land filed a Writ of Certiorari
      seeking review of the 9th Circuit’s decision by the United States Supreme Court.
      Vestin continues to believe that Desert Land’s claims are without merit and will
      vigorously oppose the Writ of Certiorari and defend against the state court
      complaint.





Our
      Manager is involved in a number of legal proceedings concerning matters arising
      in connection with the conduct of its business activities. The Manager believes
      it has meritorious defenses to each of these actions and intends to defend
      them
      vigorously. The Manager believes that it is not a party to any pending legal
      or
      arbitration proceedings that would have a material adverse effect on the
      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 the Manager’s net income in any particular period.





**Legal
      Matters Involving the Company**





The
      staff
      of the Pacific Regional Office of the United States Securities and Exchange
      Commission (SEC) conducted an investigation into certain matters related to
      us,
      Vestin Group, Vestin Capital, Fund I and Fund III. We have fully cooperated
      during the course of the investigation.





The
      Staff
      has notified us, Fund I, Fund III, our Manager, Vestin Capital and Michael
      V.
      Shustek, the Principal Executive Officer of our Manager and Vestin Capital,
      or
      collectively the Vestin Entities, that they intend to seek authority to bring
      an
      enforcement proceeding against the Vestin Entities alleging violations of
      Section 17 (a) of the Securities Act of 1933, Section 10 (b) of the Securities
      Exchange Act of 1934 and Rule 10b-5 thereunder based upon certain sales
      practices employed for a period of time by the Vestin Entities. Specifically,
      the SEC Staff has advised that they believe certain slides used at sales
      seminars held to promote the sale of Fund II and Fund III units included
      disclosure regarding distributions to members of Fund I and Fund II that were
      misleading. The Vestin Entities are engaged in discussions with the Staff
      regarding the proposed recommendation and any remedies, which might be sought
      by
      the SEC Staff. Based upon these discussions, we currently believe that neither
      we nor Fund I and Fund III will be named as parties in any enforcement
      recommendation or any order entered as a result of a settlement. These
      settlement negotiations are ongoing and, at this time, we do not know if a
      mutually acceptable settlement will be reached.





On
      April
      21, 2006, through our Manager, we filed a complaint in the Circuit Court of
      the
      First Circuit in Hawaii to expedite our efforts to foreclose upon first trust
      deeds secured by the assets of RightStar International, Inc. (the “RightStar
      Trust Deeds”). In the filing, we allege that the State of Hawaii has
      unreasonably blocked the foreclosure without any legal basis for doing so.
      On
      April 24, 2006, the State of Hawaii responded by filing allegations against
      Vestin Mortgage, Inc., and Vestin Fund II, LLC alleging that these Vestin
      entities improperly influenced the former RightStar trustees to transfer trust
      funds to Vestin. We believe these claims to be without merit and intend to
      vigorously defend those allegations. The outcome of this litigation is
      unforeseeable at this time.





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


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          26
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**ITEM
      4.**  **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITYHOLDERS**





At
      a
      special meeting held on February 23, 2006, the members of Vestin Fund II, LLC
      approved its merger into Vesting Realty Mortgage II, as reported in an 8-K
      filed
      by Vestin Fund II on February 24, 2006.





**PARTII**




**ITEM
        5. **MARKET
        FOR REGISTRANT’SCOMMON EQUITY, RELATED STOCKHOLDERS MATTERS
        AND ISSUER PURCHASES OF EQUITY
        SECURITIES****





**Market
      Information**





There
      was
      no established public trading market for the trading of Fund II Units. The
      Registrant’s shares have been listed on the Nasdaq National Market under the
      symbol VRTB. Trading on Nasdaq commenced on May 1, 2006. On June 6, 2006, the
      common stock closed at $6.10.





**Holders**





As
      of
      March 31, 2006, 4,634 accounts held 29,838,442 Units of interest in the
      Company.





**Distribution
      Policy**





Fund
      II
      generally distributed to Unit holders on a monthly basis most of its Net Income
      Available for Distribution (as defined in its Operating Agreement). Net Income
      Available for Distribution is based upon cash flow from operations, less certain
      reserves, and may exceed net income as calculated in accordance with GAAP.
      Fund
      II’s Operating Agreement also permitted distributions of capital. Fund II made
      distributions of approximately $14,659,000 (prior to reinvested distributions)
      during the nine months ended March 31, 2006, $14,517,000 of which was paid
      from
      Net Income Available for Distribution and $142,000 was in excess of Net Income
      Available for Distribution generated during the period.





In
      order
      to maintain its qualification as a REIT under the Code, we are required to
      distribute (within a certain period after the end of each year) at least 90%
      of
      our REIT taxable income for such year (determined without regard to the
      distributions made deduction and by excluding net capital gain). We currently
      intend, to the extent practicable, to distribute substantially all of our REIT
      taxable income and net capital gain each year, consistent with Fund II’s
      practice of distributing all of its net income available for distribution.
      We
      may distribute an amount in excess of our REIT taxable income, which amount
      will
      be treated as a return of capital to the shareholder. We anticipate that
      distributions generally will be paid from cash available for distribution
      (generally equal to cash from operations (other than repayments of mortgage
      loan
      principal) less an amount set aside for creation or restoration of reserves
      during the quarter). However, the actual amount and timing of the dividends
      will
      be as determined and declared by our board of directors and will depend on
      our
      financial condition, earnings and other factors.





**Recent
      Sales of Unregistered Securities**





None.





**Equity
      Compensation Plan Information**





None.


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          27
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**Purchases
      of Equity Securities by the Issuer and Affiliated
      Purchasers**








**Period**
            **Total
                Number of**
              **Units
                Purchased (1)**
            **Average
                Price Paid**
              **per
                Unit**
            **Total
                Number of Units Purchased as Part of Publicly Announced Plans or
                Programs**
            **Maximum
                Number (or Approximate Dollar Value) of Units that May Yet be Purchased
                under the Plans or Programs**January
                2006
            3,166,226
            $9.60
            None
            NoneFebruary
                2006
            5,255
            $9.60
            None
            NoneMarch
                2006
            1,390
            $9.60
            None
            None





(1)
            In
                January 2006, we redeemed approximately $30.4 million of members’ equity.
                Due to our subsequent merger into Vestin Realty Mortgage II, Inc.
                on March
                31, 2006, we will no longer redeem units since all units have been
                converted into shares of Vestin Realty Mortgage II,
                Inc.





**ITEM
      6.**  **SELECTED
      FINANCIALDATA**





**Balance
                at****Vestin
                Realty Mortgage II, Inc.**
            
            **March
                31, 2006**
            
            **June
                30, 2005**
            
            **June
                30, 2004**
            
            **June
                30, 2003**
            
            **June
                30, 2002**Balance
                Sheet Data:Investments
                in real estate loans (net of allowance)
            
            $
            212,928,000
            
            $
            217,553,000
            
            $
            303,853,000
            
            $
            338,681,000
            
            $
            222,058,000Cash,
                cash equivalents, certificates of deposits and short-term investments
            
            
            18,520,000
            
            
            11,566,000
            
            
            14,362,000
            
            
            16,816,000
            
            
            8,624,000Interest
                and other receivables
            
            
            3,434,000
            
            
            3,234,000
            
            
            4,224,000
            
            
            3,898,000
            
            
            2,190,000Investment
                in Local Agency Bonds
            
            
            --
            
            
            15,701,000
            
            
            --
            
            
            --
            
            
            --Due
                from Vestin Fund I
            
            
            --
            
            
            1,560,000
            
            
            2,987,000
            
            
            216,000
            
            
            --Real
                estate held for sale
            
            
            38,426,000
            
            
            51,222,000
            
            
            28,264,000
            
            
            13,696,000
            
            
            --Real
                estate held for sale-seller financed
            
            
            22,887,000
            
            
            12,631,000
            
            
            5,708,000
            
            
            2,137,000
            
            
            --Note
                receivable
            
            
            810,000
            
            
            328,000
            
            
            --
            
            
            --
            
            
            --Note
                receivable Vestin Fund I
            
            
            --
            
            
            --
            
            
            4,278,000
            
            
            4,599,000
            
            
            --Assets
                under secured borrowing
            
            
            11,611,000
            
            
            25,655,000
            
            
            61,924,000
            
            
            26,730,000
            
            
            --Other
                assets
            
            
            63,000
            
            
            20,000
            
            
            --
            
            
            --
            
            
            255,000Total
                assets
            
            $
            308,679,000
            
            $
            339,470,000
            
            $
            425,600,000
            
            $
            406,773,000
            
            $
            233,127,000Liabilities
            
            
            31,057,000
            
            
            28,390,000
            
            
            64,531,000
            
            
            31,583,000
            
            
            651,000Stockholders’/
                members’ equity
            
            
            277,622,000
            
            
            311,080,000
            
            
            361,069,000
            
            
            375,190,000
            
            
            232,476,000Total
                liabilities and stockholders’ equity
            
            $
            308,679,000
            
            $
            339,470,000
            
            $
            425,600,000
            
            $
            406,773,000
            
            $
            233,127,000




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          28
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**For
                the Nine Month Transition Period Ended**
            
            **For
                the Nine Months Ended**
            
            **For
                the 12 Months Ended****March
                31, 2006**
            
            **March
                31, 2005**
            
            **June
                30, 2005**
            
            **June
                30, 2004**
            
            **June
                30, 2003**
            
            **June
                30, 2002****(Unaudited)**Statement
                of Income Data:Revenues
            
            $
            23,246,000
            
            $
            22,875,000
            
            $
            28,717,000
            
            $
            43,469,000
            
            $
            40,313,000
            
            $
            15,290,000Expenses
            
            
            14,412,000
            
            
            13,871,000
            
            
            19,829,000
            
            
            11,738,000
            
            
            16,541,000
            
            
            868,000Net
                income
            
            $
            8,834,000
            
            $
            9,004,000
            
            $
            8,888,000
            
            $
            31,731,000
            
            $
            23,772,000
            
            $
            14,422,000Net
                income allocated to Members
            
            $
            8,834,000
            
            $
            9,004,000
            
            $
            8,888,000
            
            $
            31,731,000
            
            $
            23,772,000
            
            $
            14,422,000Net
                income allocated to Members per weighted average membership units
            
            $
            0.28
            
            $
            0.25
            
            $
            0.26
            
            $
            0.86
            
            $
            0.76
            
            $
            1.19Cash
                distributions
            
            $
            14,659,000
            
            $
            15,518,000
            
            $
            20,113,000
            
            $
            29,097,000
            
            $
            34,688,000
            
            $
            15,740,000Cash
                distributions per weighted average membership units
            
            $
            0.46
            
            $
            0.44
            
            $
            0.58
            
            $
            0.79
            
            $
            1.10
            
            $
            1.30Weighted
                average membership units
            
            
            31,914,713
            
            
            35,417,916
            
            
            34,760,003
            
            
            36,714,812
            
            
            31,430,793
            
            
            12,114,955





The
      information in this table should be read in conjunction with the accompanying
      audited financial statements and notes to financial statements included
      elsewhere in this document.




**ITEM
        7. **MANAGEMENT’S
        DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF
        OPERATIONS****





Our
      financial results reflect the amount of capital we had available for investment
      in real estate loans. Our past performance may not be indicative of future
      results. On March 31, 2006, Fund II merged into the Registrant and the members
      of Fund II received one share of the Registrant’s common stock for each
      membership unit of Fund II. This report is filed by the Registrant as the
      successor to Fund II. References in this report to the “Company”, “we”, “us” or
“our” refer to Fund II with respect to the period ending on March 31, 2006 and
      to the Registrant with respect to the period commencing on April 1, 2006.
      Because we were a limited liability company during the periods reflected in
      this
      report, we make reference to our “members” rather than “stockholders” in
      reporting our financial results. We intend to operate as a real estate
      investment trust (“REIT”). As a REIT, we are required to have a December
      31 st year
      end. This discussion should be read in conjunction with our financial statements
      and accompanying notes and other detailed information regarding the Company
      appearing elsewhere in this transition report Form 10-K.





**RESULTS
      OF OPERATIONS**


-
          29
          -
 *Table
          of Contents*


**OVERVIEW**





Our
      primary business objective is to generate income 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 traditional real estate lenders. The loan underwriting standards our
      Manager utilizes are less strict than traditional real estate lenders. In
      addition, one of our competitive advantages is our ability to approve loan
      applications more quickly than traditional lenders. As a result, in certain
      cases, we may make real estate loans which are riskier than real estate loans
      made by 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 traditional 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 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.”





Our
      operating results during the past several years have been adversely affected
      allowances for non-performing loans. As of March 31, 2006, we have provided
      a
      specific allowance of approximately $10.2 million on loans secured by 4
      cemeteries and 8 mortuaries in Hawaii and $500,000 for an impairment on a
      restructured loan. For additional information see “Specific Loan Allowance” in
      Note D - *Investment
      Real Estate Loans* of the
      Notes to Financial Statements included in Part IV, Item 15 *Exhibits
      and Financial Statement Schedules* of this
      Transition Report Form 10-K. Non-performing assets, net of allowance for loan
      losses, totaled approximately $65.1 million or 21.0% of our total assets as
      of
      March 31, 2006 as compared to $84.4 million or 24.9% of our total assets as
      of
      June 30, 2005. At March 31, 2006, non-performing assets consist of approximately
      $38.4 million of real estate held for sale not sold through seller financing
      and
      approximately $26.6 million of non-performing loans, net of allowance for loan
      losses. We have entered into definitive agreements to sell five of the six
      properties included in real estate held for sale to third parties at or above
      book value for cash. No assurance can be given that the sales contracts for
      the
      properties will actually close. The level of non-performing assets may reflect
      the continuing weakness in certain sectors of the economy and the risk inherent
      in our business strategy which entails more lenient underwriting standards
      and
      expedited loan approval procedures. If the economy weakens and our borrowers
      who
      develop and sell commercial real estate projects are unable to complete their
      projects or obtain takeout financing or are otherwise adversely impacted, we
      may
      experience an increase in loan defaults which may reduce the amount of funds
      we
      have for distribution to our members. Such conditions may also require us to
      restructure loans. The weighted average term of our outstanding loans as of
      March 31, 2006 was 16 months, compared to 18 months at June 30, 2005. Our
      annualized rate of return to members for the nine month transition period ended
      March 31, 2006 was 3.7%, compared to 2.6%, for the year ended June 30, 2005.
      Our
      revenues also have been impacted by lower interest rates and by member
      redemptions which leave us with less capital to invest.





Uncertain
      economic conditions during the next year could have a material impact on the
      collectibility of our loans. Recognizing the risk, we seek to maintain an
      adequate loan-to-value ratio which, as of March 31, 2006, was 64.62% on a
      weighted average basis, generally using appraisals prepared on an as-if
      developed basis in connection with the loan origination. In this manner, we
      hope
      to retain sufficient cushion in the underlying equity position to protect the
      value of our loan in the event of a default. Nevertheless, no assurances can
      be
      given that a marked increase in loan defaults accompanied by a rapid decline
      in
      real estate values will not have a material adverse effect upon our financial
      condition and operating results.





Recently,
      we have experienced an increased demand for loans. We cannot be certain whether
      this increased demand will continue or represent an ongoing trend. Any increase
      in lending activity could have an impact on our operating results.


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          30
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We
      generally invest in real estate loans throughout the areas in which Vestin
      Mortgage and its correspondents have experience. As of March 31, 2006 our loans
      were in the following states; Arizona, California, Hawaii, Nevada, New York,
      North Carolina, Oklahoma, Oregon, Texas, Washington and Wisconsin. Such
      geographical concentration creates greater risk that any downturn in such local
      real estate markets could have a significant adverse effect upon our results
      of
      operations. If we enter into another recession, particularly in any of the
      identified states, our operating results could be adversely
      affected.





**Nine
      Month Transition Period Ended March 31, 2006 Compared To the Nine Months Ended
      March 31, 2005**





**For
                the Nine Month**
              **Transition
                Period Ended**
            
            **For
                the Nine**
              **Months
                Ended****March
                31, 2006**
            
            **March
                31, 2005****(Unaudited)**Total
                Revenues
            
            $
            23,246,000
            
            $
            22,875,000Total
                Operating Expenses
            
            $
            14,412,000
            
            $
            13,871,000**NET
                INCOME**
            
            $
            8,834,000
            
            $
            9,004,000Net
                Income Allocated to Members
            
            $
            8,834,000
            
            $
            9,004,000Net
                Income Allocated to Members Per Weighted Average Membership
                Units
            
            $
            0.28
            
            $
            0.25Weighted
                Average Membership Units
            
            
            31,914,713
            
            
            35,417,916Annualized
                Rate of Return to Members (a)
            
            
            3.69%
            
            
            3.39%Cash
                Distributions
            
            $
            14,659,000
            
            $
            15,518,000Cash
                Distributions Per Weighted Average Membership Units
            
            $
            0.46
            
            $
            0.44Weighted
                Average Term of Outstanding Loans
            
            
            16
                Months
            
            
            17
                Months





(a)
            The
                annualized rate of return to members is calculated based upon the
                net GAAP
                income allocated to members per weighted average units as of March
                31,
                2006 and 2005 divided by the number of days during the period (274
                days
                for the nine month period ended March 31, 2006 and 2005) and multiplied
                by
                three hundred sixty five (365) days, then divided by the cost per
                unit
                ($10.00).





*Total
      Revenues* :
      Revenues for the nine month transition period ended March 31, 2006 increased
      compared to the same period in 2005 by approximately $371,000 or 1.62%. The
      following factors positively affected our operating results:





·
            Gain
                on sale of marketable securities held during the nine months ended
                March
                31, 2006 of approximately $224,000. As of March 31, 2006, we hold
                no
                investments in marketable
                securities.





·
            Included
                in other income for the nine month transition period ended March
                31, 2006,
                is operating income of $3.7 million related to the three apartment
                complexes which are classified as real estate held for sale. We will
                continue to recognize rental income from these properties until they
                are
                sold.


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          31
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·
            We
                recorded a gain on sale of real estate held for sale from the recognition
                of approximately $1.1 million of deposit liabilities received from
                seller
                financed loans during the nine months ended March 31, 2006.
                As of March 31, 2006 and 2005, we had $22.9 million and $13.1 million,
                respectively, in real estate held for sale - seller financed. Upon
                the
                sale of real estate held for sale where we provide the financing,
                GAAP
                requires the new borrower to have a certain percentage equity ownership
                (ranging from 10% to 25%) to allow us to record the sale of property.
                In
                addition, the borrower must maintain a minimum commitment in the
                property
                on a continuing basis. Therefore, until the borrower meets these
                requirements, the proceeds received from the borrower are recorded
                as a
                deposit liability or applied to the balance in the real estate held
                for
                sale - seller finance, depending on the guidelines established by
                GAAP.
                Our revenues will continue to be impacted until we are able to convert
                these assets into investment in real estate loans or the loans are
                paid in
                full and we reinvest the proceeds into new loans. As of March 31,
                2006 and
                2005, we had approximately $1.36 million and $1.10 million, respectively
                in deposit liability.





Our
      operating results were negatively impacted by the following
      factors:





·
            Our
                interest income decreased approximately $2.5 million as a result
                of a
                decrease in investments in real estate loans and an increase in seller
                financed real estate loans as noted above. Investment in real estate
                loans, net of allowance declined by $21.5 million from $234.4 million
                at
                March 31, 2005 to $212.9 million at March 31, 2006. The decline in
                investments in real estate loans is attributable to the capital we
                had
                available for investments and the increase in specific reserves allowance.
                (See further discussion in Note D -*Investment
                Real Estate Loans*of
                the Notes to Financial Statements included in Part IV, Item 15*Exhibits
                and Financial Statement Schedules*of
                this Transition Report Form 10-K). Our capital was reduced by redemptions
                of approximately $30.5 million paid to our members during the nine
                months
                ended March 31, 2006. Due to Fund II’s merger into Vestin Realty Mortgage
                II, Inc. as of March 31, 2006, we will no longer redeem units since
                all
                units have been converted into shares of Vestin Realty Mortgage II,
                Inc.





·
            During
                the nine month transition period ended March 31, 2005, we recorded
                a gain
                of approximately $759,000 on the sale of raw land in Mesquite, Nevada.
                During the nine months ended March 31, 2006 we recorded gain related
                to
                sale of real estate held for sale of approximately
                $60,000.





*Total
      Expenses:* For the
      nine month transition period ended March 31, 2006, total expenses were
      approximately $14.4 million compared to $13.9 million for the nine months ended
      March 31, 2005, an increase of approximately $0.5 million or 3.90%. Expenses
      were primarily affected by the following factors:





·
            We
                recognized an additional allowance for loan loss of approximately
                $5.5
                million during the nine month transition period ended March 31, 2006,
                related to the loans secured by 4 cemeteries and 8 mortuaries in
                Hawaii
                (see “Specific Loan Allowance” in Note D -*Investment
                Real Estate Loans*of
                the Notes to Financial Statements included in Part IV, Item 15*Exhibits
                and Financial Statement Schedules*of
                this Transition Report Form 10-K).





·
            We
                incurred interest expense during the nine months ended March 31,
                2006 of
                approximately $382,000 related to notes payable on three real estate
                owned
                apartment complexes. These notes were paid in full in April 2006.
                There
                was no comparable expense in the nine months ended March 31,
                2005.





·
            Included
                in expenses related to real estate held for sale for the nine months
                ended
                March 31, 2006, are operating expenses of approximately $3.4 million
                related to the three real estate owned apartment complexes, which
                were
                acquired during 2005. We will continue to incur rental expenses until
                these properties are sold. No such expenses were incurred during
                the nine
                months ended March 31, 2005.


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          32
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These
      increases were partially offset by the following decreases:





·
            Interest
                expense related to secured borrowings decrease by approximately $2.2
                million primarily due to the decrease in secured borrowings from
                approximately $24.9 million at March 31, 2005 to approximately $11.6
                million at March 31, 2006.





·
            We
                recognized a loss of approximately $829,000 during the nine months
                ended
                March 31, 2005 resulting from the sale of a 126 unit Hotel in Mesquite,
                Nevada.





·
            During
                the nine months ended March 31, 2005, we recorded a charge of
                approximately $5.9 million in connection with the write down of real
                estate for sale related to a 126 unit assisted living facility in
                Phoenix,
                Arizona. There were no write downs on real estate held for sale during
                the
                nine months ended March 31, 2006.





*Net
      Income.* Overall,
      net income for the nine month transition period ended March 31, 2006 totaled
      approximately $8.8 million compared to $9.0 million for the nine month period
      ended March 31, 2005.





*Annualized
      Rate of Return to Members.* For
      the
      nine month transition period ended March 31, 2006, the annualized rate of return
      to members, as calculated in accordance with GAAP, was 3.69% compared to 3.39%
      for the nine months ended March 31, 2005.





*Distributions
      to Members.* The
      following is a schedule of distributions made to members for the nine month
      transition period ended March 31, 2006 and the nine months ended March 31,
      2005.





