**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C.**  **20549**
 
 **FORM
        10-K**
 
 (Mark
        one)
 
 [X]
        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF
        1934
 
 For
        the
        fiscal year ended December
        31, 2006
 
 Or
 
 [   ]
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT
        OF 1934
 
 For
        the
        transition period from _____________ to ____________
 
 Commission
        File Number 333-125347
 
 **VESTIN
                  REALTY MORTGAGE I, INC.**(Exact
                  name of registrant as specified in its
                  charter)
 
 
 MARYLAND
              
              20-4028839(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
              
              None(Title
                  of each class)
              
              (Name
                  of each exchange on which
                  registered)
 
 Securities
        registered pursuant to Section 12(g) of the Act:
 
 Common
                  Stock, $0.0001 Par Value(Title
                  of class)
 
 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
        last 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.
 
 **Class**
              
              
              **Market
                  Value as of**
                **June
                  30, 2006**Common
                  Stock, $0.0001 Par Value
              
              $
              $37,572,007.80
 
 Indicate
        the number of shares outstanding of each of the registrant’s classes of common
        stock, as of the latest practicable date.
 
 **Class**
              
              
              **Number
                  of Shares Outstanding**
                **As
                  of March 9, 2007**Common
                  Stock, $0.0001 Par Value
              
              
              6,870,581
 
 
 
 
  **TABLE
        OF CONTENTS**
  **Page**PART
                    IITEM
                    1.
                BUSINESS
                1ITEM
                    1A.
                RISK
                    FACTORS
                11ITEM
                    1B.
                UNRESOLVED
                    STAFF COMMENTS
                23ITEM
                    2.
                PROPERTIES
                23ITEM
                    3.
                LEGAL
                    PROCEEDINGS
                23ITEM
                    4.
                SUBMISSION
                    OF MATTERS TO A VOTE OF SECURITY
                    HOLDERS
                25PART
                    IIITEM
                    5.
                MARKET
                    FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
                    MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
                26ITEM
                    6.
                SELECTED
                    FINANCIAL DATA
                28ITEM
                    7.
                MANAGEMENT’S
                    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                    AND RESULTS OF OPERATIONS
                30ITEM
                    7A.
                QUANTITATIVE
                    AND QUALITATIVE DISCLOSURES ABOUT MARKET
                    RISK
                44ITEM
                    8.
                FINANCIAL
                    STATEMENTS AND SUPPLEMENTARY
                    DATA
                45ITEM
                    9.
                CHANGES
                    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                    AND FINANCIAL DISCLOSURE
                45ITEM
                    9A.
                CONTROLS
                    AND PROCEDURES
                45ITEM
                    9B.
                OTHER
                    INFORMATION
                48PART
                    IIIITEM
                    10.
                DIRECTORS,
                    EXECUTIVE OFFICERS AND CORPORATE
                    GOVERNANCE
                48ITEM
                    11.
                EXECUTIVE
                    COMPENSATION
                52ITEM
                    12.
                SECURITY
                    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                    MANAGEMENT AND RELATED STOCKHOLDER MATTERS
                52ITEM
                    13.
                CERTAIN
                    RELATIONSHIPS AND RELATED TRANSACTIONS, AND
                    DIRECTOR INDEPENDENCE
                53ITEM
                    14.
                PRINCIPAL
                    ACCOUNTING FEES AND SERVICES
                54PART
                    IVITEM
                    15.
                EXHIBITS,
                    FINANCIAL STATEMENT SCHEDULES
                55EXHIBIT
                    INDEX
                55SIGNATURES
                56BALANCE
                    SHEETS
                F-3STATEMENTS
                    OF INCOME
                F-4STATEMENTS
                    OF EQUITY AND OTHER COMPREHENSIVE
                    INCOME
                F-5STATEMENTS
                    OF CASH FLOWS
                F-6NOTES
                    TO THE CONSOLIDATED 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,”
“intend,” “might,” “may,” “could,” “will,” “feel,” “forecasts,” “projects,”
“anticipates,” “believes” and words of similar expression. 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 I, LLC (“Fund I”) was organized in December 1999 as a Nevada limited
        liability company for the purpose of investing in real estate loans. Vestin
        Realty Mortgage I, Inc. (“VRM I”) was organized in January 2006 as a Maryland
        corporation for the sole purpose of effecting a merger with Fund I. On May
        1,
        2006, Fund I merged into VRM I and the members of Fund I received one share
        of
        VRM I’s common stock for each membership unit of Fund I. References in this
        report to the “Company”, “we”, “us” or “our” refer to Fund I with respect to the
        period prior to May 1, 2006 and to VRM I with respect to the period commencing
        on May 1, 2006. Because we were a limited liability company (“LLC”) during the
        prior periods reflected in this report, we make reference to Fund I’s “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 collectively as “deeds of trust” and as defined in our Management
        Agreement as “Mortgage Assets”). We commenced operations in August
        2000.
 
 We
        operate as a real estate investment trust (“REIT”). We are not a mutual fund or
        an investment company within the meaning of the Investment Company Act of
        1940,
        nor are we subject to any regulation thereunder. As a REIT, we are required
        to
        have a December 31 fiscal year end.
 
 Our
        manager is Vestin Mortgage, Inc. (the “manager” or “Vestin Mortgage”), a Nevada
        corporation, which is a wholly owned subsidiary of Vestin Group, Inc. (“Vestin
        Group”), a Delaware corporation. Michael Shustek, the CEO and director of the
        manager and CEO, President and a director of us, wholly owns Vestin Group,
        Inc.,
        which is engaged in asset management, real estate lending and other financial
        services though its subsidiaries. Our manager, prior to June 30, 2006, also
        operated as a licensed Nevada mortgage broker and was engaged in the business
        of
        brokerage, placement and servicing of commercial loans secured by real property.
        On July 1, 2006, the mortgage broker license was issued to an affiliated
        company, Vestin Originations, Inc. (“Vestin Originations”), which has continued
        the business of brokerage, placement and servicing of commercial real estate
        loans. Vestin Originations is a wholly owned subsidiary of Vestin
        Group.
 
 Pursuant
        to our management agreement, our manager shall implement our business strategies
        on a day-to-day basis, manage and provide services to us, and shall provide
        similar services to any of our subsidiaries. Without limiting the foregoing,
        our
        manager shall perform other services as may be required from time to time
        for
        management and other activities relating to our assets, as our manager shall
        deem appropriate under the particular circumstances. Consequently, our operating
        results are dependent upon our manager’s ability and performance in managing our
        operations and servicing our assets.
 
 Vestin
        Mortgage, Inc. is also the manager of Vestin Realty Mortgage II, Inc., as
        the
        successor by merger to Vestin Fund II, LLC, referred to as “VRM II”, Vestin Fund
        III, LLC (“Fund III”) and inVestin Nevada, Inc., a company wholly owned by our
        manager’s CEO. These entities also invest in real estate loans.
  -
            1
            -
 *Table
            of Contents*
  The
        consolidated financial statements include the accounts of the Company and
        our
        wholly owned taxable REIT subsidiary, TRS I, Inc. All significant inter-company
        transactions and balances have been eliminated in consolidation.
 
 **Real
        Estate Loan Objectives**
 
 As
        of
        December 31, 2006 our loans were in the following states: Arizona, California,
        Hawaii, Nevada, New York, Oklahoma, Oregon, Texas and Washington. The loans
        we
        invest in are selected for us by our manager from among loans originated
        by
        Vestin Originations or non-affiliated mortgage brokers. When Vestin Originations
        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 our manager’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 might not deem to be creditworthy. Because
        of our increased willingness to fund riskier loans, borrowers are generally
        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, held as collateral, is not generating
        any income to the borrower. The 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 maintain and grow shareholder value
        by:
 
 ·
            Producing
                revenues from the interest income on our real estate
                loans, 
 ·
            Providing
                cash distributions from the net income generated by our real estate
                loans, 
 ·
            Reinvesting,
                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 December 31, 2006,
        approximately 74% of our assets, net of allowance for loan losses, 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.
 
 Our
        real
        estate investments are not insured or guaranteed by any government
        agency.
 
 Our
        manager 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, our manager
        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;  -
            2
            -
 *Table
            of Contents*
 
 ·
            Potential
                for rental increases, if applicable; 
 ·
            Current
                and projected revenues from the property if applicable; 
 ·
            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. 
 Our
        manager may obtain our loans from an affiliated or non-affiliated mortgage
        broker who may solicit previous or new borrowers in those states where
        permissible. We may purchase existing loans that were originated by third
        party
        lenders and acquired by Vestin Originations to facilitate our purchase of
        the
        loans. Vestin Originations will sell the loans to us for no greater than
        the par
        value of the loan, not including its service fees and compensation.
 
 When
        selecting real estate loans for us, our manager 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 (on the security property) that we invest in will not
        be
        junior to more than one other loan. As of December 31, 2006, approximately
        99.44% 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 developed value)Acquisition
                  and Development
              60%
                   (of anticipated as-if developed value)Commercial
                  Property
              75%
                   (of anticipated as-if developed value)Construction
              75%
                   (of anticipated post- developed value)Leasehold
                  Interest
              75%
                   (of value of leasehold
                  interest)
 
 We
        may
        deviate from these guidelines under certain circumstances. For example, our
        manager, 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 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, our manager,
        in its sole discretion, shall be free to accept any reasonable financing
        terms
        that it deems to be in our best interest. The target loan-to-value ratio
        for our
        loan portfolio as a whole is approximately 70%. As of December 31, 2006,
        our
        actual loan to value ratio for our loan portfolio, including loans related
        to
        seller financed real estate held for sale, as a whole was 71.35% on a weighted
        average basis.
  -
            3
            -
 *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 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 state certified or licensed appraisers
        and/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 National
        Society of Real Estate Appraisers, American Society of Real Estate Appraisers,
        or from among appraisers with other qualifications acceptable to Vestin
        Originations and/or our manager. However, appraisals are only estimates of
        value
        and cannot be relied on as measures of realizable value. An employee or agent
        of
        Vestin Originations or our manager 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. *Terms
        of Real Estate Loans.* Our
        loans
        as of December 31, 2006 had original terms of six months to thirty-six months,
        excluding approved extensions. Most of our loans are for a term of 12 months.
        Generally our original loan agreements 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
        December 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 one of our loans that has both principal and interest payments
        along with a “balloon” payment at the end of the term. As of December 31, 2006,
        the loan had a balance of approximately $7.5 million and had an original
        term of
        thirty-six months, maturing in the next 9 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 December 31, 2006,
        we
        had approximately $17.1 million in investments in real estate loans which
        had
        interest reserves where the total outstanding principal due to us and our
        co-lenders was approximately $120.3 million. These loans had interest reserves
        of approximately $5.6 million, of which our portion was approximately $0.7
        million. At December 31, 2005, we had approximately $3.4 million in investments
        in real estate loans which had interest reserves where the total outstanding
        principal due to us and our co-lenders was approximately $25.1 million. These
        loans had interest reserves of approximately $2.4 million, of which our portion
        was approximately $0.3 million.
 
 4. *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 liability insurance coverage for all
                loans.  -
            4
            -
 *Table
            of Contents*
 
 ·
            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. 
 ·
            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. 
 5. *Purchase
        of Real Estate Investments from Affiliates.* We
        may
        acquire real estate loans from our affiliates, including our manager, for
        a
        price not in excess of the par value of the loan, plus allowable fees and
        expenses, but without allowance of any other compensation for the
        loans.
 
 6. *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 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 that 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.
 
 7. *Participation.* We
        participate in loans with other lenders, including affiliates as permitted
        by
        the North American Securities Administrators Association (“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 
 ·
            A
                loan fits within our investment guidelines, however it would constitute
                more than 20% of our anticipated capital contribution or otherwise
                be
                disproportionately large given our then existing
                portfolio. 
 Loans
        in
        which unaffiliated investors have participated through inter-creditor agreements
        (“Inter-creditor Agreements”) are accounted for as secured borrowings in
        accordance with Statement of Financial Accounting Standards (“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 an unaffiliated investor (the “Investor”) may
        participate on a non-pari passu basis in certain real estate loans with us
        and/or VRM II 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
        December 31, 2006, 100% of our loans were loans in which we participated
        with
        other lenders, most of whom are our affiliates.
  -
            5
            -
 *Table
            of Contents*
  8. *Diversification.* We
        voluntarily comply with NASAA Guidelines, which 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 December 31,
        2006,
        our single largest loan accounted for 12% of our stockholders’ equity. The loan
        yields interest at 5% per annum and, as of December 31, 2006, our portion
        of the
        outstanding balance of the loan was approximately $7.5 million.
 
 9. *Reserve
        Fund.* We
        have
        established contingency working capital reserves of approximately 3% of our
        capital to cover our unexpected cash needs.
 
 10. *Credit
        Evaluations.* When
        reviewing a loan proposal, our manager determines whether a borrower has
        sufficient equity in the security property. Our manager may also consider
        the
        income level and creditworthiness of a borrower to determine its ability
        to
        repay the real estate loan.
 
 11. *Sale
        of Real Estate Loan Investments.* Although
        our manager has no plans to do so, our manager may sell our real estate loans
        or
        interest in our loans to either affiliates or non-affiliated parties when
        our
        manager 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 our manager, Vestin Group or any
        of our
        affiliates. However, we may acquire an investment in a real estate loan payable
        by our manager when our manager has assumed the obligations of the borrower
        under that loan, through a foreclosure on the property.
 
 **Purchase
        of Loans from our manager and Its Affiliates**
 
 In
        addition to those loans our manager selects for us, we purchase loans that
        were
        originated by Vestin Originations or other parties and first held for Vestin
        Originations’ own portfolio, as long as the loan is not in default and otherwise
        satisfies all of our lending criteria. However, we will not acquire a loan
        from
        or sell a loan to a real estate program in which our manager or an affiliate
        has
        an interest except in compliance with NASAA Guidelines or otherwise approved
        by
        our Board of Directors. We voluntarily comply with NASAA
        Guidelines.
 
 **Types
        of Loans We Invest In**
 
 We
        primarily invest in loans that 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 our 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 December 31, 2006, approximately 26.10% 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 December 31, 2006, approximately
        4.60% 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
        December 31, 2006, approximately 9.87% 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 December 31, 2006, approximately 59.43% 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 December 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 December
        31, 2006, approximately 99.44% of our loans were secured by first deeds of
        trust.
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  **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
        December 31, 2006, approximately 0.56% of our loans were secured by a second
        deed of trust.
 
 **Prepayment
        Penalties and Exit Fees**
 
 Generally,
        the loans we invest in will not contain prepayment penalties but may contain
        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 December 31, 2006, none of our loans had a
        prepayment penalty and nine of our loans had an exit fee.
 
 **Extensions
        to Term of Loan**
 
 Our
        original loan agreements generally 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 December 31, 2006, approximately 21%
        of our
        loans had 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 December 31, 2006, we had approximately $17.1
        million in investments in real estate loans that had interest reserves where
        the
        total outstanding principal due to us and our co-lenders was approximately
        $120.3 million. These loans had interest reserves of approximately $5.6 million,
        of which our portion was approximately $0.7 million.
 
 **Balloon
        Payment**
 
 As
        of
        December 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 one of our loans that has both principal and interest payments
        along with a “balloon” payment at the end of the term. As of December 31, 2006,
        the loan had a balance of approximately $7.5 million and had a term of
        thirty-six months, maturing in the next 9 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.
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  **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.
 
 **Variable
        Rate Loans**
 
 Occasionally
        we may acquire variable rate loans. Variable rate loans originated by Vestin
        Originations 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).
        As of
        December 31, 2006, all of the loans in the real estate loans portfolio were
        fixed rate loans, with the exception of one loan with a variable interest
        rate.
        This loan has a term of 18 months, with a maturity date of December 30, 2007
        and
        a balance of $18.0 million, of which our portion was approximately $2.0 million
        as of December 31, 2006. The interest rate on this loan started at 10.5%
        and
        increases every six months until it reaches the maximum interest rate of
        11.5%.
 
 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. Our manager and Vestin Originations attempt 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 Originations contain provisions under which the interest rate cannot
        fall below the initial rate.
 
 Variable
        rate loans generally have interest rate caps. For these loans there is the
        risk
        that the market rate may exceed the interest cap rate.
 
 **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 that we might
        jointly fund. For example, we might establish a wholly-owned special purpose
        corporation that 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.
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  **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.
 
 We
        consider our direct competitors to be the providers of real estate loans,
        that
        is non-conventional 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, we compete with conventional lenders such as commercial
        banks, insurance companies, mortgage brokers, pension funds and other
        institutional lenders. Many of the companies against which we compete have
        substantially greater financial, technical and other resources than either
        our
        company or our manager. 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
        are
        managed by Vestin Mortgage, subject to the oversight of our board of directors,
        pursuant to the terms and conditions of our Management Agreement. Vestin
        Originations, an affiliate of Vestin Mortgage, operates as a mortgage broker
        and
        is subject to extensive regulation by federal, state and local laws and
        governmental authorities. Vestin Originations 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 Originations’ activities, including the authority to
        conduct periodic regulatory audits of all aspects of Vestin Originations’
operations.
 
 We
        and
        Vestin Originations 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 our manager 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
        no employees. Our manager (Vestin Mortgage), Vestin Originations and their
        parent company, Vestin Group, Inc., have provided and will continue to provide
        all of the employees necessary for our operations. As of December 31, 2006,
        those entities had a total of 23 full-time and no part-time employees. All
        employees are at-will employees and none are covered by collective bargaining
        agreements, except John Alderfer our manager’s CFO. Mr. Alderfer is a party to
        an employment, non-competition and confidentiality contract with Vestin Group,
        Inc., the parent company of our manager, through December 31, 2008.
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  **Available
        Information**
 
 Our
        Internet website address is www.vestinrealtymortgage1.com .
        We make
        available free of charge through www.vestinrealtymortgage1.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 practical
        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.
 
 **ITEM
        1A.**  **RISK
        FACTORS**
 
 In
        considering our future performance and any forward looking statements made
        in
        this report, the material risks described below should be considered carefully.
        These factors should be considered in conjunction with the other information
        included elsewhere in this report.
 
 **RISKS
        RELATED TO OUR BUSINESS**
 
 **We
        rely on our manager to manage our day-to-day operations and select our loans
        for
        investment.**
 
 Our
        ability to achieve our investment objectives and to make distributions depends
        upon our manager’s and its affiliate’s performance in obtaining, processing,
        making and brokering loans for us to invest in and determining the financing
        arrangements for borrowers. Stockholders have no opportunity to evaluate
        the
        financial information or creditworthiness of borrowers, the terms of mortgages,
        the real property that is our collateral or other economic or financial data
        concerning our loans. We pay our manager an annual management fee of up to
        0.25%
        of our aggregate capital received by us and Fund I from the sale of shares
        or
        membership units. 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.**
 
 As
        of
        December 31, 2006, our loans were in the following states: Arizona, California,
        Hawaii, Nevada, New York, Oklahoma, Oregon, Texas and Washington. 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 Western and Southern United States. Real estate markets vary
        greatly from location to location and the rights of secured real estate lenders
        vary considerably from state to state. Our manager’s limited experience in most
        U.S. real estate markets may impact its ability to make prudent investment
        decisions on our behalf. Accordingly, where our manager deems it necessary,
        it
        plans to utilize independent real estate advisors and local legal counsel
        located in markets where it lacks experience for consultation prior to making
        investment decisions. Stockholders will not have an opportunity to evaluate
        the
        qualifications of such advisors and no assurance can be given that they will
        render prudent advice to our manager.
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  **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), James M. Townsend
        (Chief Operating Officer), Daniel B. Stubbs (Senior Vice President,
        Underwriting), and Maria Rocio Revollo (Corporate Controller) 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. Mr.
        Alderfer is a party to an employment, non-competition and confidentiality
        contract with Vestin Group, Inc., the parent company of our manager, through
        December 31, 2008. None of the other key personnel of our manager is subject
        to
        an employment, non-competition or confidentiality agreement with our manager
        or
        us, and we do not maintain “key man” life insurance policies on any of them. 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.
 
 **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 that will result in a decrease of
        the
        amount available for distribution. In addition, we may enter into securitization
        arrangements in order to raise additional funds. Such arrangements could
        increase our leverage and adversely affect our cash flow and our ability
        to make
        distributions. As of December 31, 2006, we had secured borrowings equal to
        approximately 1% of our net investment in real estate loans, as compared
        to
        secured borrowings equal to approximately 5% or our net investment in real
        estate loans as of December 31, 2005.
 
 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.
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  **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
        adequate 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, including
        loans
        related to seller financed real estate held for sale, as of December 31,
        2006
        was 71.35% as compared to 66.65% as of December 31, 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
        December 31, 2006, we had in our portfolio approximately $8.1 million in
        delinquent loans, net of allowance for loan losses, and approximately $3.7
        million of real estate held for sale not sold through seller financing for
        a
        total of approximately $11.8 million in non-performing assets, which represented
        approximately 19.0% of our stockholders’ equity. As of December 31, 2006, we
        also had approximately $7.9 million of seller financed real estate held for
        sale
        and had received approximately $1.3 million in payments from the borrower
        on the
        loan associated with this property. 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.
 