**For
                the Nine Month Transition Period Ended March 31,
                2006**
            
            **For
                the Nine Months**
              **Ended
                March 31, 2005****(Unaudited)**Distributions
                of Net Income Available for Distribution
            
            $
            14,517,000
            
            $
            15,269,000Distributions
                in Excess of Net Income Available for a Distribution Generated During
                the
                Period
            
            
            142,000
            
            
            249,000Total
                Distributions
            
            $
            14,659,000
            
            $
            15,518,000





Net
      income available for distribution is a non-GAAP financial measure that is
      defined in our operating agreement as cash flows from operations, less certain
      reserves, and may exceed net income as calculated in accordance with GAAP.
      We
      have presented net income available for distribution because management believes
      this financial measure is useful and important to members as net income
      available for distribution is the minimum amount required to be distributed
      to
      members pursuant to our operating agreement. In addition, cash flows from
      operations, which are the significant component of net income available for
      distribution, affect the capital available for investment in new loans. This
      non-GAAP financial measure should not be considered in isolation or as a
      substitute for measures of performance prepared in accordance with GAAP or
      as an
      alternative to cash flows from operating activities as a measure of our
      liquidity. We compensate for these limitations by relying primarily on our
      GAAP
      results and using net income available for distributions only
      supplementally.





The
      most
      directly comparable GAAP measure to net income available for distribution is
      cash flows from operating activities. The following table reconciles net income
      available for distribution to cash flows from operating activities and presents
      the two other major categories of our statement of cash flows.


-
          33
          -
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          of Contents*





**For
                the Nine Month**
              **Transition
                Period Ended**
              **March
                31, 2006**
            
            **For
                the Nine Months**
              **Ended
                March 31, 2005****(Unaudited)**Distribution
                of Net Income Available for Distribution
            
            $
            14,517,000
            
            $
            15,269,000Additions
                to Working Capital Reserves (Amount Not Distributed)
            
            
            --
            
            
            --Gain
                on sale of real estate held for sale
            
            
            (1,186,000
            )
            
            (759,000
            )Loss
                on sale of real estate held for sale
            
            
            --
            
            
            829,000Gain
                on sale of marketable securities
            
            
            (224,000
            )
            
            --Interest
                income accrued to loan balance
            
            
            (343,000
            )
            
            280,000Change
                in operating assets and liabilities:Interest
                and other receivables
            
            
            95,000
            
            
            797,000Due
                to Manager
            
            
            36,000
            
            
            (378,000
            )Due
                to Vestin Group
            
            
            (1,000
            )
            
            (384,000
            )Due
                to/from Fund I
            
            
            1,560,000
            
            
            1,462,000Note
                receivable from Fund I
            
            
            --
            
            
            4,278,000Prepaid
                expenses
            
            
            (43,000
            )
            
            (40,000
            )Accounts
                payable and accrued liabilities
            
            
            (517,000
            )
            
            588,000Net
                cash provided by operating activities
            
            $
            13,894,000
            
            $
            21,942,000Net
                cash provided by investing
            
            $
            19,256,000
            
            $
            32,537,000Net
                cash (used) by financing
            
            $
            (25,896,000
            )
            $
            (56,288,000
            )





*Stated
      Unit Value Adjustment.* Following a periodic review by our Manager as required pursuant to the Operating
      Agreement of Fund II, as a result of write downs on the carrying value of real
      estate held for sale, effective April 1, 2005 we adjusted the stated unit value
      of each unit to $9.60 to reflect the estimated net unit value of each unit
      at
      that date. Due to Fund II’s merger into Vestin Realty Mortgage II, Inc. on April
      2006 and the conversion of member units to common stock, the stated unit value
      is no longer applicable. The common shares have been listed on the NASDAQ
      National Market under the symbol VRTB. Trading began on May 1,
      2006.





*Redemptions.* Pursuant
      to Fund II’s Operating Agreement, it redeemed units submitted for redemption. In
      accordance with the terms of the Operating Agreement and the Internal Revenue
      Code, Fund II’s redemptions were limited to no more than 10% of the members’
capital in any calendar year. As of March 31, 2006, the total of redemptions
      made from inception was approximately $138.5 million. During the nine month
      transition period ended March 31, 2006, we redeemed approximately $30.5 million
      of Members’ capital. As a result of Fund II’s merger into the Registrant on
      March 31, 2006, we no longer redeem units since all units have been converted
      into common shares of Vestin Realty Mortgage II, Inc.





To
      maintain our status as a REIT, we are required to make distributions, other
      than
      capital gain dividends, to our stockholders each year in an amount at least
      equal to (1) the sum of (a) 90% of our taxable income, computed without regards
      to the dividends paid deduction and our net capital gain, and (b) 90% of the
      net
      income, after tax, from foreclosure property, minus (2) the sum of certain
      specified items of noncash income over 5% of our REIT taxable
      income.


-
          34
          -
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          of Contents*


**Fiscal
      Year Ended June 30, 2005 Compared To June 30, 2004**





**For
                the 12 Months Ended June 30, 2005**
            
            **For
                the 12 Months Ended June 30, 2004**Total
                Revenues
            
            $
            28,717,000
            
            $
            43,469,000Total
                Operating Expenses
            
            $
            19,829,000
            
            $
            11,738,000**NET
                INCOME**
            
            $
            8,888,000
            
            $
            31,731,000Net
                Income Allocated to Members
            
            $
            8,888,000
            
            $
            31,731,000Net
                Income Allocated to Members Per Weighted Average Membership
                Units
            
            $
            0.26
            
            $
            0.86Weighted
                Average Membership Units
            
            
            34,760,003
            
            
            36,714,812Annualized
                Rate of Return to Members (a)
            
            
            2.56%
            
            
            8.64%Cash
                Distributions
            
            $
            20,113,000
            
            $
            29,097,000Cash
                Distributions Per Weighted Average Membership Units
            
            $
            0.58
            
            $
            0.79Weighted
                Average Term of Outstanding Loans
            
            
            18
                Months
            
            
            15
                Months





(a)
            The
                annualized rate of return to members is calculated based upon the
                net GAAP
                income allocated to members per weighted average units as of June
                30, 2005
                and 2004 divided by ten (the $10 cost per
                unit).





*Total
      Revenues* .
      For the
      fiscal year ended June 30, 2005, total revenues were approximately $28.7 million
      compared to $43.5 million for the fiscal year ended June 30, 2004, a decrease
      of
      $14.8 million or 34%. The decline in revenue was primarily due to the
      following:





·
            A
                decrease in interest income of approximately $13.5 million related
                to a
                decrease in investments in real estate loans and secured borrowings
                of
                approximately $83.7 million and $36.3 million, respectively, as of
                June
                30, 2005. The decrease is primarily related to non-performing assets
                and
                member redemptions for the year ended June 30, 2005. In addition,
                the
                average interest rate on our loans as of June 30, 2005 was 9.95%,
                compared
                to 10.9% at June 30, 2004. While there has been some movement in
                the
                economy towards higher interest rates, it is not clear if or when
                any such
                rate increases will impact our
                business.


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          35
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          of Contents*





·
            We
                recognized $2.3 million in revenue related to a finder’s fee on the sale
                of real estate in the City of Mesquite, Nevada during the fiscal
                year
                ended June 30, 2004. We had no such comparable revenue for the fiscal
                year
                ended June 30, 2005. Our company and Fund I were presented with an
                opportunity to purchase the property but were prohibited by their
                respective operating agreements from purchasing the property. Instead,
                Vestin Mortgage facilitated the purchase and subsequent sale of the
                property. The subsequent sale of the property was made possible due
                to
                buyer financing provided by our company and Fund I. Vestin Mortgage
                negotiated that the buyer (an unaffiliated third party) pay a finder’s fee
                in the form of a $2.3 million promissory note to our company and
                a $4.7
                million promissory note to Fund I to reflect the fact that the transaction
                was made possible by financing provided by our company and Fund I.
                The
                total $7.0 million finder’s fee was allocated to our company and Fund I
                based on the same ratio of the financing that each provided in the
                transaction. We received a promissory note in lieu of cash from an
                unaffiliated party in connection with the sale. The note required
                monthly
                interest payments at a rate of 8.5% per annum and had an original
                maturity
                date of June 13, 2005. We were using the cost recovery method of
                accounting for the transaction. Accordingly, we did not recognize
                any
                income on the $2.3 million note until the principal balance of both
                notes
                were paid in full. Under the cost recovery method, interest payments
                received by our company in excess of the principal balance are not
                recorded as income until such time as the note is paid in full, which
                occurred in the first calendar quarter of 2004. In February 2004,
                both
                notes were paid in full and we recorded the $2.3 million as revenue
                related to the sale of real estate related to the original note and
                $0.3
                million in interest income related to interest payments received
                prior to
                loan payoff.





Non-performing
      assets include loans in non-accrual status totaling $36.0 million as of June
      30,
      2005 compared to $46.0 million as of June 30, 2004 and real estate held for
      sale
      totaling $51.2 million as of June 30, 2005 compared to $28.3 million as of
      June
      30, 2004. The amount of non-performing assets may reflect the risks inherent
      in
      our business strategy which entails more lenient underwriting standards and
      expedited loan approvals procedures, as well as the effects of a weakening
      economy. Our revenues will continue to be impacted until we are able to convert
      these non-performing assets into interest paying real estate loans. We will
      attempt to accomplish this by working with the borrower where possible and
      by
      foreclosing on the underlying property where necessary. We intend to sell
      properties acquired through foreclosure as soon as practicable, consistent
      with
      its objective of avoiding a loss of principal on our loans. However, we cannot
      predict how quickly we will be able to sell foreclosed properties.





As
      of
      June 30, 2005 and 2004, we also had $12.6 million and $5.7 million,
      respectively, of seller financed real estate held for sale. Generally accepted
      accounting principles, or GAAP, requires the borrower to have a certain
      percentage equity ownership (typically 20%) to allow us to record the sale
      of a
      property in accordance with SFAS 66. In addition, the borrower must maintain
      a
      minimum commitment in the property on a continuing basis. Therefore, until
      the
      borrower meets these requirements, the investment in the new loan is reduced
      by
      the amount originally invested in the real estate held for sale.





As
      of
      June 30, 2005, our Manager had granted extensions on 9 loans pursuant to the
      terms of the original loan agreements which permit extensions by mutual consent.
      Such extensions are generally provided on loans where the original term was
      12
      months or less and where a borrower requires additional time to complete a
      construction project or negotiate take out financing. However, our Manager
      only
      grants extensions when a borrower is in full compliance with the terms of the
      loan, including, but not limited to the borrower’s obligation to make interest
      payments on the loan. The aggregate amount due to us from borrowers whose loans
      had been extended as of June 30, 2005 was approximately $76.0 million. At June
      30, 2005, an extended loan of approximately $1.5 million was a non-performing
      loan. Our Manager concluded that no additional allowance for loan losses was
      necessary with respect to such loans.





*Total
      Expenses* .
      For the
      year ended June 30, 2005, total expenses were $19.8 million compared to $11.7
      million for the year ended June 30, 2004, an increase of $8.1 million or 69%.
      The increase is primarily related to the following:





·
            We
                wrote down the carrying value of a 126 unit assisted living facility
                located in Phoenix, Arizona by approximately $5.9 million during
                the year
                ended June 30, 2005.


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          36
          -
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          of Contents*





·
            We
                wrote down the carrying value of the 166 residential lots located
                in
                Henderson, Nevada by $179,000 during the year ended June 30,
                2005.





·
            We
                wrote down the carrying value of two real estate parcels located
                in Austin
                and Cedar Park, Texas by approximately $1.0 million during the year
                ended
                June 30, 2005.





·
            We
                wrote down the carrying value of the 74 unit (90 beds) assisted living
                facility located in San Bernardino, California by $282,000 during
                the year
                ended June 30, 2005.





·
            We
                have commenced a judicial foreclosure on a loan secured by 4 cemeteries
                and 8 mortuaries in Hawaii. Upon completion of a valuation analysis
                it was
                deemed necessary to provide a valuation allowance of approximately
                $2.3
                million during the quarter ended June 30, 2005 (see “Specific Loan
                Allowance” in Note D -*Investment
                Real Estate Loans*of
                the Notes to Financial Statements included in Part IV, Item 15*Exhibits
                and Financial Statement Schedules*of
                this Transition Report Form 10-K).





·
            We
                sold a 126 unit hotel in Mesquite, Nevada and sustained a loss of
                approximately $829,000 during the year ended June 30,
                2005.





·
            We
                recognized an impairment value of $500,000 due to a restructured
                loan.





·
            We
                recognized professional fees related to a restructured loan in the
                amount
                of $590,000.





·
            For
                the year ended June 30, 2005 and 2004, we recognized expenses related
                to
                the maintenance of real estate held for sale of approximately $2.8
                million
                and $1.6 million, respectively, which was an increase of approximately
                $1.2 million. The increase in these expenses is related to the increase
                in
                real estate held for sale at June 30, 2005 of approximately $51.2
                million
                compared to $28.3 million at June 30, 2004, an increase of approximately
                $22.9 million.





·
            The
                increase in expenses was partially offset by a decrease in interest
                expense of approximately $2.2 million due to a decrease in the amount
                of
                secured borrowings as of June 30, 2005 and 2004 of approximately
                $25.7
                million and $61.9 million, respectively, a decrease of approximately
                $36.2
                million.





*Net
      Income* .
      Overall, net income for the year ended June 30, 2005 was approximately $8.9
      million compared to $31.7 million for the same period in 2004, a decrease of
      $22.8 million or 72%.





*Annualized
      Rate of Return to Members* .
      For the
      year ended June 30, 2005, the annualized rate of return to members, as
      calculated in accordance with GAAP, was 2.6% compared to 8.6% for fiscal
      2004.





*Distributions
      to Members* .
      The
      following is a schedule of distributions made to members for the years ended
      June 30, 2005 and 2004.





**For
                the 12 Months Ended**
              **June
                30, 2005**
            
            **For
                the 12 Months Ended**
              **June
                30, 2004**Distributions
                of Net Income Available for Distribution
            
            $
            19,108,000
            
            $
            29,097,000Distributions
                in Excess of Net Income Available for a Distribution Generated During
                the
                Period
            
            
            1,005,000
            
            
            --Total
                Distributions
            
            $
            20,113,000
            
            $
            29,097,000





-
          37
          -
 *Table
          of Contents*


Net
      income available for distribution is a non-GAAP financial measure that is
      defined in our operating agreement as cash flows from operations, less certain
      reserves, and may exceed net income as calculated in accordance with GAAP.
      We
      have presented net income available for distribution because management believes
      this financial measure is useful and important to members as net income
      available for distribution is the minimum amount required to be distributed
      to
      members pursuant to our operating agreement. In addition, cash flows from
      operations, which are the significant component of net income available for
      distribution, affect the capital available for investment in new loans. This
      non-GAAP financial measure should not be considered in isolation or as a
      substitute for measures of performance prepared in accordance with GAAP or
      as an
      alternative to cash flows from operating activities as a measure of our
      liquidity. We compensate for these limitations by relying primarily on our
      GAAP
      results and using net income available for distributions only
      supplementally.





The
      most
      directly comparable GAAP measure to net income available for distribution is
      cash flows from operating activities. The following table reconciles net income
      available for distribution to cash flows from operating activities and presents
      the two other major categories of our statement of cash flows.





**For
                the 12 Months Ended**
              **June
                30, 2005**
            
            **For
                the 12 Months Ended**
              **June
                30, 2004**Distribution
                of Net Income Available for Distribution
            
            $
            19,108,000
            
            $
            29,097,000Additions
                to Working Capital Reserves (Amount Not Distributed)
            
            
            --
            
            
            5,249,000Gain
                on sale of real estate held for sale
            
            
            (759,000
            )
            
            --Loss
                on sale of real estate held for sale
            
            
            829,000
            
            
            --Interest
                income accrued to loan balance
            
            
            402,000
            
            
            --Change
                in operating assets and liabilities:Interest
                and other receivables
            
            
            216,000
            
            
            --Due
                to Manager
            
            
            (289,000
            )
            
            (1,095,000
            )Due
                to Vestin Group
            
            
            (384,000
            )
            
            --Due
                to/from Fund I
            
            
            1,427,000
            
            
            (2,771,000
            )Note
                receivable from Fund I
            
            
            4,278,000
            
            
            --Prepaid
                expenses
            
            
            (20,000
            )
            
            --Other
                assets
            
            
            --
            
            
            (444,000
            )Accounts
                payable and accrued liabilities
            
            
            811,000
            
            
            219,000Net
                cash provided by operating activities
            
            $
            25,619,000
            
            $
            30,255,000Net
                cash provided by investing
            
            $
            33,067,000
            
            $
            23,792,000Net
                cash (used) by financing
            
            $
            (60,057,000
            )
            $
            (47,851,000
            )





**Investments
      in Real Estate Loans Secured by Real Estate Portfolio**





We
      have
      five real estate loan products consisting of commercial, construction,
      acquisition and development, land, and residential loans. The effective interest
      rates on all product categories range from 5% to 14%. Revenue by product will
      fluctuate based upon relative balances during the period. We had investments
      in
      33 real estate loans as of March 31, 2006, with a fund balance of $247.5 million
      as compared to investments in 36 real estate loans as of June 30, 2005, with
      a
      fund balance of $235.4 million.





At
      March
      31, 2006, three of our loans totaling approximately $36.9 million were
      non-performing (more than 90 days past due on interest payments or past due
      on
      principal). These loans have been placed on non-accrual of interest status.
      We
      commenced foreclosure proceedings on these loans identified as the Mid-State
      and
      RightStar loans.





On
      May 1,
      2006 the bankruptcy plan of Mid-State Raceway, Inc. for Vernon Downs became
      effective. As a result of the bankruptcy plan, we and Fund I received the
      following:


-
          38
          -
 *Table
          of Contents*





·
            New
                first deeds of trust from buyer, Vernon Downs Acquisition, LLC,
                approximating $22.8 million, of which our portion is $19.6 million.
                The
                new terms reflect a $1.2 million principal reduction, reducing our
                principal balance by approximately $1.0 million. The transaction
                resulted
                in our recording a deferred gain of approximately $1.0 million. The
                terms
                of the loan are 9% due in 6 months, with an option to extend for
                an
                additional 6 months for a fee.





·
            The
                loan is secured by a first trust deed on Vernon Downs properties
                and a
                150% personal guarantee by
                borrowers.





·
            Prepayment
                of interest in the aggregate amount of $500,000, of which our portion
                is
                approximately $429,000.





·
            Delay
                fees from the date of the bankruptcy confirmation until the effective
                date
                in the aggregate amount of $287,000 of which our portion is approximately
                $246,000.





·
            Payment
                of past due forbearance fees approximately $555,000 of which our
                portion
                is approximately $476,000.





Our
      Manager periodically reviews and makes a determination as to whether the
      allowance for loan losses is adequate to cover any potential losses. Additions
      to the allowance for loan losses are made by charges to the provision for loan
      losses. Recoveries of previously charged off amounts are credited to the
      allowance for loan losses or included as income when the asset is disposed.
      As
      of March 31, 2006, we have provided a specific reserve related to the four
      cemeteries and eight mortuaries in Hawaii, of which our portion of the specific
      reserve is $10,234,000. In addition, our manager recognized a specific reserve
      for the impairment of a restructured loan in the amount of $500,000. Our Manager
      evaluated the loans and concluded that the remaining underlying collateral
      was
      sufficient to protect us against further losses of principal or interest. Our
      Manager will continue to evaluate these loans in order to determine if any
      other
      allowance for loan losses should be recorded. For additional information on
      our
      investments in real estate loans, refer to Note D - *Investments
      In Real Estate Loans* of the
      Notes to the Financial Statements included in Part IV, Item *15
      Exhibits and Financial Statement Schedules* of this
      Transition Report Form 10-K.





**Asset
      Quality and Loan Reserves**





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





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





·
            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.


-
          39
          -
 *Table
          of Contents*


Based
      upon this evaluation, a determination is made as to whether the allowance for
      loan losses is adequate to cover any potential losses. Additions to the
      allowance for loan losses are made by charges to the provision for loan losses.
      Recoveries of previously charged off amounts are credited to the allowance
      for
      loan losses. For additional information regarding the roll-forward of the
      allowance for loan losses for the nine months ended March 31, 2006, refer to
      Note D - *Investments
      In Real Estate Loans* of the
      Notes to Financial Statements included in Part IV, Item 15 *Exhibits
      and Financial Statement Schedules* of this
      Transition Report Form 10-K.





**Investments
      in Real Estate Held for Sale**





At
      March
      31, 2006, we held six properties with a total carrying value of $38.4 million,
      which were acquired through foreclosure and recorded as investments in real
      estate held for sale. During the nine month transition period we sold two
      properties. These investments in real estate held for sale are accounted for
      at
      the lower of cost or fair value less costs to sell with fair value based on
      appraisals and knowledge of local market conditions. It is not our intent to
      invest in or own real estate as a long-term investment. We seek to sell
      properties acquired through foreclosure as quickly as circumstances permit.
      We
      have entered into definitive agreements to sell five of the six properties
      included in real estate held for sale to third parties at or above book value
      for cash, as described below:





·
            We
                have entered into a sales agreement for the “Lakeview” property at the
                price of $17.5 million. The terms of the agreement includes two 45
                day non
                refundable extension payments, of which we have received the first
                extension payment in the amount of
                $100,000.





·
            We
                have entered into a sales agreement for the “Windrush” property at a price
                of $8 million, which approximates book
                value.





·
            We
                have entered into a sales agreement for the sale of a real estate
                parcel
                in Austin, Texas for a price of
                $600,000.





·
            We
                have entered into a sales agreement for a partially completed golf
                course
                on 570 acres of land near Austin, Texas for a price of $5.5
                million.





·
            We
                have an option agreement for the sale of 82 residential lots in Henderson,
                NV.





No
      assurance can be given that the sales contracts for the properties will actually
      close. For additional information on our investments in real estate loans,
      refer
      to Note F - *Real
      Estate Held for Sale* of the
      Notes to the Financial Statements included in Part IV, Item *15
      Exhibits and Financial Statement Schedules* of this
      Transition Report Form 10-K.





**Investments
      in Real Estate Held for Sale — Seller Financed**





At
      March
      31, 2006, we held an interest in three **** properties
      with a total carrying value of $22.9 million, which have been sold in
      transactions where we provided the financing to the purchaser. GAAP requires
      us
      to include these properties in real estate held for sale until the borrower
      has
      met and maintained a certain percentage of equity ownership, which ranges from
      10% to 25%. We may share ownership of such properties with Fund I, Fund III,
      the
      Manager, or other related and/or unrelated parties. These investments in real
      estate held for sale are accounted for at the lower of cost or fair value less
      costs to sell with fair value based on appraisals and knowledge of local market
      conditions. For additional information on our investments in real estate loans,
      refer to Note G - *Real
      Estate Held for Sale-Seller Financed* of the
      Notes to the Financial Statements included in Part IV, Item *15
      Exhibits and Financial Statement Schedules* of this
      Transition Report Form 10-K.





**OFF-BALANCE
      SHEET ARRANGEMENTS**





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.


-
          40
          -
 *Table
          of Contents*


**CONTRACTUAL
      OBLIGATIONS**





The
      following summarizes our contractual obligations at March 31, 2006:





**Contractual
                Obligation**
            
            **Total**
            
            **Less
                Than**
              **1
                Year**
            
            **1-3
                Years**
            
            **3-5
                Years**
            
            **More
                Than**
              **5
                Years**Secured
                borrowings
            
            $
            11,611,000
            
            $
            11,611,000
            
            $
            --
            
            $
            --
            
            $
            --Notes
                Payable
            
            
            17,200,000
            
            
            17,200,000
            
            
            --
            
            
            --
            
            
            --Total
            
            $
            28,811,000
            
            $
            28,811,000
            
            $
            --
            
            $
            --
            
            $
            --





Subsequent
      to March 31, 2006, we paid the above contractual obligations in
      full.





**CRITICAL
      ACCOUNTING ESTIMATES**





**Revenue
      Recognition**





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





The
      following table presents a sensitivity analysis to show the impact on our
      financial condition at March 31, 2006 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% or 100 basis
                points
            
            $2,457,000Weighted
                average interest rate assumption increased by 5% or 500 basis
                points
            
            $
            12,287,000Weighted
                average interest rate assumption decreased by 1% or 100 basis
                points
            
            $
            (2,457,000
            )Weighted
                average interest rate assumption decreased by 5% or 500 basis
                points
            
            $
            (12,287,000
            )





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 financial
      statements.





**Allowance
      for Loan Losses**





We
      maintain an allowance for loan losses on our investments in real estate loans
      for estimated credit impairment. The 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.


-
          41
          -
 *Table
          of Contents*


The
      following table presents a sensitivity analysis to show the impact on our
      financial condition at March 31, 2006 from increases and decreases to our
      allowance for loan losses as a percentage of the loan portfolio:





Changed
                Assumption
            
            **Increase
                (Decrease) in**
              **Allowance
                for Loan Losses**Allowance
                for loan losses assumption increased by 1.0% of loan
                portfolio
            
            $
            2,475,000Allowance
                for loan losses assumption increased by 5.0% of loan
                portfolio
            
            $
            12,374,000Allowance
                for loan losses assumption decreased by 1.0% of loan
                portfolio
            
            $
            (2,475,000
            )Allowance
                for loan losses assumption decreased by 4.3% of loan
                portfolio
            
            $
            (10,734,000
            )





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 non-conventional
      lender willing to invest in loans to borrowers who may not meet the credit
      standards of conventional lenders, the default rate on our loans could be higher
      than those generally experienced in the mortgage lending industry. We 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 the material facts pertaining to a borrower and the
      security.





Additional
      facts and circumstances are 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 caused significant
      changes in our estimated allowance include:





·
            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.





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





**Real
      Estate Held For Sale**





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





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





·
            Management
                commits to a plan to sell the
                properties;


-
          42
          -
 *Table
          of Contents*





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





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





·
            The
                sale of the property is probable;





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





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





**Real
      Estate Held For Sale - Seller Financed**





The
      Company occasionally finances sales of foreclosed properties to independent
      third parties. In order to record a sale of real estate when the seller is
      providing continued financing, FAS 66 requires the buyer of the real estate
      to
      make minimum and initial continuing investments. Minimum initial investments
      as
      defined by FAS 66 range from 10% to 25% based on the type of real estate sold.
      In addition, FAS 66 limits commitments and contingent obligations incurred
      by a
      seller in order to record a sale.





Because
      the Company occasionally forecloses on loans with raw land or developments
      in
      progress, available financing for such properties is often limited and the
      Company frequently provides financing up to 100% of the selling price on these
      properties. In addition, the Company 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
      sales transaction as defined in FAS 66. These sale agreements are not recorded
      as a sale until the requirements of FAS 66 are met.





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





**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 use all of our available funds
      to invest in real estate loans or satisfy redemption requests. Distributable
      cash flow generated from such loans is paid out to our members unless they
      have
      elected to reinvest their dividends. We do not anticipate the need for hiring
      any employees, acquiring fixed assets such as office equipment or furniture,
      or
      incurring material office expenses during the next twelve months because Vestin
      Mortgage will manage our affairs. We may pay Vestin Mortgage an annual
      management fee of up to 0.25% of our aggregate capital
      contributions.





During
      the nine month transition period ended March 31, 2006, cash flows provided
      by
      operating activities approximated $13.7 million. Investing activities consisted
      of cash provided by loan payoffs of approximately $145.0 million, cash proceeds
      from sale of investments in real estate loans $19.5 million. Cash used for
      new
      investments and purchases of real estate loans of approximately $169.9 million,
      and proceeds from the sale of real estate held for sale of approximately $5.0
      million. Financing activities consisted of members’ redemptions in the amount of
      $30.5 million, distributions of $12.6 million (net of
      reinvestments).





At
      March
      31, 2006, we had $17.8 million in cash, $0.7 million in certificates of deposit,
      and $308.7 million in total assets. We intend to meet short-term working capital
      needs through a combination of proceeds from loan payoffs, loan sales and/or
      borrowings. We believe we have sufficient working capital to meet our operating
      needs in the near term.


-
          43
          -
 *Table
          of Contents*


Since
      we
      distribute most or all of our distributable cash generated by operations, our
      sources of liquidity include: repayments of outstanding loans, distribution
      reinvestments by our members and arrangements with third parties to participate
      in our loans and proceeds from issuance of note payable and secured
      borrowings.





As
      of
      March 31, 2006, 30% of our members have elected to reinvest their distributions.
      We have no current plans to sell any new shares except through our dividend
      reinvestment program. The level of dividend reinvestment in the future will
      depend upon our performance, as well as, the number of our members who prefer
      to
      reinvest rather than receive current dividends.





We
      rely
      primarily upon repayment of outstanding loans to provide capital for investment
      in new loans. Any significant level of defaults on outstanding loans could
      reduce the funds we have available for investment in new loans. Resulting
      foreclosure proceedings may not generate full repayment of our loans and may
      result in significant delays in the return of invested funds. This would
      diminish our capital resources and would impair our ability to invest in new
      loans. During April and May 2006, eight of our loans in our investment in real
      estate loans totaling approximately $93.7 million were paid in full, of which
      $20.0 million was reinvested in new real estate loans. Non-performing assets
      include loans in non-accrual status, net of allowance for loan losses, and
      real
      estate held for sale totaling $26.6 million and $38.4 million, respectively,
      as
      of March 31, 2006 compared to $36.0 million and $51.2 million, respectively,
      as
      of June 30, 2005. It is possible that no earnings will be recognized from these
      assets until they are disposed of, or that no earnings will be recognized at
      all, and the time it will take to dispose of these assets cannot be predicted.
      Our Manager believes that non-performing assets exist as a result of factors
      unique to specific borrowers and properties. Because of the estimated value
      of
      the underlying properties, we do not believe that any losses beyond those
      already recognized will be incurred from these assets upon final disposition.
      However, it is possible that we will not be able to realize the full estimated
      carrying values upon disposition.





Historically,
      redemptions by our members reduced the capital we had available for investment.
      As of March 31, 2006, the total of redemptions made from inception was $138.5
      million. In January 2006, we redeemed approximately $30.5 million of Members’
capital. Due to Fund II’s subsequent merger into Vestin Realty Mortgage II, Inc.
      as of March 31, 2006, we will no longer redeem units since all units have been
      converted into shares of Vestin Realty Mortgage II, Inc.





To
      maintain our status as a REIT, we will be required to make distributions, other
      than capital gain dividends, to our stockholders each year in an amount at
      least
      equal to (1) the sum of (a) 90% of our taxable income, computed without regards
      to the dividends paid deduction and our net capital gain, and (b) 90% of the
      net
      income, after tax, from foreclosure property, minus (2) the sum of certain
      specified items of noncash income over 5% of our REIT taxable
      income.





Loans
      in
      which third party investors have participated through inter-creditor agreements
      (“Inter-creditor Agreements”) are accounted for as secured borrowings in
      accordance with FAS 140, Accounting for Transfers and Servicing of Financial
      Assets and Extinguishments of Liabilities (“FAS 140”). The Inter-creditor
      Agreements provide us additional funding sources for real estate loans whereby
      a
      third party investor (the “Investor”) may participate on a senior basis in
      certain real estate loans with us and/or Fund I and/or Fund III (collectively,
      the “Lead Lenders”). In the event of borrower non-performance, the
      Inter-creditor Agreements generally provide that the Lead Lenders must repay
      the
      Investor’s loan amount either by (i) continuing to remit to the Investor the
      interest due on the participated loan amount; (ii) substituting an alternative
      loan acceptable to the Investor; or (iii) repurchasing the participation from
      the Investor for the outstanding balance plus accrued interest.





Additionally,
      an Investor may participate in certain loans with the Lead Lenders through
      Participation Agreements. In the event of borrower non-performance, the
      Participation Agreement may allow the Investor to be repaid up to the amount
      of
      the Investor’s investment prior to the Lead Lender being repaid. Real estate
      loan financing under the Participation Agreements are also accounted for as
      a
      secured borrowing in accordance with FAS 140.





As
      of
      March 31, 2006, funds being used under Inter-creditor and Participation
      Agreements where we have potential obligations as defined above totaled $11.6
      million compared to $25.7 million at June 30, 2005. Subsequently, all of these
      obligations have been paid in full.


-
          44
          -
 *Table
          of Contents*


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.





**ITEM
      7A.**  **QUANTITATIVE
      AND QUALITATIVEDISCLOSURES ABOUT MARKET
      RISK**





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





Most
      of
      our assets consist of investments in real estate loans, including those that
      are
      financed under intercreditor agreements. At March 31, 2006, our aggregate
      investment in real estate loans was approximately $212.9 million net of
      allowance with a weighted average effective interest rate of 9.96%. Loans
      financed under inter-creditor agreements totaled $11.6 million at March 31,
      2006
      and are classified as assets under secured borrowing. Such financing is at
      a
      weighted average interest rate of 11.21%. These secured borrowings were paid
      in
      full in April 2006. Most of the real estate loans have an initial term of 12
      months; the weighted average term of outstanding loans at March 31, 2006 was
      16
      months. All of the outstanding real estate loans at March 31, 2006 were fixed
      rate loans. All of the real estate loans are held for investment purposes;
      none
      are held for sale. We intend to hold such real estate loans to maturity. None
      of
      the real estate loans have prepayment penalties and one has an exit
      fee.





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





The
      following table contains information about the investment in mortgage loans
      held
      in our portfolio as of March 31, 2006. The presentation aggregates the
      investment in mortgage loans by their maturity dates for maturities occurring
      in
      each of the years 2006 through 2010 and separately aggregates the information
      for all maturities arising after 2010. The carrying values of these assets
      approximate their fair value as of March 31, 2006.





**Interest
                Earning Assets**
              **Aggregated
                by Maturity at March 31, 2006****Interest
                Earning Assets**
            
            **2006**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **Thereafter**
            
            **Total**Investments
                In Real Estate Loans
            
            $
            207,765,000
            
            $
            39,708,000
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            247,473,000Weighted
                Average Interest Rates
            
            
            10.29%
            
            
            8.24%
            
            
            --%
            
            
            --%
            
            
            --%
            
            
            9.96%





At
      March
      31, 2006, we also had approximately $18.5 million invested in cash, cash
      equivalents, and certificates of deposit. Approximately 3% of our assets will
      be
      held in such accounts as a cash reserve; additional deposits in such accounts
      will be made as funds are received from investors and repayment of loans pending
      the deployment of such funds in new real estate loans. We believe that these
      financial assets do not give rise to significant interest rate risk due to
      their
      short-term nature.





**ITEM
      8.**  **FINANCIAL
      STATEMENTS AND SUPPLEMENTARYDATA**





The
      financial statements and supplementary data are indexed in Part IV, Item 15 *Exhibits
      and Financial Statement Schedules* of this
      Transition Report Form 10-K.


-
          45
          -
 *Table
          of Contents*




**ITEM
      9. **CHANGES
      IN AND DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE****




None.





**ITEM
      9A.**  **CONTROL
      AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports under the Exchange Act
      is
      recorded, processed, summarized and reported within the time periods specified
      in the SEC’s rules and forms, and that such information is accumulated and
      communicated to our management, including our Chief Executive Officer (“CEO”)
      and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions
      regarding required financial disclosure. In connection with the preparation
      of
      this Transition Report on Form 10−K, our management carried out an evaluation,
      under the supervision and with the participation of the our management,
      including the CEO and CFO, as of March 31, 2006, of the effectiveness of the
      design and operation of our disclosure controls and procedures, as such term
      is
      defined under Rule 13a−15(e) under the Exchange Act. Based upon this evaluation,
      our CEO and CFO concluded that our disclosure controls and procedures were
      not
      effective as of March 31, 2006 because of the material weaknesses discussed
      below. Notwithstanding the material weaknesses discussed below, our management
      has concluded that the financial statements included in this Transition Report
      on Form 10−K fairly present in all material respects our financial condition,
      results of operations and cash flows for the periods presented in conformity
      with accounting principles generally accepted in the United States.





**Management’s
      Report on Internal Control Over Financial Reporting**





Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting for our Company, as such term is defined in Rules 13a−15(f)
      and 15d−15(f) under the Exchange Act. Our internal control over financial
      reporting is a process designed to provide reasonable assurance regarding the
      reliability of financial reporting and the preparation of financial statements
      for external reporting purposes in accordance with accounting principles
      generally accepted in the United States. Internal control over financial
      reporting includes those policies and procedures that: pertain to the
      maintenance of records that, in reasonable detail, accurately and fairly reflect
      the transactions and dispositions of the assets of our Company; provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with accounting principles
      generally accepted in the United States, and that receipts and expenditures
      of
      our Company are being made only in accordance with authorizations of management
      and directors of our Company; and provide reasonable assurance regarding
      prevention or timely detection of unauthorized acquisition, use or disposition
      of our Company’s assets that could have a material effect on our financial
      statements. Because of its inherent limitations, internal control over financial
      reporting may not prevent or detect misstatements. Also, projections of any
      evaluation of effectiveness to future periods are subject to the risk that
      controls may become inadequate because of changes in conditions, or that the
      degree of compliance with the policies or procedures may
      deteriorate.





Management
      has conducted an assessment, including testing, of the effectiveness of our
      internal control over financial reporting as of March 31, 2006. In making its
      assessment of internal control over financial reporting, management used the
      criteria in *Internal
      Control — Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission
      (“COSO”).





A
      material weakness is a control deficiency, or combination of control
      deficiencies, that results in more than a remote likelihood that a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected. As of March 31, 2006, management identified the following material
      weaknesses in their assessment of the effectiveness of our internal control
      over
      financial reporting:


-
          46
          -
 *Table
          of Contents*





·
            We
                did not adequately implement certain controls over investments in
                real
                estate loans, specifically relating to the computer database of
                investments in real estate loans which summarizes information used
                to
                prepare the related disclosures. These disclosures include the
                classification of the types of loans, portfolio percentage, loan
                to value
                percentage, and the geographical location of the investment in real
                estate
                loans. These areas included logical access security controls to the
                computer database, and we have therefore identified a material weakness
                in
                our information technology general controls as of March 31,
                2006.





Management’s
      assessment of the effectiveness of our internal control over financial reporting
      as of March 31, 2006 has been audited by Moore Stephens Wurth Frazer and Torbet,
      LLP, our independent registered public accounting firm, as stated in its report
      which appears below in this Item 9A.





**Remediation
      Plan**





To
      remediate our material weakness over the computer database of investments in
      real estate loans, management is currently establishing and implementing
      controls, policies and procedures within our information technology department
      that will provide monitoring and management of the computer systems access
      rights. Such .procedures, when established, will provide for various levels
      of
      access by certain individuals as deemed appropriate by management. These
      procedures will also provide for appropriate approvals for programming changes,
      along with supporting documentation of such approvals. Management is currently
      reviewing all individuals and their functions and duties within our information
      technology department to fully establish these access and approval
      controls.





**Changes
      in Internal Control Over Financial Reporting**





Our
      management has not identified any changes in our internal controls over
      financial reporting during our Transition Quarter that have materially affected,
      or are reasonably likely to materially affect, our internal controls over
      financial reporting, except as discussed above.





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





Notwithstanding
      the above, nothing has come to the attention of management which would cause
      management to believe that the material weaknesses noted above have resulted
      in
      material misstatements or errors in our financial statements as of March 31,
      2006, or for any prior periods.


-
          47
          -
 *Table
          of Contents*


Report
        of
        Independent Registered Public Accounting Firm
 
 To
        the
        Board of Directors and Stockholders of
 Vestin
        Realty Mortgage II, Inc., successor to Vestin Fund II, LLC
 
 We
        have
        audited management’s assessment, included in the accompanying Management’s
        Report on Internal Control over Financial Reporting (Item 9A), that Vestin
        Realty Mortgage II, Inc., successor to Vestin Fund II, LLC (the Company)
        did not
        maintain effective internal control over financial reporting as of the nine
        month transition period ended March 31, 2006, because of the effect of material
        weaknesses identified in management’s assessment, based on criteria established
        in *Internal
        Control - Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
        Vestin Realty Mortgage II’s management is responsible for maintaining effective
        internal control over financial reporting and for its assessment of the
        effectiveness of internal control over financial reporting. Our responsibility
        is to express an opinion on management’s assessment and an opinion on the
        effectiveness of the Company’s internal control over financial reporting based
        on our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether effective
        internal control over financial reporting was maintained in all material
        respects. Our audit included obtaining an understanding of internal control
        over
        financial reporting, evaluating management’s assessment, testing and evaluating
        the design and operating effectiveness of internal control, and performing
        such
        other procedures as we considered necessary in the circumstances. We believe
        that our audit provides a reasonable basis for our opinion.
 
 A
        company’s internal control over financial reporting is a process designed to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles. A company’s internal control over
        financial reporting includes those policies and procedures that (1) pertain
        to
        the maintenance of records that, in reasonable detail, accurately and fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company’s
        assets that could have a material effect on the financial
        statements.
 
 Because
        of the inherent limitations of internal control over financial reporting,
        including the possibility of collusion or improper management override of
        controls, material misstatements due to error or fraud may not be prevented
        or
        detected on a timely basis. Also, projections of any evaluation of the
        effectiveness of the internal control over financial reporting to future
        periods
        are subject to the risk that the controls may become inadequate because of
        changes in conditions, or that the degree of compliance with the policies
        or
        procedures may deteriorate.
 
 A
        material weakness is a control deficiency, or combination of control
        deficiencies, that results in more than a remote likelihood that a material
        misstatement of the annual or interim financial statements will not be prevented
        or detected. The following material weaknesses have been identified and included
        in management’s assessment as of the nine month transition period ended March
        31, 2006:
 
 ·
            The
                Company did not adequately implement certain controls over investments
                in
                real estate loans, specifically relating to the computer database
                of
                investments in real estate loans which summarizes information used
                to
                prepare the related disclosures. These disclosures include the
                classification of the types of loans, portfolio percentage, loan
                to value
                percentage, and the geographical location of the investment in real
                estate
                loans. These areas included logical access security controls to the
                computer database, and we have therefore identified a material weakness
                in
                our information technology general controls as of March 31, 2006. 
 In
        our
        opinion, management’s assessment that Vestin Realty Mortgage II, Inc. did not
        maintain effective internal control over financial reporting as of March
        31,
        2006, is fairly stated, in all material respects, based on criteria established
        in *Internal
        Control - Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
        Also, in our opinion, because of the effect of the material weaknesses described
        above on the achievement of the objectives of the control criteria, Vestin
        Realty Mortgage II, Inc. has not maintained effective internal control over
        financial reporting as of March 31, 2006 based on criteria established in *Internal
        Control - Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission
        (COSO).
 
 /s/Moore
        Stephens Wurth Frazer and Torbet, LLP
 
 Orange,
        California
 June
        6,
        2006  -
              48
              -
 *Table
              of Contents*





**ITEM
      9B.**  **OTHERINFORMATION**





None.





**PARTIII**





**ITEM
      10.**  **DIRECTORSAND
      EXECUTIVE OFFICERS OF
      REGISTRANT**





We
      are
      managed by Vestin Mortgage which is engaged in asset management, real estate
      lending and other financial services. Vestin Mortgage, a privately held company
      and wholly-owned subsidiary of Vestin Group, has no audit committee and no
      requirement for independence at this time.





**Directors
      and Executive Officers**





The
      following table sets forth the names, ages as of March 31, 2006 and positions
      of
      the individuals who serve as our directors and executive officers:





**Name**
            **Age**
            **Title**Michael
                V. Shustek
            47
            President,
                Chief Executive Officer and DirectorJohn
                W. Alderfer
            61
            Chief
                Financial Officer and DirectorRobert
                J. Aalberts(1)(2)(3)
            54
            DirectorFredrick
                J. Zaffarese Leavitt(1)(2)(3)
            34
            DirectorRoland
                M. Sansone(1)(2)(3)
            50
            Director





(1)
            Member
                of the audit committee.





(2)
            Member
                of the nominating committee.





(3)
            Member
                of the compensation committee.





The
      following table sets forth the names, ages as of March 31, 2006 and positions
      of
      the individuals who serve as directors and executive officers of Vestin
      Mortgage, our manager:





**Name**
            **Age**
            **Title**Michael
                V. Shustek
            47
            President,
                Chief Executive Officer and ChairmanJohn
                W. Alderfer
            61
            Chief
                Financial OfficerMichael
                J. Whiteaker
            56
            Vice
                President of Regulatory AffairsDaniel
                B. Stubbs
            44
            Senior
                Vice President, UnderwritingJennifer
                Tsuneta
            34
            Vice
                President of Loan ServicingShannon
                Haddow
            37
            Vice
                President of Investor Relations





**Directors
      and Executive Officers of Vestin Realty Mortgage II and Vestin
      Mortgage**





The
      principal occupation and business experience for the directors and executive
      officers of Vestin Realty Mortgage II and Vestin Mortgage, other than the
      independent and unaffiliated directors of Vestin Realty Mortgage II described
      below, are as follows:


-
          49
          -
 *Table
          of Contents*


*Michael
      V. Shustek* has been
      a director of Vestin Mortgage and Chairman of the Board of Directors, Chief
      Executive Officer and a director of Vestin Group since April 1999. In February
      2004, Mr. Shustek became the President of Vestin Group. Mr. Shustek also serves
      on the loan committee of Vestin Mortgage. In 2003, Mr. Shustek became the Chief
      Executive Officer of Vestin Mortgage. In 1995, Mr. Shustek founded Del Mar
      Mortgage, and has been involved in various aspects of the real estate industry
      in Nevada since 1990. In 1993, he founded Foreclosures of Nevada, Inc., a
      company specializing in non-judicial foreclosures. In 1993, Mr. Shustek also
      started Shustek Investments, a company that originally specialized in property
      valuations for third-party lenders or investors and which continues today as
      the
      primary vehicle for his private investment portfolio. In 1997, Mr. Shustek
      was
      involved in the initial founding of Nevada First Bank, with the largest initial
      capital base of any new state charter in Nevada’s history. Mr. Shustek has
      co-authored two books, entitled “Trust Deed Investments,” on the topic of
      private mortgage lending, and “If I Can Do It, So Can You.” Mr. Shustek is a
      guest lecturer at the University of Nevada, Las Vegas, where he also has taught
      a course in Real Estate Law and Ethics. Mr. Shustek received a Bachelor of
      Science degree in Finance at the University of Nevada, Las Vegas.