 **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.
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  **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 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 December 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 one of our loans that have both principal and interest
        payments along with a “balloon” payment at the end of the term. Loans with
        balloon payments are riskier than loans with even payments of principal over
        an
        extended time period such as 15 or 30 years because the borrower’s repayment
        depends on its ability to sell the property 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.
 
 **Our
        real estate loans may not be marketable, and we expect no secondary market
        to
        develop.**
 
 We
        do not
        expect our real estate loans to be marketable, and we do not expect a secondary
        market to develop for them. As a result, we will generally bear all the risk
        of
        our investment until the loans mature. This will limit our ability to hedge
        our
        risk in changing real estate markets and may result in reduced returns to
        our
        investors.
 
 **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:
  -
            14
            -
 *Table
            of Contents*
 
 ·
            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 the RightStar loans discussed in Item 3*Legal
                Proceedings*to
                this report Form 10-K 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.
 
 **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 twelve months
        ended
        December 31, 2006, loan originations accounted for all but one loan funded
        during that period as there was one loan refinanced 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.
  -
            15
            -
 *Table
            of Contents*
  **Our
        results are subject to fluctuations in interest rates and other economic
        conditions.**
 
 As
        of
        December 31, 2006, none of our loans had a prepayment penalty and nine loans
        had
        an exit fee. Based on our manager’s historical experience, we expect that 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 Vestin
                Originations, 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 real estate loans
                earning
                that higher rate of interest. In the absence of a prepayment fee,
                we will
                receive neither the anticipated revenue stream at the higher rate
                nor any
                compensation for its loss. 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.
 
 **We
        face competition for real estate loans that may reduce available yields and
        fees
        available.**
 
 We
        consider our direct competitors to be the providers of real estate loans,
        that
        is non-conventional 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, we compete with conventional lenders such as commercial
        banks, insurance companies, mortgage brokers, pension funds and other
        institutional lenders. Many of the companies against which we compete have
        substantially greater financial, technical and other resources than either
        our
        company or our manager. 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. 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.
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            16
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            of Contents*
  **Vestin
        Mortgage serves as our manager pursuant to a long-term management agreement
        that
        may be difficult to terminate and does not reflect arm’s length
        negotiations.**
 
 We
        have
        entered into a long-term management agreement with Vestin Mortgage to act
        as our
        manager. The term of the management agreement is for the duration of our
        existence. The management agreement may only be terminated upon the affirmative
        vote of a majority in interest of stockholders entitled to vote on the matter
        or
        by our board of directors for cause upon 90 days’ written notice of termination.
        Consequently, it may be difficult to terminate our management agreement and
        replace our manager in the event that our performance does not meet expectations
        or for other reasons unless the conditions for termination of the management
        agreement are satisfied. The management agreement was negotiated by related
        parties and may not reflect terms as favorable as those subject to arm’s length
        bargaining.
 
 **Our
        manager will face conflicts of interest concerning the allocation of its
        personnel’s time.**
 
 Our
        manager is also the manager of VRM II, Fund III and inVestin Nevada, companies
        with investment objectives similar to ours. Our manager and Mr. Shustek,
        who
        indirectly owns 100% of our manager, anticipate that they may also sponsor
        other
        real estate programs having investment objectives similar to ours. As a result,
        our manager and Mr. Shustek may have conflicts of interest in allocating
        their
        time and resources between our business and other activities. During times
        of
        intense activity in other programs and ventures, our manager and its key
        people
        will likely devote less time and resources to our business than they ordinarily
        would. Our management agreement with our manager does not specify a minimum
        amount of time and attention that our manager and its key people are required
        to
        devote to our company. Thus, our manager may not spend sufficient time managing
        our operations, which could result in our not meeting our investment
        objectives.
 
 **Our
        manager and its affiliates will face conflicts of interest arising from our
        fee
        structure.**
 
 Vestin
        Originations, an affiliate of our manager, will receive substantial fees
        from
        borrowers for transactions involving real estate loans. Many of these fees
        are
        paid on an up-front basis. In some cases, Vestin Originations 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.” Vestin Originations’
compensation is based on the volume and size of the real estate loans selected
        for us, regardless of their performance, which could create an incentive
        to make
        or extend riskier loans. Our interests may diverge from those of our manager,
        Vestin Originations and Mr. Shustek to the extent that Vestin Originations
        benefits from up-front fees that are not shared with us.
 
 Vestin
        Originations will be receiving fees from borrowers that would otherwise increase
        our returns. Because Vestin Originations receives all of these fees, our
        interests will diverge from those of our manager, Vestin Originations and
        Mr.
        Shustek when our manager decides whether we should charge the borrower higher
        interest rates or our manager’ affiliates should receive higher fees from
        borrowers.
 
 We
        paid
        our manager a total of $277,000 for the twelve months ended December 31,
        2006
        for managing us and Fund I. In
        addition, Vestin Mortgage and Vestin Originations received a total of
        approximately $8.5 million and $7.4 million, respectively in fees directly
        from
        borrowers for the twelve months ended December 31, 2006 .
        The
        amounts received from borrowers represent fees earned by Vestin Mortgage
        and
        Vestin Originations for loans originated for all funds managed by Vestin
        Mortgage, including us, VRM II, Fund III and inVestin Nevada. Our assets
        represented approximately 15% of the assets managed by Vestin Mortgage as
        of
        December 31, 2006.
  -
            17
            -
 *Table
            of Contents*
  **Our
        manager will face conflicts of interest relating to other investments in
        real
        estate loans.**
 
 We
        expect
        to invest in real estate loans when one or more other companies managed by
        our
        manager are also investing in real estate loans. There is a risk that our
        manager may select for us a real estate loan investment that provides lower
        returns than a real estate loan investment purchased by another program or
        entity managed by our manager. Our manager also serves as the manager for
        VRM
        II, 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
        VRM
        II, Fund III, inVestin Nevada or another company that our manager manages.
        Moreover, our manager has no obligation to provide us with any particular
        opportunities or even a pro rata share of opportunities afforded to other
        companies it manages.
 
 **UNITED
        STATES FEDERAL INCOME TAX RISKS RELATING TO OUR REIT
        QUALIFICATION**
 
 **Our
        failure to qualify as a REIT would subject us to U.S. federal income tax,
        which
        would reduce amounts available for distribution to our
        stockholders.**
 
 We
        have
        elected to be taxed as a REIT under the Code. Our qualification as a REIT
        requires us to satisfy numerous requirements (some on an annual and quarterly
        basis) established under highly technical and complex Code provisions for
        which
        there are only limited judicial or administrative interpretations, and involves
        the determination of various factual matters and circumstances not entirely
        within our control. We intend that our organization and method of operation
        will
        enable us to qualify as a REIT, but we may not so qualify or we may not be
        able
        to remain so qualified in the future. Future legislation, new regulations,
        administrative interpretations or court decisions could adversely affect
        our
        ability to qualify as a REIT or adversely affect our stockholders.
 
 If
        we
        fail to qualify as a REIT in any taxable year, we would be subject to U.S.
        federal income tax (including any applicable alternative minimum tax) on
        our
        taxable income at corporate rates, and we would not be allowed to deduct
        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, extended 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 Vestin Realty Mortgage I’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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            18
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 *Table
            of Contents*
  We
        intend
        to avoid the 100% prohibited transactions tax on property foreclosed upon
        by
        Fund I 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
        December 31, 2006, we held one property with a total carrying value of
        approximately $3.7 million recorded as investments in real estate held for
        sale.
        As of December 31, 2006, we also held interests in one property with a total
        carrying value of approximately $7.9 million, which was sold in a transaction
        in
        which we or an affiliate provided the financing and recorded as seller financed
        real estate held for sale. United States generally accepted accounting
        principals (“GAAP”) requires us to include this property in real estate held for
        sale until the borrower has met and maintained certain requirements. The
        real
        estate held for sale and the seller financed real estate held for sale
        collectively constituted approximately 17.8% of our assets as of December
        31,
        2006. In addition, the seller financed real estate held for sale property
        is an
        assisted living facilities, which cannot be operated by a taxable REIT
        subsidiary.
 
 **Taxable
        REIT subsidiaries are subject to corporate-level tax, which may devalue our
        common stock relative to other companies.**
 
 Taxable
        REIT subsidiaries are corporations subject to corporate-level tax. Our use
        of
        taxable REIT subsidiaries may cause the market to value its common stock
        lower
        than the stock of other publicly traded REITs which may not use taxable REIT
        subsidiaries and lower than the equity of mortgage pools taxable as non-publicly
        traded partnerships such as Fund I’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.
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            19
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            of Contents*
  **We
        may lose our REIT status if we issue shares under our stockholders’ rights
        plan.**
 
 Under
        Section 562(c) of the Code, a REIT generally cannot make a distribution unless
        the distribution is pro rata, with no preference to any share of stock as
        compared to other shares of the same class of stock. A REIT that is not in
        compliance with this requirement may lose its REIT status. Under our
        stockholders’ rights plan, upon certain events, some holders of our common stock
        and not others will have the right to acquire shares of Series A preferred
        stock. When effective, this right could be treated as a deemed distribution
        to
        those holders of our common stock entitled to the right with no distribution
        to
        other such holders. Thus, this right, when effective, could be treated as
        a
        distribution that is not consistent with the requirements of Section 562(c)
        of
        the Code, which could result in the loss of our REIT qualification.
 
 **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 June 1, 2006
        to
        December 31, 2006 has ranged from $1.01 to $7.48. We believe the price of
        our
        stock has been affected by, among other things, selling pressure from
        stockholders seeking immediate liquidity and the level of non-performing
        assets
        which we own. Our stock price may be highly volatile and subject to wide
        fluctuations. In addition, the trading volume in our common stock may fluctuate
        and cause significant price variations to occur. Our Company will be dissolved
        on December 31, 2019 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
        dividend yield on our common stock (as a percentage of the price of our common
        stock) relative to market interest rates. Thus, an increase in market interest
        rates may lead prospective purchasers of our common stock to expect a higher
        dividend yield, a lack of which could adversely affect the market price of
        our
        common stock.
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            20
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  **We
        are the subject of shareholder litigation which may depress the price of
        our
        stock.**
 
 A
        lawsuit
        has been filed against us by shareholders who claim, among other things,
        that
        they were improperly denied dissenter’s rights in connection with the conversion
        of Fund I into a REIT. We believe the suit is without merit and we intend
        to
        vigorously defend against such claims. Nonetheless, the outcome of the lawsuit
        cannot be predicted at this time, nor can a meaningful evaluation be made
        of the
        potential impact upon us if the plaintiffs were to prevail in their claim.
        The
        resulting uncertainty may depress the price of our stock. Moreover, concerns
        about the potential diversion of our manager’s time to deal with these lawsuits
        may have an adverse effect upon the price of our stock.
 
 **Our
        charter documents and Maryland law contain provisions that may delay, defer
        or
        prevent a change of control transaction.**
 
 Our
        charter and bylaws and Maryland corporate law contain a number of provisions
        (as
        further described in exhibit 3.2 *Bylaws
        of the Registrant* under
        the Exhibit Index included in Part IV, Item 15 *Exhibits
        and Financial Statement Schedules* of this
        Report Form 10-K) that could delay, defer or prevent a transaction or a change
        in control of us that might involve a premium price for holders of our common
        stock or otherwise be in their best interests, including:
 
 ·
            *Ownership
                Limit*.
                Our articles of incorporation, subject to certain exceptions, authorizes
                our board of directors to take such actions as are necessary and
                desirable
                to preserve our qualification as a REIT and to limit any person to
                actual
                or constructive ownership of no more than a 9.8% of the number or
                value,
                whichever is more restrictive, of the outstanding shares of our stock,
                unless our board of directors waives this ownership limit. However,
                our
                board of directors may not grant a waiver of the ownership limit
                that
                would permit a person to acquire more than 15% of our stock without
                exception. The ownership limit may have the effect of precluding
                a change
                in control of us by a third party, even if such change in control
                would be
                in the interest of 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.  -
            21
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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:
  -
            22
            -
 *Table
            of Contents*
 
 ·
            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
        STAFF COMMENTS**
 
 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 an unrelated third party. The lease agreement governing this
        property expires in March 2014. The building was previously owned by Fund
        III
        and subsequently was sold to an unrelated third party during November
        2006.
 
 **ITEM
        3.**  **LEGAL
        PROCEEDINGS**
 
 **Legal
        Matters Involving Our Manager**
 
 The
        United States Securities and Exchange Commission (the “Commission”), conducted
        an investigation of certain matters related to us, our manager, Vestin Capital,
        VRM II and Fund III. We fully cooperated during the course of the investigation.
        On September 27, 2006, the investigation was resolved through the entry of
        an
        Administrative Order by the Commission (the “Order”). Our manager, Vestin
        Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin
        Capital (collectively, the “Respondents”), consented to the entry of the Order
        without admitting or denying the findings therein. In the Order, the Commission
        finds that the Respondents violated Sections 17(a)(2) and 17(a)(3) of the
        Securities Act of 1933 through the use of certain slide presentations in
        connection with the sale of units in Fund III and in Fund II, the predecessor
        to
        VRM II. The Respondents consented to the entry of a cease and desist order,
        the
        payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s suspension from
        association with any broker or dealer for a period of six months ,
        which
        expires in March 2007 .
        In
        addition, the Respondents agreed to implement certain undertakings with respect
        to future sales of securities. We are not a party to the Order and we do
        not
        expect that the sanctions imposed upon the Respondents will have any material
        affect upon our operations.
 
 VRM
        II,
        Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
        civil action filed by 88 separate plaintiffs (“Plaintiffs”) in Superior Court
        for Clark County, Nevada. The Plaintiffs allege, among other things, that
        Defendants: breached certain alleged contractual obligations owed to Plaintiffs;
        breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented
        or
        omitted material facts regarding the conversion of Fund II into VRM II. The
        Action seeks monetary damages and a rescission of the REIT conversion. The
        Defendants believe that the allegations are without merit and that they have
        adequate defenses. The Defendants intend to undertake a vigorous defense.
        The
        terms of VRM II’s management agreement and Fund II’s operating agreement contain
        indemnity provisions whereby, Vestin Mortgage and Michael V. Shustek may
        be
        eligible for indemnification by the Company with respect to the above
        actions.
  -
            23
            -
 *Table
            of Contents*
 VRM
          II
          and Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
          action filed in San Diego Superior Court by certain plaintiffs who allege,
          among
          other things, that they were wrongfully denied appraisal rights in connection
          with the merger of Fund II into Vestin Realty Mortgage II, Inc. The action
          is
          being brought as a purported class action on behalf of all members of Vestin
          Fund II who did not vote in favor of the merger.  The Defendants believe
          that the allegations are without merit and that they have adequate defenses.
          The
          Defendants intend to undertake a vigorous defense.  The terms of VRM
          II's management agreement and Fund II’s Operating Agreement contain
          indemnity provisions whereby, Vestin Mortgage and Michael V. Shustek may
          be
          eligible for indemnification by VRM II with respect to the above
          actions.
 
 In
        addition to the matters described above, our manager is involved in a number
        of
        other legal proceedings concerning matters arising in connection with the
        conduct of its business activities. Our manager believes it has meritorious
        defenses to each of these actions and intends to defend them vigorously.
        Other
        than the pending state court litigation involving Desert Land as further
        described above and the matters described in *Legal
        Matters Involving the Company* below,
        our 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**
 
 Vestin
        Group, Vestin Mortgage, and Del Mar Mortgage, Inc., a company wholly owned
        by
        Michael V. Shustek, the sole stockholder 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 in 1999, prior to the formation of Vestin Fund I, LLC. 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. were 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. had indemnified Vestin Group and Vestin Mortgage for any losses and
        expenses in connection with the Action, and Mr. Shustek had 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.
 
 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. The U.S. Supreme
        Court denied Desert Land’s Writ of Certiorari on June 12, 2006, effectively
        ending this action.
  -
            24
            -
 *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 us 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 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. 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. We believe that the allegations
        are without merit and that we have adequate defenses. We intend to undertake
        a
        vigorous defense.
 
 In
        April
        2006, the lenders filed suit against the State of Hawaii listing 26 causes
        of
        action, including allegations that the State of Hawaii has illegally blocked
        the
        lender’s right to foreclose and take title to its collateral by inappropriately
        attaching conditions to the granting of licenses needed to operate the business,
        the pre-need trust funds and the perpetual care trust funds and that the
        State
        of Hawaii has attempted to force the lenders to accept liability for any
        statutory trust fund deficits while no such lender liability exists under
        the
        laws of the State of Hawaii. The State of Hawaii responded by filing allegations
        against Vestin Mortgage, Inc. and VRM II alleging that these Vestin entities
        improperly influenced the former RightStar trustees to transfer trust funds
        to
        VRM II. We believe the State’s claims to be without merit and intend to
        vigorously pursue our remedies while defending against any allegations made
        by
        the State.
 
 In
        October 2006, a Judge of the Circuit Court of the First Circuit in Hawaii
        imposed new restrictions upon our right to foreclose and denied any subsequent
        owner the licensing necessary to operate the funeral service until the alleged
        pre-need and perpetual care trust funds shortages are cured. We believe these
        restrictions are both unauthorized under state law and unconstitutional under
        federal law. In January 2007, the Lenders filed a petition with the Supreme
        Court of Hawaii seeking mandamus relief from that ruling. As of March 9,
        2007,
        the Supreme Court of Hawaii has not ruled on the lender’s petition, but has
        requested briefing from the State of Hawaii regarding the petition. 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 and
          Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
          action filed in San Diego Superior Court by certain plaintiffs who allege,
          among
          other things, that they were wrongfully denied appraisal rights in connection
          with the merger of Fund I into Vestin Realty Mortgage I, Inc. The action
          has
          been removed to the United States District Court for the Southern District
          of
          California, but the Company has agreed to stipulate to remand this action
          to San
          Diego Superior Court. The action is being brought as a purported class
          action on
          behalf of all members of Vestin Fund I who did not vote in favor of the
          merger.
          The Defendants believe that the allegations are without merit and that
          they have
          adequate defenses. The Defendants intend to undertake a vigorous defense.
          The
          terms of our management agreement and Fund I’s Operating Agreement contain
          indemnity provisions whereby, Vestin Mortgage and Michael V. Shustek may
          be
          eligible for indemnification by the Company with respect to the above
          actions.
 
 In
        addition to the matters described above, we are involved in a number of other
        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. Other than the matters
        described above, we believe that we are not a party to any pending legal
        or
        arbitration proceedings that would have a material adverse effect on our
        financial condition or results of operations or cash flows, although it is
        possible that the outcome of any such proceedings could have a material impact
        on our net income in any particular period.
 
 **ITEM
        4.**  **SUBMISSION
        OF MATTERS TO A VOTE OF SECURITYHOLDERS**
 
 None.
  -
            25
            -
 *Table
            of Contents*
  **PARTII**
 
 **ITEM
                  5.**
              **MARKET
                  FOR REGISTRANT’S COMMONEQUITY, RELATED STOCKHOLDER
                  MATTERS AND ISSUER PURCHASES OF EQUITY
                  SECURITIES**
 
 **Market
        Information**
 
 Our
        common stock is traded on the Nasdaq National Market under the symbol VRTA
        and
        began trading on June 1, 2006. The price per share of common stock presented
        below represents the highest and lowest sales price for our common stock
        on the
        Nasdaq National Market during each quarter since it began trading.
 
 **2006**
              
              **High**
              
              **Low**First
                  Quarter
              
              $
              N/A
              
              $
              N/ASecond
                  Quarter
              
              $
              6.43
              
              $
              1.01Third
                  Quarter
              
              $
              7.48
              
              $
              4.97Fourth
                  Quarter
              
              $
              6.49
              
              $
              4.75
 
 On
        December 18, 2006, our Board of Directors declared a quarterly cash dividend
        of
        $0.15 per common share. The dividend was paid on January 26, 2007 to
        shareholders of record as of December 31, 2006.
 
 On
        March
        7, 2007, the common stock closed at $5.80 per share.
 
 **Holders**
 
 As
        of
        March 7, 2007 582 accounts held 6,870,581 of our common shares.
 
 **Dividend
        Policy**
 
 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. 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. Cash distributions per membership unit and dividends declared
        per
        share for the twelve months ended December 31, 2006 are listed
        below:
  -
            26
            -
 *Table
            of Contents*
 
 **Distributions
                  During:**
              **Cash
                  Distribution to Members Per Membership Unit**January
                  2006
              $0.06February
                  2006
              $0.05March
                  2006
              $0.05April
                  2006
              $0.10Total
                  Cash Distributions to Members During the Four Months Ended April
                  30,
                  2006
              $0.26**Date
                  of Declaration**
              **Record
                  Date**
              **Date
                  Paid**
              **Dividend
                  Per Share**July
                  27, 2006
              August
                  7, 2006
              August
                  21, 2006
              $0.08October
                  24, 2006
              November
                  13, 2016
              November
                  29, 2026
              $0.15December
                  18, 2006
              December
                  31, 2006
              January
                  26, 2007
              $0.15Total
                  Dividends Declared During the Eight Months Ended December 31,
                  2006
              $0.38Dividends
                  Declared Per Common Share / Cash Distributions to Members Per Membership
                  Unit for the Twelve Months Ended December 31, 2006
              $0.64
 
 **Recent
        Sales of Unregistered Securities**
 
 None.
 
 **Equity
        Compensation Plan Information**
 
 None.
 
 **Purchases
        of Equity Securities by the Issuer and Affiliated
        Purchasers**
 
 None.
  -
            27
            -
 *Table
            of Contents*
  **ITEM
        6.**  **SELECTED
        FINANCIALDATA**
 
 **Balance
                  at****Vestin
                  Realty Mortgage I, Inc.**
              
              **12/31/2006**
              
              **12/31/2005**
              
              **12/31/2004**
              
              **6/30/2005**
              
              **9/30/2004**
              
              **9/30/2003****(Unaudited)**Balance
                  Sheet Data:Investments
                  in real estate loans (net of allowance)
              
              $
              48,631,000
              
              $
              51,309,000
              
              $
              41,027,000
              
              $
              54,878,000
              
              $
              47,344,000
              
              $
              51,695,000Cash,
                  cash equivalents, certificates of deposits and short-term investments
              
              
              3,626,000
              
              
              9,904,000
              
              
              20,510,000
              
              
              3,162,000
              
              
              10,130,000
              
              
              14,883,000Interest
                  and other receivables
              
              
              938,000
              
              
              959,000
              
              
              602,000
              
              
              682,000
              
              
              1,327,000
              
              
              1,632,000Real
                  estate held for sale
              
              
              3,689,000
              
              
              2,497,000
              
              
              11,645,000
              
              
              7,757,000
              
              
              15,287,000
              
              
              22,517,000Real
                  estate held for sale-seller financed
              
              
              7,911,000
              
              
              8,797,000
              
              
              10,802,000
              
              
              10,374,000
              
              
              10,801,000
              
              
              4,006,000Note
                  receivable
              
              
              102,000
              
              
              291,000
              
              
              119,000
              
              
              119,000
              
              
              119,000
              
              
              --Assets
                  under secured borrowing
              
              
              310,000
              
              
              2,719,000
              
              
              3,177,000
              
              
              11,391,000
              
              
              6,134,000
              
              
              20,324,000Due
                  from Manager
              
              
              --
              
              
              248,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --Due
                  from Vestin Originations
              
              
              1,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Other
                  assets
              
              
              124,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              7,000Total
                  assets
              
              $
              65,332,000
              
              $
              76,724,000
              
              $
              87,882,000
              
              $
              88,363,000
              
              $
              91,142,000
              
              $
              115,064,000Liabilities
              
              
              2,993,000
              
              
              4,404,000
              
              
              5,886,000
              
              
              15,092,000
              
              
              8,864,000
              
              
              28,549,000Stockholder's
                  equity
              
              
              62,339,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Members’
                  equity
              
              
              --
              
              
              72,320,000
              
              
              81,996,000
              
              
              73,271,000
              
              
              82,278,000
              
              
              86,515,000Total
                  liabilities and stockholders’/members' equity
              
              $
              65,332,000
              
              $
              76,724,000
              
              $
              87,882,000
              
              $
              88,363,000
              
              $
              91,142,000
              
              $
              115,064,000
  -
            28
            -
 *Table
            of Contents*
 
 **For
                  the Twelve Months Ended**
              
              **For
                  the Six**
                **Months
                  Ended**
              
              **For
                  the Six**
                **Months
                  Ended**
              
              **For
                  the Nine Month Transition Period Ended**
              
              **For
                  the Years Ended****12/31/2006**
              
              **12/31/2005**
              
              **12/31/2004**
              
              **6/30/2005**
              
              **9/30/2004**
              
              **9/30/2003****(Unaudited)****Income
                  Statement Data:**Revenues
              
              $
              4,963,000
              
              $
              3,139,000
              
              $
              3,082,000
              
              $
              4,997,000
              
              $
              7,999,000
              
              $
              10,365,000Operating
                  expenses
              
              
              4,596,000
              
              
              492,000
              
              
              758,000
              
              
              2,562,000
              
              
              2,504,000
              
              
              2,204,000Income
                  (loss) from real estate held for sale
              
              
              220,000
              
              
              419,000
              
              
              (95,000
              )
              
              (1,307,000
              )
              
              3,072,000
              
              
              (3,850,000
              )Net
                  income before income tax provision
              
              
              587,000
              
              
              3,066,000
              
              
              2,229,000
              
              
              1,128,000
              
              
              8,567,000
              
              
              4,311,000Provision
                  for income taxes
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --**Net
                  income**
              
              $
              587,000
              
              $
              3,066,000
              
              $
              2,229,000
              
              $
              1,128,000
              
              $
              8,567,000
              
              $
              4,311,000Basic
                  and diluted earning per weighted average common share / membership
                  unit
              
              $
              0.09
              
              $
              0.40
              
              $
              0.27
              
              $
              0.14
              
              $
              1.03
              
              $
              0.45Dividends
                  declared per common share / cash distributions per membership unit
              
              $
              0.64Annualized
                  rate of return
                to
                  members**(a)**
              
              
              
              
              
              7.93%
              
              
              5.31%
              
              
              1.90%
              
              
              10.24%
              
              
              4.46%Cash
                  distributions to Members
              
              $
              1,822,000
              
              $
              2,306,000
              
              $
              2,643,000
              
              $
              3,694,000
              
              $
              5,098,000
              
              $
              10,364,000Cash
                  distributions per weighted average membership units
              
              
              
              
              $
              0.30
              
              $
              0.32
              
              $
              0.47
              
              $
              0.61
              
              $
              1.07Weighted
                  average common shares / membership units
              
              
              6,882,809
              
              
              7,668,098
              
              
              8,334,448
              
              
              7,919,354
              
              
              8,339,404
              
              
              9,668,310Weighted
                  average term of outstanding loans**(b)**
              
              
              19
                  months
              
              
              18
                  months
              
              
              22
                  months
              
              
              19
                  months
              
              
              19
                  months
              
              
              13
                  months
 
 **(a)**
            The
                annualized rate of return to members is calculated based upon the
                net GAAP
                income allocated to members per weighted average units, divided by
                the
                number of days during the period and multiplied by three hundred
                sixty
                five (365) days, then divided by the cost per unit
                ($10.00). 
 **(b)**
            The
                weighted average term of our outstanding loans includes extensions
                and
                loans related to seller financed real estate held for
                sale. 
 The
        information in this table should be read in conjunction with the accompanying
        audited consolidated financial statements and notes to the consolidated
        financial statements included elsewhere in this document.
  -
            29
            -
 *Table
            of Contents*
  **ITEM
                  7.**
              **MANAGEMENT’S
                  DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND
                  RESULTS OF OPERATIONS**
 
 The
        following is a financial review and analysis of our financial condition and
        results of operations for the twelve months ended December 31, 2006, six
        months
        ended December 2005 and 2004, the nine month transition period ended June
        30,
        2005 and for the nine months ended June 30, 2004. This discussion should
        be read
        in conjunction with our financial statements and accompanying notes and other
        detailed information regarding us appearing elsewhere in this report on Form
        10-K and our reports on Form 10-Q, Part I, Item 2 Management’s Discussion and
        Analysis of Financial Conditions and Results of Operations for the periods
        ended
        June 30, 2006 and September 30, 2006.
 
 **FORWARD
        LOOKING STATEMENTS**
 
 Certain
        statements in this report, including, without limitation, matters discussed
        under this Item 7, “Management’s Discussion and Analysis of Financial Condition
        and Results of Operations,” should be read in conjunction with the financial
        statements, related notes, and other detailed information included elsewhere
        in
        this report on Form 10-K. We are including this cautionary statement to make
        applicable and take advantage of the safe harbor provisions of the Private
        Securities Litigation Reform Act of 1995. Statements that are not historical
        fact are forward-looking statements. Certain of these forward-looking statements
        can be identified by the use of words such as “believes,” “anticipates,”
“expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,”
“should,” “will,” or other similar expressions. Such forward-looking statements
        involve known and unknown risks, uncertainties and other important factors,
        which could cause actual results, performance or achievements to differ
        materially from future results, performance or achievements. These
        forward-looking statements are based on our current beliefs, intentions and
        expectations. These statements are not guarantees or indicative of future
        performance. Important assumptions and other important factors that could
        cause
        actual results to differ materially from those forward-looking statements
        include, but are not limited to, those factors, risks and uncertainties
        described in Item 1A of this report on Form 10-K for the twelve months ended
        December 31, 2006 and in our other securities filings with the Securities
        and
        Exchange Commission. Our future financial condition and results of operations,
        as well as any forward-looking statements, are subject to change and involve
        inherent risks and uncertainties. The forward-looking statements contained
        in
        this report are made only as of the date hereof. We undertake no obligation
        to
        update or revise information contained herein to reflect events or circumstances
        after the date hereof or to reflect the occurrence of unanticipated
        events.
 
 **RESULTS
        OF OPERATIONS**
 
 **OVERVIEW**
 
 Our
        primary business objective is to generate income 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 utilized
        by our manager and Vestin Originations 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 make real estate loans that 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.”
  -
            30
            -
 *Table
            of Contents*
  Our
        operating results during the past several years have been adversely affected
        by
        allowances for non-performing loans. At December 31, 2006, the following
        loans
        were non-performing (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); RightStar (Part I & Part II), Monterrey Associates LP, Forest
        Development LLC and Babuski LLC. These loans are currently carried on our
        books
        at a value of approximately $8.1 million, net of allowance for loan losses
        of
        approximately $4.5 million for the RightStar loans. These loans have been
        placed
        on non-accrual of interest status and are the subject of pending foreclosure
        proceedings. For additional information see “Specific Loan Allowance” in Note D
        - *Investments
        In Real Estate Loans* of the
        Notes to the Consolidated Financial Statements included in Part IV, Item
        15 *Exhibits
        and Financial Statement Schedules* of this
        report Form 10-K. Non-performing assets, net of allowance for loan losses,
        totaled approximately $11.8 million or 18.1% of our total assets as of December
        31, 2006 as compared to approximately $13.2 million or 17.2% of our total
        assets
        as of December 31, 2005. At December 31, 2006, non-performing assets consisted
        of approximately $3.7 million of real estate held for sale not sold through
        seller financing and approximately $8.1 million of non-performing loans,
        net of
        allowance for loan losses. During the twelve months ended December 31, 2006
        we
        completed the following transactions related to our real estate held for
        sale:
 
 ·
            During
                July 2006, we and VRM II sold the land containing residential lots
                in
                Henderson, NV, for approximately $3.8 million, of which we received
                approximately $2.5 million which resulted in a gain of
                $41,000. 
 ·
            During
                November 2006, we, VRM II and Fund III acquired the collateral of
                a loan,
                480 residential building lots and two single family dwellings in
                Rio Vista
                Village Subdivision in Cathedral City, CA, through foreclosure. Our
                manager has evaluated the carrying value of the property and based
                on its
                estimate, no valuation allowance was deemed necessary as of December
                31,
                2006. The property is currently under a purchase agreement for a
                total
                sales price of approximately $29.9 million, of which our portion
                will be
                approximately $3.7 million. 
 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 that 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 to pay dividends to our
        stockholders. Such conditions may also require us to restructure loans. The
        weighted average term of our outstanding loans, including extensions and
        loans
        related to seller financed real estate held for sale, as of December 31,
        2006
        and 2005 were 19 months and 18 months, respectively.
 
 Uncertain
        economic conditions during the next year could have a material impact on
        the
        collectibility of our loans. A downturn in the real estate markets where
        we
        conduct business might increase defaults on our loans and might require us
        to
        record additional reserves with respect to non-performing loans. Recognizing
        the
        risk, we seek to maintain an adequate loan-to-value ratio, generally using
        appraisals prepared on an “as-if developed” basis in connection with the loan
        origination. As of December 31, 2006, our loan-to-value ratio, including
        loans
        related to seller financed real estate held for sale, was 71.35% on a weighted
        average basis. We hope to retain sufficient cushion in the underlying equity
        position to protect the value of our loans 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.
 
 From
        time
        to time we may acquire or sell investments in real estate loans from/to our
        manager or other related parties pursuant to the terms of our Management
        Agreement provided the price does not exceed the par value of the loan. No
        gain
        or loss is recorded on these transactions, as it is not our intent to make
        a
        profit on the purchase or sale of such investments. The purpose is generally
        to
        diversify our portfolio by syndicating loans, thereby providing us with
        additional capital to make additional loans. For further information regarding
        related party transactions refer to Item 13. *Certain
        Relationships and Related Transactions, and Director
        Independence* in Part
        III of this report Form 10-K.
 
 As
        of
        December 31, 2006 our loans were in the following states; Arizona, California,
        Hawaii, Nevada, New York, Oklahoma, Oregon, Texas and Washington.
  -
            31
            -
 *Table
            of Contents*
  **The
        Twelve Months Ended December 31, 2006**
 
 *Total
        Revenues* :
        For the
        twelve months ended December 31, 2006, total revenues were approximately
        $ 5.0
        million due in significant part to the following factors:
 
 ·
            We
                recognized interest income from investments in real estate loans
                of
                approximately $4.6 million. Our revenue is dependent upon the balance
                of
                our investment in real estate loans and the interest earned on these
                loans. As of December 31, 2006, our investment in real estate loans
                was
                approximately $60.7 million with a weighted average interest rate
                of
                10.85%. As of December 31, 2005, our investment in real estate loans,
                including loans related to seller financed real estate held for sale,
                was
                approximately $61.6 million with a weighted average interest rate
                of
                10.04%. The amount we have to invest in real estate loans is attributable
                to the capital we have available. 
 In
        addition, our interest income is affected by the performances of our loans.
        During the twelve months ended December 31, 2006, four loans totaling
        approximately $7.0 million became non-performing. One of the non-performing
        loans, with a balance of approximately $3.7 million was foreclosed upon and
        reclassified to real estate held for sale. For additional information see
        Note D
        - *Investment
        Real Estate Loans* and Note
        F - *Real
        Estate Held For Sale* of
        the
        Notes to the Consolidated Financial Statements included in Part IV of this
        Report on Form 10-K.
 
 ·
            We
                recognized $151,000 in dividend income from the investment in VRM
                II held
                during the twelve months ended December 31, 2006. 
 *Total
        Operating Expenses* :
        For the
        twelve months ended December 31, 2006, total operating expenses were
        approximately $4.6 million Expenses were primarily affected by the following
        factors:
 
 ·
            Recognition
                of provisions for loan loss of approximately $3.0 million related
                to the
                loans secured by 4 cemeteries and 8 mortuaries in Hawaii. See “Specific
                Reserve Allowance” in Note D -*Investment Real Estate Loans*of
                the Notes to the Consolidated Financial Statements included in Part
                IV of
                this Report on Form 10-K.. 
 ·
            We
                recognized a provision for doubtful receivable relating to a note
                receivable in default of $171,000 during the twelve months ended
                December
                31, 2006. See Note I -*Note
                Receivables*of
                the Notes to the Consolidated Financial Statements included in Part
                IV of
                this Report on Form 10-K. 
 ·
            Included
                in other expenses are expenses totaling $193,000 related to the liability
                insurance for our directors and officers and expenses relating to
                investor
                services for the twelve months ended December 31,
                2006. 
 *Total
        Income (Loss) from Real Estate Held for Sale* :
        For the
        twelve months ended December 31, 2006, total income from real estate held
        for
        sale was $220,000.
 
 ·
            We
                recorded a gain on sale of real estate held for sale of $248,000
                from the
                recognition of approximately $1.1 million of deposit liabilities
                received
                from a seller financed loan during the twelve months ended December
                31,
                2006. As of December 31, 2006, we had approximately $7.9 million
                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 December 31, 2006, we
                had
                approximately $1.3 million in deposit liability.  -
            32
            -
 *Table
            of Contents*
 
 ·
            During
                July 2006, we and VRM II sold the land containing residential lots
                in
                Henderson, NV, for approximately $3.8 million, of which we received
                approximately $2.5 million which resulted in a gain of
                $41,000. 
 *Dividends* :
        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 non-cash income over 5% of our REIT taxable income. During
        the twelve months ended December 31, 2006 we declared dividends to our
        shareholders of approximately $2.6 million.
 
 *Distributions
        to Members:* We
        distributed to Fund I’s members approximately $1.7 million, net of
        reinvestments, during the four months ended April 30, 2006.
 
 **The
        Six Months Ended December 31, 2005 Compared to Six Months Ended December
        31,
        2004**
 
 *Revenues:* Revenues
        for the six months ended December 31, 2005 and 2004 were consistent with
        each
        other. Included in other income for the six months ended December 31, 2005
        was a
        title insurance settlement received in the amount of $272,000.
 
 *Total
        Operating Expenses:* For
        the
        six months ended December 31, 2005 and 2004, total expenses were approximately
        $0.5 million and $0.8 million, respectively, representing a decrease of
        approximately $0.3 million or 35.1%. Operating expenses were affected by
        the
        decrease in interest expense of approximately $0.3 million due to the decrease
        in secured borrowing for the six months ended December 31, 2005 compared
        to the
        same period in 2004, approximately $2.7 million and $3.2 million,
        respectively.
 
 *Total
        Income (Losses) from Real Estate Held for Sale:* For the
        six months ended December 31, 2005 and 2004, total income/(loss) from real
        estate held for sale was approximately $0.4 million and a loss of approximately
        $0.1 million, respectively. Income (loss) from real estate held for sale
        was
        primarily affected by the following factors:
 
 ·
            Gains
                on sale of real estate held for sale related to seller financed loans,
                which were paid during the six months ended December 31, 2005 were
                approximately $0.5 million. 
 ·
            During
                the six months ended December 31, 2004, we recorded a gain on sale
                of real
                estate held for sale relating to raw land in Mesquite, Nevada. The
                transaction resulted in a gain of approximately $1 million. This
                gain was
                offset by a loss on sale of real estate held for sale of approximately
                $0.5 million. During the six months ended December 31, 2005, we recorded
                a
                gain of $24,000 related to the sale of 460 acre residential subdivision
                in
                Lake Travis, Texas. 
 ·
            During
                the six months ended December 31, 2004, we recorded approximately
                $0.3
                million in write downs on real estate held for sales as a result
                of a
                reassessment of the value of two of our real estate properties based
                on
                purchase offers received. We incurred no write downs during the same
                period in 2005. 
 ·
            Expenses
                related to real estate held for sale decreased by approximately $0.3
                million due to the decrease in the balance of real estate held for
                sale at
                December 31, 2004 of approximately $11.6 million compared to $2.5
                million
                at December 31, 2005. 
 As
        of
        December 31, 2005 and 2004, we had approximately $8.8 million and $10.8 million,
        respectively, in real estate held for sale-seller financed. As of December
        31,
        2005 and 2004, we had approximately $0.7 million and $0.8 million, respectively,
        in deposit liability.
 
 *Annualized
        Rate of Return to Members* .
        For the
        six months ended December 31, 2005 and 2004, the annualized rate of return
        to
        members, as calculated in accordance with GAAP, was 7.93% and 5.31%,
        respectively
  -
            33
            -
 *Table
            of Contents*
  *Distributions
        to Members* .
        The
        following is a schedule of distributions made to members for the six months
        ended December 31, 2005 and 2004.
 
 **For
                  the Six**
                **Months
                  Ended**
                **December
                  31, 2005**
              
              **For
                  the Six**
                **Months
                  Ended**
                **December
                  31, 2004****(Unaudited)**Distributions
                  of Net Income Available for Distribution
              
              $
              2,306,000
              
              $
              2,521,000Distributions
                  in Excess of Net Income Available for a Distribution Generated
                  During the
                  Period
              
              
              --
              
              
              122,000Total
                  Distributions
              
              $
              2,306,000
              
              $
              2,643,000
 
 Net
        Income Available for Distributions is a non-GAAP financial measure that is
        defined in the operating agreement which governed Fund I 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. Although
        we
        generally do not plan to make distributions in excess of net income available
        for distribution, we may do so from time to time. Any such distribution will
        be
        treated as a return of capital for income tax purposes. 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 distribution 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 Six**
                **Months
                  Ended**
                **December
                  31, 2005**
              
              **For
                  the Six**
                **Months
                  Ended**
                **December
                  31, 2004**Distribution
                  of Net Income Available for Distribution
              
              $
              2,306,000
              
              $
              2,521,000Additions
                  to Working Capital Reserves (Amount Not Distributed)
              
              
              752,000
              
              
              --Gain
                  on Sale of Marketable Securities
              
              
              (46,000
              )
              
              --Gain
                  on Real Estate Held for Sale
              
              
              (519,000
              )
              
              (1,049,000
              )Loss
                  on Sale of Real Estate Held for Sale
              
              
              --
              
              
              474,000Change
                  in Operating Assets and Liabilities:Net
                  Change in Amounts Due to Manager
              
              
              (1,170,000
              )
              
              288,000Net
                  Change in Amounts Due to Fund II
              
              
              (1,560,000
              )
              
              2,062,000Net
                  Change in Other Operating Assets
              
              
              (54,000
              )
              
              664,000Net
                  Change in Accounts Payable and Accrued Liabilities
              
              
              (339,000
              )
              
              (7,000
              )Net
                  Change in Amounts Due to Related Parties
              
              
              (8,000
              )
              
              (170,000
              )Net
                  Cash Provided (Used) by Operating Activities
              
              $
              (638,000
              )
              $
              4,783,000Net
                  Cash Provided by Investing Activities
              
              $
              8,800,000
              
              $
              14,164,000Net
                  Cash Used in Financing Activities
              
              $
              (3,140,000
              )
              $
              (5,308,000
              )
  -
            34
            -
 *Table
            of Contents*
  **Transition
        period ended June 30, 2005 compared to the nine months ended June 30, 2004
        (Unaudited)**
 
 *Total
        Revenues* .
        For the
        nine month transition period ended June 30, 2005, revenues totaled approximately
        $5.0 million compared to approximately $6.2 million for the nine months ended
        June 30, 2004, a decrease of approximately $1.2 million or 19%.
 