*John
      W. Alderfer* has
      served as the Chief Financial Officer of Vestin Group effective January 2005
      and
      was elected a director of Vestin Group effective March 2005. Mr. Alderfer
      previously served as Chief Financial Officer of Vestin Group from September
      2002
      to February 2004. From February 2004 to December 2004, Mr. Alderfer served
      as a
      consultant to Vestin Group. From October 1998 to September 2002, Mr. Alderfer
      was retired. From September 1996 to October 1998, Mr. Alderfer was a Director,
      Vice President, Treasurer, and Chief Financial Officer of Interactive Flight
      Technologies, Inc. From September 1990 to June 1996, Mr. Alderfer was Senior
      Vice President, Treasurer, and Chief Financial Officer of Alliance Gaming
      Corporation. Mr. Alderfer is the former Senior Vice President, Corporate
      Controller and Chief Accounting Officer of Summa Corporation and The Hughes
      Corporation, 100% owned by the Estate of Howard R. Hughes. Mr. Alderfer received
      his BBA degree in accounting from Texas Tech University. He is a Certified
      Public Accountant.





*Michael
      J. Whiteaker* has been
      Vice President of Regulatory Affairs of Vestin Mortgage and Vestin Group since
      May 1999. Mr. Whiteaker is experienced in the banking and finance regulatory
      fields, having most recently served with the State of Nevada, Financial
      Institution Division from 1982 to 1999 as its Supervisory Examiner, responsible
      for the financial and regulatory compliance audits of all financial institutions
      in Nevada. Mr. Whiteaker has worked extensively on matters pertaining to both
      state and federal statutes, examination procedures, policy determination and
      credit administration for commercial and real estate loans. From 1973 to 1982,
      Mr. Whiteaker was Assistant Vice President of Nevada National Bank, responsible
      for a variety of matters including loan review.





*Daniel
      B. Stubbs* has been
      the Senior Vice President, Underwriting of Vestin Mortgage since January of
      2000. Mr. Stubbs heads the loan department for Vestin Mortgage and is
      responsible for reviewing loan requests and performs due diligence necessary
      for
      risk analysis in connection with the underwriting process. In addition, Mr.
      Stubbs serves on the loan committee and acts as liaison for Vestin Mortgage
      with
      the various commercial loan participants. Mr. Stubbs has 15 years experience
      in
      the title insurance industry and has received a Bachelor of Arts degree in
      Communication Studies from the University of Nevada, Las Vegas.





*Jennifer
      Tsuneta* is Vice
      President of the Loan Servicing Department of Vestin Mortgage. Ms. Tsuneta
      currently is the Manager of the Loan Servicing Department and has served in
      various capacities with Vestin Mortgage since 1994. As one of the very first
      employees of Vestin, Ms. Tsuneta is familiar with the daily company operations
      as well as client relations. Prior to her employment at Vestin Mortgage, Ms.
      Tsuneta served as an assistant in the Trust Department with Bank of America.
      Ms.
      Tsuneta received a Bachelor of Science degree in Business Administration from
      the University of Nevada, Las Vegas in 1993.





*Shannon
      Haddow* is Vice
      President of Investor Relations of Vestin Mortgage. Ms. Haddow has served as
      the
      Compliance Officer for Vestin Capital, Inc. since October of 2004 and previously
      was a registered sales representative beginning in May of 2000. Prior to Vestin
      Capital, Ms. Haddow was employed as an investor relations representative with
      Vestin Mortgage from December 1998 to May 2000. Ms. Haddow has also served
      as a
      controller for Ivory Homes located in Salt Lake City, Utah and has a real estate
      license in the State of Nevada as well as Series 7, 22, 24 and 63 securities
      licenses.


-
          50
          -
 *Table
          of Contents*


**Unaffiliated
      Directors of Vestin Realty Mortgage II**





The
      principal occupation and business experience for the independent and
      unaffiliated directors of Vestin Realty Mortgage II are as follows:





*Robert
      J. Aalberts* has been
      a director of Vestin Group since April 1999. Since 1991, Professor Aalberts
      has
      held the Ernst Lied Professor of Legal Studies professorship in the College
      of
      Business at the University of Nevada, Las Vegas. From 1984 to 1991, Professor
      Aalberts was an Associate Professor of Business Law at Louisiana State
      University in Shreveport, Louisiana. From 1982 through 1984, he served as an
      attorney for Gulf Oil Company. Professor Aalberts has co-authored a book
      relating to the regulatory environment, law and business of real estate;
      including Real Estate Law 6 th Ed.
      (2006) published by the Thomson/West Company. He is also the author of numerous
      legal articles, dealing with various aspects of real estate, business and the
      practice of law. Since 1992, Professor Aalberts has been the Editor-in-chief
      of
      the Real Estate Law Journal. Professor Aalberts received his Juris Doctor degree
      from Loyola University, in New Orleans, Louisiana, a Masters of Arts from the
      University of Missouri, Columbia, and received a Bachelor of Arts degree in
      Social Sciences, Geography from the Bemidji State University in Bemidji,
      Minnesota. He was admitted to the State Bar of Louisiana in 1982 (currently
      inactive status).





*Fredrick
      J. Zaffarese Leavitt* has been
      a director for Vestin Group since November 2004. Since August of 1993 Mr.
      Zaffarese has been an accountant for the United States Department of the
      Interior where his responsibilities include the review and audit of various
      states, local and municipality governments for compliance with federal laws
      and
      regulations as well as preparation of financial statements for Executive Branch
      and Congressional review. Additionally, Mr. Zaffarese sits on various audit
      committees involving the utility industry. Mr. Zaffarese is a CPA and a graduate
      of University of Nevada Las Vegas.





*Roland
      M. Sansone* has
      served as President of Sansone Development, Inc. since 2002. Sansone
      Development, Inc. is a real estate development company. Mr. Sansone has been
      self-employed as a Manager and developer of real estate since 1980. Mr. Sansone
      is currently the president of several companies that develop, own and manage
      commercial and residential property. Mr. Sansone attended Mt. San Antonio
      College.





**Board
      Composition**





Our
      board
      of directors is authorized to have up to 15 directors. Our board of directors
      is
      currently comprised of five directors. In accordance with our articles of
      charter and bylaws, our board of directors will be divided into three classes,
      class I, class II and class III, with each class serving staggered three-year
      terms. The members of the classes are divided as follows:





·
            The
                class I director will be Mr. Zaffarese, and his term will expire
                at the
                2007 annual meeting of
                stockholders;





·
            The
                class II directors will be Messrs, Alderfer and Sansone, and their
                terms
                will expire at the 2008 annual meeting of stockholders;
                and





·
            The
                class III directors will be Messrs, Aalberts and Shustek, and their
                terms
                will expire at the 2009 annual meeting of
                stockholders.





The
      authorized number of directors may be changed only by resolution of the board
      of
      directors. Any additional directors resulting from an increase in the number
      of
      directors will be distributed between the three classes so that, as nearly
      as
      possible, each class will consist of one third of the directors. This
      classification of our board of directors may have the effect of delaying or
      preventing changes in our control or management. Our directors will hold office
      until their successors have been elected and qualified or until their earlier
      death, resignation, disqualification or removal for cause by the affirmative
      vote of the holders of at least a majority of our outstanding stock entitled
      to
      vote on election of directors.


-
          51
          -
 *Table
          of Contents*


**Board
      Committees**





Our
      board
      of directors have an audit committee, a nominating committee and a compensation
      committee. There are no family relationships among any of our directors or
      executive officers.





*Audit
      Committee.* The
      audit
      committee consists of Messrs, Aalberts, Zaffarese and Sansone. Our board of
      directors has determined that Mr. Zaffarese is an audit committee financial
      expert as defined under the applicable rules of the SEC and has the requisite
      financial sophistication as defined under the applicable Nasdaq stock market
      rules. We believe the composition of our audit committee meets the criteria
      for
      independence under, and the functioning of our audit committee complies with
      applicable requirements of, the Sarbanes-Oxley Act of 2002, the current rules
      of
      the Nasdaq Stock Market and SEC rules and regulations. We intend to comply
      with
      future audit committee requirements as they become applicable to
      us.





Our
      audit
      committee oversees our accounting and financial reporting processes, internal
      systems of control, independent auditor relationships and the audits of our
      financial statements. This committee’s responsibilities include, among other
      things:





·
            Selecting
                and hiring our independent
                auditors;





·
            Evaluating
                the qualifications, independence and performance of our independent
                auditors;





·
            Approving
                the audit and nonaudit services to be performed by our independent
                auditors;





·
            Reviewing
                the design, implementation, adequacy and effectiveness of our internal
                controls and our critical accounting
                policies;





·
            Overseeing
                and monitoring the integrity of our financial statements and our
                compliance with legal and regulatory requirements as they relate
                to
                financial statements or accounting matters;
                and





·
            Reviewing
                with management and our auditors any earnings announcements and other
                public announcements regarding our results of
                operations.





Our
      independent auditors and internal financial personnel regularly meet privately
      with our audit committee and have unrestricted access to this
      committee.





*Nominating
      Committee.* The
      nominating committee consists of Messrs, Aalberts,
      Zaffarese and Sansone .
      We
      believe the composition of our nominating committee meets the criteria for
      independence under, and the functioning of our nominating committee complies
      with applicable requirements of, the Sarbanes-Oxley Act of 2002, the current
      rules of the Nasdaq Stock Market and SEC rules and regulations. We intend to
      comply with future nominating committee requirements as they become applicable
      to us.





Our
      nominating committee’s purpose is to assist our board of directors by
      identifying individuals qualified to become directors. This committee’s
      responsibilities include, among other things:





·
            Evaluating
                the composition, size and governance of our board of directors and
                make
                recommendations regarding future planning and the appointment of
                directors;





·
            Establishing
                a policy for considering stockholder nominees for election to our
                board of
                directors; and





·
            Evaluating
                and recommending candidates for election to our board of
                directors.


-
          52
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 *Table
          of Contents*


*Compensation
      Committee* **** The
      compensation committee consists of Messer, Aalberts, Zaffarese and Sansone.
      We
      believe the composition of our compensation committee meets the criteria for
      independence under, and the functioning of our compensation committee complies
      with applicable requirements of, the Sarbanes-Oxley Act of 2002, the current
      rules of the Nasdaq Stock Market and SEC rules and regulations. We intend to
      comply with future compensation committee requirements as they become applicable
      to us.





Our
      compensation committee’s purpose is to assist our board of directors relating to
      compensation of the Company’s directors, executive officers and its sole
      manager, Vestin Mortgage, Inc.; and to produce as may be required an annual
      report on executive officer compensation. Subject to applicable provisions
      of
      our bylaws and the Management Agreement with Vestin Mortgage, the compensation
      committee is responsible for reviewing and approving compensation paid by us
      to
      Vestin Mortgage.





**Director
      Compensation**





Currently,
      our directors who are also employees of our company receive no additional
      compensation for their services as directors. Our non-employee directors receive
      $500 for each board meeting they attend, whether in person or by phone, and
      are
      reimbursed for travel expenses and other out-of-pocket costs of attending board
      and committee meetings.





**Code
      of Ethics**





Our
      Board
      of Directors has adopted a Code of Business Conduct and Ethics that applies
      to
      all of our directors, officers and employees of our Manager. The Code of
      Business Conduct and Ethics may be found on our web site at www.vestinrealtymortgage2.com .





**ITEM
      11.**  **EXECUTIVECOMPENSATION**





Our
      directors who are also employees of our company receive no additional
      compensation for their services as directors .




**ITEM
        12. **SECURITY
        OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
        AND
        RELATED STOCKHOLDER MATTERS****





The
      following table sets forth the total number and percentage of Fund II units
      beneficially owned as of March 31, 2006 by:





·
            Each
                director;





·
            Our
                chief executive officer and our other executive officers;
                and





·
            All
                executive officers and directors as a
                group.





As
      of
      March 31, 2006, none of our members were beneficial owners of 5% or more of
      our
      units.





Unless
      otherwise noted, the percentage ownership is calculated based on 29,838,442
      shares of Fund II outstanding as of March 31, 2006. The address of each of
      the
      persons in the table is c/o Vestin Realty Mortgage II, Inc., 8379 West Sunset
      Road, Las Vegas, Nevada 89113.


-
          53
          -
 *Table
          of Contents*





**Units
                Beneficially Owned****Beneficial
                Owner**
            
            **Number**
            
            **Percent**Michael
                V. Shustek(1)
            
            
            112,710
            
            
            *John
                W. Alderfer
            
            
            426
            
            
            *Robert
                J. Aalberts
            
            
            --
            
            
            --Frederick
                J. Zaffarese Leavitt
            
            
            --
            
            
            --Roland
                M. Sansone
            
            
            --
            
            
            --All
                directors and executive officers as a group (5 persons)
            
            
            113,136
            
            
            *





*
      Less
      than one percent.





(1)
            Includes
                110,000 units held by Vestin Mortgage and 2,710 units held by The
                Michael
                V. Shustek Trust. Mr. Shustek is the Chairman, President and Chief
                Executive Officer of Vestin Mortgage and indirectly owns all of the
                capital stock of Vestin Mortgage. Mr. Shustek is the trustee of the
                Michael V. Shustek Family Trust.





**ITEM
      13.**  **CERTAIN
      RELATIONSHIPSAND RELATED 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 Operating
      Agreement provided the price does not exceed the original cost. 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 contribution, paid monthly in arrears. The amount
      of
      management fees paid to our Manager for the nine months ended March 31, 2006
      and
      2005 approximated $820,000 and $787,000, respectively.





As
      of
      March 31, 2006, we owed our Manager approximately $250,000 related to unpaid
      management fees, our Manager’s pro-rata share of distributions and expenses paid
      on our behalf related to the maintenance of real estate held for
      sale.





As
      of
      March 31, 2006, Vestin Mortgage had an investment in us of approximately $1.1
      million, which consists of certain costs paid on our behalf related to the
      registration and start-up costs. Vestin Mortgage has received 110,000 units
      from
      us related to this investment. Additionally, for the nine months ended March
      31,
      2006 and 2005, we recorded pro-rata distributions owed to our Manager of
      approximately $45,000.





**Transactions
      with the Funds**





As
      of
      March 31, 2006 and June 30, 2005, Fund I owed us $0 and $1,560,000,
      respectively, primarily related to payments made on our behalf for the
      maintenance of real estate owned.





During
      the nine months ended March 31, 2006, we purchased $8,800,000 in real estate
      loans from Fund I.





During
      the nine months ended March 31, 2006, we sold $500,000 in real estate loans
      to
      Fund I.





During
      the nine months ended March 31, 2006, we purchased $500,000 in real estate
      loans
      from Fund III.


-
          54
          -
 *Table
          of Contents*


**Transactions
      with Other Related Parties**





During
      the nine months ended March 31, 2006, we sold $7 million in performing real
      estate loans to InVestin Nevada, Inc., a company wholly owned by our Manager’s
      CEO. No gain or loss resulted as a result of these transactions.





During
      the nine months ended March 31, 2006, we purchased $11.8 million in performing
      real estate loans from InVestin Nevada, Inc. No gain or loss resulted as a
      result of these transactions.





During
      the nine months ended March 31, 2006 and 2005, we incurred $51,000 and $62,000,
      respectively, for legal fees to the law firm of Levine, Garfinkel & Katz in
      which the Secretary of Vestin Group has an equity ownership
      interest.





During
      the nine months ended March 31, 2006 and 2005, we incurred $144,000 and
      $101,000, respectively, to L.L. Bradford & Company, LLC, a certified public
      accounting firm for accounting services. A former Director and Officer of Vestin
      Group is an equity owner in that firm.





During
      January 2006, Michael V. Shustek, the Manager’s CEO, purchased a $2 million
      trust deed investment from us, of which, the total balance of $2 million was
      repurchased by us.





At
      June
      30, 2005, we owed Vestin Group, Inc. $1,000, a company wholly owned by our
      Manager’s CEO.





During
      the nine months ended March 31, 2006 we purchased $556,000 in performing real
      estate loans from LTD, a company wholly owned by our Manager’s CEO. No gain or
      loss resulted as a result of these transactions.





**ITEM
      14.**  **PRINCIPAL
      ACCOUNTINGFEES AND SERVICES**





During
      the nine month transition period ended March 31, 2006 and the fiscal year ended
      June 2005, Moore Stephens Wurth Frazer and Torbet, LLP (“Moore Stephens”)
      provided various audit, audit related and non-audit services to us as
      follows:





**March
                31, 2006**
            
            **June
                30, 2005**Audit
                Fees
            
            $
            400,000
            
            $
            328,000Audit
                Related Fees
            
            $
            --
            
            $
            --Tax
                Fees
            
            $
            --
            
            $
            --All
                Other Fees
            
            $
            --
            
            $
            --





The
      Audit
      Committee of Vestin Group (the “Audit Committee”) has considered whether
      provision of the services described regarding audit related fees, tax fees
      and
      all other fees above were compatible with maintaining the independent
      accountant’s independence and has determined that such services did not
      adversely affect Moore Stephens’ independence.





The
      Audit
      Committee has direct responsibility to review and approve the engagement of
      the
      independent auditors to perform audit services or any permissible non-audit
      services. All audit and non-audit services to be provided by the independent
      auditors must be approved in advance by the Audit Committee. The Audit Committee
      may not engage the independent auditors to perform specific non-audit services
      proscribed by law or regulation. All services performed by independent auditors
      under engagements entered into on or after May 6, 2003, were approved by the
      Audit Committee pursuant to its pre-approval policy, and none was approved
      pursuant to the *de
      minimus* exception
      to the rules and regulations of the Securities Exchange Act of 1934, Section
      10A(i)(1)(B), on pre-approval.


-
          55
          -
 *Table
          of Contents*


**PARTIV**





**ITEM
      15.**  **EXHIBITS
      AND FINANCIALSTATEMENT SCHEDULES**


(a)
      1. Financial
      Statements





The
      financial statement are contained on Pages F-2 through F-27 on this Annual
      Report on Form 10-K, and the list of the financial statements contained herein
      is set forth on page F-1, which is hereby incorporated by
      reference.





(a)
      2. Financial
      Statement Schedules





(a)
      3. Exhibits





**EXHIBITINDEX**





**Exhibit
                No.**
            
            **Description
                of Exhibits**2.1(3)
            
            Agreement
                and Plan of Merger between Vestin Fund II, LLC and the
                Registrant3.1(3)
            
            Articles
                of Incorporation of the Registrant3.2(3)
            
            Bylaws
                of the Registrant3.3(3)
            
            Form
                of Articles Supplementary of the Registrant4.1(3)
            
            Reference
                is made to Exhibits 3.1, 3.2 and 3.34.2(4)
            
            Specimen
                Common Stock Certificate4.3(3)
            
            Form
                of Rights Certificate10.1(3)
            
            Form
                of Management Agreement between Vestin Mortgage, Inc. and the
                Registrant10.2(3)
            
            Form
                of Rights Agreement between the Registrant and the rights
                agent10.3(1)
            
            Assignment
                Agreement, dated January 23, 2004, by and between Vestin Mortgage,
                Inc.,
                Vestin Fund I, LLC, Vestin Fund III, LLC, Owens Financial Group,
                Inc. and
                Owens Mortgage Investment Fund10.4(1)
            
            Intercreditor
                Agreement, dated January 17, 2003, by and among Vestin Mortgage,
                Inc.,
                Vestin Fund I, LLC, Vestin Fund III, LLC and Western United Life
                Assurance
                Company10.5(1)
            
            Intercreditor
                Agreement, dated April 22, 2004, by and between Vestin Mortgage,
                Inc. and
                Owens Mortgage Investment Fund10.6(1)
            
            Intercreditor
                Agreement, dated June 24, 2004, by and between Vestin Mortgage, Inc.
                and
                Owens Mortgage Investment Fund10.7(1)
            
            Participation
                Agreement, dated May 13, 2004, by and among the Registrant, Vestin
                Fund I,
                LLC, Vestin Fund III, LLC and Royal Bank of America21.1(4)
            
            List
                of subsidiaries of the Registrant31.1
            
            Section
                302 Certification of Michael V.
                Shustek31.2
            
            Section
                302 Certification of John
                Alderfer32
            
            Certification
                Pursuant to U.S.C. 18 Section
                135099.2R
            
            Vestin
                Realty Mortgage II, Inc. Code of Business
                Conduct and Ethics





(1)
            
            Incorporated
                herein by reference to our Form S-4 Registration Statement filed
                on May
                20, 2005 (File No. 333-125121).(2)
            
            Incorporated
                herein by reference to Post-Effective Amendment No. 5 to our Form
                S-4
                Registration Statement filed on December 20, 2005 (File No.
                333-125121).(3)
            
            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).(4)
            
            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).


-
            56
            -
 *Table
            of Contents*





**SIGNATURES**





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





**Vestin
                Realty Mortgage II, Inc. (successor to Vestin Fund II,
                LLC)**By:
            */s/
                Michael V. Shustek*Michael
                V. ShustekPresident
                and Chief Executive OfficerDate:
            June
                7, 2006





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





**Signature**
            
            **Capacity**
            
            **Date***/s/
                Michael V. Shustek*
            
            President
                and Chief Executive Officer and Director
            
            June
                7, 2006Michael
                V. Shustek
            
            (Principal
                Executive Officer)*/s/
                John W. Alderfer*
            
            Chief
                Financial Officer and Director
            
            June
                7, 2006John
                W. Alderfer
            
            (Principal
                Financial and Accounting Officer)*/s/
                Robert J. Aalberts*
            
            Director
            
            June
                7, 2006Robert
                J. Aalberts*/s/
                Fredrick J.**Zaffarese**Leavitt*
            
            Director
            
            June
                7, 2006Fredrick
                J.ZaffareseLeavitt*/s/
                Roland M. Sansone*
            
            Director
            
            June
                7, 2006Roland
                M. Sansone




-
          57
          -
 *Table
          of Contents*


**INDEX
      TO** **CONSOLIDATED** **FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION**





**Page**REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
                FIRM
            F-2FINANCIAL
                STATEMENTSBalance
                Sheets
            F-3Statements
                of Operations
            F-4Statements
                of Stockholders’ Equity
            F-5Statements
                of Cash Flows
            F-6Notes
                to Financial Statements
            F-8SUPPLEMENTARY
                INFORMATIONInvestments
                in Real Estate Loans:Real
                Estate Loan Roll Forward
            F-31Real
                Estate Loans by Type of
                Property
            F-32Real
                Estate Loans by Lien Position
            F-33Real
                Estate Loans that Exceed Three Percent of the
                Portfolio
            F-34





F-1
 *Table
          of Contents*


Report
        of
        Independent Registered PublicAccounting Firm
 
 
 To
        Board
        of Directors and Stockholders of Vestin Realty Mortgage II, Inc., successor
        to
        Vestin Fund II, LLC
 
 We
        have
        audited the accompanying balance sheets of Vestin Realty Mortgage II, Inc.,
        successor to Vestin Fund II, LLC, (“the Company”) as of March 31, 2006 and June
        30, 2005 and related statements of operations, stockholders’ equity, and cash
        flows for the nine month transition period ended March 31, 2006 and for each
        of
        the two years in the period ended June 30, 2005. These financial statements
        are
        the responsibility of the Company’s management. Our responsibility is to express
        an opinion on these financial statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Accounting
        Oversight Board (United States). Those standards require that we plan and
        perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Vestin Realty Mortgage II, Inc.,
        successor to Vestin Fund II, LLC, as of March 31, 2006 and June 30, 2005,
        and
        the results of its operations and its cash flows for the nine month transition
        period ended March 31, 2006 and for each of the two years in the period ended
        June 30, 2005 in conformity with accounting principles generally accepted
        in the
        United States of America. Our audits were conducted for the purpose of forming
        an opinion on the financial statements taken as a whole. The supplemental
        schedules are presented for purposes of additional analysis and are not a
        required part of the financial statements. Such information has been subjected
        to the auditing procedures applied in our audits of the financial statements
        and, in our opinion, is fairly stated in all material respects in relation
        to
        the financial statements taken as a whole.
 