 ·
            During
                the nine months ended June 30, 2004, we recognized approximately
                $4.7
                million of a finder’s fee as revenue related to the sale of real estate in
                the City of Mesquite, Nevada. We and Fund II were presented with
                an
                opportunity to purchase the property but were prohibited by their
                respective operating agreements from purchasing the property. Instead,
                our
                manager 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 II. Our manager directed that the
                buyer
                (an unaffiliated third party) pay a finder’s fee in the form of a
                promissory note to our company for approximately $4.7 million and
                a $2.3
                million promissory note to Fund II to reflect the fact that the
                transaction was made possible by financing provided by our company
                and
                Fund II. 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. In addition, we loaned approximately $0.9
                million
                to the unaffiliated party and received a promissory note with an
                original
                maturity date of June 13, 2004 in connection with the sale. We were
                using
                the cost recovery method of accounting for the transaction. We did
                not
                loan any money to the unaffiliated party with respect to the $4.7
                million.
                We had no such revenue in the nine months ended June 30,
                2005. 
 ·
            Revenues
                for the nine month transition period ended June 30, 2005 included
                other
                income of $700,000, compared to $400,000, for the nine months ended
                June
                30, 2004. The increase in other income is primarily related to an
                increase
                in late fees received on our investments in real estate loans of
                $350,000
                and bank interest revenue of $100,000. 
 ·
            Approximately
                $1.3 million of our interest revenue for the nine month transition
                period
                ended June 30, 2005 was derived from interest reserves compared to
                interest revenue of approximately $1.4 million for the nine months
                ended
                June 30, 2004. 
 ·
            Total
                non-performing assets decreased to approximately $14.6 million at
                June 30,
                2005 from $38.6 million at June 30, 2004. Non-performing assets at
                June
                30, 2005 consist of approximately $6.8 million of non-performing
                loans,
                net of allowance for loan losses, and approximately $7.8 million
                of real
                estate held for sale not resold through seller financing. The amount
                of
                non-performing assets may reflect the risks inherent in our business
                strategy which entails more lenient underwriting standards and expedited
                loan approval procedures. Our revenues will continue to be impacted
                until
                we are able to convert these non-performing assets into interest
                paying
                real estate loans. We 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 our objective of avoiding
                a loss
                of principal. However, we cannot predict how quickly we can convert
                non-performing assets and any increase in our non-performing assets
                will
                have an adverse affect upon our revenues. 
 ·
            As
                of June 30, 2005, our manager had granted extensions on four 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 June 30, 2005 was approximately $4.3 million. At June
                30,
                2005, one such loan was non-performing with an outstanding balance
                of
                $51,000. Our manager concluded that no allowance for loan loss was
                necessary with respect to these loans as of that
                date.  -
            35
            -
 *Table
            of Contents*
  *Total
        Operating Expenses* .
        For the
        nine month transition period ended June 30, 2005, expenses totaled approximately
        $2.6 million compared to approximately $2.0 million for the nine months ended
        June 30, 2004, an increase of approximately $0.6 million or 30%. The increase
        is
        primarily related to the following:
 
 ·
            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 for the entire
                carrying
                value of the loan by approximately $1.2 million during the quarter
                ended
                June 30, 2005 See “RightStar Loan
                Allowance.” 
 ·
            For
                the nine month transition period ended June 30, 2005 and the nine
                months
                ended June 30, 2004, we recognized professional fees of $494,000
                and
                $144,000, respectively, which was an increase of
                $350,000. 
 The
        increase in expenses was partially offset by an interest expense decrease
        of
        approximately $1.1 million due to a decrease in the amount of secured borrowings
        of approximately $7.7 million.
 
 *Total
        Income (Loss) from Real Estate Held for Sale* :
        For the
        nine month transition period ended June 30, 2005, total income from real
        estate
        held for sale decreased approximately $5.1 million or 135% compared to the
        nine
        months ended June 30, 2004, due to the following factors:
 
 ·
            During
                the nine months ended June 30, 2005 we recorded a charge of $278,000
                in
                connection with the write down of real estate held for sale related
                to a
                custom residential property located in Santa Fe, New Mexico, a write
                down
                of $354,000 related to the carrying value of 166 residential lots
                located
                in Henderson, Nevada and a charge of $639,000 relating to a 126 unit
                assisted living facility in Phoenix,
                Arizona 
 ·
            During
                September 2004, we and Fund II entered into an agreement to sell
                the
                remaining 28 acres of raw land in Mesquite, Nevada for approximately
                $6.2
                million. Prior to September 2004, $145,000 was released from escrow
                representing an early release of funds. The transaction was finalized
                in
                December 2004 and resulted in a gain of approximately $1.0
                million. 
 ·
            We
                sold a 126 unit hotel in Mesquite, Nevada and sustained a loss of
                $389,000
                during the quarter ended March 31, 2005. 
 ·
            Expenses
                related to the maintenance of real estate held for sale increased
                by
                $340,000. This increase includes expenses of $160,000 in property
                taxes. 
 *Annualized
        Rate of Return to Members* .
        For the
        nine month transition period ended June 30, 2005, annualized rate of return
        to
        members totaled 1.90% as compared to 12.55% for the same period in
        2004.
 
 *Distributions
        to Members* .
        The
        following is a schedule of distributions paid from Net Income Available for
        Distribution as defined in our Operating Agreement and a return of capital
        for
        the nine month transition period ended June 30, 2005 and the nine months
        ended
        June 30, 2004. 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.
 
 **For
                  the Nine Month Transition Period Ended June 30,
                  2005**
              
              **For
                  the Nine Months Ended June 30, 2004****(Unaudited)**Distributions
                  of Net Income Available for Distribution
              
              $
              3,694,000
              
              $
              3,705,000Distributions
                  in Excess of Net Income Available for a Distribution Generated
                  During the
                  Period
              
              
              --
              
              
              --Total
                  Distributions
              
              $
              3,694,000
              
              $
              3,705,000
  -
            36
            -
 *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 Nine Month Transition Period Ended June 30,
                  2005**
              
              **For
                  the Nine Months Ended June 30, 2004****(Unaudited)**Distribution
                  of Net Income Available for Distribution
              
              $
              3,694,000
              
              $
              3,705,000Additions
                  to Working Capital Reserves (Amount Not Distributed)
              
              
              1,000
              
              
              4,828,000Gain
                  on sale of real estate held for sale
              
              
              (1,072,000
              )
              
              --Loss
                  on sale of real estate held for sale
              
              
              400,000
              
              
              --Change
                  in operating assets and liabilities:Interest
                  and other receivables
              
              
              612,000
              
              
              286,000Due
                  to manager
              
              
              270,000
              
              
              98,000Due
                  to related parties
              
              
              84,000
              
              
              2,104,000Prepaid
                  expenses
              
              
              --
              
              
              8,000Accounts
                  payable and accrued liabilities
              
              
              92,000
              
              
              (16,000
              )Net
                  cash provided by operating activities
              
              $
              4,081,000
              
              $
              11,013,000Net
                  cash used by investing activities
              
              $
              (914,000
              )
              $
              (6,797,000
              )Net
                  cash used in financing activities
              
              $
              (10,135,000
              )
              $
              (11,353,000
              )
 
 **CAPITAL
        AND LIQUIDITY**
 
 Liquidity
        is a measure of a company’s ability to meet potential cash requirements,
        including ongoing commitments to fund lending activities and general operating
        purposes. Subject to a 3% reserve, we generally use all of our available
        funds
        to invest in real estate loans. Distributable cash flow generated from such
        loans is paid out to our stockholders, in the form of a dividend. We do not
        anticipate the need for hiring any employees, acquiring fixed assets such
        as
        office equipment or furniture, or incurring material office expenses during
        the
        next twelve months because our manager will manage our affairs. We may pay
        our
        manager an annual management fee of up to 0.25% of our aggregate capital
        received by us and Fund I from the sale of shares or membership
        units.
  -
            37
            -
 *Table
            of Contents*
  During
        the twelve months ended December 31, 2006, cash flows provided by operating
        activities approximated $3.6 million. Investing activities consisted of cash
        provided by loan payoffs of approximately $33.0 million, proceeds from sale
        of
        real estate held for sale not sold through seller financing of approximately
        $2.6 million and purchase of marketable securities - related party of
        approximately $1.9 million. Cash used for new investments and purchases of
        real
        estate loans totaled approximately $38.0 million. In addition, investing
        activities consisted of the purchase of approximately $2.5 million in
        certificates of deposit and proceeds from maturities of certificates of deposit
        totaling approximately $2.7 million. Financing activities consisted of payments
        on a note payable in the amount of approximately $1.1 million and dividends
        to
        stockholders, net of reinvestment, of approximately $1.6 million. In addition,
        financing activities consisted of members’ redemptions in the amount of
        approximately $6.4 million and distributions of approximately $1.7 million,
        net
        of reinvestments.
 
 At
        December 31, 2006, we had $1,507,000 in cash, $150,000 in certificates of
        deposit, $1,969,000 in marketable securities - related party and approximately
        $65.3 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.
 
 Since
        we
        distribute most or all of our distributable cash generated by operations,
        our
        sources of liquidity include repayments of outstanding loans, dividend
        reinvestments by our stockholders, arrangements with third parties to
        participate in our loans and proceeds from issuance of note payable and secured
        borrowings.
 
 We
        have
        no current plans to sell any new shares except through our dividend reinvestment
        program. As of February 26, 2007, approximately 3% of our shareholders owning
        less than 1% our outstanding shares have elected to reinvest their dividends.
        The level of dividend reinvestment in the future will depend upon our
        performance, as well as the number of our stockholders 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. Non- performing
        assets included
        loans in non-accrual status, net of allowance for loan losses, and real estate
        held for sale not sold through seller financing totaling approximately $8.1
        million and $3.7 million, respectively as of December 31, 2006 compared to
        approximately $10.7 million and $2.5 million, respectively, as of December
        31,
        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 these non-performing assets are a result of factors unique
        to
        specific borrowers and properties. Because of the estimated value of the
        underlying properties, we do not currently 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.
 
 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 non-cash income over 5% of our REIT taxable
        income.
 
 Loans
        in
        which unaffiliated investors have participated through inter-creditor agreements
        (“Inter-creditor Agreements”) are accounted for as secured borrowings in
        accordance with Statement of Financial Accounting Standards (“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 an unaffiliated investor (the “Investor”) may
        participate on a non-pari passu basis in certain real estate loans with us
        and/or VRM II 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.
  -
            38
            -
 *Table
            of Contents*
  During
        October 2006, we, our manager, Vestin Origination, Inc., VRM II and Fund
        III
        entered into an intercreditor agreement with an unrelated third party related
        to
        the funding of a construction real estate loan. (See exhibit 10.8 Intercreditor
        Agreement under the Exhibit Index included in Part IV, Item 15 Exhibits and
        Financial Statement Schedules of this Report Form 10-K). The secured borrowing
        will be recognized pro rata between us, VRM II and Fund III for the amount
        each
        entity has funded for the loan. As of December 31, 2006, approximately $24.3
        million has been funded on this loan, of which our portion was $97,000. As
        of
        December 31, 2006, this secured borrowing totaled approximately $18.5 million,
        of which our portion was $310,000. In the event VRM II and Fund III were
        unable
        to pay their pro rata share of the secured borrowing, we would be liable
        for the
        full outstanding balance. As of December 31, 2005, we had approximately $2.7
        million in funds being used under Inter-creditor Agreements.
 
 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.
 
 **Investments
        in Real Estate Loans Secured by Real Estate Portfolio**
 
 We
        offer
        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, including loans related to seller financed real estate
        held for sale, as of December 31, 2006, with a balance of approximately $60.7
        million as compared to investments in 27 real estate loans as of December
        31,
        2005 with a balance of approximately $61.6 million.
 
 At
        December 31, 2006, the following loans were non-performing (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); RightStar (Part I &
Part II), Monterrey Associates LP, Forest Development LLC and Babuski LLC.
        These
        loans are currently carried on our books at a value of approximately $8.1
        million, net of allowance for loan losses of approximately $4.5 million for
        the
        RightStar loans. These loans have been placed on non-accrual of interest
        status
        and are the subject of pending foreclosure proceedings.
 
 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 VRM II 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
                approximately $3.2 million. The new terms included a $1.2 million
                principal payment, reducing our principal balance by $171,000. This
                transaction resulted in us recording unearned revenue of $171,000,
                to be
                recognized through March 2007, the maturity of the loan. The terms
                of the
                loan are 9% due in 6 months, with an option to extend, which was
                granted
                in September 2006, for an additional 6
                months. 
 ·
            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
                was
                $71,000. 
 ·
            Delay
                fees from the date of the bankruptcy confirmation until the effective
                date
                in the aggregate amount of $282,000 of which our portion was
                $40,000. 
 ·
            Payment
                of past due forbearance fees of $555,000 of which our portion was
                $79,000,
                to be recognized as unearned revenue and amortized through March
                2007.  -
            39
            -
 *Table
            of Contents*
  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 December 31, 2006, we have provided a specific reserve related to the
        4
        cemeteries and 8 mortuaries in Hawaii, of which our portion of the specific
        reserve is approximately $4.5 million. 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
        Annual 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 real
                estate loan amount. 
 Based
        upon this evaluation, a determination is made as to whether the allowance
        for
        loan losses is adequate to cover any potential losses. Additions to the
        allowance for loan losses are made by charges to the provision for loan 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 twelve months ended December 31, 2006,
        refer
        to Note D - *Investments
        In Real Estate Loans* of the
        Notes to the Consolidated Financial Statements included in Part IV, Item
        15 *Exhibits
        and Financial Statement Schedules* of this
        Annual Report Form 10-K.
 
 **Investments
        in Real Estate Held for Sale**
 
 At
        December 31, 2006, we
        held
        one property with a total carrying value of approximately $3.7 million, which
        was acquired through foreclosure and recorded as investments in real estate
        held
        for sale. Our
        investments in real estate held for sale are accounted for at the lower of
        cost
        or fair value less costs to sell with fair value based on appraisals and
        knowledge of local market conditions. It is not our intent to invest in or
        own
        real estate as a long-term investment. We seek to sell properties acquired
        through foreclosure as quickly as circumstances permit. During the twelve
        months
        ended December 31, 2006, we completed the following transactions related
        to our
        real estate held for sale:
  -
            40
            -
 *Table
            of Contents*
  ·
            During
                July 2006, we and VRM II sold the land containing residential lots
                in
                Henderson, NV, for approximately $3.8 million, of which we received
                approximately $2.5 million which resulted in a gain of
                $41,000. 
 ·
            During
                November 2006, we, VRM II and Fund III acquired the collateral of
                a loan,
                480 residential building lots and two single family dwellings in
                Rio Vista
                Village Subdivision in Cathedral City, CA, through foreclosure. Our
                manager has evaluated the carrying value of the property and based
                on its
                estimate, no valuation allowance was deemed necessary as of December
                31,
                2006. The property is currently under a purchase agreement for a
                total
                sales price of approximately $29.9 million, of which our portion
                will be
                approximately $3.7 million. 
 For
        additional information on our investments in real estate held for sale, refer
        to
        Note F - *Real
        Estate Held for Sale* of the
        Financial Statements included in Part IV, Item *15
        Exhibits and Financial Statement Schedules* of this
        Annual Report Form 10-K.
 
 **Investments
        in Real Estate Held for Sale — Seller Financed**
 
 At
        December 31, 2006, we held an interest in one **** property
        with a total carrying value of approximately $7.9 million, which was sold
        in a
        transaction 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 certain requirements. We may share ownership of such
        properties with VRM II, 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
        Annual 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.
 
 **CONTRACTUAL
        OBLIGATIONS**
 
 The
        following summarizes our contractual obligations at December 31,
        2006:
 
 **Contractual
                  Obligation**
              
              **Total**
              
              **Less
                  Than 1 Year**
              
              **1-3
                  Years**
              
              **3-5
                  Years**
              
              **More
                  Than**
                **5
                  Years**Secured
                  borrowings (1)
              
              $
              310,000
              
              $
              310,000
              
              $
              --
              
              $
              --
              
              $
              --Note
                  Payable (2)
              
              
              22,000
              
              
              22,000
              
              
              --
              
              
              --
              
              
              --Total
              
              $
              332,000
              
              $
              332,000
              
              $
              --
              
              $
              --
              
              $
              --
 
 (1)
            In
                the event VRM II and Fund III were unable to pay their pro rata share
                of
                the secured borrowings, we would be liable for the full outstanding
                balance, which was approximately $18.5 million as of December 31,
                2006. 
 (2)
            During
                January 2007, the note payable was paid in
                full. 
 **CRITICAL
        ACCOUNTING ESTIMATES**
 
 **Revenue
        Recognition**
 
 Interest
        income on loans is accrued by the effective interest method. We do not accrue
        interest income from loans once they are determined to be 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.
  -
            41
            -
 *Table
            of Contents*
  The
        following table presents a sensitivity analysis to show the impact on our
        financial condition at December 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 1.0% or 100 basis
                  points
              
              $
              607,000Weighted
                  average interest rate assumption increased by 5.0% or 500 basis
                  points
              
              $
              3,034,000Weighted
                  average interest rate assumption decreased by 1.0% or 100 basis
                  points
              
              $
              (607,000
              )Weighted
                  average interest rate assumption decreased by 5.0% or 500 basis
                  points
              
              $
              (3,034,000
              )
 
 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 in our investment in real estate loans
        portfolio. 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.
 
 The
        following table presents a sensitivity analysis to show the impact on our
        financial condition at December 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
              
              $
              607,000Allowance
                  for loan losses assumption increased by 5.0% of loan
                  portfolio
              
              $
              3,035,000Allowance
                  for loan losses assumption decreased by 1.0% of loan
                  portfolio
              
              $
              (607,000
              )Allowance
                  for loan losses assumption decreased by 5.0% of loan
                  portfolio
              
              $
              (3,035,000
              )
 
 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, our
        manager and Vestin Originations generally approves loans more quickly than
        other
        real estate lenders and, due to our expedited underwriting process, there
        is a
        risk that the credit inquiry we perform will not reveal all material facts
        pertaining to a borrower and the security.
 
 We
        may
        discover additional facts and circumstances as we continue our efforts in
        the
        collection and foreclosure processes. This additional information often causes
        management to reassess its estimates. In recent years, we have revised estimates
        of our allowance for loan losses. Circumstances that may cause significant
        changes in our estimated allowance include, but not limited to:
 
 ·
            Declines
                in real estate market conditions that can cause a decrease in expected
                market value;  -
            42
            -
 *Table
            of Contents*
  ·
            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 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; 
 ·
            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**
 
 We
        occasionally finance 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 - *Accounting
        for Sales of Real Estate* ("FAS
        66'') requires the buyer of the real estate to make minimum initial and
        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
        we occasionally foreclose on loans with raw land or developments in progress,
        available financing for such properties is often limited and we frequently
        provide financing up to 100% of the selling price on these properties. In
        addition, we may make additional loans to the buyer to continue development
        of a
        property. Although sale agreements are consummated at closing, they lack
        adequate initial investment by the buyer to qualify as a sales transaction
        as
        defined in FAS 66. These sale agreements are not recorded as a sale until
        the
        requirements of FAS 66 are met.
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            43
            -
 *Table
            of Contents*
  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 consolidated balance sheets.
 
 **ITEM
        7A.**  **QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**
 
 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 consisted of investments in real estate loans, which from time
        to
        time include those that are financed under Inter-creditor Agreements. At
        December 31, 2006, our aggregate investment in real estate loans was
        approximately $48.6 million, net of allowance, with a weighted average effective
        interest rate of 10.85%. We had one loan financed under an Inter-creditor
        Agreement at December 31, 2006 which was classified as assets under secured
        borrowing totaling $310,000. Most of the real estate loans had an initial
        term
        of 12 months. The weighted average term of outstanding loans, including
        extensions and loans related to seller financed real estate held for sale,
        at
        December 31, 2006 was 19 months. All but one of the outstanding real estate
        loans at December 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 had prepayment
        penalties and nine had 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 dividend distribution to stockholders. On the other hand,
        a
        significant increase in interest rates could result in a slowdown in real
        estate
        development activity that would reduce the demand for commercial real estate
        loans. As a result, we might encounter greater difficulty in identifying
        appropriate borrowers. We are not in a position to quantify the potential
        impact
        on our operating results from a material change in interest rates.
 
 The
        following table contains information about the investment in real estate
        loans,
        including loans related to seller financed real estate held for sale held,
        in
        our portfolio as of December 31, 2006. The presentation aggregates the
        investment in real estate loans by their maturity dates for maturities occurring
        in each of the years 2007 through 2010 and thereafter and separately aggregates
        the information for all maturities arising after 2010. The carrying values
        of
        these assets approximate their fair value as of December 31, 2006.
 
 **Interest
                  Earning Assets**
                **Aggregated
                  by Maturity at December 31, 2006****Interest
                  Earning Assets**
              
              **2007**
              
              **2008**
              
              **2009**
              
              **2010**
              
              **Thereafter**
              
              **Total**Investments
                  In Real Estate Loans
              
              $
              60,697,000
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              60,697,000Weighted
                  Average Interest Rates
              
              
              10.85%
              
              
              --%
              
              
              --%
              
              
              --%
              
              
              --%
              
              
              10.85%
 
 At
        December 31, 2006, we also had approximately $3.6 million invested in cash,
        cash
        equivalents, certificates of deposit and marketable securities - related
        party
        (VRM II). 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.
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            44
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            of Contents*
  **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
        Report Form 10-K.
 
 **ITEM
        9.**  **CHANGES
        IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND
        FINANCIAL DISCLOSURE**
 
 None.
 
 **ITEM
        9A.**  **CONTROLS
        AND PROCEDURES**
 
 **Evaluation
        of Disclosure Controls and Procedures**
 
 We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed in our reports under the Exchange Act
        is
        recorded, processed, summarized and reported within the time periods specified
        in the SEC's rules and forms, and that such information is accumulated and
        communicated to our management, including our Chief Executive Officer (“CEO”)
        and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions
        regarding required financial disclosure. In connection with the preparation
        of
        this Report on Form 10-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 December 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 believe that these controls and procedures are adequate to ensure
        we are
        able to collect, process and disclose the information we are required to
        disclose in the reports it files with the SEC within the required time
        periods.
 
 The
        certifications of the our Chief Executive Officer and Chief Financial Officer
        required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits
        31.1 and 31.2 to this report.
 
 **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. In addition, 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. Therefore,
        even those systems determined to be effective can provide only reasonable
        assurance with respect to financial statement preparation and
        presentation.
 
 Management
        has conducted an assessment, including testing, of the effectiveness of our
        internal control over financial reporting as of December 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”). Based on this assessment, management, with the participation of the
        Chief Executive and Chief Financial Officers, believes that, as of
        December 31, 2006, the Company’s internal control over financial reporting
        is effective based on those criteria.
  -
            45
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            of Contents*
  Management's
        assessment of the effectiveness of our internal control over financial reporting
        as of December 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.
 
 **Changes
        in Internal Control Over Financial Reporting**
 
 Our
        management has not identified any changes in our internal controls over
        financial reporting during the Quarter ended December 31, 2006, 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.
  -
            46
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 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors and Stockholders of
 Vestin
        Realty Mortgage I, Inc.
 
 We
        have
        audited management’s assessment, included in the accompanying Management’s
        Report on Internal Control over Financial Reporting, that Vestin Realty Mortgage
        I, Inc., (the Company) maintained effective internal control over financial
        reporting as of December 31, 2006, based on criteria established in *Internal
        Control - Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission (the
        COSO criteria). Vestin Realty Mortgage I’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, internal control over financial reporting may
        not
        prevent or detect misstatements. 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.
 
 In
        our
        opinion, management’s assessment that Vestin Realty Mortgage I, Inc. maintained
        effective internal control over financial reporting as of December 31, 2006,
        is
        fairly stated, in all material respects, based on the COSO criteria. Also,
        in
        our opinion, Vestin Realty Mortgage I, Inc. maintained, in all material
        respects, effective internal control over financial reporting as of December
        31,
        2006 based on the COSO criteria.
 
 We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated balance sheet of Vestin
        Realty
        Mortgage I, Inc., as of December 31, 2006 and 2005, and the related consolidated
        statements of operations, equity and other comprehensive income and its cash
        flows for the twelve months ended December 31, 2006, the six months ended
        December 31, 2005, the nine month transition period ended June 30, 2005,
        and the
        year ended September 30, 2004, and our report dated March 12, 2007 expressed an unqualified opinion on those consolidated financial
        statements.
  /s/Moore
        Stephens Wurth Frazer and Torbet, LLP
 
 Orange,
        California
 March
        12, 2007
 
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            47
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  **ITEM
        9B.**  **OTHER
        INFORMATION**
 
 None.
 
 **PARTIII**
 
 **ITEM
        10.**  **DIRECTORS,
        EXECUTIVE OFFICERS AND CORPORATEGOVERNANCE**
 
 We
        are
        managed on a day to day basis by Vestin Mortgage, a privately held company
        wholly owned by Vestin Group.
 
 **Directors
        and Executive Officers**
 
 The
        following table sets forth the names, ages as of December 31, 2006 and positions
        of the individuals who serve as our directors and executive
        officers:
 
 **Name**
              **Age**
              **Title**Michael
                  V. Shustek
              48
              President,
                  Chief Executive Officer and DirectorJohn
                  W. Alderfer
              62
              Chief
                  Financial Officer and DirectorRobert
                  J. Aalberts(1)(2)(3)
              55
              DirectorFredrick
                  J. Zaffarese Leavitt(1)(2)(3)
              36
              DirectorRoland
                  M. Sansone(1)(2)(3)
              51
              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 January 31, 2007 and positions
        of the individuals who serve as directors and executive officers of Vestin
        Mortgage (our manager), Vestin Group, Vestin Originations or our
        affiliates:
 
 **Name**
              **Age**
              **Title**Michael
                  V. Shustek
              48
              President,
                  Chief Executive Officer and ChairmanJohn
                  W. Alderfer
              62
              Chief
                  Financial OfficerJames
                  M. Townsend
              37
              Chief
                  Operating OfficerMichael
                  J. Whiteaker
              57
              Vice
                  President of Regulatory AffairsDaniel
                  B. Stubbs
              45
              Senior
                  Vice PresidentMaria
                  Rocio Revollo
              45
              Corporate
                  Controller
 
 **Directors
        and Executive Officers of Vestin Realty Mortgage I, Vestin Mortgage (our
        manager), Vestin Group, Vestin Originations or our
        affiliates**
  -
            48
            -
 *Table
            of Contents*
  *Michael
        V. Shustek* has been
        our Chief Executive Officer and Chairman of our Board of Directors since
        January
        2006. He has been a director of our manager and Chairman of the Board of
        Directors, Chief Executive Officer and a director of Vestin Group since April
        1999. In addition, Mr. Shustek has been the Direct and CEO of VRM I since
        January 2006. In February 2004, Mr. Shustek became the President of Vestin
        Group. Mr. Shustek also serves on the loan committee of our manager and its
        affiliates. In 2003, Mr. Shustek became the Chief Executive Officer of our
        manager. 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. See Item 3 *Legal
        Proceedings* ,
        regarding legal matters involving our manager and Mr. Shustek.
 
 *John
        W. Alderfer* has been
        our Chief Financial Officer and member of our Board of Directors since January
        2006. He has served as the Chief Financial Officer of Vestin Group effective
        January 2005. In addition, Mr. Alderfer has been a Director and the CFO of
        VRM
        II since January 2006. 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.
 
 *James
        M. Townsend* has
        served as the Chief Operating Officer of Vestin Group since January 2007.
        Mr.
        Townsend also serves on the loan committee of Vestin Mortgage and its
        affiliates. Mr. Townsend has over 15 years of experience in the securities
        industry. From February 2004 to September 2006, Mr. Townsend was the National
        Sales Manager of Samco Financial Services, Inc. From November 2003 to February
        2004, Mr. Townsend was employed by Vestin Group as Manager of the Wholesale
        Division. From September 2002 to October of 2004, Mr. Townsend was National
        Sales Manager of Samco Financial Services, Inc. From February 1997 to July
        2002,
        Mr. Townsend was employed by Donald & Co. Securities, Inc., as both a Sales
        Manager and the National Sales Manager. Mr. Townsend received a Bachelor
        of
        Science degree in Business Administration from The University of Texas at
        Dallas.
 
 *Michael
        J. Whiteaker* has been
        Vice President of Regulatory Affairs of our manager 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 of Underwriting and Secretary of our manager from
        January 2000 to July 2006, and has continued in that capacity in Vestin
        Originations since July 2006. Mr. Stubbs heads the loan department for our
        manager’s affiliates 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 our manager and its affiliates 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.
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  *Maria
        Rocio Revollo* has been
        Corporate Controller of Vestin Group since June 2005. Ms. Revollo previously
        served as Corporate Controller for Sobel Westex from January 2002 through
        May
        2005. From April 1999 to December 2001, Ms. Revollo was a financial consultant
        for Re:Source Connections. Ms. Revollo is a Certified Public Accountant and
        worked for the accounting firm of KPMG LLP. She received a Bachelor of Business
        Administration degree in Accounting and a Bachelor of Arts degree in
        Communication Studies from the University of Nevada, Las Vegas.
 
 **Unaffiliated
        Directors of Vestin Realty Mortgage I**
 
 The
        principal occupation and business experience for the independent and
        unaffiliated directors of Vestin Realty Mortgage I are as follows:
 
 *Robert
        J. Aalberts* was a
        director of Vestin Group from April 1999 to December 2005. He has been a
        director of us and VRM II since January 2006. 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* was a
          director for Vestin Group from November 2004 to December 2005. He has been
          a
          director of us and VRM II since January 2006. Since August of 1993 Mr.
          Zaffarese
          Leavitt 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 Leavitt sits on various
          audit
          committees involving the utility industry. Mr. Zaffarese Leavitt is a CPA
          and a
          graduate of University of Nevada Las Vegas.
 
 *Roland
        M. Sansone* was a
        director for Vestin Group from December 2004 to December 2005. He has been
        a
        director of us and VRM II since January 2006 and 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 is 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 is Mr. Zaffarese, and his term will expire at the
                2007
                annual meeting of stockholders; 
 ·
            The
                class II directors are Messrs, Alderfer and Sansone, and their terms
                will
                expire at the 2008 annual meeting of stockholders;
                and 
 ·
            The
                class III directors are Messrs, Aalberts and Shustek, and their terms
                will
                expire at the 2009 annual meeting of
                stockholders.  -
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  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.
 
 **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. Mr. Zaffarese is the Audit Committee Chairman. 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 .
        Mr.
        Aalberts is the Nomination Chairman. 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. There were no material changes to the procedures
        by which security holders may recommend nominees to our Board of Directors.
        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:
  -
            51
            -
 *Table
            of Contents*
 
 ·
            evaluating
                the composition, size and governance of our board of directors and
                making
                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. 
 *Compensation
        Committee* **** The
        compensation committee consists of Messer, Aalberts, Zaffarese and Sansone.
        Mr.
        Sansone is the Compensation Chairman. 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 our manager, the compensation
        committee is responsible for reviewing and approving compensation paid by
        us to
        our manager.
 
 **Director
        Compensation**
 
 Currently,
        our directors who are also employees of our manager receive no additional
        compensation for their services as directors. Our non-employee directors
        receive
        $500 for each board meeting and committee 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.vestinrealtymortgage1.com .
 
 **ITEM
        11.**  **EXECUTIVE
        COMPENSATION**
 
 We
        do not
        pay any compensation to our executive officers. We pay a management fee of
        up to
        0.25% of the amounts raised by us and Fund I through the sale of shares or
        units. Payment of the management fee is reviewed by and subject to approval
        of
        our Compensation Committee. For the twelve months ended December 31, 2006,
        we
        paid our manager $277,000 for its management services.
 
 Our
        independent directors receive $500 for each board meeting and committee 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.
 
 **ITEM
                  12.**
              **SECURITY
                  OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT
                  AND RELATED STOCKHOLDER
                  MATTERS**
 
 Shown
        below is certain information as of March 9, 2007, with respect to beneficial
        ownership, as that term is defined in Rule 13d-3 under the Securities Exchange
        Act of 1934, as amended (the “Exchange Act”), of shares of common stock by the
        only persons or entities known to us to be a beneficial owner of more than
        5% of
        the outstanding shares of common stock. Unless otherwise noted, the percentage
        ownership is calculated based on 6,870,581 shares of our common stock as
        of
        March 9, 2007.
  -
            52
            -
 *Table
            of Contents*
  
 **Name
                  and Address of**
                **Beneficial
                  Owner**
              
              **Amount
                  and Nature of**
                **Beneficial
                  Ownership**
              
              **Percent
                  of Class**Vestin
                  Reality Mortgage II, Inc.
                8379
                  West Sunset Rd.
                Las
                  Vegas, NV 89113
              
              Sole
                  voting and dispositive power of 407,485 shares
              
              5.93%
 
 The
        following table sets forth the total number and percentage of our common
        stock
        beneficially owned as of March 9, 2007 by:
 
 ·
            each
                director; 
 ·
            our
                chief executive officer and our other executive officers;
                and 
 ·
            all
                executive officers and directors as a
                group. 
 Unless
        otherwise noted, the percentage ownership is calculated based on 6,870,581
        shares of our total outstanding common stock as of March
        9,
        2007.
 
 **Common
                  Shares Beneficially Owned****Beneficial
                  Owner**
              
              **Number**
              
              **Percent**Michael
                  V. Shustek (1)
              
              101,041
              
              1.47%John
                  W. Alderfer (3)
              
              --
              
              --James
                  M. Townsend (2) (3)
              
              7,344
              
              **Robert
                  J. Aalberts (3)
              
              440
              
              **Frederick
                  J. Zaffarese Leavitt
              
              --
              
              --Roland
                  M. Sansone
              
              --
              
              --All
                  directors and executive officers as a group (6 persons)
              
              108,825
              
              1.58%
 
 **
        Less
        than one percent of our total outstanding common stock.
 
 (1)
            Includes
                100,000 share held by our manager and 1,041 shares held by Michael
                Shustek. Mr. Shustek is the Chairman, President and Chief Executive
                Officer of Vestin Mortgage and indirectly owns all of the capital
                stock of
                our manager through Vestin Group. Mr. Shustek has sole voting and
                investment power in all these shares. 
 (2)
            Mr.
                Townsend became an officer of Vestin Group in January
                2007. 
 (3)
            Except
                as otherwise indicated, and subject to applicable community property
                and
                similar laws, the persons listed as beneficial owners of the shares
                have
                sole voting and investment power with respect to such
                shares. 
 **ITEM
        13.**  **CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
        INDEPENDENCE**
 
 From
        time
        to time we may acquire or sell investments in real estate loans from/to our
        manager or other related parties pursuant to the terms of our Management
        Agreement provided the price does not exceed the par value. 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.
  -
            53
            -
 *Table
            of Contents*
  **Transactions
        with the Manager**
 
 Our
        manager is entitled to receive from us an annual management fee of up to
        0.25%
        of our aggregate capital contributions received by us and Fund I from the
        sale
        of shares or membership units, paid monthly. The amount of management fees
        paid
        to our manager for the twelve months ended December 31, 2006 was
        $277,000.
 
 As
        of
        December 31, 2006, our manager owned 100,000 of our common shares. For the
        twelve months ended December 31, 2006 we incurred $38,000 in dividends payable
        to our manager based on the number of shares they held on the dividend record
        dates and we recorded pro-rata distributions owed to our manager of
        $25,000.
 
 **Transactions
        with Other Related Parties**
 
 As
        of
        December 31, 2006, we owned 372,655 common shares of VRM II, representing
        approximately 0.96% of their total outstanding common stock. For the twelve
        months ended December 31, 2006 we recognized $151,000 in dividends from VRM
        II
        based on the number of shares we held on the dividend record dates.
 
 As
        of
        December 31, 2006, VRM II owned 407,485 of our common shares, representing
        approximately 5.93% of our total outstanding common stock. On November 29,
        2006
        VRM II filed the required Schedule 13D with the SEC. For the twelve months
        ended
        December 31, 2006 we incurred $72,000 in dividends payable to VRM II based
        on
        the number of shares they held on the dividend record dates.
 
 During
        the twelve months ended December 31, 2006, we sold $1.4 million in real estate
        loans to VRM II and bought $0.5 million in real estate loans from VRM II.
        No
        gain or loss resulted from these transactions.
 
 As
        of
        December 31, 2006, Vestin Originations owed us $1,000 related to a loan payment
        by a borrower. We received payment from Vestin Origination on January 2,
        2007.
 
 For
        the
        twelve months ended December 31, 2006, we incurred $61,000 for legal fees
        to the
        law firm of Levine, Garfinkel & Katz in which the Secretary of Vestin Group
        has an equity ownership interest in the law firm.
 
 **ITEM
        14.**  **PRINCIPAL
        ACCOUNTINGFEES AND SERVICES**
 
 During
        the twelve months ended December 31, 2006 and 2005, Moore Stephens Wurth
        Frazer
        and Torbet, LLP (“Moore Stephens”) provided various audit, audit related and
        non-audit services to us as follows:
  **December
                    31, 2006**
                
                **December
                    31, 2005**Audit
                    Fees
                
                $
                379,000
                
                $
                305,000Audit
                    Related Fees
                
                $
                --
                
                $
                --Tax
                    Fees
                
                $
                --
                
                $
                --All
                    Other Fees
                
                $
                --
                
                $
                --
 
 Our
        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 our independent
        auditors under engagements entered into on or after May 6, 2003, were approved
        by the Audit Committee or, prior to May 1, 2006, by the Audit Committee of
        Vestin Group, pursuant to our 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.
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            54
            -
 *Table
            of Contents*
  **PARTIV**
 
 **ITEM
        15.**  **EXHIBITS,
        FINANCIALSTATEMENT SCHEDULES**
 (a)
        1. Financial
        Statements
 
 The
        financial statement are contained on Pages F-2 through F-33 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(2)
              
              Agreement
                  and Plan of Merger between Vestin Fund I, LLC and the
                  Registrant3.1(2)
              
              Articles
                  of Incorporation of the Registrant3.2(2)
              
              Bylaws
                  of the Registrant3.3(2)
              
              Form
                  of Articles Supplementary of the Registrant4.1(2)
              
              Reference
                  is made to Exhibits 3.1, 3.2 and 3.34.2(3)
              
              Specimen
                  Common Stock Certificate4.3(2)
              
              Form
                  of Rights Certificate10.1(2)
              
              Form
                  of Management Agreement between Vestin Mortgage, Inc. and the
                  Registrant10.2(2)
              
              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 II, 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 II, 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 II, LLC and Royal Bank of America10.8(5)
              
              Intercreditor
                  Agreement, dated October 13, 2006, by and between Vestin Originations,
                  Inc., Vestin Mortgage, Inc. Vestin Realty Mortgage I, Inc., Vestin
                  Realty
                  Mortgage II, Inc., Vestin Fund III, LLC, Owens Financial Group,
                  Inc. and
                  Owens Mortgage Investment Fund21.1(3)
              
              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(4)
              
              Vestin
                  Realty Mortgage I, Inc. Code of Business Conduct and
                  Ethics
 
 (1)
              
              Incorporated
                  herein by reference to our Form S-4 Registration Statement filed
                  on May
                  27, 2005 (File No. 333-125347).(2)
              
              Incorporated
                  herein by reference to Post-Effective Amendment No. 3 to our Form
                  S-4
                  Registration Statement filed on January 4, 2006 (File No.
                  333-125347).(3)
              
              Incorporated
                  herein by reference to Post-Effective Amendment No. 4 to our Form
                  S-4
                  Registration Statement filed on January 31, 2006 (File No.
                  333-125347).(4)
              
              Incorporated
                  herein by reference to the Transition Report on Form 10-K for the
                  ten
                  month transition period ended April 30, 2006 filed on June 28,
                  2006 (File
                  No. 000-51964)(5)
              
              Incorporated
                  herein by reference to the Quarterly Report on Form 10-Q for the
                  three
                  months ended September 30, 2006 filed on October 26, 2006 (File
                  No.
                  000-51964)
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            55
            -
 *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 I, Inc. (successor to Vestin Fund I,
                  LLC)**By:
              */s/
                  Michael V. Shustek*Michael
                  V. ShustekPresident
                  and Chief Executive OfficerDate:
              March
                  13, 2007
 
 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
              
              March
                  13, 2007Michael
                  V. Shustek
              
              (Principal
                  Executive Officer)*/s/
                  John W. Alderfer*
              
              Chief
                  Financial Officer and Director
              
              March
                  13, 2007John
                  W. Alderfer
              
              (Principal
                  Financial and Accounting Officer)*/s/
                  Robert J. Aalberts*
              
              Director
              
              March
                  13, 2007Robert
                  J. Aalberts*/s/
                  Fredrick J.**Zaffarese**Leavitt*
              
              Director
              
              March
                  13, 2007Fredrick
                  J.ZaffareseLeavitt*/s/
                  Roland M. Sansone*
              
              Director
              
              March
                  13, 2007Roland
                  M. Sansone
 
 
 
 
 -
            56
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 *Table
            of Contents*
  
 
 **INDEX
        TO** **CONSOLIDATED** **FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION**
 
 **Page**REPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
                  FIRM
              F-2CONSOLIDATED
                  FINANCIAL STATEMENTSConsolidated
                  Balance Sheets
              F-3Consolidated
                  Statements of Income
              F-4Consolidated
                  Statements of and Other Comprehensive
                  Income
              F-5Consolidated
                  Statements of Cash Flows
              F-6Notes
                  to the Consolidated 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-32Real
                  estate loans that Exceed Three Percent of the
                  Portfolio
              F-33
 
  F
            -
            1
 *Table
            of Contents*
  
 
 **REPORT
        OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING
        FIRM**
 
 To
        Board
        of Directors and Stockholders of Vestin Realty Mortgage I, Inc.
 