 We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of Vestin Realty Mortgage
        II,
        Inc., successor to Vestin Fund II, LLC, internal control over financial
        reporting as of March 31, 2006, based on criteria established in *Internal
        Control - Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
        and
        our report dated June 6, 2006, expressed an unqualified opinion on management’s
        assessment of, and an adverse opinion on the effective operation of, internal
        control over financial reporting.
 
 /s/Moore
        Stephens Wurth Frazer and Torbet, LLP
 
 Orange,
        California
 June
        6,
        2006  F-2
 *Table
              of Contents*


**FINANCIAL
      STATEMENTS**




**VESTIN
                REALTY MORTGAGEII, INC.****(SUCCESSOR
                TO VESTIN FUND II, LLC)****BALANCE
                SHEETS****ASSETS****March
                31, 2006**
            
            **June
                30, 2005**Cash
            
            $
            17,820,000
            
            $
            10,566,000Certificates
                of deposit
            
            
            700,000
            
            
            1,000,000Investment
                in marketable securities
            
            
            --
            
            
            15,701,000Interest
                and other receivables
            
            
            3,434,000
            
            
            3,234,000Due
                from Fund I
            
            
            --
            
            
            1,560,000Note
                receivable, net of allowance of $2,096,000 at March 31, 2006 and
                $2,247,000 at June 30, 2005
            
            
            810,000
            
            
            328,000Real
                estate held for sale
            
            
            38,426,000
            
            
            51,222,000Real
                estate held for sale - seller financed
            
            
            22,887,000
            
            
            12,631,000Investment
                in real estate loans, net of allowance for loan losses of $10,734,000
                at
                March 31, 2006 and $5,234,000 at June 30, 2005
            
            
            212,928,000
            
            
            217,553,000Assets
                under secured borrowings
            
            
            11,611,000
            
            
            25,655,000Other
                Assets
            
            
            63,000
            
            
            20,000Total
                assets
            
            $
            308,679,000
            
            $
            339,470,000**LIABILITIES
                AND STOCKHOLDERS' EQUITY**LiabilitiesAccounts
                payable and accrued liabilities
            
            $
            631,000
            
            $
            1,148,000Due
                to Fund Manager
            
            
            250,000
            
            
            214,000Due
                to Vestin Group
            
            
            --
            
            
            1,000Notes
                Payable
            
            
            17,200,000
            
            
            --Secured
                borrowings
            
            
            11,611,000
            
            
            25,655,000Deposit
                liability
            
            
            1,365,000
            
            
            1,372,000Total
                liabilities
            
            
            31,057,000
            
            
            28,390,000Stockholders'
                equity -Preferred
                stock, $0.0001 par value; 1,000,000 shares authorized; none
                issued
            
            
            --
            
            
            --Common
                stock, $0.0001 par value; 100,000,000 shares authorized; 29,838,442
                shares
                issued at March 31, 2006
            
            
            3,000
            
            
            --Capital
                in excess of par
            
            
            277,619,000
            
            
            --Members’
                equity - Authorized 50,000,000 units at $10 per unit, 32,810,551
                member
                units issued and outstanding at June 30, 2005
            
            
            --
            
            
            311,080,000Total
                equity
            
            
            277,622,000
            
            
            311,080,000Total
                liabilities and stockholders' equity
            
            $
            308,679,000
            
            $
            339,470,000


The
            accompanying notes are an integral part of these statements.
 F-3
 *Table
          of Contents*





**VESTIN
                REALTY MORTGAGEII, INC.****(SUCCESSOR
                TO VESTIN FUND II, LLC)****STATEMENTS
                OF OPERATIONS****FOR
                THE NINE**
              **MONTH
                TRANSITION PERIOD ENDED**
            
            **FOR
                THE NINE**
              **MONTHS
                ENDED**
            
            **FOR
                THE**
              **YEAR
                ENDED****March
                31, 2006**
            
            **March
                31, 2005**
            
            **June
                30, 2005**
            
            **June
                30, 2004****(UNAUDITED)****Revenues**Interest
                income from investment in real estate loans
            
            $
            17,135,000
            
            $
            19,660,000
            
            $
            25,301,000
            
            $
            38,825,000Adjustment
                to allowance for loan losses
            
            
            --
            
            
            159,000
            
            
            41,000
            
            
            --Gain
                on sale of real estate held for sale
            
            
            1,186,000
            
            
            759,000
            
            
            759,000
            
            
            --Revenue
                related to the sale of real estate
            
            
            --
            
            
            --
            
            
            --
            
            
            2,333,000Gain
                on sale marketable securities
            
            
            224,000
            
            
            --
            
            
            --
            
            
            --Income
                related to real estate held for sale
            
            
            3,722,000
            
            
            --
            
            
            --
            
            
            --Other
                income
            
            
            979,000
            
            
            2,297,000
            
            
            2,616,000
            
            
            2,311,000Total
                revenues
            
            
            23,246,000
            
            
            22,875,000
            
            
            28,717,000
            
            
            43,469,000**Operating
                expenses**Management
                fees - related party
            
            
            820,000
            
            
            787,000
            
            
            1,060,000
            
            
            1,025,000Provision
                for loan losses
            
            
            5,500,000
            
            
            167,000
            
            
            2,775,000
            
            
            2,605,000Interest
                expense
            
            
            1,282,000
            
            
            3,011,000
            
            
            3,526,000
            
            
            5,681,000Loss
                on sale of real estate held for sale
            
            
            --
            
            
            829,000
            
            
            829,000
            
            
            -Write
                down on real estate held for sale
            
            
            --
            
            
            6,257,000
            
            
            7,486,000
            
            
            10,000Expenses
                related to real estate held for sale
            
            
            5,978,000
            
            
            2,291,000
            
            
            2,784,000
            
            
            1,559,000Professional
                fees
            
            
            309,000
            
            
            245,000
            
            
            996,000
            
            
            626,000Professional
                fees - related parties
            
            
            195,000
            
            
            163,000
            
            
            206,000
            
            
            50,000Other
            
            
            328,000
            
            
            121,000
            
            
            167,000
            
            
            182,000Total
                operating expenses
            
            
            14,412,000
            
            
            13,871,000
            
            
            19,829,000
            
            
            11,738,000**NET
                INCOME**
            
            $
            8,834,000
            
            $
            9,004,000
            
            $
            8,888,000
            
            $
            31,731,000Net
                income allocated to members
            
            $
            8,834,000
            
            $
            9,004,000
            
            $
            8,888,000
            
            $
            31,731,000Net
                income allocated to members per weighted average membership
                units
            
            $
            0.28
            
            $
            0.25
            
            $
            0.26
            
            $
            0.86Weighted
                average membership units
            
            
            31,914,713
            
            
            35,417,916
            
            
            34,760,003
            
            
            36,714,812


The
            accompanying notes are an integral part of these statements.
 F-4
 *Table
          of Contents*





**VESTIN
                REALTY MORTGAGEII, INC.****(SUCCESSOR
                TO VESTIN FUND II, LLC)****STATEMENT
                OF STOCKHOLDERS' EQUITY****FROM
                JUNE 30, 2003 TO MARCH 31, 2006****Units**
            
            **Amount**Members'
                equity at June 30, 2003
            
            
            38,602,848
            
            $
            375,189,000Issuance
                of units
            
            
            2,667,700
            
            
            26,677,000Distributions
            
            
            
            
            
            (29,097,000
            )Reinvestments
                of distributions
            
            
            782,300
            
            
            7,823,000Members'
                redemptions
            
            
            (5,248,679
            )
            
            (51,254,000
            )Net
                income
            
            
            
            
            
            31,731,000Members'
                equity at June 30, 2004
            
            
            36,804,169
            
            
            361,069,000Net
                income
            
            
            
            
            
            8,888,000Comprehensive
                income:Unrealized
                loss on marketable securities available for sale
            
            
            
            
            
            (804,000
            )Total
                comprehensive income
            
            
            
            
            
            8,084,000Capital
                contribution form Manager related to sale of rights to receive proceeds
                of
                guarantee
            
            
            
            
            
            1,984,000Distributions
            
            
            
            
            
            (20,113,000
            )Reinvestments
                of distributions
            
            
            396,616
            
            
            3,966,000Members'
                redemptions
            
            
            (4,390,234
            )
            
            (43,910,000
            )Members’
                equity at June 30, 2005
            
            
            32,810,551
            
            
            311,080,000Net
                income
            
            
            
            
            
            8,834,000Comprehensive
                income:Sale
                of marketable securities available for sale
            
            
            
            
            
            804,000Total
                comprehensive income
            
            
            
            
            
            9,638,000Distributions
            
            
            
            
            
            (14,659,000
            )Reinvestments
                of distributions
            
            
            202,475
            
            
            2,023,000Members'
                redemptions
            
            
            (3,174,584
            )
            
            (30,460,000
            )Stockholders'
                equity at March 31, 2006
            
            
            29,838,442
            
            $
            277,622,000


The
            accompanying notes are an integral part of these statements.
 F-5
 *Table
          of Contents*





**VESTIN
                REALTY MORTGAGEII, INC.****(SUCCESSOR
                TO VESTIN FUND II, LLC)****STATEMENTS
                OF CASH FLOWS****FOR
                THE NINE MONTH TRANSITION PERIOD ENDED**
            
            **FOR
                THE NINE MONTHS ENDED**
            
            **FOR
                THE**
              **YEAR
                ENDED****March
                31, 2006**
            
            **March
                31, 2005**
            
            **June
                30, 2005**
            
            **June
                30, 2004****(UNAUDITED)****Cash
                flows from operating activities:**Net
                income
            
            $
            8,834,000
            
            $
            9,004,000
            
            $
            8,888,000
            
            $
            31,731,000Adjustments
                to reconcile net income to net cash provided by operating
                activities:Provision
                of doubtful accounts related to receivable
            
            
            183,000
            
            
            --
            
            
            --
            
            
            --Write
                down of real estate held for sale
            
            
            --
            
            
            6,257,000
            
            
            7,486,000
            
            
            10,000Gain
                on sale of real estate held for sale
            
            
            (1,186,000
            )
            
            (759,000
            )
            
            (759,000
            )
            
            --Loss
                on sale of real estate held for sale
            
            
            --
            
            
            829,000
            
            
            829,000
            
            
            --Provision
                for loan losses
            
            
            5,500,000
            
            
            167,000
            
            
            2,775,000
            
            
            2,605,000Adjustment
                to allowance for loan losses
            
            
            --
            
            
            (159,000
            )
            
            (41,000
            )
            
            --Gain
                on sale of marketable securities
            
            
            (224,000
            )
            
            --
            
            
            --
            
            
            --Amortized
                interest income
            
            
            (343,000
            )
            
            280,000
            
            
            402,000
            
            
            --Change
                in operating assets and liabilities:Interest
                and other receivables
            
            
            95,000
            
            
            797,000
            
            
            216,000
            
            
            (444,000
            )Due
                to/from Manager
            
            
            36,000
            
            
            (378,000
            )
            
            (289,000
            )
            
            (1,072,000
            )Due
                to/from Vestin Group
            
            
            (1,000
            )
            
            (384,000
            )
            
            (384,000
            )
            
            (23,000
            )Due
                to/from Fund I
            
            
            1,560,000
            
            
            1,462,000
            
            
            1,427,000
            
            
            (2,771,000
            )Note
                receivable from Fund I
            
            
            --
            
            
            4,278,000
            
            
            4,278,000
            
            
            --Prepaid
                expenses
            
            
            (43,000
            )
            
            (40,000
            )
            
            (20,000
            )
            
            --Accounts
                payable and accrued liabilities
            
            
            (517,000
            )
            
            588,000
            
            
            811,000
            
            
            219,000Net
                cash provided by operating activities
            
            
            13,894,000
            
            
            21,942,000
            
            
            25,619,000
            
            
            30,255,000**Cash
                flows from investing activities:**Investments
                in real estate loans
            
            
            (124,821,000
            )
            
            (69,982,000
            )
            
            (77,218,000
            )
            
            (215,225,000
            )Purchase
                of investments in real estate loans including interest receivable
                of $
                958,000.
            
            
            (10,065,000
            )
            
            --
            
            
            --
            
            
            --Purchase
                of investments in real estate loans from:Fund
                I
            
            
            (8,800,000
            )
            
            --
            
            
            --
            
            
            (10,000,000
            )Fund
                III
            
            
            (500,000
            )
            
            (5,000,000
            )
            
            (10,000,000
            )
            
            --Other
                related party
            
            
            (14,380,000
            )
            
            --
            
            
            (2,700,000
            )
            
            --Third
                party
            
            
            (11,334,000
            )
            
            (20,058,000
            )
            
            (27,058,000
            )
            
            (32,653,000
            )Proceeds
                from loan payoff
            
            
            145,077,000
            
            
            126,743,000
            
            
            136,158,000
            
            
            183,048,000Sale
                of investments in real estate loans to:Fund
                I
            
            
            500,000
            
            
            --
            
            
            600,000
            
            
            806,000Fund
                III
            
            
            --
            
            
            --
            
            
            5,000,000
            
            
            10,000,000Other
                related party
            
            
            9,000,000
            
            
            4,000,000
            
            
            4,000,000
            
            
            --Third
                party
            
            
            10,000,000
            
            
            4,533,000
            
            
            17,033,000
            
            
            77,928,000Proceeds
                from sale of investment in real estate
            
            
            5,040,000
            
            
            16,397,000
            
            
            16,397,000
            
            
            3,754,000Principal
                payments on real estate held for sale-seller financed
            
            
            9,635,000
            
            
            --
            
            
            --
            
            
            --Repayment
                of secured borrowing
            
            
            --
            
            
            --
            
            
            --
            
            
            (2,442,000
            )Proceeds
                from note receivable
            
            
            (154,000
            )
            
            --
            
            
            --
            
            
            --Purchase
                of marketable securities
            
            
            (14,827,000
            )
            
            (26,058,000
            )
            
            (31,942,000
            )
            
            --Proceeds
                from sale of marketable securities
            
            
            23,617,000
            
            
            
            
            
            565,000
            
            
            --Purchase
                of fixed assets
            
            
            --
            
            
            --
            
            
            (7,000
            )
            
            --Purchase/Sale
                of investments in certificates of deposit
            
            
            300,000
            
            
            --
            
            
            --
            
            
            (265,000
            )Proceeds
                from investment in certificates of deposit
            
            $
            --
            
            $
            1,425,000
            
            $
            1,425,000
            
            $
            8,915,000


The
            accompanying notes are an integral part of these statements.
 F-6
 *Table
          of Contents*





**VESTIN
                REALTY MORTGAGE II, INC.****(SUCCESSOR
                TO VESTIN FUND II, LLC)****STATEMENTS
                OF CASH FLOWS****FOR
                THE NINE MONTH TRANSITION PERIOD ENDED**
            
            **FOR
                THE NINE MONTHS ENDED**
            
            **FOR
                THE**
              **YEAR
                ENDED****March
                31, 2006**
            
            **March
                31, 2005**
            
            **June
                30, 2005**
            
            **June
                30, 2004****(UNAUDITED)**Cash
                outlays for real estate held for sale
            
            $
            --
            
            $
            (177,000
            )
            $
            (177,000
            )
            $
            (455,000
            )Deposit
                liability
            
            
            968,000
            
            
            714,000
            
            
            991,000
            
            
            381,000Net
                cash provided by investing activities
            
            
            19,256,000
            
            
            32,537,000
            
            
            33,067,000
            
            
            23,792,000**Cash
                flows from financing activities:**Payment
                on line of credit
            
            
            --
            
            
            --
            
            
            --
            
            
            (2,000,000
            )Payment
                on note payable
            
            
            (8,684,000
            )
            
            --
            
            
            --
            
            
            --Proceeds
                from issuance of note payable
            
            
            25,884,000
            
            
            --
            
            
            --
            
            
            --Proceeds
                from issuance of membership units
            
            
            --
            
            
            --
            
            
            --
            
            
            26,677,000Members'
                distributions, net of reinvestments
            
            
            (12,591,000
            )
            
            (12,334,000
            )
            
            (16,086,000
            )
            
            (21,195,000
            )Members’
                distributions, net of reinvestments - related party
            
            
            (45,000
            )
            
            (45,000
            )
            
            (61,000
            )
            
            (79,000
            )Members'
                redemptions
            
            
            (30,460,000
            )
            
            (43,909,000
            )
            
            (43,910,000
            )
            
            (51,254,000
            )Net
                cash used in financing activities
            
            
            (25,896,000
            )
            
            (56,288,000
            )
            
            (60,057,000
            )
            
            (47,851,000
            )**NET
                CHANGE IN CASH**
            
            
            7,254,000
            
            
            (1,809,000
            )
            
            (1,371,000
            )
            
            6,196,000**Cash,
                beginning of period**
            
            
            10,566,000
            
            
            11,937,000
            
            
            11,937,000
            
            
            5,741,000**Cash,
                end of period**
            
            $
            17,820,000
            
            $
            10,128,000
            
            $
            10,566,000
            
            $
            11,937,000**Supplemental
                disclosures of cash flows information:**Non-cash
                investing and financing activities:Loans
                funded through secured borrowing
            
            $
            16,136,000
            
            $
            11,235,000
            
            $
            14,837,000
            
            $
            79,979,000Loan
                payoffs of loans funded through secured borrowings
            
            $
            30,180,000
            
            $
            47,610,000
            
            $
            51,106,000
            
            $
            42,343,000Real
                estate held for sale acquired through foreclosure
            
            $
            7,939,000
            
            $
            27,638,000
            
            $
            37,627,000
            
            $
            15,456,000Note
                receivable from Vestin Mortgage related to sale of rights to receive
                proceeds of guarantee
            
            $
            --
            
            $
            1,000,000
            
            $
            1,000,000
            
            $
            --Capital
                contribution from Manager related to sale of rights to receive proceeds
                of
                guarantee
            
            $
            --
            
            $
            1,984,000
            
            $
            1,984,000
            
            $
            --Ownership
                of real estate held for sale assigned from Fund I
            
            $
            --
            
            $
            7,424,000
            
            $
            7,424,000
            
            $
            --Unrealized
                loss on marketable securities
            
            $
            --
            
            $
            123,000
            
            $
            804,000
            
            $
            --Note
                receivable received from guarantor in exchange from release of
                guarantee
            
            $
            --
            
            $
            328,000
            
            $
            328,000
            
            $
            --Sale
                of real estate held for sale where we provide the
                financing
            
            $
            15,463,000
            
            $
            --
            
            $
            --
            
            $
            --Investment
                in real estate held for sale reclassified from interest
                receivable
            
            $
            --
            
            $
            9,000
            
            $
            9,000
            
            $
            --Investment
                in real estate loans reclassified from other receivable
            
            $
            479,000
            
            $
            --
            
            $
            --
            
            $
            --Note
                receivable from Vestin Mortgage paid in full through relief of Due
                to
                manager
            
            $
            --
            
            $
            1,000,000
            
            $
            1,000,000
            
            $
            --Other
                receivable related to local agency bond liquidation
            
            $
            --
            
            $
            --
            
            $
            446,000
            
            $
            --Loans
                rewritten with same or similar property as collateral
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            41,331,000




The
            accompanying notes are an integral part of these statements.
 F-7
 *Table
          of Contents*





**VESTIN
      REALTY MORTGAGEII, INC.**


**(SUCCESSOR
      TO VESTIN FUND II, LLC)**





**NOTES
      TO FINANCIAL STATEMENTS**





**MARCH
      31, 2006**





**NOTE
      A — ORGANIZATION**





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





We
      invest
      in loans secured by real estate through deeds of trust or mortgages (hereafter
      referred to as “deeds of trust”). We commenced operations in June
      2001.





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





Our
      Manager is Vestin Mortgage, Inc. (the “Manager” or “Vestin Mortgage”), a Nevada
      corporation and licensed mortgage broker engaged in the business of brokerage,
      placement and servicing of commercial loans secured by real property. Our
      Manager is a wholly owned subsidiary of Vestin Group, Inc., a Delaware
      corporation (“Vestin Group”) wholly owned by Michael V. Shustek, the CEO and
      director of the Manager. Through its subsidiaries, Vestin Group is engaged
      in
      asset management, real estate lending and other financial services.





Pursuant
      to a Management Agreement, the Manager controls the daily operating activities
      of the Company, including the power to assign duties, to determine how to invest
      our assets, to sign bills of sale, title documents, leases, notes, security
      agreements, mortgage investments and contracts, and to assume direction of
      the
      business operations. As a result, our operating results are dependent upon
      the
      Manager’s ability and performance in managing our operations and servicing our
      assets.





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





**NOTE
      B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**Management
      Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America (“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 financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.


F-8
 *Table
          of Contents*


**Cash
      and Cash Equivalents**





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





**Revenue
      Recognition**





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





**Investments
      in Real Estate Loans**





The
      Company may from time to time acquire or sell investments in real estate loans
      from or to the Manager or other related parties pursuant to the terms of the
      Company's Operating Agreement provided the price does not exceed the original
      cost. 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 the Company's capital. For example, the
      Company's Operating Agreement provides certain guidelines with respect to loan
      concentration by dollar amount, location and lien position. Selling or buying
      loans allows the Company to diversify its loan portfolio within these
      parameters. Due to the short term nature of the loans the Company makes and
      the
      similarity of interest rates in loans the Company 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 (hereafter
      referred to as “deeds of trust”). 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 based on appraisals
      obtained at the time of loan origination and may not 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 appraisals
      may be for the current estimate of the “as-if developed” value of the property,
      which approximates the post-construction value of the collateralized property
      assuming that such property is developed. As-if developed values on raw land
      loans or acquisition and development loans often dramatically exceed the
      immediate sales value and may include anticipated zoning changes and timely
      successful development by the purchaser. As most of the appraisals will be
      prepared on an as-if developed basis, if a loan goes into default prior to
      any
      development of a project, the market value of the property may be substantially
      less than the appraised value. As a result, there may be less security than
      anticipated at the time the loan was originally made. If there is less security
      and a default occurs, we may not recover the full amount of the
      loan.





As
      of
      March 31, 2006, all of our loans provided for payments of interest only with
      a
“balloon” payment of principal payable in full at the end of the term, with the
      exception of two of our loans which include principal and interest payments.
      As
      of March 31, 2006, these two loans had a balance of approximately $18,650,000
      and had terms ranging from twelve to thirty-six months. In addition, we invest
      in real estate loans which require borrowers to maintain interest reserves
      funded from the principal amount of the loan for a period of time. At March
      31,
      2006, we had $8.5 million investments in real estate loans which had interest
      reserves where the total outstanding principal was approximately $14.7 million,
      including participating lenders. These loans had interest reserves of
      approximately $1.6 million, of which our portion is $0.8 million. At June 30,
      2005, we had $48 million in investments in real estate loans that had interest
      reserves where the total outstanding principal was approximately $68 million,
      including participating lenders. These loans had interest reserves of
      approximately $3.7 million, of which our portion was $1.8 million.