 We
        have
        audited the accompanying consolidated balance sheets of Vestin Realty Mortgage
        I, Inc., (“the Company”) as of December 31, 2006 and 2005 and the related
        consolidated statements of operations equity and other comprehensive income
        and
        its cash flows for the twelve months ended December 31, 2006, the six months
        ended December 31, 2005, the nine month transition period ended June 30,
        2005,
        and the year ended September 30, 2004. These consolidated 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 Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the consolidated financial statements. An audit also includes
        assessing the accounting principles used and significant estimates made by
        management, as well as evaluating the overall consolidated financial statement
        presentation. We believe that our audits provide a reasonable basis for our
        opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Vestin Realty Mortgage
        I,
        Inc., as of December 31, 2006 and 2005 and the results of its operations
        and its
        cash flows for the twelve month period ended December 31, 2006, the six month
        period ended December 31, 2005, the nine month transition period ended June
        30,
        2005 and for the year ended September 30, 2004 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 consolidated financial
        statements taken as a whole. The supplemental schedules are presented for
        purposes of additional analysis and are not a required part of the consolidated
        financial statements. Such information has been subjected to the auditing
        procedures applied in our audits of the consolidated financial statements
        and,
        in our opinion, is fairly stated in all material respects in relation to
        the
        consolidated 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
        I,
        Inc’s. internal control over financial reporting as of December 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 March 12, 2007 ,
        expressed an unqualified opinion threreon.
 
 /s/Moore
        Stephens Wurth Frazer and Torbet, LLP
 
 Orange,
        California
 March
        12, 2007
 
 
 F
            -
            2
 *Table
            of Contents*
   **FINANCIALSTATEMENTS**
 
 **VESTIN
                  REALTY MORTGAGEI, INC.****(SUCCESSOR
                  TO VESTIN FUND I, LLC)****CONSOLIDATED
                  BALANCE SHEETS****ASSETS****December
                  31, 2006**
              
              **December
                  31, 2005**AssetsCash
              
              $
              1,507,000
              
              $
              7,884,000Certificates
                  of deposit
              
              
              150,000
              
              
              300,000Investment
                  in marketable securities
              
              
              --
              
              
              1,720,000Investment
                  in marketable securities - related party
              
              
              1,969,000
              
              
              --Interest
                  and other receivables, net of allowance of $0 at December 31, 2006
                  and
                  $292,000 at December 31, 2005
              
              
              938,000
              
              
              959,000Note
                  receivable, net of allowance of $885,000 at December 31, 2006 and
                  $738,000
                  at December 31, 2005
              
              
              102,000
              
              
              291,000Real
                  estate held for sale
              
              
              3,689,000
              
              
              2,497,000Real
                  estate held for sale - seller financed
              
              
              7,911,000
              
              
              8,797,000Investment
                  in real estate loans, net of allowance for loan losses of $4,534,000
                  at
                  December 31, 2006 and $1,604,000 at December 31, 2005
              
              
              48,631,000
              
              
              51,309,000Assets
                  under secured borrowings
              
              
              310,000
              
              
              2,719,000Due
                  from manager - related party
              
              
              --
              
              
              248,000Due
                  from Vestin Originations - related party
              
              
              1,000
              
              
              --Other
                  assets
              
              
              124,000
              
              
              --Total
                  assets
              
              $
              65,332,000
              
              $
              76,724,000**LIABILITIES,
                  STOCKHOLDERS' EQUITY & MEMBERS’ EQUITY**LiabilitiesAccounts
                  payable and accrued liabilities
              
              $
              307,000
              
              $
              104,000Secured
                  borrowings
              
              
              310,000
              
              
              2,719,000Note
                  payable
              
              
              22,000
              
              
              881,000Deposit
                  liability
              
              
              1,255,000
              
              
              700,000Unearned
                  revenue
              
              
              69,000
              
              
              --Dividend
                  payable
              
              
              1,030,000
              
              
              --Total
                  liabilities
              
              
              2,993,000
              
              
              4,404,000Commitments
                  and ContingenciesMembers'
                  equity - authorized 10,000,000 units at $10 per unit, 7,509,984
                  units
                  issued and outstanding at December 31, 2005
              
              
              --
              
              
              72,316,000Stockholders'
                  equityPreferred
                  stock, $0.0001 par value; 1,000,000 shares authorized; none
                  issued
              
              
              --
              
              
              --Common
                  stock, $0.0001 par value; 25,000,000 shares authorized; 6,869,790
                  shares
                  issued and outstanding at December 31, 2006
              
              
              1,000
              
              
              --Additional
                  paid in capital
              
              
              62,235,000
              
              
              --Accumulated
                  deficits
              
              
              (7,000
              )
              
              --Accumulated
                  other comprehensive income
              
              
              110,000
              
              
              4,000Total
                  stockholders' equity & members’ equity
              
              
              62,339,000
              
              
              72,320,000Total
                  liabilities and stockholders' equity & members’ equity
              
              $
              65,332,000
              
              $
              76,724,000
  The
            accompanying notes are an integral part of these consolidated
            statements.
 F
            -
            3
 *Table
            of Contents*
 
 **VESTIN
                  REALTY MORTGAGEI, INC.****(SUCCESSOR
                  TO VESTIN FUND I, LLC)****CONSOLIDATED
                  STATEMENTS OF INCOME****For
                  The Twelve Months Ended**
              
              **For
                  The Six**
                **Months
                  Ended**
              
              **For
                  The Six**
                **Months
                  Ended**
              
              **For
                  The Nine Month Transition Period Ended**
              
              **For
                  The Year Ended****12/31/2006**
              
              **12/31/2005**
              
              **12/31/2004**
              
              **6/30/2005**
              
              **9/30/2004****(Unaudited)****Revenues**Interest
                  income from investment in real estate loans
              
              $
              4,558,000
              
              $
              2,693,000
              
              $
              2,913,000
              
              $
              4,303,000
              
              $
              7,519,000Gain
                  on sale marketable securities
              
              
              --
              
              
              46,000
              
              
              --
              
              
              --
              
              
              --Dividend
                  income - related party
              
              
              151,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --Other
                  income
              
              
              254,000
              
              
              400,000
              
              
              169,000
              
              
              694,000
              
              
              480,000Total
                  revenues
              
              
              4,963,000
              
              
              3,139,000
              
              
              3,082,000
              
              
              4,997,000
              
              
              7,999,000**Operating
                  expenses**Management
                  fees-related party
              
              
              277,000
              
              
              138,000
              
              
              128,000
              
              
              201,000
              
              
              255,000Provision
                  for loan loss
              
              
              3,000,000
              
              
              --
              
              
              --
              
              
              1,296,000
              
              
              100,000Interest
                  expense
              
              
              85,000
              
              
              107,000
              
              
              440,000
              
              
              408,000
              
              
              1,789,000Professional
                  fees
              
              
              638,000
              
              
              131,000
              
              
              182,000
              
              
              411,000
              
              
              225,000Professional
                  fees - related parties
              
              
              61,000
              
              
              93,000
              
              
              5,000
              
              
              83,000
              
              
              5,000Provision
                  of doubtful accounts related to receivable
              
              
              171,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --Other
              
              
              364,000
              
              
              23,000
              
              
              3,000
              
              
              163,000
              
              
              130,000Total
                  operating expenses
              
              
              4,596,000
              
              
              492,000
              
              
              758,000
              
              
              2,562,000
              
              
              2,504,000**Income
                  from Continuing Operations**
              
              
              367,000
              
              
              2,647,000
              
              
              2,324,000
              
              
              2,435,000
              
              
              5,495,000**Income
                  from real estate held for sale**Revenue
                  related to the sale of real estate
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              4,667,000Net
                  gain on sale of real estate held for sale
              
              
              44,000
              
              
              24,000
              
              
              575,000
              
              
              672,000
              
              
              (463,000
              )Gain
                  on sale of real estate held for sale - seller financed
              
              
              245,000
              
              
              495,000
              
              
              --
              
              
              --
              
              
              --Write
                  down on real estate held for sale
              
              
              --
              
              
              --
              
              
              (292,000
              )
              
              (1,271,000
              )
              
              (535,000
              )Expenses
                  related to real estate held for sale
              
              
              (69,000
              )
              
              (100,000
              )
              
              (378,000
              )
              
              (708,000
              )
              
              (597,000
              )Total
                  income (loss) from real estate held for sale
              
              
              220,000
              
              
              419,000
              
              
              (95,000
              )
              
              (1,307,000
              )
              
              3,072,000Income
                  before provision for income taxes
              
              
              587,000
              
              
              3,066,000
              
              
              2,229,000
              
              
              1,128,000
              
              
              8,567,000Provision
                  for income taxes
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --**NET
                  INCOME**
              
              $
              587,000
              
              $
              3,066,000
              
              $
              2,229,000
              
              $
              1,128,000
              
              $
              8,567,000Basic
                  and diluted earnings per common weighted average share / membership
                  unit
              
              $
              0.09
              
              $
              0.40
              
              $
              0.27
              
              $
              0.14
              
              $
              0.99Dividends
                  declared per common share / cash distributions per membership
                  unit
              
              $
              0.64Weighted
                  average common shares / membership units
              
              
              6,882,809
              
              
              7,668,098
              
              
              8,334,448
              
              
              7,919,977
              
              
              8,653,998
  The
            accompanying notes are an integral part of these consolidated
            statements.
 F
            -
            4
 *Table
            of Contents*
 
 **VESTIN
                  REALTY MORTGAGEI, INC.****(SUCCESSOR
                  TO VESTIN FUND I, LLC)****CONSOLIDATED
                  STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE
                  INCOME****Common
                  Stock****Units**
              
              **Number
                  of Shares**
              
              **Amount**
              
              **Additional
                  Paid-in-Capital**
              
              **Retained
                  Earnings**
              
              **Accumulated
                  Other Comprehensive Income**
              
              **Members'
                  Equity**
              
              **Total****Members'
                  Equity at September 30, 2003**
              
              9,124,566
              
              --
              $
              --
              $
              --
              $
              --
              $
              --
              $
              86,515,000
              $
              86,515,000Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,567,000
              
              8,567,000Distributions
                  to Members
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,098,000)
              
              (5,098,000)Reinvestments
                  of Distributions
              
              85,761
              
              
              
              
              
              
              
              
              
              
              
              857,000
              
              857,000Members'
                  Redemptions
              
              (856,270)
              
              
              
              
              
              
              
              
              
              
              
              (8,563,000)
              
              (8,563,000)**Members'
                  Equity at September 30, 2004**
              
              8,354,057
              
              --
              $
              --
              $
              --
              $
              --
              $
              --
              $
              82,278,000
              $
              82,278,000Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,128,000
              
              1,128,000Distributions
                  to Members
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,694,000)
              
              (3,694,000)Reinvestments
                  of Distributions
              
              48,930
              
              
              
              
              
              
              
              
              
              
              
              489,000
              
              489,000Members'
                  Redemptions
              
              (716,664)
              
              
              
              
              
              
              
              
              
              
              
              (6,930,000)
              
              (6,930,000)**Members'
                  Equity at**
                **June
                  30, 2005**
              
              7,686,323
              
              --
              $
              --
              $
              --
              $
              --
              $
              --
              $
              73,271,000
              $
              73,271,000Comprehensive
                  Income:Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,066,000
              
              3,066,000Unrealized
                  Gain on Marketable Securities
              
              
              
              
              
              
              
              
              
              
              
              4,000
              
              
              
              4,000Total
                  Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,070,000Distributions
                  to Members
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,306,000)
              
              (2,306,000)Reinvestments
                  of Distributions
              
              19,435
              
              
              
              
              
              
              
              
              
              
              
              194,000
              
              194,000Members'
                  Redemptions
              
              (195,774)
              
              
              
              
              
              
              
              
              
              
              
              (1,909,000)
              
              (1,909,000)**Members'
                  Equity at December 31, 2005**
              
              7,509,984
              
              --
              $
              --
              $
              --
              $
              --
              $
              4,000
              $
              72,316,000
              $
              72,320,000Comprehensive
                  Income:Net
                  Income
              
              
              
              
              
              
              
              
              
              2,603,000
              
              
              
              (2,016,000)
              
              587,000Reversal
                  of Unrealized Gain on Marketable Securities
              
              
              
              
              
              
              
              
              
              
              
              (4,000)
              
              
              
              (4,000)Unrealized
                  Gain on Marketable Securities - Related Party
              
              
              
              
              
              
              
              
              
              
              
              110,000
              
              
              
              110,000Total
                  Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              693,000Distributions
                  to Members
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,822,000)
              
              (1,822,000)Reinvestments
                  of Distributions
              
              12,846
              
              
              
              
              
              
              
              
              
              
              
              129,000
              
              129,000Members'
                  Redemptions
              
              (654,090)
              
              
              
              
              
              
              
              
              
              
              
              (6,377,000)
              
              (6,377,000)Reclassify
                  members' equity to stockholders' equity
              
              (6,868,740)
              
              6,868,740
              
              1,000
              
              62,229,000
              
              
              
              
              
              (62,230,000)
              
              --Dividends
                  to Stockholder
              
              
              
              
              
              
              
              
              
              (2,610,000)
              
              
              
              
              
              (2,610,000)Reinvestment
                  of Dividends
              
              
              
              1,050
              
              --
              
              6,000
              
              
              
              
              
              
              
              6,000**Stockholders'
                  Equity at December 31, 2006**
              
              --
              
              6,869,790
              $
              1,000
              $
              62,235,000
              $
              (7,000)
              $
              110,000
              $
              --
              $
              62,339,000
  The
            accompanying notes are an integral part of these consolidated
            statements.
 F
            -
            5
 *Table
            of Contents*
 
 **VESTIN
                    REALTY MORTGAGE I, INC.****(SUCCESSOR
                    TO VESTIN FUND I, LLC)****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****For
                    The Twelve Months Ended**
                
                **For
                    The Six**
                  **Months
                    Ended**
                
                **For
                    The Six**
                  **Months
                    Ended**
                
                **For
                    The Nine Month Transition Period Ended**
                
                **For
                    the Year Ended****12/31/2006**
                
                **12/31/2005**
                
                **12/31/2004**
                
                **6/30/2005**
                
                **9/30/2004****(Unaudited)****Cash
                    flows from operating activities:**Net
                    income
                
                $
                587,000
                
                $
                3,066,000
                
                $
                2,229,000
                
                $
                1,128,000
                
                $
                8,567,000Adjustments
                    to reconcile net income to net cash provided by operating
                    activities:
                
                
                --Provision
                    of doubtful accounts related to receivable
                
                
                171,000
                
                
                --
                
                
                --
                
                
                --
                
                
                --Write
                    down of real estate held for sale
                
                
                --
                
                
                --
                
                
                292,000
                
                
                1,271,000
                
                
                535,000Gain
                    on sale of real estate held for sale
                
                
                (286,000
                )
                
                (519,000
                )
                
                (1,049,000
                )
                
                (1,072,000
                )
                
                --Loss
                    on sale of real estate held for sale
                
                
                --
                
                
                --
                
                
                474,000
                
                
                400,000
                
                
                463,000Provision
                    for loan loss
                
                
                3,000,000
                
                
                --
                
                
                --
                
                
                1,296,000
                
                
                100,000Gain
                    on sale of marketable securities
                
                
                (1,000
                )
                
                (46,000
                )
                
                --
                
                
                --
                
                
                --Amortized
                    interest income
                
                
                (159,000
                )
                
                --
                
                
                --
                
                
                --
                
                
                --Change
                    in operating assets and liabilities:
                
                
                --Interest
                    and other receivables
                
                
                (1,000
                )
                
                (54,000
                )
                
                664,000
                
                
                612,000
                
                
                226,000Due
                    to/from Manager
                
                
                248,000
                
                
                (1,170,000
                )
                
                288,000
                
                
                270,000
                
                
                260,000Due
                    to Vestin Group
                
                
                --
                
                
                (2,000
                )
                
                (170,000
                )
                
                (3,000
                )
                
                (127,000
                )Due
                    to/from Vestin Originations
                
                
                (1,000
                )
                
                --
                
                
                --
                
                
                --
                
                
                --Due
                    to VRM II
                
                
                --
                
                
                (1,560,000
                )
                
                2,062,000
                
                
                81,000
                
                
                4,102,000Due
                    to Fund III
                
                
                --
                
                
                (6,000
                )
                
                --
                
                
                6,000
                
                
                --Prepaid
                    expenses
                
                
                70,000
                
                
                --
                
                
                --
                
                
                --
                
                
                8,000Accounts
                    payable and accrued liabilities
                
                
                203,000
                
                
                (339,000
                )
                
                (7,000
                )
                
                92,000
                
                
                327,000Net
                    cash provided (used) by operating activities
                
                
                3,831,000
                
                
                (630,000
                )
                
                4,783,000
                
                
                4,081,000
                
                
                14,461,000**Cash
                    flows from investing activities:**Investments
                    in real estate loans
                
                
                (37,455,000
                )
                
                (17,009,000
                )
                
                (5,627,000
                )
                
                (20,565,000
                )
                
                (39,473,000
                )Purchase
                    of investments in real estate loans including interest receivable
                    of
                    $515,000.
                
                
                --
                
                
                (5,408,000
                )
                
                --
                
                
                --
                
                
                --Purchase
                    of investments in real estate loans from:
                
                
                --VRM
                    II
                
                
                (500,000
                )
                
                --
                
                
                --
                
                
                (600,000
                )
                
                --Other
                    related parties
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                (350,000
                )Third
                    parties
                
                
                (75,000
                )
                
                --
                
                
                (1,459,000
                )Proceeds
                    from loan payoff
                
                
                33,043,000
                
                
                17,908,000
                
                
                15,259,000
                
                
                11,490,000
                
                
                35,011,000Principal
                    payments on real estate held for sale-seller financed
                
                
                886,000
                
                
                2,585,000
                
                
                507,000
                
                
                --
                
                
                --Sale
                    of investments in real estate loans to:
                
                
                --VRM
                    II
                
                
                1,350,000
                
                
                7,600,000
                
                
                --
                
                
                --
                
                
                --Third
                    parties
                
                
                125,000
                
                
                337,000
                
                
                155,000
                
                
                --
                
                
                5,528,000Proceeds
                    from sale of investment in real estate held for sale
                
                
                2,551,000
                
                
                4,227,000
                
                
                7,333,000
                
                
                8,245,000
                
                
                --Allowance
                    for investment in real estate loan losses, related to legal
                    expense
                
                
                (362,000
                )
                
                --
                
                
                --
                
                
                --Proceeds
                    from note receivable
                
                
                18,000
                
                
                
                
                
                --
                
                
                --
                
                
                --Purchase
                    of marketable securities
                
                
                --
                
                
                (3,565,000
                )
                
                --
                
                
                --
                
                
                --Purchase
                    of marketable securities - related party
                
                
                (1,859,000
                )
                
                --
                
                
                --
                
                
                --
                
                
                --Proceeds
                    from sale of marketable securities
                
                
                1,717,000
                
                
                1,895,000
                
                
                --
                
                
                --
                
                
                --Cash
                    outlays for real estate held for sale
                
                
                --
                
                
                --
                
                
                (2,251,000
                )
                
                --
                
                
                (5,350,000
                )Purchase
                    of certificates of deposit
                
                
                (2,532,000
                )
                
                --
                
                
                --
                
                
                --
                
                
                --Proceeds
                    from maturities of certificates of deposit
                
                
                2,682,000
                
                
                --
                
                
                --
                
                
                --
                
                
                875,000Proceeds
                    from unearned revenue
                
                
                100,000
                
                
                --
                
                
                --
                
                
                --
                
                
                --Deposit
                    liability
                
                
                800,000
                
                
                222,000
                
                
                247,000
                
                
                516,000
                
                
                223,000Net
                    cash provided (used) by investing activities
                
                $
                489,000
                
                $
                8,792,000
                
                $
                14,164,000
                
                $
                (914,000
                )
                $
                (3,536,000
                )
  The
            accompanying notes are an integral part of these consolidated
            statements.
 F
            -
            6
 *Table
            of Contents*
 
 **VESTIN
                    REALTY MORTGAGE I, INC.****(SUCCESSOR
                    TO VESTIN FUND I, LLC)****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****For
                    The Twelve Months Ended**
                
                **For
                    The Six**
                  **Months
                    Ended**
                
                **For
                    The Six**
                  **Months
                    Ended**
                
                **For
                    The Nine Month Transition Period Ended**
                
                **For
                    the Year Ended****12/31/2006**
                
                **12/31/2005**
                
                **12/31/2004**
                
                **6/30/2005**
                
                **9/30/2004****(Unaudited)****Cash
                    flows from financing activities:**Payment
                    on note payable
                
                $
                (1,053,000
                )
                $
                --
                
                $
                (2,000,000
                )
                $
                --
                
                $
                (2,000,000
                )Proceeds
                    from issuance of note payable
                
                
                --
                
                
                881,000
                
                
                --
                
                
                --
                
                
                --Dividends
                    to stockholders, net of reinvestments
                
                
                (1,502,000
                )
                
                --
                
                
                --
                
                
                --
                
                
                --Dividends
                    to stockholders, net of reinvestments - related party
                
                
                (72,000
                )
                
                --
                
                
                --
                
                
                --
                
                
                --Members'
                    distributions, net of reinvestments
                
                
                (1,668,000
                )
                
                (2,082,000
                )
                
                (2,222,000
                )
                
                (3,159,000
                )
                
                (4,196,000
                )Members'
                    distributions, net of reinvestments-related party
                
                
                (25,000
                )
                
                (30,000
                )
                
                (31,000
                )
                
                (46,000
                )
                
                (45,000
                )Members'
                    redemptions
                
                
                (6,377,000
                )
                
                (1,909,000
                )
                
                (1,055,000
                )
                
                (6,930,000
                )
                
                (8,562,000
                )Net
                    cash used in financing activities
                
                
                (10,697,000
                )
                
                (3,140,000
                )
                
                (5,308,000
                )
                
                (10,135,000
                )
                
                (14,803,000
                )**NET
                    CHANGE IN CASH**
                
                
                (6,377,000
                )
                
                5,022,000
                
                
                13,639,000
                
                
                (6,968,000
                )
                
                (3,878,000
                )**Cash,
                    beginning of period**
                
                
                7,884,000
                
                
                2,862,000
                
                
                6,571,000
                
                
                9,830,000
                
                
                13,708,000**Cash,
                    end of period**
                
                $
                1,507,000
                
                $
                7,884,000
                
                $
                20,210,000
                
                $
                2,862,000
                
                $
                9,830,000**Supplemental
                    disclosures of cash flows information:**Interest
                    paid
                
                $
                85,000
                
                $
                107,000
                
                $
                440,000
                
                $
                --
                
                $
                --Non-cash
                    investing and financing activities:Loans
                    funded through secured borrowings
                
                $
                310,000
                
                $
                1,665,000
                
                $
                2,084,000
                
                $
                8,830,000
                
                $
                30,233,000Loan
                    payoffs of loans funded through secured borrowings
                
                $
                2,719,000
                
                $
                10,337,000
                
                $
                18,000,000
                
                $
                3,574,000
                
                $
                44,422,000Reinvestment
                    of dividends
                
                $
                6,000
                
                $
                --
                
                $
                --
                
                $
                --
                
                $
                --Reinvestment
                    of member distributions
                
                $
                129,000
                
                $
                194,000
                
                $
                39,000
                
                $
                489,000
                
                $
                86,000Real
                    estate held for sale acquired through foreclosure
                
                $
                3,702,000
                
                $
                --
                
                $
                5,458,000
                
                $
                2,149,000
                
                $
                6,581,000Note
                    receivable from guarantor in exchange for release of
                    guarantee
                
                $
                --
                
                $
                --
                
                $
                119,000
                
                $
                --
                
                $
                119,000Sale
                    of real estate held for sale where we provided the
                    financing
                
                $
                --
                
                $
                886,000
                
                $
                7,910,000
                
                $
                --
                
                $
                7,910,000Unrealized
                    gain on marketable securities - related party
                
                $
                110,000
                
                $
                --
                
                $
                --
                
                $
                --
                
                $
                --Note
                    payable relating to prepaid E & O insurance policy
                
                $
                194,000
                
                $
                --
                
                $
                --
                
                $
                --
                
                $
                --Unearned
                    revenue from loans rewritten with same or similar property as
                    collateral
                
                $
                66,000
                
                $
                --
                
                $
                868,000
                
                $
                868,000
                
                $
                5,759,000Transfer
                    of pro-rata interest in real property to Fund II
                
                $
                --
                
                $
                --
                
                $
                4,278,000
                
                $
                --
                
                $
                --Receivable
                    related to loan rewritten with same or similar property, net
                    of allowance,
                    as collateral applied to unearned income
                
                $
                40,000
                
                $
                --
                
                $
                --
                
                $
                --
                
                $
                --Reduction
                    in note payable to Fund II due to valuation allowance on real
                    estate held
                    for sale
                
                $
                --
                
                $
                --
                
                $
                --
                
                $
                --
                
                $
                455,000Issuance
                    of note receivable related to sale of real estate held for
                    sale
                
                $
                --
                
                $
                171,000
                
                $
                --
                
                $
                --
                
                $
                --Investment
                    in real estate held for sale reclassified from interest
                    receivable
                
                $
                --
                
                $
                --
                
                $
                --
                
                $
                33,000
                
                $
                --
  The
            accompanying notes are an integral part of these consolidated
            statements.
 F
            -
            7
 *Table
            of Contents*
 
 **VESTIN
        REALTY MORTGAGEI, INC.**
 **(SUCCESSOR
        TO VESTIN FUND I, LLC)**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 
 **DECEMBER
        31, 2006**
 
 **NOTE
        A — ORGANIZATION**
 
 Vestin
        Fund I, LLC (“Fund I”) was organized in December 1999 as a Nevada limited
        liability company for the purpose of investing in real estate loans. Vestin
        Realty Mortgage I, Inc. (“VRM I”) was organized in January 2006 as a Maryland
        corporation for the sole purpose of effecting a merger with Fund I. On May
        1,
        2006, Fund I merged into VRM I and the members of Fund I received one share
        of
        VRM I’s common stock for each membership unit of Fund I. References in this
        report to the “Company”, “we”, “us” or “our” refer to Fund I with respect to the
        period prior to May 1, 2006 and to VRM I with respect to the period commencing
        on May 1, 2006. Because we were a limited liability company (“LLC”) during the
        prior periods reflected in this report, we make reference to Fund I’s “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 collectively as “deeds of trust” and as defined in our Management
        Agreement as “Mortgage Assets”). We commenced operations in August
        2000.
 
 We
        operate as a real estate investment trust (“REIT”). We are not a mutual fund or
        an investment company within the meaning of the Investment Company Act of
        1940,
        nor are we subject to any regulation thereunder. As a REIT, we are required
        to
        have a December 31 fiscal year end.
 
 Our
        manager is Vestin Mortgage, Inc. (the “manager” or “Vestin Mortgage”), a Nevada
        corporation, which is a wholly owned subsidiary of Vestin Group, Inc. (“Vestin
        Group”), a Delaware corporation. Michael Shustek, the CEO and director of the
        manager and CEO, President and a director of us, wholly owns Vestin Group,
        Inc.,
        which is engaged in asset management, real estate lending and other financial
        services though its subsidiaries. Our manager, prior to June 30, 2006, also
        operated as a licensed Nevada mortgage broker and was engaged in the business
        of
        brokerage, placement and servicing of commercial loans secured by real property.
        On July 1, 2006, the mortgage broker license was issued to an affiliated
        company, Vestin Originations, Inc. that has continued the business of brokerage,
        placement and servicing of commercial real estate loans. Vestin Originations,
        Inc. is a wholly owned subsidiary of Vestin Group.
 
 Pursuant
        to our management agreement, our manager shall implement our business strategies
        on a day-to-day basis, manage and provide services to us, and shall provide
        similar services to any of our subsidiaries. Without limiting the foregoing,
        our
        manager shall perform other services as may be required from time to time
        for
        management and other activities relating to our assets, as our manager shall
        deem appropriate under the particular circumstances. Consequently, our operating
        results are dependent upon our manager’s ability and performance in managing our
        operations and servicing our assets.
 
 Vestin
        Mortgage, Inc. is also the manager of Vestin Realty Mortgage II, Inc., as
        the
        successor by merger to Vestin Fund II, LLC, referred to as “VRM II”, Vestin Fund
        III, LLC (“Fund III”) and inVestin Nevada, Inc., a company wholly owned by our
        manager’s CEO. These entities also invest in real estate loans.
 
 The
        consolidated financial statements include the accounts of the Company and
        our
        wholly owned taxable REIT subsidiary, TRS I, Inc. All significant inter-company
        transactions and balances have been eliminated in consolidation.
  F
            -
            8
 *Table
            of Contents*
  **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.
 
 **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 accrue 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**
 
 We
        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 our Management
        Agreement provided the price does not exceed the par value of the loan. The
        primary purpose is to either free up capital to provide liquidity for various
        reasons, such as loan diversification, or place excess capital in investments
        to
        maximize the use of our capital. Selling or buying loans allows us to diversify
        our loan portfolio within these parameters. Due to the short term nature
        of the
        loans we make and the similarity of interest rates in loans we normally would
        invest in, the fair value of a loan typically approximates its carrying value.
        Accordingly, discounts or premiums typically do not apply upon sales of loans
        and therefore, generally no gain or loss is recorded on these transactions,
        regardless of whether to a related or unrelated party.
 
 Investments
        in real estate loans are secured by deeds of trust or mortgages. Generally,
        our
        real estate loans require interest only payments with a balloon payment of
        the
        principal at maturity. We have both the intent and ability to hold real estate
        loans until maturity and therefore, real estate loans are classified and
        accounted for as held for investment and are carried at amortized cost. Loans
        sold to or purchased from affiliates are accounted for at the principal balance
        and no gain or loss is recognized by us or any affiliate. Loan to value ratios
        are 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.
  F
            -
            9
 *Table
            of Contents*
  As
        of
        December 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 one of our loans that has both principal and interest payments
        along with a “balloon” payment at the end of the term. As of December 31, 2006,
        the loan had a balance of approximately $7.5 million and had an original
        term of
        thirty-six months, maturing in the next 9 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 December 31, 2006,
        we
        had approximately $17.1 million in investments in real estate loans which
        had
        interest reserves where the total outstanding principal due to us and our
        co-lenders was approximately $120.3 million. These loans had interest reserves
        of approximately $5.6 million, of which our portion was approximately $0.7
        million. At December 31, 2005, we had approximately $3.4 million in investments
        in real estate loans that had interest reserves where the total outstanding
        principal due to us and our co-lenders was approximately $25.1 million. These
        loans had interest reserves of approximately $2.4 million, of which our portion
        was approximately $0.3 million.
 
 **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,
        our
        manager and Vestin Originations generally approves loans more quickly than
        other
        real estate lenders and, due to our expedited underwriting process, there
        is a
        risk that the credit inquiry we perform will not reveal all material facts
        pertaining to a borrower and the security.
 
 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 may cause significant
        changes in our estimated allowance include, but are not limited to:
 
 ·
            Declines
                in real estate market conditions, which can cause a decrease in expected
                market value; 
 ·
            Discovery
                of undisclosed liens for community improvement bonds, easements and
                delinquent property taxes; 
 ·
            Lack
                of progress on real estate developments after we advance funds. We
                customarily utilize disbursement agents to monitor the progress of
                real
                estate developments and approve loan advances. After further inspection
                of
                the related property, progress on construction occasionally does
                not
                substantiate an increase in value to support the related loan
                advances; 
 ·
            Unanticipated
                legal or business issues that may arise subsequent to loan origination
                or
                upon the sale of foreclosed 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.  F
            -
            10
 *Table
            of Contents*
  **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 (“FAS”) 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:
 
 ·
            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**
 
 We
        occasionally finance 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 - *Accounting
        for Sales of Real Estate* ("FAS
        66'') requires the buyer of the real estate to make minimum initial and
        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
        we occasionally foreclose on loans with raw land or developments in progress,
        available financing for such properties is often limited and we frequently
        provide financing up to 100% of the selling price on these properties. In
        addition, we may make additional loans to the buyer to continue development
        of a
        property. Although sale agreements are consummated at closing, they lack
        adequate initial investment by the buyer to qualify as a 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
        sale 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 consolidated balance sheets.
 
 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.
  F
            -
            11
 *Table
            of Contents*
  **Classification
        of Operating Results from Real Estate Held for Sale**
 
 FAS
        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 related to real estate held for sale are
        separately identified in the accompanying consolidated statements of
        income.
 
 **Secured
        Borrowings**
 
 Secured
        borrowings provide an additional source of capital for our lending activity.
        Secured borrowings allow us to increase the diversification of our loan
        portfolio and to invest in loans that we might not otherwise invest in. We
        do
        not receive any fees for entering into secured borrowing arrangements; however,
        we may receive revenue in any differential of the interest spread. Loans
        in
        which unaffiliated investors have participated through inter-creditor agreements
        (“Inter-creditor Agreements”) are accounted for as secured borrowings in
        accordance with Statement of Financial Accounting Standards (“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 an unaffiliated investor (the “Investor”) may
        participate on a non-pari passu basis in certain real estate loans with us
        and/or VRM II 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. We do not receive any revenues
        for
        entering into secured borrowing arrangements. As of December 31, 2006, we
        had
        $310,000 in outstanding secured borrowing arrangements.
 
 **Investment
        in Marketable Securities - Related Party**
 
 Investment
        in marketable securities - related party consists of stock in VRM II. The
        securities are stated at fair value as determined by the market price as
        of
        December 31, 2006. All securities are classified as available-for-sale under
        the
        provisions of FAS 115 *Accounting
        for Certain Investments in Debt and Equity Securities* .
 
 **Fair
        Value of Financial Instruments**
 
 FAS
        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 instruments 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
        December 31, 2006 and 2005, the estimated fair values of the real estate
        loans,
        including seller financed loans, were approximately $54.2 million and $57.4
        million, respectively. At December 31, 2006 and 2005, we had $310,000 and
        approximately $2.7 million, respectively, in assets under secured borrowings.
        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.
 
 **Basic
        and Diluted Earnings Per Common Share**
 
 Basic
        earnings per share (“EPS”) is computed, in accordance with FAS 128 - *Earnings
        per Share* (“FAS
        128”), by dividing net income available to common stockholders by the weighted
        average number of common shares outstanding. Diluted EPS is similar to basic
        EPS
        except that the weighted average number of common shares outstanding is
        increased to include the number of additional common shares that would have
        been
        outstanding if the dilutive potential common shares had been exercised. We
        had
        no outstanding common shares equivalents during the twelve months ended December
        31, 2006. The following is a computation of the EPS data for the twelve months
        ended December 31, 2006:
 
 
 **For
                  the Four**
                **Months
                  Ended**
                **April
                  30, 2006**
              
              **For
                  the Eight**
                **Months
                  Ended**
                **December
                  31, 2006**
              
              **For
                  the Twelve**
                **Months
                  Ended**
                **December
                  31, 2006**Net
                  income available to common stockholders / members
              
              $
              (2,016,000
              )
              $
              2,603,000
              
              $
              587,000Weighted
                  average number of common shares / units outstanding during the
                  period
              
              
              6,910,950
              
              
              6,869,035
              
              
              6,882,809Basic
                  and diluted earnings per common share / membership unit
              
              $
              (0.29
              )
              $
              0.38
              
              $
              0.09
 
 **Net
        Income Allocated to Members Per Weighted Average Membership
        Unit**
 
 Because
        Fund I was an LLC prior to the merger, it stated net income allocated to
        members
        per weighted average membership unit, which is computed by dividing net income
        calculated in accordance with GAAP by the weighted average number of membership
        units outstanding for the period. The following is a computation of the net
        income per weighted average unit for the six months ended December 31,
        2005:
 
 **For
                  the Six**
                **Months
                  Ended**
                **December
                  31, 2005**Net
                  income available to members
              
              $
              3,066,000Weighted
                  average number of membership units outstanding during the
                  period
              
              
              7,668,098Net
                  income per weighted average membership unit
              
              $
              0.40
  F
            -
            13
 *Table
            of Contents*
  **Common
        Stock Dividends**
 
 Cash
        dividends declared during the twelve months ended December 31, 2006, were
        $0.38
        per common share. The Board of Directors declared a quarterly cash dividend
        of
        $0.15 per share, for the three months ended December 31, 2006, on December
        18,
        2006 that was paid on January 26, 2007, to the stockholders of record as
        of
        December 31, 2006.
 
 **Segments**
 
 We
        operate as one business segment.
 
 **Income
        Taxes**
 
 The
        Company is organized and conducts its operations to qualify as a real estate
        investment trust (“REIT”) under Sections 856 to 860 of the Internal Revenue Code
        of 1986, as amended (the “Code”) and to comply with the provisions of the
        Internal Revenue Code with respect thereto. A REIT is generally not subject
        to
        federal income tax on that portion of its REIT taxable income (“Taxable Income”)
        which is distributed to its stockholders, provided that at least 90% of Taxable
        Income is distributed and provided that certain other requirements are met.
 
 Certain
          assets of the Company are held in a taxable REIT subsidiary (“TRS”). The income
          of a TRS is subject to federal and state income taxes. The net income tax
          provision after net loss carryfowards for the twelve months ended December
          31,
          2006, was approximately zero.
 
 **Reclassifications**
 
 Certain
        reclassifications have been made to the prior periods’ financial statements to
        conform to the current period 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 related
        to cash deposits. As of December 31, 2006 and 2005 we had approximately $1.5
        million and $7.7 million, respectively, in excess of the federally insured
        limits.
 
 As
        of
        December 31, 2006, 35%, 15%, 12% and 9% of our loans were in Nevada, Hawaii,
        California and Arizona, respectively, compared to 25%, 15%, 17% and 14%,
        at
        December 31, 2005, respectively. As a result of this geographical concentration
        of our real estate loans, a downturn in the local real estate markets in
        these
        states could have a material adverse effect on us.
 
 At
        December 31, 2006, the aggregate amount of loans to our three largest borrowers
        represented 33.37% of our total investment in real estate loans including
        loans
        related to seller financed real estate held for sale. These real estate loans
        consisted of commercial and land located in Hawaii and Nevada, with a first
        lien
        position, interest rates between 5% and 14%, with an aggregate outstanding
        balance of approximately $20.3 million and maturing through September 2007.
        At
        December 31, 2005, the aggregate amount of loans to our three largest borrowers
        represented 38.0% of our total investment in real estate loans. These real
        estate loans consisted of commercial and acquisition and development loans,
        located in Arizona, Hawaii and Nevada, with a first lien position, interest
        rates between 5% and 14%, with an aggregate outstanding balance of approximately
        $23.4 million. The California loan “Rio Vista” was foreclosed upon during the
        three months ended December 31, 2006 and reclassified as a real estate held
        for
        sale. Refer to Note F - *Real
        Estate Held for Sale* in the
        notes to these financial statements for further information. Because we have
        a
        significant concentration of credit risk with our three largest borrowers,
        a
        default by any of such borrowers could have a material adverse effect on
        us.
  F
            -
            14
 *Table
            of Contents*
  As
        of
        December 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 one of our loans that has both principal and interest payments
        along with a “balloon” at the end of the term. 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**
 
 As
        of
        December 31, 2006 and 2005, we had 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 including loans related to seller financed real estate
        held
        for sale as of December 31, 2006 were as follows:
 
 **Loan
                  Type**
              
              **Number
                  Of Loans**
              
              **Balance
                  (2)**
              
              **Weighted
                  Average Interest Rate**
              
              **Portfolio
                  Percentage**
              
              **Weighted
                  Average Loan To Value (1)**Acquisition
                  and development
              
              
              4
              
              $
              2,788,000
              
              
              12.01%
              
              
              4.60%
              
              
              64.20%Commercial
              
              
              14
              
              
              36,072,000
              
              
              9.99%
              
              
              59.43%
              
              
              81.44%Construction
              
              
              6
              
              
              5,994,000
              
              
              11.68%
              
              
              9.87%
              
              
              64.66%Land
              
              
              9
              
              
              15,843,000
              
              
              12.31%
              
              
              26.10%
              
              
              52.16%33
              
              $
              60,697,000
              
              
              10.85%
              
              
              100.00%
              
              
              71.35%
 
 Investments
        in real estate loans including loans related to seller financed real estate
        held
        for sale as of December 31, 2005 were as follows:
 
 **Loan
                  Type**
              
              **Number
                  Of Loans**
              
              **Balance
                  (2)**
              
              **Weighted
                  Average Interest Rate**
              
              **Portfolio
                  Percentage**
              
              **Weighted
                  Average Loan To Value (1)**Acquisition
                  and development
              
              
              3
              
              $
              6,603,000
              
              
              9.39%
              
              
              10.71%
              
              
              55.03%Commercial
              
              
              18
              
              
              47,094,000
              
              
              9.63%
              
              
              76.39%
              
              
              69.17%Construction
              
              
              3
              
              
              2,298,000
              
              
              12.00%
              
              
              3.73%
              
              
              62.32%Land
              
              
              3
              
              
              5,653,000
              
              
              13.38%
              
              
              9.17%
              
              
              61.01%27
              
              $
              61,648,000
              
              
              10.04%
              
              
              100.00%
              
              
              66.65%
  (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 completion of the development 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 the loan.  F
            -
            15
 *Table
            of Contents*
 
 (2)
            The
                following table reconciles the balance of the loan portfolio to the
                amount
                shown on the accompanying Consolidated 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. 
 **December
                  31, 2006 Balance**
              
              **December
                  31, 2005 Balance**Balance
                  Per Loan Portfolio
              
              $
              60,697,000
              
              $
              61,648,000Less:Seller
                  Financed Loans Included in Real Estate Held for Sale
              
              
              (7,911,000
              )
              
              (8,797,000
              )Proceeds
                  of Principal on Seller Financed Loans Included in Deposit
                  Liability
              
              
              379,000
              
              
              206,000Unrealized
                  Gain on Seller Financed Loans
              
              
              --
              
              
              (144,000
              )Allowance
                  for Loan Losses
              
              
              (4,534,000
              )
              
              (1,604,000
              )Balance
                  per Balance Sheet
              
              $
              48,631,000
              
              $
              51,309,000
 
 The
        following is a schedule of priority of real estate loans including loans
        related
        to seller financed real estate held for sale as of December 31, 2006 and
        2005:
 
 **Loan
                  Type**
              
              **Number
                  of Loans**
              
              **December
                  31, 2006 Balance***
              
              **Portfolio**
                **Percentage**
              
              **Number
                  of Loans**
              
              **December
                  31, 2005**
                **Balance***
              
              **Portfolio**
                **Percentage**First
                  Deeds of Trust
              
              
              31
              
              $
              60,359,000
              
              
              99.44%
              
              
              26
              
              $
              61,610,000
              
              
              99.94%Second
                  Deeds of Trust**
              
              
              2
              
              
              338,000
              
              
              0.56%
              
              
              1
              
              
              38,000
              
              
              0.06%33
              
              $
              60,697,000
              
              
              100.00%
              
              
              27
              
              $
              61,648,000
              
              
              100.00%
 
 *
        Please
        see (2) above
 **
        Generally, our second trust deeds are junior to first trust deed positions
        held
        by either us or our manager.
 