F-9
 *Table
          of Contents*


**Allowance
      for Loan Losses**





We
      maintain an allowance for loan losses on our investments in real estate loans
      for estimated credit impairment. The 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.





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 non-conventional
      lender willing to invest in loans to borrowers who may not meet the credit
      standards of conventional lenders, the default rate on our loans could be higher
      than those generally experienced in the real estate lending industry. We
      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 the material facts pertaining to a borrower and the
      security.





Additional
      facts and circumstances are 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 caused significant
      changes in our estimated allowance include:





·
            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 upon property;
                and





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





**Real
      Estate Held For Sale**





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





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


F-10
 *Table
          of Contents*





·
            Management
                commits to a plan to sell the
                properties;





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





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





·
            The
                sale of the property is probable;





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





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





**Real
      Estate Held For Sale - Seller Financed**





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





Because
      the Company occasionally forecloses on loans with raw land or developments
      in
      progress, available financing for such properties is often limited and the
      Company frequently provides financing up to 100% of the selling price on these
      properties. In addition, the Company 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
      sales transaction as defined in FAS 66. These sale agreements are not recorded
      as a sale until the requirements of FAS 66 are met.





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





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**





Statement
      of Financial Accounting Standards 144 *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ("FAS
      144'') generally requires operating results from long lived assets held for
      sale
      to be classified as discontinued operations as a separately stated component
      of
      net income. The Company's operations involve foreclosing on real estate when
      necessary and the Company considers these operating results to be part of the
      Company's continuing operations. Accordingly, expenses related to real estate
      held for sale have been included on the accompanying statements of income,
      net
      of related rental income when applicable.


F-11
 *Table
          of Contents*


**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 revenues for entering into secured borrowing arrangements.
      Loans
      in which third party investors have participated through inter-creditor
      agreements (“Inter-creditor Agreements”) are accounted for as secured borrowings
      in accordance with Statement of Financial Accounting Standards 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* (“FAS
      140”). The Inter-creditor Agreements provide us additional funding sources for
      mortgage loans whereby a third party investor (the “Investor”) may participate
      on a senior basis in certain mortgage loans with us and/or Fund I and/or Fund
      III (collectively, the “Lead Lenders”). In the event of borrower
      non-performance, the Inter-creditor Agreements generally provide that the Lead
      Lenders must repay the Investor’s loan amount either by (i) continuing to remit
      to the Investor the interest due on the participated loan amount; (ii)
      substituting an alternative loan acceptable to the Investor; or (iii)
      repurchasing the participation from the Investor for the outstanding balance
      plus accrued interest.





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





**Marketable
      Securities**





Investments
      in marketable securities consist of bonds secured by real estate and mortgage
      backed securities. The securities are stated at market value as determined
      by
      the most recently traded price of each security at the balance sheet date.
      All
      marketable securities are classified as available-for-sale securities under
      the
      provisions of Statement of Financial Accounting Standards 115, *Accounting
      for Certain Investments in Debt and Equity Securities* (“FAS
      115”).





The
      appropriate classification of investments in marketable securities is determined
      at the time of purchase and such determination is reevaluated at each balance
      sheet date. Securities that are bought and held principally for the purpose
      of
      selling them in the near term are classified as trading securities, and
      unrealized holding gains and losses are included in earnings. Debt securities
      for which the Company does not have the intent or ability to hold to maturity,
      and equity securities are classified as available-for-sale. Available-for-sale
      securities are carried at fair value, with the unrealized gains and losses
      reported in other comprehensive income.





**Fair
      Value of Financial Instruments**





Statement
      of Financial Accounting Standards 107, *Disclosures
      about Fair Value of Financial Instruments* (“FAS
      107”), requires the determination of fair value of the Company’s financial
      assets. The following methods and assumptions were used to estimate the fair
      value of financial statements included in the following categories:





(a)
            Certificate
                of Deposits and Short-Term Investments: The carrying amounts of these
                instruments are at amortized cost, which approximates fair
                value.





(b)
            Investment
                in Real Estate Loans: The carrying value of these instruments, net
                of the
                allowance for loan losses, approximates the fair value due to their
                short-term maturities. Fair values for loans, which are delinquent
                and/or
                in foreclosure are determined by underlying collateral securing the
                loans.





(c)
            Assets
                under Secured Borrowing: The carrying amount of these instruments
                approximate fair value. The fair value is estimated based upon projected
                cash flows discounted at the estimated current interest rates at
                which
                similar loans would be made.


F-12
 *Table
          of Contents*


At
      March
      31, 2006 and June 30, 2005, the estimated fair values of the real estate loans
      were approximately $232.9 million and $224.5 million, respectively. At March
      31,
      2006 and June 30, 2005, the estimated fair values of assets under secured
      borrowings were approximately $11.6 million and $25.7 million, respectively.
      These estimates were based upon the present value of expected cash flows
      discounted at rates currently available for similar loans. Fair value estimates
      are made at a specific point in time; based on relevant market information;
      are
      subjective in nature; and involve uncertainties and matters of significant
      judgment. Accordingly, the estimates presented herein are not necessarily
      indicative of the amounts that would be collected upon maturity or disposition
      of the loans.





**Net
      Income Allocated to Members Per Weighted Average Membership
      Unit**





Net
      income allocated to members per weighted average membership unit is computed
      by
      dividing net income calculated in accordance with GAAP by the weighted average
      number of membership units outstanding for the period.





**Segments**





We
      operate as one business segment.





**Income
      Taxes**


Since
      we
      were a Limited Liability Company during the periods reflected in this report,
      the income tax effects resulting from the Company’s operations pass through to
      the members individually and, accordingly, no provision for income taxes is
      included in the financial statements as of March 31, 2006.





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





**Reclassifications**





Certain
      reclassifications have been made to the prior years’ financial statements to
      conform to the current year presentation.




**NOTE
      C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT
      RISK**





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





We
      maintain cash deposit accounts and certificates of deposit, which at times,
      may
      exceed federally insured limits. We have not experienced any losses in such
      accounts and believe we are not exposed to any significant credit risk on cash.
      As of March 31, 2006 and June 30, 2005, we had $19.7 million and $11.1 million,
      respectively, in excess of the federally insured limits.





As
      of
      March 31, 2006, 17% of our real estate loans were in Nevada compared to 19%
      at
      June 30, 2005 and 22% of our real estate loans were in California compared
      to
      36% at June 30, 2005. Additionally, as of March 31, 2006; 18% of our loans
      were
      in Arizona compared to 16% at June 30, 2005 and 14% of our loans were in Hawaii
      compared to 11% at June 30, 2005. As a result of this geographical concentration
      of our real estate loans, a downturn in the local real estate markets in Nevada,
      California, Arizona and/or Hawaii could have a material adverse effect on
      us.


F-13
 *Table
          of Contents*


At
      March
      31, 2006, the aggregate amount of loans to our three largest borrowers
      represented 32% of our total investment in real estate loans. These real estate
      loans consisted of land and acquisition and development loans, located in
      Nevada, Arizona and California, with a first lien position, earning between
      8%
      and 12%, with an aggregate outstanding balance of approximately $79.5 million
      and maturing from April 2006 through June 2006. At June 30, 2005, the aggregate
      amount of loans to our three largest borrowers represented 32% of our total
      investment in real estate loans. These real estate loans consisted of land
      and
      acquisition and development loans, located in Arizona and California, with
      a
      first lien position, earning between 8% and 10%, with an aggregate outstanding
      balance of approximately $76 million and maturing from July 2005 through March
      2006. Because we have a significant concentration of credit risk with its three
      largest borrowers, a default by any of such borrowers could have a material
      adverse effect on us.





As
      of
      March 31, 2006, all of our real estate loans will require the borrower to make
      a
      balloon payment of the principal at maturity. 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. An increase in interest rates
      over
      the loan rate applicable at origination of the loan may have an adverse effect
      on the borrower’s ability to refinance.





**NOTE
      D — INVESTMENTS IN REAL ESTATE LOANS**





We
      have
      four real estate loan products consisting of commercial, construction,
      acquisition and development, and land. The effective interest rates on all
      product categories range from 5% to 14%. Revenue by product will fluctuate
      based
      upon relative balances during the period.





Investments
      in real estate loans as of March 31, 2006 are as follows:





**Loan
                Type**
            
            **Number
                Of Loans**
            
            **Fund
                Balance (2)**
            
            **Weighted
                Average Interest Rate**
            
            **Portfolio
                Percentage**
            
            **Weighted
                Average Loan To Value (1)**Acquisition
                and development
            
            
            3
            
            $
            51,603,000
            
            
            9.76%
            
            
            20.77%
            
            
            48.82%Commercial
            
            
            23
            
            
            127,159,000
            
            
            9.10%
            
            
            51.18%
            
            
            74.04%Construction
            
            
            3
            
            
            15,781,000
            
            
            12.00%
            
            
            6.35%
            
            
            62.21%Land
            
            
            4
            
            
            52,930,000
            
            
            11.55%
            
            
            21.70%
            
            
            58.54%33
            
            $
            247,473,000
            
            
            9.96%
            
            
            100.00%
            
            
            64.62%





Investments
      in real estate loans as of June 30, 2005 are as follows:





**Loan
                Type**
            
            **Number
                Of Loans**
            
            **Fund
                Balance (2)**
            
            **Weighted
                Average Interest Rate**
            
            **Portfolio
                Percentage**
            
            **Weighted
                Average Loan To Value (1)**Acquisition
                and development
            
            
            4
            
            $
            57,313,000
            
            
            8.69%
            
            
            24.35%
            
            
            67.58%Commercial
            
            
            21
            
            
            116,782,000
            
            
            9.61%
            
            
            49.61%
            
            
            68.40%Construction
            
            
            4
            
            
            7,547,000
            
            
            10.31%
            
            
            3.21%
            
            
            68.81%Land
            
            
            7
            
            
            53,776,000
            
            
            12.00%
            
            
            22.83%
            
            
            59.66%36
            
            $
            235,418,000
            
            
            9.95%
            
            
            100.00%
            
            
            66.23%


F-14
 *Table
          of Contents*





(1)
            Loan
                to value ratios are based on the most recent appraisals and may not
                reflect subsequent changes in value estimates. Such appraisals, which
                may
                be commissioned by the borrower, are generally dated no greater than
                12
                months prior to the date of loan origination. The appraisals may
                be for
                the current estimate of the “as-if developed” value of the property, which
                approximates the post-construction value of the collateralized property
                assuming that such property is developed. “As-if developed” values on raw
                land loans or acquisition and development loans often dramatically
                exceed
                the immediate sales value and may include anticipated zoning changes,
                and
                successful development by the purchaser; upon which development is
                dependent on availability of financing. As most of the appraisals
                will be
                prepared on an “as-if developed” basis, if a loan goes into default prior
                to any development of a project, the market value of the property
                may be
                substantially less than the appraised value. As a result, there may
                be
                less security than anticipated at the time the loan was originally
                made.
                If there is less security and a default occurs, we may not recover
                the
                full amount of the loan.





(2)
            The
                following table reconciles the balance of the loan portfolio to the
                amount
                shown on the accompanying Balance Sheet. The contra accounts represent
                the
                amount of real estate held for sale sold to third parties where the
                Company provided financing. GAAP requires the borrower to have a
                certain
                percentage equity ownership (ranging from 10% to 25%) to allow the
                Company
                to record the sale of a property. In addition, the borrower must
                maintain
                a minimum commitment in the property on a continuing basis. Therefore,
                until the borrower meets this requirement, the investment in the
                new loan
                is reduced by the amount originally invested in the real estate held
                for
                sale.





**March
                31, 2006 Balance**
            
            **June
                30, 2005 Balance**Balance
                Per Loan Portfolio
            
            $
            247,473,000
            
            $
            235,418,000Less:Seller
                Financed Loans Included in Real Estate Held for Sale
            
            
            (22,887,000
            )
            
            (12,631,000
            )Proceeds
                of Principal on Seller Financed Loans Included in Deposit
                Liability
            
            
            432,000
            
            
            --Unrealized
                Gain on Seller Financed Loans
            
            
            (1,356,000
            )
            
            --Allowance
                for Loan Losses
            
            
            (10,734,000
            )
            
            (5,234,000
            )Balance
                per Balance Sheet
            
            $
            212,928,000
            
            $
            217,553,000





The
      following is a schedule of priority of real estate loans as of March 31, 2006
      and June 30, 2005:





**Loan
                Type**
            
            **Number
                of Loans**
            
            **March
                31, 2006**
              **Balance***
            
            **Portfolio**
              **Percentage**
            
            **Number
                of Loans**
            
            **June
                30, 2005**
              **Balance***
            
            **Portfolio**
              **Percentage**First
                Deeds of Trust
            
            
            31
            
            $
            247,028,000
            
            
            99.82%
            
            
            33
            
            $
            228,668,000
            
            
            97.13%Second
                Deeds of Trust**
            
            
            2
            
            
            445,000
            
            
            0.18%
            
            
            3
            
            
            6,750,000
            
            
            2.87%33
            
            $
            247,473,000
            
            
            100.00%
            
            
            36
            
            $
            235,418,000
            
            
            100.00%





*
      Please
      see note (2) above


**
      Generally, our second trust deeds are junior to a first trust deed position
      held
      by either us or our Manager.





The
      following is a schedule of contractual maturities of investments in real estate
      loans as of March 31, 2006:





April
                - December 2006
            
            $
            207,765,000January
                - December 2007
            
            
            39,708,000$
            247,473,000





F-15
 *Table
          of Contents*


The
      following is a schedule by geographic location of investments in real estate
      loans as of March 31, 2006 and June 30, 2005:





**March
                31, 2006 Balance***
            
            **Portfolio
                Percentage**
            
            **June
                30, 2005**
              **Balance***
            
            **Portfolio
                Percentage**Arizona
            
            $
            44,868,000
            
            
            18.13%
            
            $
            38,184,000
            
            
            16.22%California
            
            
            53,397,000
            
            
            21.58%
            
            
            84,818,000
            
            
            36.03%Hawaii
            
            
            35,291,000
            
            
            14.26%
            
            
            25,704,000
            
            
            10.91%Nevada
            
            
            43,058,000
            
            
            17.40%
            
            
            45,051,000
            
            
            19.14%New
                York
            
            
            19,571,000
            
            
            7.91%
            
            
            20,000,000
            
            
            8.50%North
                Carolina
            
            
            1,583,000
            
            
            0.64%
            
            
            --
            
            
            --%Oklahoma
            
            
            7,682,000
            
            
            3.10%
            
            
            2,155,000
            
            
            0.92%Oregon
            
            
            5,193,000
            
            
            2.10%
            
            
            --
            
            
            --%Texas
            
            
            24,219,000
            
            
            9.79%
            
            
            19,506,000
            
            
            8.28%Washington
            
            
            9,314,000
            
            
            3.76%
            
            
            --
            
            
            --%Wisconsin
            
            
            3,297,000
            
            
            1.33%
            
            
            --
            
            
            --%Total
            
            $
            247,473,000
            
            
            100.00%
            
            $
            235,418,000
            
            
            100.00%





*
      Please
      see note (2) above





At
      March
      31, 2006, three of our loans totaling approximately $36.9 million were
      non-performing (more than 90 days past due on interest payments or past due
      on
      principal). These loans have been placed on non-accrual of interest status.
      We
      commenced foreclosure proceedings on these loans identified as the Mid-State
      and
      RightStar loans. The following schedule summarizes the non-performing
      loans:





**Description
                of Collateral**
            
            **March
                31, 2006**
              **Balance**
            
            **Maturity
                Date**
            
            **Number
                of Months Non-Performing**
            
            **Percentage
                of Total Loan Balance**4
                cemeteries and 8 mortuaries in Hawaii Part I***
            
            $
            8,183,000
            
            
            03/31/2004
            
            
            24
            
            
            39%
                of Part I4
                cemeteries and 8 mortuaries in Hawaii Part II***
            
            
            9,107,000
            
            
            03/31/2004
            
            
            24
            
            
            65%
                of Part IIRacetrack
                and hotel in Vernon, NY(3)
            
            
            19,571,000
            
            
            06/30/2005
            
            
            20
            
            
            75%$
            36,861,000





(3)
            On
                May 1, 2006 the bankruptcy plan of Mid-State Raceway, Inc. for Vernon
                Downs became effective. As a result of the bankruptcy plan, we and
                Fund I
                received the following:





·
            A
                new first deed of trust was received from the buyer, Vernon Downs
                Acquisition, LLC, approximating $22.8 million, of which our portion
                is
                $19.6 million. The new terms reflect a $1.2 million principal reduction,
                reducing our principal balance by approximately $1.0 million. The
                transaction resulted in us recording unearned revenue of approximately
                $1.0 million. The terms of the loan are 9% due in 6 months, with
                an option
                to extend for an additional 6 months for a
                fee.





·
            The
                loan is secured by a first deed of trust on Vernon Downs properties
                and a
                150% personal guarantee by the
                borrowers.





·
            Prepayment
                of interest in the aggregate amount of $500,000, of which our portion
                is
                approximately $429,000.





·
            Delay
                fees from the date of the bankruptcy confirmation until the effective
                date
                in the aggregate amount of $287,000 of which our portion is approximately
                $246,000.





·
            Payment
                of past due forbearance fees approximately $555,000 of which our
                portion
                is approximately $476,000.


F-16
 *Table
          of Contents*


***
      Please refer to note (4) *Specific
      Reserve Allowance* below.





Our
      Manager periodically reviews and makes a determination as to whether the
      allowance for loan losses is adequate to cover any potential losses. Additions
      to the allowance for loan losses are made by charges to the provision for loan
      losses. Recoveries of previously charged off amounts are credited to the
      allowance for loan losses or included as income when the asset is disposed.
      As
      of March 31, 2006, we have provided a specific reserve related to the four
      cemeteries and eight mortuaries in Hawaii, of which our portion of the specific
      reserve is $10,234,000. In addition, our manager recognized a specific reserve
      for the impairment of a restructured loan in the amount of $500,000. Our Manager
      evaluated the loans and concluded that the remaining underlying collateral
      was
      sufficient to protect us against further losses of principal or interest. Our
      Manager will continue to evaluate these loans in order to determine if any
      other
      allowance for loan losses should be recorded.





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





The
      following is a roll-forward of the allowance for loan losses for the nine months
      ended March 31, 2006:





**Description**
            
            **Balance**
              **June
                30, 2005**
            
            **Specific
                Reserve Allocation**
            
            **Balance**
              **March
                31, 2006**General
                Valuation Allowance
            
            $
            2,459,000
            
            $
            (2,459,000
            )
            $
            --Specific
                allowance (4)
            
            
            2,775,000
            
            
            7,959,000
            
            
            10,734,000Total
            
            $
            5,234,000
            
            $
            5,500,000
            
            $
            10,734,000





**(4)**
            **Specific
                Reserve Allowance**





*RightStar
      Loan Allowance* -RightStar, Inc. (“RightStar”) defaulted on the loan in the fall of 2004. The
      lenders commenced a judicial foreclosure on the loan which is secured by a
      lien
      on the business and virtually all of the property of RightStar, which includes
      four cemeteries and eight mortuaries in Hawaii. The aggregate principal balance
      of the loan is approximately $32 million. The loan is owned as
      follows:





**Senior
                Portion**
            
            **Junior
                Portion**
            
            **Total**Fund
                I
            
            $4,892,000
            
            $4,415,000
            
            $9,307,000Fund
                II
            
            
            9,108,000
            
            
            8,183,000
            
            
            17,291,000Sunset
                Financial Resources, Inc.
            
            
            --
            
            
            5,657,000
            
            
            5,657,000**Total**
            
            $
            14,000,000
            
            $
            18,255,000
            
            $
            32,255,000





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





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





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





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





·
            Fourth
                to pay Senior Principal; and





·
            Fifth
                to pay Junior Principal.


F-17
 *Table
          of Contents*


We
      and
      Fund I acquired the senior portion of the loan on July 14, 2005 for
      approximately $15.5 million of which our portion was approximately $10.1 million
      (including accrued interest of approximately $1.0 million). We and Fund I
      acquired this balance to expedite the foreclosure process and remove the prior
      senior lender from its priority position, which had the potential to impair
      the
      value we may receive at the time the property is sold. In exchange for
      assistance in expediting the foreclosure process, the lenders jointly agreed
      to
      release the guarantors from their guaranty of the loan.





RightStar
      is currently being operated by a Court appointed Receiver, installed at the
      request of the lenders. A Special Master appointed by the State of Hawaii is
      currently administering the pre-need and perpetual care trust
      funds.





Foreclosure
      proceedings are being delayed by the State of Hawaii which has refused to issue
      licenses to potential buyers or the lenders to: (1) operate the facility, (2)
      operate a pre-need program and (3) operate a perpetual care program. During
      the
      nine month transition period ended March 31, 2006, the State of Hawaii notified
      the lenders of a potential statutory trust fund deficiency, estimated between
      $20 and $30 million and claimed that this balance has priority over all lenders.
      The lenders dispute the amount and priority of this deficit. On April 20, 2006,
      the lenders filed suit against the State of Hawaii listing 26 causes of action,
      including allegations that the State of Hawaii has illegally blocked the
      lender’s right to foreclose and take title to its collateral by inappropriately
      attaching conditions to the granting of licenses needed to operate the business,
      the pre-need trust funds and the perpetual care trust funds and that the State
      of Hawaii has attempted to force the lenders to accept liability for any
      statutory trust fund deficits while no such lender liability exists under the
      laws of the State of Hawaii. On April 24, 2006, the State of Hawaii responded
      by
      filing allegations against Vestin Mortgage, Inc., and Fund II alleging that
      these Vestin entities improperly influenced the former RightStar trustees to
      transfer trust funds to Vestin. We believe these claims to be without merit
      and
      intend to vigorously defend those allegations. The outcome of this litigation
      is
      unforeseeable at this time. We cannot estimate when the foreclosure will
      ultimately be completed or when the lenders may obtain title to the underlying
      properties.





We
      have
      evaluated the estimated value of the underlying collateral, the potential trust
      fund deficit, and the expected cost and length of litigation. Based on this
      estimate we increased our total specific reserve allowance for loss by
      approximately $5.5 million during the quarter ended March 31, 2006 and
      specifically allocated our general allowance of approximately $2.5 million
      to
      the RightStar loans, bringing our specific reserve allowance to a total of
      approximately $10.2 million. The increase in the reserve allowance includes
      approximately $1.0 million for estimated litigation fees and expenses which
      we
      anticipate incurring in enforcing our rights against the underlying collateral.
      We will continue to evaluate our position in the RightStar loan as the situation
      progresses.





*Impairment
      on Restructured Loan* —
During
      the fiscal year ended June 30, 2005, we restructured a loan where we changed
      the
      interest rate on the loan from 12.5% to 6.25%. The impairment of $500,000
      reflects the difference between the present value of the future cash flows
      to be
      received under the original loan and the present value of future cash flows
      to
      be received under the restructured loan discounted at the effective interest
      rate. The $500,000 impairment is specifically reserved for in the allowance
      for
      loan losses.





In
      addition, our Manager had granted extensions on 13 loans pursuant to the terms
      of the original loan agreements, which permit extensions by mutual consent.
      Such
      extensions are generally provided on loans where the original term was 12 months
      or less and where a borrower requires additional time to complete a construction
      project or negotiate take-out financing. However, our Manager only grants
      extensions when a borrower is in full compliance with the terms of the loan,
      including, but not limited to the borrower’s obligation to make interest
      payments on the loan. The aggregate amount due from borrowers whose loans had
      been extended as of March 31, 2006 was approximately $120.6 million. Our Manager
      concluded that no allowance for loan loss was necessary with respect to these
      loans as of March 31, 2006.


F-18
 *Table
          of Contents*


**Asset
      Quality and Loan Reserves**





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





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





·
            Prevailing
                economic conditions;





·
            Historical
                experience;





·
            The
                nature and volume of the loan
                portfolio;





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





·
            Evaluation
                of industry trends; and





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





Based
      upon this evaluation, a determination is made as to whether the allowance for
      loan losses is adequate to cover any potential losses. Additions to the
      allowance for loan losses are made by charges to the provision for loan losses.
      As of March 31, 2006, our Manager had provided $10.7 million as a specific
      allowance for loan losses. At March 31, 2006, three of our loans totaling
      approximately $36.9 million were non-performing (more than 90 days past due
      on
      principal or interest payments.) Our Manager evaluated the loans and concluded
      that the underlying collateral was sufficient to protect us against further
      losses of principal or interest. Our Manager will continue to evaluate these
      loans in order to determine if any other allowance for loan losses should be
      recorded.





**NOTE
      E — INVESTMENT IN MARKETABLE SECURITIES**





*Local
      Agency Bonds*





During
      the year ended June 30, 2005, we acquired three tax-free fixed income securities
      issued by local agencies with fixed interest rates varying from 4.5% to 6.38%.
      These investments were secured by real estate holdings primarily comprised
      of
      low-income housing projects. These fixed income securities mature from 2010
      through 2034. The fair value was determined by market quotes for securities
      that
      were actively traded. When securities were not actively traded, fair value
      was
      estimated based on market quotes of similar securities. We reviewed our
      intention to hold these securities for the purpose of selling them. Through
      this
      review it was determined the bonds were in non-performing status and our
      estimated fair value of the underlying collateral of real estate securing the
      investments exceeded fair value and our cost of the securities.





During
      the year ended June 30, 2005, we acquired an additional $5.8 million of one
      of
      the three local agency bonds, which we held 100% of the local agency bond.
      As of
      June 30, 2005, we foreclosed on the collateral securing the local agency bond,
      a
      504 unit apartment complex located in Austin, Texas, with a cost of
      approximately $15.4 million, including fees of $947,000. Upon the foreclosure
      of
      the property, we received approximately $1.0 million, which was held in a trust
      account for accrued interest related to the bonds. These proceeds reduced the
      book value of the property. The carrying value of the property was approximately
      $14.5 million as of March 31, 2006. Based on a recent appraisal of the 504
      unit
      apartment complex located in Austin, Texas, no valuation allowance was deemed
      necessary as of March 31, 2006.


F-19
 *Table
          of Contents*


During
      the three months ended September 30, 2005, we foreclosed on a local agency
      bond
      with a cost of approximately $8.3 million. Upon the foreclosure of the property,
      a 278 unit apartment complex located in Fort Worth, Texas, we received
      approximately $245,000, which was held in a trust account for accrued interest
      related to the bonds. These proceeds reduced the book value of the property.
      Based on a purchase offer of the 278 unit apartment complex located in Fort
      Worth, Texas, no valuation allowance was deemed necessary as of December 31,
      2005. Following the foreclosure of the property, we reclassified the asset
      to
      real estate held for sale. The accumulated unrealized loss of $279,000 related
      to this investment was not realized and the amount of this other comprehensive
      loss was reported as a part of the cost of the real estate held for sale. As
      of
      March 31, 2006, the carrying value was approximately $8.1 million.





During
      August 2005, we sold a local agency bond with a carrying value of approximately
      $8.2 million and an accumulated unrealized loss of approximately $525,000
      recorded as other comprehensive loss. The proceeds from the sale of the bond
      of
      approximately $8.2 million resulted in a realized gain of approximately $10,000
      during the three months ended September 30, 2005.





*Mortgage
      Backed Securities - Available for Sale*





During
      the nine month transition period ended March 31, 2006, we purchased and sold
      approximately $15 million in mortgage backed securities realizing a gain of
      $0.2
      million.





At
      March
      31, 2006, we had no investment in mortgage-backed securities.





**NOTE
      F — REAL ESTATE HELD FOR SALE**





At
      March
      31, 2006, we held six properties with a total carrying value of $38.4 million,
      which were acquired through foreclosure and recorded as investments in real
      estate held for sale. The summary below includes our percentage ownership in
      each property. These investments in real estate held for sale are accounted
      for
      at the lower of cost or fair value less costs to sell with fair value based
      on
      appraisals and knowledge of local market conditions. It is not our intent to
      invest in or own real estate as a long-term investment. We seek to sell
      properties acquired through foreclosure as quickly as circumstances permit.
      The
      following is a roll-forward of investments in real estate held for sale for
      the
      nine month transition period ended March 31, 2006:


F-20
 *Table
          of Contents*




**Description**
            **Date
                Acquired**
            **Percentage
                of Ownership**
            
            **Balance
                at**
              **July
                1, 2005**
            
            **Acquisitions
                (Reductions)**
            
            **Seller
                Financed Sales**
            
            **Sales**
            
            **Gain
                on Sale of Real Estate**
            
            **Balance
                at**
              **March
                31, 2006**Land
                containing (82) residential lots in Henderson, NV
                **(2)**
            2/28/2003
            34%
            $
            2,557,000
            $
            (1,000)
            $
            --
            $
            (1,294,000)
            $
            --
            $
            1,262,000278
                Unit apartments in Fort Worth, TX
                **(1)(3)**“Windrush”
            8/2/2005
            100%
            
            --
            
            8,059,000
            
            --
            
            --
            
            --
            
            8,059,000460
                acre residential sub-division in Lake Travis,
                TX****
            8/3/2004
            66%
            
            3,478,000
            
            --
            
            --
            
            (3,525,000)
            
            47,000
            
            --Two
                real estate parcels in Cedar Park and Austin, TX
                **(2)(3)**
            3/2/2004
            100%
            
            600,000
            
            (102,000)
            
            --
            
            (260,000)
            
            60,000
            
            298,000Partially
                completed golf course on 570 acres of land near Austin, TX
                **(3)**
            8/3/2004
            100%
            
            5,633,000
            
            (300,000)
            
            --
            
            --
            
            --
            
            5,333,000126
                unit, (207 bed) assisted living facility in Phoenix, AZ**(2)**
            9/8/2004
            90%
            
            8,113,000
            
            --
            
            (8,113,000)
            
            --
            
            --
            
            --150-unit
                condominium conversion in Houston, TX of “The Club at Stablechase”
            6/15/2005
            100%
            
            9,058,000
            
            (52,000)
            
            --
            
            --
            
            --
            
            9,006,000504
                unit apartments in Austin, TX “Lakeview”
                **(3)**
            6/7/2005
            100%
            
            14,433,000
            
            35,000
            
            --
            
            --
            
            --
            
            14,468,00074
                unit, (90 bed) assisted living facility in San Bernardino, CA
                **(2**)****
            4/6/2004
            100%
            
            7,350,000
            
            --
            
            (7,350,000)
            
            --
            
            --
            
            --$
            51,222,000
            $
            7,639,000
            $
            (15,463,000)
            $
            (5,079,000)
            $
            107,000
            $
            38,426,000





**(1)**
            **Foreclosures
                for the Nine Months Ended March 31,
                2006:**





During
      August 2005, we foreclosed on a local agency bond with a cost of approximately
      $8.3 million. Upon the foreclosure of the property, a 278 unit apartment complex
      located in Fort Worth, Texas, we received approximately $245,000, which was
      held
      in a trust account for accrued interest related to the bonds. These proceeds
      reduced the book value of the property. Based on a purchase offer of the 278
      unit apartment complex located in Fort Worth, Texas, no valuation allowance
      was
      deemed necessary as of March 31, 2006. Following the foreclosure of the
      property, the value of this investment was no longer treated as a marketable
      security and will be reclassified as real estate held for sale. The accumulated
      unrealized loss of $279,000 related to this investment was not realized and
      the
      amount of this other comprehensive loss was reported as a part of the cost
      of
      the real estate held for sale.


F-21
 *Table
          of Contents*




**(2)**
            **Sales
                of Real Estate Held for Sale for the Nine Months Ended March 31,
                2006:**





During
      July 2003, we and Fund I entered into an agreement for the sale of a portion
      of
      our interest in 40 acres of land containing 354 residential lots in Henderson,
      Nevada. The agreement required the buyer to purchase 138 lots for cash and
      gives
      the buyer an option to purchase the remaining 216 lots over the next three
      years
      at a predetermined price, which may be adjusted for potential value increases.
      Through March 31, 2006, the buyer had purchased 272 of the 354 lots. We and
      Fund
      I recorded a valuation adjustment for the year ended June 30, 2005 of $180,000
      and $354,000, respectively, to write down the carrying value of our respective
      interest in the parcel to the amount corresponding to the negotiated sale and
      option price. During July 2005, the buyer exercised their option to purchase
      an
      additional 82 lots for approximately $3.85 million of which we received
      approximately $1.29 million, resulting in no further gain or loss.





During
      August 2005, we and Fund I sold the 126 unit, (207 beds) assisted living
      facility in Phoenix, Arizona and financed 100% of the purchase price upon the
      following terms: a 12 month $10.5 million interest only loan; interest rate
      of
      7.50% commencing six months following the date of the loan; our portion is
      $9.5
      million. The transaction resulted in a $1,357,000 deferred gain, which will
      be
      recognized once the equity requirement has been met.





During
      April 2004, we foreclosed on a loan secured by a 74 Unit/90 bed assisted living
      facility in San Bernardino, California. The business continued operations.
      During the year ended June 30, 2005, we wrote down the carrying value of the
      facility by $282,000. In October 2005, we sold the facility and financed 97%
      of
      the purchase price on the following terms; two payments totaling $400,000;
      a
      $7,150,000 real estate mortgage bearing an interest rate of 8.5%; quarterly
      payments of interest of approximately $152,000; maturing during November
      2006.





During
      December 2005, we and Fund I sold the 460 acre residential subdivision in Lake
      Travis, TX for $5.5 million, of which our portion was $3.5 million. The purchase
      price included cash proceeds of $5 million and a $500,000 note receivable,
      with
      an imputed interest rate of 8%, due in May 2006. A net gain of $71,000 resulted
      in this transaction, of which our portion was $47,000.





During
      March 2006, we sold a real estate parcel in Cedar Park, Texas with a book value
      of $200,000 for $260,000. This transaction resulted in a net gain of
      $60,000.





**(3)**
            **Sales
                Agreements for Real Estate Held for
                Sale:**





We
      have
      entered into definitive agreements to sell five of the six properties included
      in real estate held for sale to third parties at or above book value for cash,
      as described below:





·
            We
                have entered into a sales agreement for the “Lakeview” property at the
                price of $17.5 million. The terms of the agreement includes two 45
                day non
                refundable extension payments, of which we have received the first
                extension payment in the amount of $100,000.





·
            We
                have entered into a sales agreement for the “Windrush” property at a price
                of $8 million, which approximates book
                value.





·
            We
                have entered into a sales agreement for the sale of a real estate
                parcel
                in Austin, Texas for a price of
                $600,000.





·
            We
                have entered into a sales agreement for a partially completed golf
                course
                on 570 acres of land near Austin, Texas for a price of $5.5
                million.





No
      assurance can be given that the sales contracts for the properties will actually
      close.


F-22
 *Table
          of Contents*


**NOTE
      G — REAL ESTATE HELD FOR SALE - SELLER FINANCED**





At
      March
      31, 2006, we held an interest in three **** properties
      with a total carrying value of $22.9 million, which have been sold in
      transactions where we provided the financing to the purchaser. GAAP requires
      us
      to include these properties in real estate held for sale until the borrower
      has
      met and maintained a certain percentage of equity ownership, which ranges from
      10% to 25%. We may share ownership of such properties with Fund I, Fund III,
      the
      Manager, or other related and/or unrelated parties. The summary below includes
      our percentage ownership in each property. These investments in real estate
      held
      for sale are accounted for at the lower of cost or fair value less costs to
      sell
      with fair value based on appraisals and knowledge of local market conditions.
      The following is a roll-forward of seller financed real estate held for sale
      for
      the nine month transition period ended March 31, 2006:





**Description**
            **Date
                Acquired**
            **Percentage
                of Ownership**
            
            **Balance
                at**
              **July
                1, 2005**
            
            **Acquisitions**
            
            **Adjustments**
            
            **Principal
                Payments Received from Borrower**
            
            **Balance
                at**
              **March
                31, 2006**74
                unit (90) bed assisted living facility in San Bernardino,
                CA
            4/06/2004
            100%
            $
            --
            $
            7,350,000
            $
            --
            $
            --
            $
            7,350,000126
                unit (207) bed assisted living facility in Phoenix, AZ
            9/08/2004
            90%
            
            --
            
            8,113,000
            
            --
            
            --
            
            8,113,000An
                approximate 200-unit apartment complex located in Las Vegas, Nevada
                “Emerald Suites” Bonanza
            1/27/2003
            95%
            
            3,214,000
            
            --
            
            --
            
            (3,214,000)
            
            --An
                uncompleted golf course in Mesquite, Nevada
            11/06/2002
            45%
            
            1,209,000
            
            --
            
            --
            
            (1,209,000)
            
            --36
                acres of raw land in Mesquite, Nevada
            11/27/2002
            52%
            
            357,000
            
            --
            
            --
            
            (357,000)
            
            --Assisted
                living facility in Las Vegas, Nevada
            9/23/2004
            48%
            
            7,309,000
            
            --
            
            115,000
            
            --
            
            7,424,000Raw
                land in Mesquite, Nevada
            11/272002
            47%
            
            542,000
            
            --
            
            --
            
            (542,000)
            
            --$
            12,631,000
            $
            15,463,000
            $
            115,000
            $
            (5,322,000)
            $
            22,887,000





We
      received $1,365,000 in payments from borrowers on the loans associated with
      the
      sale of the properties as of March 31, 2006. These payments are recorded as
      a
      deposit liability. During the nine months ended March 31, 2006, we recognized
      $1,089,000 as a gain on sale of real estate related to seller financed loans
      which were paid in full during the period.





Until
      borrowers have met the minimum equity ownership requirement to allow us to
      record a sale, we will record payments received under the deposit method or
      the
      cost recovery method, which ever is applicable in accordance to FAS
      66.


F-23
 *Table
          of Contents*


**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 Operating
      Agreement provided the price does not exceed the original cost. 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 contribution, paid monthly in arrears. The amount
      of
      management fees paid to our Manager for the nine months ended March 31, 2006
      and
      2005 approximated $820,000 and $787,000, respectively.





As
      of
      March 31, 2006, we owed our Manager approximately $250,000 related to unpaid
      management fees, our Manager’s pro-rata share of distributions and expenses paid
      on our behalf related to the maintenance of real estate held for
      sale.





As
      of
      March 31, 2006, Vestin Mortgage had an investment in us of approximately $1.1
      million, which consists of certain costs paid on our behalf related to the
      registration and start-up costs. Vestin Mortgage has received 110,000 units
      from
      us related to this investment. Additionally, for the nine months ended March
      31,
      2006 and 2005, we recorded pro-rata distributions owed to our Manager of
      approximately $45,000.





**Transactions
      with the Funds**





As
      of
      March 31, 2006 and June 30, 2005, Fund I owed us $0 and $1,560,000,
      respectively, primarily related to payments made on our behalf for the
      maintenance of real estate owned.





During
      the nine months ended March 31, 2006, we purchased $8,800,000 in real estate
      loans from Fund I.





During
      the nine months ended March 31, 2006, we sold $500,000 in real estate loans
      to
      Fund I.





During
      the nine months ended March 31, 2006, we purchased $500,000 in real estate
      loans
      from Fund III.





**Transactions
      with Other Related Parties**





During
      the nine months ended March 31, 2006, we sold $7 million in performing real
      estate loans to InVestin Nevada, Inc., a company wholly owned by our Manager’s
      CEO. No gain or loss resulted as a result of these transactions.





During
      the nine months ended March 31, 2006, we purchased $11.8 million in performing
      real estate loans from InVestin Nevada, Inc. No gain or loss resulted as a
      result of these transactions.





During
      the nine months ended March 31, 2006 and 2005, we incurred $51,000 and $62,000,
      respectively, for legal fees to the law firm of Levine, Garfinkel & Katz in
      which the Secretary of Vestin Group has an equity ownership
      interest.





During
      the nine months ended March 31, 2006 and 2005, we incurred $144,000 and
      $101,000, respectively, to L.L. Bradford & Company, LLC, a certified public
      accounting firm for accounting services. A former Director and Officer of Vestin
      Group is an equity owner in that firm.





During
      January 2006, Michael V. Shustek, the Manager’s CEO, purchased a $2 million
      trust deed investment from us, of which, the total balance of $2 million was
      repurchased by us.


F-24
 *Table
          of Contents*


At
      June
      30, 2005, we owed Vestin Group, Inc. $1,000, a company wholly owned by our
      Manager’s CEO.





During
      the nine months ended March 31, 2006 we purchased $556,000 in performing real
      estate loans from LTD, a company wholly owned by our Manager’s CEO. No gain or
      loss resulted as a result of these transactions.





**NOTE
      I — NOTES RECEIVABLE**





During
      October 2004, we and Fund I sold the Castaways Hotel/Casino in Las Vegas, Nevada
      of which our portion of the net cash proceeds of approximately $5.8 million.
      We
      originally sold this property under a 100% seller financing arrangement. The
      borrowers then sold the property to an unrelated third party that resulted
      in a
      payoff of the note and also allowed us to record the sale and remove the asset
      from seller financed real estate held for sale. In addition, during September
      2004, we received a promissory note from the guarantors of the loan in the
      amount of $440,000 in exchange for a release of their personal guarantees.
      Since
      payments on the note do not begin for 21 months from the date of the note,
      we
      discounted the face value of the note to $328,000, which is based on a discount
      rate of 8% as of that date. The note is fully reserved.





During
      March 2005, we and Fund I sold the
      126
      unit hotel in Mesquite, Nevada for $5,473,000 of which our share of the proceeds
      were approximately $3.8 million which resulted in a loss of approximately
      $829,000.  In
      addition, during June
      2005 ,
      we entered
      into a settlement agreement  with the
      guarantor s of the
      loan in the amount of $ 2,000 ,000
      in
      exchange for a release of their personal guarantees of which
      our share was approximately $1,350,000 . The
      balance is secured by a second trust deed and is payable in a first installment
      of $100,000 due in July 2005 and monthly interest only payments of 5% on
      $1,100,000 from July 2005 through July 2008, at which time the entire balance
      is
      due. The guarantors are entitled to a discount of $782,000 from the principal
      balance in the event the entire balance is paid by December 2006. The first
      installment was received and recognized as income in July 2005. Our portion
      was
      $68,000. Payments will be recognized as revenue when received.





During
      June 2005, we took title to 133 units of a 150 unit condominium conversion
      of
“The Club at Stablechase” located in Houston, Texas. Our
      Manager has evaluated the carrying value of approximately $9.0 million and
      based
      on its estimated value and the underlying personal guarantee from the borrower,
      no valuation allowance was deemed necessary as of March 31, 2006. Additionally,
      the guarantor entered into an unsecured promissory note totaling $375,000
      bearing an annual interest rate of 8.0%, payable in monthly payments of
      principal of approximately $6,000 plus interest and maturing during June 2010.
      Due to uncertainty of collectibility, payments will be recognized when received
      as a decrease to the value of the real estate held for sale. As
      of
      March 31, 2006, we received approximately $76,000 in principal and interest
      payments.





During
      November 2004, we and Fund I sold the 140 Unit/224 beds senior facility in
      Mesa,
      Arizona of which our consideration received totaled $6,043,000. We and Fund
      I
      received a promissory note from the original guarantor in the amount of $478,000
      of which our portion was $409,000. The promissory note is payable in interest
      only payments of 8% on the principal balance outstanding. Commencing June 25,
      2005 through May 25, 2006, monthly payments shall increase to $15,000 and be
      applied to principal and accrued interest. Beginning June 25, 2006 through
      May
      25, 2009 payments are to increase to $20,000 monthly. Due to uncertainty of
      collectibility, we have provided a valuation allowance for the entire balance
      of
      the promissory note. Revenues will be recognized when payments are received.
      As
      of March 31, 2006, we received approximately $95,000 in payments.





During
      December 2005, we and Fund I sold the 460 acre residential subdivision in Lake
      Travis, TX for $5.5 million, of which our portion was $3.5 million. The purchase
      price included cash proceeds of $5 million and a $500,000 note receivable,
      with
      an imputed interest rate of 8%, which has been extended to June 2006. A net
      gain
      of $71,000 resulted in this transaction, of which our portion was
      $47,000.


F-25
 *Table
          of Contents*


**NOTE
      J— SECURED BORROWINGS**





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





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





As
      of
      March 31, 2006 and June 30, 2005, funds being used under Inter-creditor and
      Participation Agreements where we have potential obligations as defined above
      totaled $11.6 million and $25.7 million, respectively. In April 2006 all secured
      borrowings were paid in full.





**NOTE
      K — NOTES PAYABLE**





Notes
      payable consist of the following:





**March
                31, 2006**12
                Month Note Payable, to a third party which also participates in our
                secured borrowing arrangements, Secured By Real Property located
                in Austin
                TX, Bearing Monthly Interest Only Payments At 8% Per Annum
            
            $
            11,700,00012
                Month Note Payable, to a third party which also participates in our
                secured borrowing arrangements, Secured By Real Property located
                in
                Houston TX, Bearing Monthly Interest Only Payments At 8% Per
                Annum
            
            
            5,500,000Total
                Notes Payable At March 31, 2006
            
            $
            17,200,000





All
      notes
      payable balances were paid in full in April 2006.





**NOTE
      L — RECENT ACCOUNTING PRONOUNCEMENTS**





FASB
      Staff Position (FSP) FAS 115-1/124-1, replacing Emerging Issues Task Force
      (EITF) 03-1, *The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investment* ”
-
      On
      November 3, 2005, the FASB released FSP FAS 115-1 and FAS 124-1 replacing EITF
      03-1. The final language on FSP FAS 115-1 / FAS 124-1 requires investors to
      recognize an impairment loss when the impairment is deemed other-than-temporary,
      even if a decision to sell has not been made. The FSP applies to reporting
      periods beginning after December 15, 2005. We do not expect the adoption of
      Staff Position (FSP) FAS 115-1/124-1 to have a material impact on our financial
      position or results of operations.


F-26
 *Table
          of Contents*


On
      February 16, 2006, the FASB issued FAS 155, *Accounting
      for Certain Hybrid Financial Instrument* (“FAS
      155”), an amendment of FAS 140 and FAS 133. FAS 155 permits the Company to elect
      to measure any hybrid financial instrument at fair value (with changes in fair
      value recognized in earnings) if the hybrid instrument contains an embedded
      derivative that would otherwise be required to be bifurcated and accounted
      for
      separately under FAS 133. The election to measure the hybrid instrument at
      fair
      value is made on an instrument-by-instrument basis and is irreversible. The
      Statement will be effective for all instruments acquired, issued, or subject
      to
      a re-measurement event occurring after the beginning of the Company's fiscal
      year that begins after September 15, 2006, with earlier adoption permitted
      as of
      the beginning of the Company's 2006 fiscal year, provided that financial
      statements for any interim period of that fiscal year have not yet been issued.
      We do not expect the adoption of FAS 155 to have a material impact on our
      financial position or results of operations.





On
      March
      17, 2006, the FASB issued FAS 156 *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* (“FAS
      156”), an amendment to portions of FAS 133, FAS 140 and FTB 87-3. FAS 156
      requires that all separately recognized servicing assets and servicing
      liabilities be initially measured at fair value, if practicable. It also
      permits, but does not require, the subsequent measurement of servicing assets
      and servicing liabilities at fair value. Derivative instruments used to mitigate
      the risks inherent in servicing assets and servicing liabilities must be
      accounted for at fair value. Under FAS 156 an election can also be made for
      subsequent fair value measurement of servicing assets and servicing liabilities
      by class, thus simplifying the accounting and provide for income statement
      recognition of potential offsetting changes in the fair value of servicing
      assets, servicing liabilities and related derivative instruments. The Statement
      will be effect beginning the first fiscal year that begins after September
      15,
      2006. We do not expect the adoption of FAS 156 to have a material impact on
      our
      financial position or results of operations.





**NOTE
      M — LEGAL MATTERS INVOLVING THE MANAGER**





Vestin
      Group, Vestin Mortgage, and Del Mar Mortgage, Inc., a company wholly owned
      by
      Michael V. Shustek, the sole shareholder and CEO of Vestin Group, are defendants
      in a civil action entitled Desert Land, LLC et al. v. Owens Financial Group,
      Inc. et al (the “Action”). The Action is based upon allegations that Del Mar
      Mortgage, Inc. and/or Vestin Mortgage charged unlawful fees on various loans
      arranged by them. Desert Land sought in excess of $10 million in monetary
      damages. On April 10, 2003, the United States District Court for the District
      of
      Nevada (the “Court”) entered judgment jointly and severally in favor of Desert
      Land against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. Judgment
      was predicated upon the Court’s finding that Del Mar Mortgage, Inc. received an
      unlawful penalty fee from the plaintiffs.





The
      defendants subsequently filed a motion for reconsideration. The Court denied
      the
      motion and, on August 13, 2003, held that Vestin Group, Vestin Mortgage, and
      Del
      Mar Mortgage, Inc. are jointly and severally liable for the judgment in the
      amount of $5,683,312 (which amount includes prejudgment interest and attorney’s
      fees). On August 27, 2003, the Court stayed execution of the judgment against
      Vestin Group and Vestin Mortgage based upon the posting of a bond in the amount
      of $5,830,000. Mr. Shustek personally posted a cash bond without any cost or
      obligation to Vestin Group and Vestin Mortgage. Additionally, Del Mar Mortgage,
      Inc. has indemnified Vestin Group and Vestin Mortgage for any losses and
      expenses in connection with the Action, and Mr. Shustek has guaranteed the
      indemnification with his cash bond. On September 12, 2003, all of the defendants
      held liable to Desert Land appealed the judgment to the United States Court
      of
      Appeals for the Ninth Circuit, which heard the case on October 18, 2005. On
      November 15, 2005, the Ninth Circuit vacated the judgment of the District Court
      and dismissed the state law claims against the defendants without prejudice
      on
      the basis that the District Court lacked subject matter jurisdiction in the
      case. On November 29, 2005, Desert Land petitioned the Ninth Circuit Court
      for
      rehearing with a suggestion that the matter be heard en banc. On December 16,
      2005, the District Court issued an Order releasing the bond, and on January
      6,
      2006, the Ninth Circuit denied Desert Land’s petition and the matter remains
      dismissed.


F-27
 *Table
          of Contents*


On
      November 21, 2005, Desert Land filed a complaint in the state courts of Nevada,
      which complaint is substantially similar to the original complaint previously
      filed by Desert Land in the United States District Court, with the exception
      of
      claiming Nevada State Law violations and seeking Nevada State Law remedies
      rather than claiming Federal Law violations and seeking Federal Law remedies.
      On
      March 6, 2006, Desert Land amended the state court complaint to name Fund I
      as a
      defendant. Desert Land alleges that one or more of the defendants have
      transferred assets to other entities without receiving reasonable value
      therefore; alleges plaintiffs are informed and believe that defendants have
      made
      such transfers with the actual intent to hinder, delay or defraud Desert Land;
      that such transfers made the transferor insolvent and that sometime between
      February 27 and April 1, 2003, Vestin Group transferred $1.6 million to us
      for
      that very purpose. The state court complaint further alleges that Desert Land
      is
      entitled to avoid such transfers and that pursuant to NRS 112.20, Desert Land
      is
      entitled to an injunction to enjoin defendants from further disposition of
      assets.





Most
      recently, on or about April 6, 2006, Desert Land filed a Writ of Certiorari
      seeking review of the 9th Circuit’s decision by the United States Supreme Court.
      Vestin continues to believe that Desert Land’s claims are without merit and will
      vigorously oppose the Writ of Certiorari and defend against the state court
      complaint.





Our
      Manager is involved in a number of legal proceedings concerning matters arising
      in connection with the conduct of its business activities. The Manager believes
      it has meritorious defenses to each of these actions and intends to defend
      them
      vigorously. The Manager believes that it is not a party to any pending legal
      or
      arbitration proceedings that would have a material adverse effect on the
      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 the Manager’s net income in any particular period.





**NOTE
      N — LEGAL MATTERS INVOLVING THE COMPANY**





The
      staff
      of the Pacific Regional Office of the United States Securities and Exchange
      Commission (SEC) conducted an investigation into certain matters related to
      us,
      Vestin Group, Vestin Capital, Fund I and Fund III. We have fully cooperated
      during the course of the investigation.





The
      Staff
      has notified us, Fund I, Fund III, our Manager, Vestin Capital and Michael
      V.
      Shustek, the Principal Executive Officer of our Manager and Vestin Capital,
      or
      collectively the Vestin Entities, that they intend to seek authority to bring
      an
      enforcement proceeding against the Vestin Entities alleging violations of
      Section 17 (a) of the Securities Act of 1933, Section 10 (b) of the Securities
      Exchange Act of 1934 and Rule 10b-5 thereunder based upon certain sales
      practices employed for a period of time by the Vestin Entities. Specifically,
      the SEC Staff has advised that they believe certain slides used at sales
      seminars held to promote the sale of Fund II and Fund III units included
      disclosure regarding distributions to members of Fund I and Fund II that were
      misleading. The Vestin Entities are engaged in discussions with the Staff
      regarding the proposed recommendation and any remedies, which might be sought
      by
      the SEC Staff. Based upon these discussions, we currently believe that neither
      we nor Fund I and Fund III will be named as parties in any enforcement
      recommendation or any order entered as a result of a settlement. These
      settlement negotiations are ongoing and, at this time, we do not know if a
      mutually acceptable settlement will be reached.





On
      April
      21, 2006, through our Manager, we filed a complaint in the Circuit Court of
      the
      First Circuit in Hawaii to expedite our efforts to foreclose upon first trust
      deeds secured by the assets of RightStar International, Inc. (the “RightStar
      Trust Deeds”). In the filing, we allege that the State of Hawaii has
      unreasonably blocked the foreclosure without any legal basis for doing so.
      On
      April 24, 2006, the State of Hawaii responded by filing allegations against
      Vestin Mortgage, Inc., and Vestin Fund II, LLC alleging that these Vestin
      entities improperly influenced the former RightStar trustees to transfer trust
      funds to Vestin. We believe these claims to be without merit and intend to
      vigorously defend those allegations. The outcome of this litigation is
      unforeseeable at this time.





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


F-28
 *Table
          of Contents*


**NOTE
      O — REDEMPTION LIMITATION**





Pursuant
      to Fund II’s Operating Agreement, it redeemed units submitted for redemption. In
      accordance with the terms of the Operating Agreement and the Internal Revenue
      Code, Fund II’s redemptions were limited to no more than 10% of the members’
capital in any calendar year. As of March 31, 2006, the total of redemptions
      made from inception was $138.5 million. In January 2006, we redeemed
      approximately $30.5 million of Members’ capital. As a result of Fund II’s merger
      into the Registrant on March 31, 2006, we will no longer redeem units since
      all
      units have been converted into shares of Vestin Realty Mortgage II,
      Inc.





To
      maintain our status as a REIT, we are required to make distributions, other
      than
      capital gain dividends, to our stockholders each year in an amount at least
      equal to (1) the sum of (a) 90% of our taxable income, computed without regards
      to the dividends paid deduction and our net capital gain, and (b) 90% of the
      net
      income, after tax, from foreclosure property, minus (2) the sum of certain
      specified items of noncash income over 5% of our REIT taxable
      income.





**NOTE
      P — SUBSEQUENT EVENTS**





On
      April
      21, 2006, through our manager we filed a complaint in the Circuit Court of
      the
      First Circuit in Hawaii to expedite our efforts to foreclose upon first trust
      deeds secured by the assets of RightStar International, Inc. (the “RightStar
      Trust Deeds”). In the filing, we allege that the State of Hawaii has
      unreasonably blocked the foreclosure without any legal basis for doing so.
      On
      April 24, 2006, the State of Hawaii responded by filing allegations against
      Vestin Mortgage, Inc., and Vestin Fund II, LLC alleging that these Vestin
      entities improperly influenced the former RightStar trustees to transfer trust
      funds to Vestin.





In
      April
      2006, our secured borrowing of $11.6 million and notes payable of $17.2 million
      were paid in full.





On
      May 1,
      2006 the bankruptcy plan of Mid-State Raceway, Inc. for Vernon Downs became
      effective. As a result of the bankruptcy plan, we and Fund I received the
      following:





·
            New
                first deeds of trust from buyer, Vernon Downs Acquisition, LLC,
                approximating $22.8 million, of which our portion is $19.6 million.
                The
                new terms reflect a $1.2 million principal reduction, reducing our
                principal balance by approximately $1.0 million. The transaction
                resulted
                in our recording unearned revenue of approximately $1.0 million.
                The terms
                of the loan are 9% due in 6 months, with an option to extend for
                an
                additional 6 months for a fee.





·
            The
                loan is secured by a first trust deed on Vernon Downs properties
                and a
                150% personal guarantee by
                borrowers.





·
            Prepayment
                of interest in the aggregate amount of $500,000, of which our portion
                is
                approximately $429,000.





·
            Delay
                fees from the date of the bankruptcy confirmation until the effective
                date
                in the aggregate amount of $287,000 of which our portion is approximately
                $246,000.





·
            Payment
                of past due forbearance fees approximately $555,000 of which our
                portion
                is approximately $476,000.





During
      April and May 2006, eight of our loans in our investment in real estate loans
      totaling approximately $93.7 million were paid in full, of which $20.0 million
      was reinvested in new investments in real estate loans.


F-29
 *Table
          of Contents*


**NOTE
      Q — SELECTED QUARTERLY FINANCIAL DATA**





The
      following schedule is a selected quarterly financial date for nine month
      transition period ended March 31, 2006:





**First
                Quarter**
            
            **Second
                Quarter**
            
            **Third
                Quarter**
            
            **Nine
                Month Transition Period**Total
                Revenues
            
            $
            7,971,000
            
            $
            7,693,000
            
            $
            7,582,000
            
            $
            23,246,000Total
                Operating Expenses
            
            $
            2,161,000
            
            $
            2,959,000
            
            $
            9,292,000
            
            $
            14,412,000**NET
                (LOSS) INCOME**
            
            $
            5,810,000
            
            $
            4,734,000
            
            $
            (1,710,000
            )
            $
            8,834,000Net
                Income (Loss) Allocated to Members
            
            $
            5,810,000
            
            $
            4,734,000
            
            $
            (1,710,000
            )
            $
            8,834,000Net
                Income (Loss) Allocated to Members Per Weighted Average Membership
                Units
            
            $
            0.18
            
            $
            0.14
            
            $
            (0.06
            )
            $
            0.28Weighted
                Average Membership Units
            
            
            32,851,440
            
            
            32,914,290
            
            
            29,935,380
            
            
            31,914,713Annualized
                Rate of Return to Members (a)
            
            
            7.02%
            
            
            5.71%
            
            
            (2.32)%
            
            
            3.69%Cash
                Distributions
            
            $
            4,230,000
            
            $
            4,356,000
            
            $
            6,073,000
            
            $
            14,659,000Cash
                Distributions Per Weighted Average Membership Units
            
            $
            0.13
            
            $
            0.13
            
            $
            0.20
            
            $
            0.46Weighted
                Average Term of Outstanding Loans
            
            
            16
                months
            
            
            16
                months
            
            
            16
                months
            
            
            16
                months





(a)
            The
                annualized rate of return to members for the nine month transition
                period
                ended March 31, 2006, is calculated based upon the net GAAP income
                allocated to members per weighted average units, divided by the number
                of
                days during the period (92, 92, 90 and 274 for the first quarter,
                second
                quarter, third quarter, and nine month transition period, respectively)
                and multiplied by three hundred and sixty five (365) days, then divided
                by
                the cost per unit ($10.00).




F-30
 *Table
          of Contents*


**SUPPLEMENTARY
      INFORMATION**







**ScheduleI****VESTIN
                REALTY MORTGAGE II, INC.****(SUCCESSOR
                TO VESTIN FUND II, LLC)****REAL
                ESTATE LOANS ON REAL ESTATE****REAL
                ESTATE LOAN ROLL FORWARD****Balance,**June
                30, 2003
            
            $
            352,481,000Additions
                during the periodNew
                real estate loans and additions
            
            
            262,134,000Real
                estate loans bought
            
            
            44,159,000Deductions
                during the periodCollections
                of principal
            
            
            220,379,000Foreclosed
                loans (Real estate held for sale)
            
            
            24,625,000Real
                estate loans sold
            
            
            94,709,000Net
                Change in 2003 - 2004
            
            
            (33,420,000
            )**Balance,**June
                30, 2004
            
            $
            319,061,000Additions
                during the periodNew
                real estate loans and additions
            
            
            72,219,000Real
                estate loans bought
            
            
            39,758,000Deductions
                during the periodCollections
                of principal
            
            
            135,959,000Foreclosed
                loans (Real estate held for sale)
            
            
            37,627,000Real
                estate loans sold
            
            
            22,034,000Net
                Change in 2004 - 2005
            
            
            (83,643,000
            )**Balance,**June
                30, 2005
            
            $
            235,418,000Additions
                during the periodNew
                real estate loans and additions
            
            
            141,921,000Real
                estate loans bought
            
            
            44,121,000Deductions
                during the periodCollections
                of principal
            
            
            154,487,000Real
                estate loans sold
            
            
            19,500,000Net
                Change in 2005 - 2006
            
            
            12,055,000**Balance,**March
                31, 2006
            
            
            247,473,000





F-31
 *Table
          of Contents*





**ScheduleII****VESTIN
                REALTY MORTGAGE II, INC.****(SUCCESSOR
                TO VESTIN FUND II, LLC)****REAL
                ESTATE LOANS ON REAL ESTATE****REAL
                ESTATE LOANS BY TYPE OF PROPERTY****As
                of March 31, 2006:****Type
                of Property**
            
            **Interest
                Rate**
            
            **Face
                Amount**
              **of
                Loan**
            
            **Fund
                Balance**
            
            **Maturity
                Date**
            
            **Amount
                Subject to Delinquency**Commercial
            
            
            5%
                - 14%
            
            $
            190,395,000
            
            $
            127,159,000
            
            
            03/04
                - 12/07
            
            $
            36,861,000Construction
            
            
            12%
            
            $
            42,050,000
            
            $
            15,781,000
            
            
            06/06
                - 05/07
            
            $
            --Acquisition
                and Development
            
            
            8%
                - 12%
            
            $
            75,662,000
            
            $
            51,603,000
            
            
            04/06
                - 07/06
            
            $
            --Land
            
            
            10%
                - 14%
            
            $
            72,658,000
            
            $
            52,930,000
            
            
            04/06
                - 03/07
            
            $
            --247,473,000**As
                of June 30, 2005:****Type
                of Property**
            
            
            **Interest
                Rate**
            
            
            **Face
                Amount**
              **of
                Loan**
            
            
            **Fund
                Balance**
            
            
            **Maturity
                Date**
            
            
            **Amount
                Subject to Delinquency**Commercial
            
            
            5%
                - 14%
            
            $
            201,245,000
            
            $
            116,782,000
            
            
            03/04
                - 02/07
            
            $
            30,457,000Construction
            
            
            8%
                - 13%
            
            $
            29,145,000
            
            $
            7,547,000
            
            
            08/05
                - 07/06
            
            $
            --Acquisition
                and Development
            
            
            8%
                - 12%
            
            $
            79,162,000
            
            $
            57,313,000
            
            
            01/05
                - 01/06
            
            $
            5,539,000Land
            
            
            10%
                - 14%
            
            $
            102,579,000
            
            $
            53,776,000
            
            
            06/05
                - 04/06
            
            $
            --235,418,000





F-32
 *Table
          of Contents*





**ScheduleIII****VESTIN
                REALTY MORTGAGE II, INC.****(SUCCESSOR
                TO VESTIN FUND II, LLC)****REAL
                ESTATE LOANS ON REAL ESTATE****REAL
                ESTATE LOANS BY LIEN POSITION****As
                of March 31, 2006:****Lien
                Position**
            
            
            **Face
                Amount of Loan**
            
            
            **Interest
                Rate**
            
            
            **Fund
                Balance**
            
            
            **Maturity
                Date**
            
            
            **Amount
                Subject to Delinquency**1st
            
            $
            372,403,000
            
            
            5%
                - 14%
            
            $
            247,028,000
            
            
            03/04
                - 12/07
            
            $
            36,861,0002nd
            
            $
            8,362,000
            
            
            12%
                - 14%
            
            $
            445,000
            
            
            03/06
                - 07/06
            
            $
            --247,473,000**As
                of June 30, 2005:****Lien
                Position**
            
            
            **Face
                Amount of Loan**
            
            
            **Interest
                Rate**
            
            
            **Fund
                Balance**
            
            
            **Maturity
                Date**
            
            
            **Amount
                Subject to Delinquency**1st
            
            $
            402,067,000
            
            
            5%
                - 14%
            
            $
            228,668,000
            
            
            03/04
                - 12/07
            
            $
            30,457,0002nd
            
            $
            10,064,000
            
            
            10%
                - 15%
            
            $
            6,750,000
            
            
            04/05
                - 10/06
            
            $
            5,539,000235,418,000





F-33
 *Table
          of Contents*





**ScheduleIV****VESTIN
                REALTY MORTGAGE II, INC.****(SUCCESSOR
                TO VESTIN FUND II, LLC)****REAL
                ESTATE LOANS ON REAL ESTATE****REAL
                ESTATE LOANS WHICH EXCEED THREE PERCENT OF THE
                PORTFOLIO****As
                of March 31, 2006:****Description
                of Loan**
            
            **Interest
                Rate**
            
            **Maturity
                Date**
            
            **Lien
                Position**
            
            **Face
                Amount**
              **of
                Loan**
            
            **Carrying
                Amount**
              **of
                Loan**
            
            **Amount
                Subject to Delinquency**A/D
            
            
            8.00%
            
            
            04/25/06
            
            
            1st
            
            $
            35,000,000
            
            $
            28,932,000
            
            $
            --Land
            
            
            10.00%
            
            
            06/30/06
            
            
            1st
            
            $
            35,000,000
            
            $
            28,598,000
            
            $
            --A/D
            
            
            12.00%
            
            
            05/10/06
            
            
            1st
            
            $
            33,000,000
            
            $
            22,025,000
            
            $
            --Commercial
            
            
            11.00%
            
            
            06/30/05
            
            
            1st
            
            $
            26,000,000
            
            $
            19,571,000
            
            $
            19,571,000Commercial
            
            
            8.00%
            
            
            05/20/06
            
            
            1st
            
            $
            18,000,000
            
            $
            18,000,000
            
            $
            --Commercial
            
            
            14.00%
            
            
            03/31/04
            
            
            1st
            
            $
            34,000,000
            
            $
            17,291,000
            
            $
            17,291,000Land
            
            
            14.00%
            
            
            05/15/06
            
            
            1st
            
            $
            21,632,000
            
            $
            14,419,000
            
            $
            --Commercial
            
            
            6.25%
            
            
            12/25/07
            
            
            1st
            
            $
            12,500,000
            
            $
            11,459,000
            
            $
            --Commercial
            
            
            7.50%
            
            
            07/15/06
            
            
            1st
            
            $
            10,500,000
            
            $
            9,470,000
            
            $
            --Construction
            
            
            12.00%
            
            
            05/16/07
            
            
            1st
            
            $
            26,000,000
            
            $
            7,868,000
            
            $
            --Land
            
            
            12.00%
            
            
            03/17/07
            
            
            1st
            
            $
            9,500,000
            
            $
            7,663,000
            
            $
            --**As
                of June 30, 2005:****Description
                of Loan**
            
            
            **Interest
                Rate**
            
            
            **Maturity
                Date**
            
            
            **Lien
                Position**
            
            
            **Face
                Amount**
              **of
                Loan**
            
            
            **Carrying
                Amount**
              **of
                Loan**
            
            
            **Amount
                Subject to Delinquency**Acquisition
                and Development
            
            
            9.00%
            
            
            07/13/05
            
            
            1st
            
            $
            30,000,000
            
            $
            27,574,000
            
            $
            --Acquisition
                and Development
            
            
            8.00%
            
            
            01/25/06
            
            
            1st
            
            $
            35,000,000
            
            $
            24,040,000
            
            $
            --Land
            
            
            10.00%
            
            
            03/30/06
            
            
            1st
            
            $
            35,000,000
            
            $
            23,918,000
            
            $
            --Commercial
            
            
            11.00%
            
            
            06/30/05
            
            
            1st
            
            $
            26,000,000
            
            $
            20,000,000
            
            $
            20,000,000Commercial
            
            
            8.00%
            
            
            05/20/06
            
            
            1st
            
            $
            18,000,000
            
            $
            18,000,000
            
            $
            --Commercial
            
            
            6.25%
            
            
            12/25/07
            
            
            1st
            
            $
            13,000,000
            
            $
            11,377,000
            
            $
            --Land
            
            
            14.00%
            
            
            02/15/06
            
            
            1st
            
            $
            21,632,000
            
            $
            10,772,000
            
            $
            --Land
            
            
            13.00%
            
            
            07/22/05
            
            
            1st
            
            $
            20,000,000
            
            $
            8,757,000
            
            $
            --Commercial
            
            
            14.00%
            
            
            03/31/04
            
            
            1st
            
            $
            34,000,000
            
            $
            7,704,000
            
            $
            7,704,000Commercial
            
            
            5.00%
            
            
            09/21/07
            
            
            1st
            
            $
            15,334,000
            
            $
            7,310,000
            
            $
            --




F-34