 The
        following is a schedule of contractual maturities of investments in real
        estate
        loans, including loans related to seller financed real estate held for sale
        as
        of December 31, 2006:
 
 January
                  2007 - March 2007
              
              $
              19,760,000April
                  2007 - June 2007
              
              
              15,849,000July
                  2007 - September 2007
              
              
              17,329,000October
                  2007 - December 2007
              
              
              7,759,000Thereafter
              
              
              --Total
              
              $
              60,697,000
  F
            -
            16
 *Table
            of Contents*
  The
        following is a schedule by geographic location of investments in real estate
        loans, including loans related to seller financed real estate held for sale,
        as
        of December 31, 2006 and 2005:
 
 **December
                  31, 2006 Balance***
              
              **Portfolio
                  Percentage**
              
              **December
                  31, 2005 Balance***
              
              **Portfolio
                  Percentage**Arizona
              
              $
              5,509,000
              
              
              9.08%
              
              $
              8,586,000
              
              
              13.93%California
              
              
              6,988,000
              
              
              11.51%
              
              
              10,774,000
              
              
              17.48%Hawaii
              
              
              9,307,000
              
              
              15.33%
              
              
              9,031,000
              
              
              14.65%Nevada
              
              
              21,310,000
              
              
              35.11%
              
              
              15,504,000
              
              
              25.15%New
                  York
              
              
              3,246,000
              
              
              5.35%
              
              
              3,249,000
              
              
              5.27%North
                  Carolina
              
              
              --
              
              
              --%
              
              
              1,000,000
              
              
              1.62%Oklahoma
              
              
              1,937,000
              
              
              3.19%
              
              
              1,237,000
              
              
              2.01%Oregon
              
              
              5,200,000
              
              
              8.57%
              
              
              3,200,000
              
              
              5.19%Texas
              
              
              4,168,000
              
              
              6.87%
              
              
              4,567,000
              
              
              7.41%Washington
              
              
              3,032,000
              
              
              4.99%
              
              
              2,500,000
              
              
              4.05%Wisconsin
              
              
              --
              
              
              --%
              
              
              2,000,000
              
              
              3.24%Total
              
              $
              60,697,000
              
              
              100.00%
              
              $
              61,648,000
              
              
              100.00%
 
 *
        Please
        see (2) above
 
 At
        December 31, 2006, the following loans were non-performing (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); RightStar (Part I & Part II),
        Monterrey Associates LP, Forest Development LLC and Babuski LLC. These loans
        are
        currently carried on our books at a value of approximately $8.1 million,
        net of
        allowance for loan losses of approximately $4.5 million for the RightStar
        loans.
        These loans have been placed on non-accrual of interest status and are the
        subject of pending foreclosure proceedings.
 
 ·
            RightStar
                (Part I & Part II) are loans secured by a lien on the business and
                virtually all of the property of RightStar, which includes 4 cemeteries
                and 8 mortuaries in Hawaii with an outstanding balance of approximately
                $32.3 million of which our portion is approximately $9.3 million
                ($4.4
                million for Part I and $4.9 million for Part II). The lenders have
                commenced a judicial foreclosure on the loans, Part I and Part
                II. 
 ·
            Monterrey
                Associates, L.P., a loan secured by a 248 Unit apartment complex
                in
                Oklahoma City, OK, along with other real estate collateral, with
                an
                outstanding balance of approximately $4.4 million of which our portion
                is
                approximately $1.2 million. The loan is four months in arrears in
                payments
                of interest. Our manager has commenced foreclosure proceedings and
                is
                filing litigation to enforce the personal guarantee on the loan.
                Our
                manager has evaluated this loan and concluded that the value of the
                underlying collateral is sufficient to protect us from loss of principal.
                No specific allowance was deemed necessary. In addition, our manager
                commenced foreclosure proceedings on a second mortgage on a 233 unit
                apartment complex that was additional collateral for the loan. Subsequent
                to December 31, 2006, we completed the foreclosure of the second
                mortgage
                and took title to the property subject to a non-recourse first mortgage,
                which is held by an unrelated third party. We sold this property
                to an
                unrelated third party who will assume the non-recourse first mortgage.
                This transaction did not result in any gain or
                loss. 
 ·
            Forest
                Development, LLC , a loan secured by two 4,000 square foot single
                family
                residences, together with the four remaining lots in the subdivision,
                located in Mt. Charleston, NV with an outstanding balance of approximately
                $2.6 million of which our portion is $631,000. The loan is two months
                in
                arrears in payment of interest. Our manager has commenced foreclosure
                proceedings and is filing litigation to enforce the personal guarantee
                on
                the loan. Our manager has evaluated this loan and concluded that
                the value
                of the underlying collateral is sufficient to protect us from loss
                of
                principal. No specific allowance was deemed
                necessary.  F
            -
            17
 *Table
            of Contents*
 
 ·
            Babuski,
                LLC, a loan secured by 9.23 +/- acres of land at the northeast corner
                of
                the I-215 and Russell Road in Las Vegas, NV, with an outstanding
                balance
                of approximately $9.5 million of which our portion is approximately
                $1.5
                million. The loan is one month in arrears in payments of interest.
                Our
                manager has commenced foreclosure proceedings and is filing litigation
                to
                enforce the personal guarantee on the loan. Our manager has evaluated
                this
                loan and concluded that the value of the underlying collateral is
                sufficient to protect us from loss of principal. No specific allowance
                was
                deemed necessary. 
 The
        following schedule summarizes the non-performing loans as of December 31,
        2006:
 
 **Description
                  of Collateral**
              
              **Balance
                  at**
                **December
                  31, 2006**
              
              **Maturity
                  Date**
              
              **Number
                  of Months Non-Performing**
              
              **Percentage
                  of Total Loan Balance**4
                  cemeteries and 8 mortuaries in Hawaii Part I***
              
              $
              4,415,000
              
              
              3/31/2004
              
              
              33
              
              
              24%
                  of Part I4
                  cemeteries and 8 mortuaries in Hawaii Part II***
              
              
              4,892,000
              
              
              3/31/2004
              
              
              33
              
              
              35%
                  of Part II248-unit
                  apartment complex in Oklahoma City, OK
              
              
              1,237,000
              
              
              9/1/2006
              
              
              4
              
              
              28%2
                  single family residences, with 4 remaining lots in the subdivision
                  in Mt.
                  Charleston, NV
              
              
              631,000
              
              
              10/27/2006
              
              
              2
              
              
              24%9.23
                  +- acres of land in Las Vegas, NV
              
              
              1,500,000
              
              
              3/17/2007
              
              
              1
              
              
              16%$
              12,675,000
 
 ***
        Please refer to (3) *Specific
        Reserve Allowance* below.
 
 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 VRM II 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
                approximately $3.2 million. The new terms included a $1.2 million
                principal payment, reducing our principal balance by $171,000. This
                transaction resulted in us recording unearned revenue of $171,000,
                to be
                recognized through March 2007, the maturity of the loan. The terms
                of the
                loan are 9% due in 6 months, with an option to extend, which was
                granted
                in September 2006, for an additional 6
                months. 
 ·
            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
                was
                $71,000. 
 ·
            Delay
                fees from the date of the bankruptcy confirmation until the effective
                date
                in the aggregate amount of $282,000 of which our portion was
                $40,000. 
 ·
            Payment
                of past due forbearance fees of $555,000 of which our portion was
                $79,000,
                to be recognized as unearned revenue and amortized through March
                2007, the
                maturity of the loan. 
 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 December 31, 2006, we have provided a specific reserve related to the
        two
        loans secured by 4 cemeteries and 8 mortuaries in Hawaii (“RightStar loans”), of
        which our portion of the specific reserve is approximately $4.5 million.
        Our
        manager evaluated the loans and concluded that the remaining underlying
        collateral was sufficient to protect us against further losses of principal.
        Our
        manager will continue to evaluate these loans in order to determine if any
        other
        allowance for loan losses should be recorded.
  F
            -
            18
 *Table
            of Contents*
  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 stockholders.
 
 The
        following is a roll-forward of the allowance for loan losses for the twelve
        months ended December 31, 2006:
 
 **Description**
              
              **Balance
                  at**
                **December
                  31, 2005**
              
              **Specific
                  Reserve Allocation**
              
              **RightStar
                  Legal Reserve**
              
              **Balance
                  at**
                **December
                  31, 2006**General
                  allowance
              
              $
              379,000
              
              $
              (379,000
              )
              $
              --
              
              $
              --Specific
                  allowance (3)
              
              $
              1,225,000
              
              
              3,171,000
              
              
              138,000
              
              
              4,534,000Total
              
              $
              1,604,000
              
              $
              2,792,000
              
              $
              138,000
              
              $
              4,534,000
 
 **(3)**
            **Specific
                Reserve Allowance** 
 *RightStar
        Loan Allowance* -RightStar, Inc. (“RightStar”) defaulted on our loans in the fall of 2004. The
        lenders commenced a judicial foreclosure on the loans, part I and part II,
        which
        is secured by a lien on the business and virtually all of the property of
        RightStar, which includes 4 cemeteries and 8 mortuaries in Hawaii. The aggregate
        principal balance of the loan is approximately $32.3 million. The loans,
        part I
        and part II, are owned as follows:
 
 **Senior
                  Principal Amount (Part II)**
              
              **Junior
                  Principal Amount (Part I)**
              
              **Total**VRM
                  I
              
              $
              4,892,000
              
              $
              4,415,000
              
              $
              9,307,000VRM
                  II
              
              
              9,108,000
              
              
              8,183,000
              
              
              17,291,000Unrelated
                  Third Party
              
              
              --
              
              
              5,657,000
              
              
              5,657,000**Total**
              
              $
              14,000,000
              
              $
              18,255,000
              
              $
              32,255,000
 
 The
        loans
        are subject to an inter-creditor agreement which states the order of priority
        for any payments received are disbursed as follows:
 
 ·
            First
                to reimburse collection and foreclosure expenses advanced by the
                lenders; 
 ·
            Second
                to pay past due interest on the Senior Principal (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. 
 We
        and
        VRM II acquired the senior portion of the loan on July 14, 2005 for
        approximately $15.5 million of which our portion was approximately $5.4 million
        (including accrued interest of approximately $0.5 million). We and VRM II
        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. Subsequent to December
        31, 2006, Vestin Mortgage, Inc. purchased the junior principal amount owned
        by
        the unrelated third party for $500,000 cash. Vestin Mortgage, Inc. has agreed
        that any monies it receives as a result of payment of the notes or proceeds
        from
        a foreclosure sale are limited to its $500,000 investment in the notes plus
        expenses.
  F
            -
            19
 *Table
            of Contents*
  RightStar
        is currently being operated by a Court appointed Receiver, installed at the
        request of the lenders.
 
 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
        four months ended April 30, 2006, the State of Hawaii notified the lenders
        of a
        potential statutory trust fund deficiency, estimated to be between $20 million
        and $30 million and claimed that this balance has priority over all lenders.
        The
        lenders dispute the amount and priority of this deficit.
 
 In
        April
        2006, the lenders filed suit against the State of Hawaii listing 26 causes
        of
        action, including allegations that the State of Hawaii has illegally blocked
        the
        lender’s right to foreclose and take title to its collateral by inappropriately
        attaching conditions to the granting of licenses needed to operate the business,
        the pre-need trust funds and the perpetual care trust funds and that the
        State
        of Hawaii has attempted to force the lenders to accept liability for any
        statutory trust fund deficits while no such lender liability exists under
        the
        laws of the State of Hawaii. The State of Hawaii responded by filing allegations
        against Vestin Mortgage, Inc. and VRM II alleging that these Vestin entities
        improperly influenced the former RightStar trustees to transfer trust funds
        to
        VRM II. We believe the State’s claims to be without merit and intend to
        vigorously pursue our remedies while defending against any allegations made
        by
        the State.
 
 In
        October 2006, a Judge of the Circuit Court of the First Circuit in Hawaii
        imposed new restrictions upon our right to foreclose and denied any subsequent
        owner the licensing necessary to operate the funeral service until the alleged
        pre-need and perpetual care trust funds shortages are cured. We believe these
        restrictions are both unauthorized under state law and unconstitutional under
        federal law. In January 2007, the Lenders filed a petition with the Supreme
        Court of Hawaii seeking mandamus relief from that ruling. As of February
        2,
        2007, the Supreme Court of Hawaii has not ruled on the Lender’s petition, but
        has requested briefing from the State of Hawaii regarding the petition. 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 $3.0 million during the twelve months ended December 31, 2006
        and
        specifically allocated our general allowance of approximately $0.4 million
        to
        the RightStar loans. The increase in the reserve allowance included
        approximately $0.5 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. As of December 31, 2006, our specific reserve allowance on the
        RightStar loans totaled approximately $4.5 million, which includes a legal
        reserve balance of $138,000.
 
 In
        addition, our manager had granted extensions on seven 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 December 31, 2006 was approximately $8.25 million.
        Our manager concluded that no allowance for loan loss was necessary with
        respect
        to these loans as of December 31, 2006.
 
 **Asset
        Quality and Loan Reserves**
 
 Losses
        may occur from investing in real estate loans. The amount of losses will
        vary as
        the loan portfolio is affected by changing economic conditions and the financial
        condition of borrowers.
  F
            -
            20
 *Table
            of Contents*
  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 December 31, 2006 and 2005 approximately $3.4 million and $3.2 million,
        respectively, in non-performing loans had no specific allowance for loan
        losses.
        As of December 31, 2006 and 2005, approximately $9.3 million and $9.0 million,
        respectively, in non-performing loans had an allowance for loan losses of
        approximately $4.5 million and 1.6 million, respectively. At December 31,
        2006,
        the following loans were non-performing (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); RightStar (Part I & Part II), Monterrey
        Associates LP, Forest Development LLC and Babuski LLC. These loans are currently
        carried on our books at a value of approximately $8.1 million, net of allowance
        for loan losses of approximately $4.5 million for the RightStar loans. These
        loans have been placed on non-accrual of interest status and are the subject
        of
        pending foreclosure proceedings. 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 - RELATED PARTY**
 
 During
        the twelve months ended December 31, 2006, we purchased 372,655 shares of
        VRM
        II’s common stock, representing approximately 0.96% of their total outstanding
        common stock.
 
 **NOTE
        F — REAL ESTATE HELD FOR SALE**
 
 At
        December 31, 2006, we
        held
        one property with a total carrying value of approximately $3.7 million, which
        was acquired through foreclosure and recorded as investments in real estate
        held
        for sale. The
        summary below includes our percentage ownership in the property. Our investments
        in real estate held for sale are accounted for at the lower of cost or fair
        value less costs to sell with fair value based on appraisals and knowledge
        of
        local market conditions. It is not our intent to invest in or own real estate
        as
        a long-term investment. We seek to sell properties acquired through foreclosure
        as quickly as circumstances permit. The following is a roll-forward of
        investments in real estate held for sale during the twelve months ended December
        31, 2006:
  F
            -
            21
 *Table
            of Contents*
 
 **Description**
              **Date
                  Acquired**
              **Percentage
                  of Ownership**
              
              **Balance
                  at**
                **December
                  31, 2005**
              
              **Acquisitions
                  (Reductions)**
              
              **Seller
                  Financed Sales**
              
              **Proceeds
                  from Sales**
              
              **Gain
                  on Sale of Real Estate**
              
              **Balance
                  at**
                **December
                  31, 2006**Land
                  containing (82) residential lots in Henderson, NV
                  **(1)**
              2/28/2003
              66%
              $
              2,497,000
              $
              (25,000)
              $
              --
              $
              (2,513,000)
              $
              41,000
              $
              --480
                  residential building lots & 2 family dwellings in Cathedral City, CA
                  **(2)**
              12/21/2006
              12%
              
              --
              
              3,689,000
              
              --
              
              --
              
              --
              
              3,689,000**Total**
              
              
              $
              2,497,000
              $
              3,664,000
              $
              --
              $
              (2,513,000)
              $
              41,000
              $
              3,689,000
 
 **(1)**
              **Sales
                  of Real Estate Held for Sale for the Twelve Months Ended December
                  31,
                  2006:**
 
 During
        July 2006, we and VRM II sold the land containing residential lots in Henderson,
        NV, for approximately $3.8 million, of which we received approximately $2.5
        million which resulted in a gain of $41,000.
 
 **(2)**
              **Acquisitions
                  of Real Estate Held for Sale for the Twelve Months Ended December
                  31,
                  2006:**
 
 During
        November 2006, we, VRM II and Fund III acquired the collateral of a loan,
        480
        residential building lots and two single family dwellings in Rio Vista Village
        Subdivision in Cathedral City, CA, through foreclosure. Our manager has
        evaluated the carrying value of the property and based on its estimate, no
        valuation allowance was deemed necessary as of December 31, 2006. The property
        is currently under a purchase agreement for a total sales price of approximately
        $29.9 million, of which our portion will be approximately $3.7
        million.
 
 **NOTE
        G — REAL ESTATE HELD FOR SALE - SELLER FINANCED**
 
 At
        December 31, 2006, we held an interest in one **** property
        with a total carrying value of approximately $7.9 million, which was 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 certain requirements. We may share ownership of such
        properties with VRM II, Fund III, the manager, or other related and/or unrelated
        parties. The summary below includes our percentage of 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 twelve
        months
        ended December 31, 2006:
 
 **Description**
              **Date
                  Acquired**
              **Percentage
                  of Ownership**
              
              **Balance
                  at**
                **December
                  31, 2005**
              
              **Acquisitions**
              
              **Sales**
              
              **Gain
                  (Loss) on Sale**
              
              **Balance
                  at**
                **December
                  31, 2006**126
                  unit (207) bed assisted living facility in Phoenix, AZ
                  **(1)**
              9/8/2004
              10%
              $
              886,000
              $
              --
              $
              (1,131,000)
              $
              245,000
              $
              --Assisted
                  living facility in Las Vegas, Nevada **(2)**
              9/23/2004
              52%
              
              7,911,000
              
              --
              
              --
              
              --
              
              7,911,000$
              8,797,000
              $
              --
              $
              (1,131,000)
              $
              245,000
              $
              7,911,000
  **(1)**
              During
                  August 2005, we and VRM II sold the 126 unit (207 bed) assisted
                  living
                  facility in Phoenix, AZ and financed 100% of the purchased price
                  of
                  approximately $10.5 million maturing in January 2007. The transaction
                  resulted in a $144,000 deferred gain. In December 2006 the borrower
                  paid
                  the loan in full resulting in us recognizing a gain on sale of
                  $245,000,
                  which included the deferred gain and payments received from the
                  borrower
                  during the life of the loan.
 F
            -
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 *Table
            of Contents*
 
 **(2)**
            During
                September 2004, we and VRM II sold an assisted living facility in
                Las
                Vegas, NV and financed 100% of the purchased price of approximately
                $15.3
                million maturing in September 2007. The transaction resulted in no
                gain or
                loss. As of December 31, 2006, we had received approximately $1.3
                million
                in payments from the borrower. These payments are recorded as a deposit
                liability and will be recognized as income once the equity requirement
                has
                been met or the loan is paid in full. 
 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 with FAS
        66.
 
 **NOTE
        H — RELATED PARTY TRANSACTIONS**
 From
        time
        to time we may acquire or sell investments in real estate loans from/to our
        manager or other related parties pursuant to the terms of our Management
        Agreement provided the price does not exceed the par value. No gain or loss
        is
        recorded on these transactions, as it is not our intent to make a profit
        on the
        purchase or sale of such investments. The purpose is generally to diversify
        our
        portfolio by syndicating loans, thereby providing us with additional capital
        to
        make additional loans.
 
 **Transactions
        with the Manager**
 
 Our
        manager is entitled to receive from us an annual management fee of up to
        0.25%
        of our aggregate capital contributions received by us and Fund I from the
        sale
        of shares or membership units, paid monthly. The amount of management fees
        paid
        to our manager for the twelve months ended December 31, 2006 was
        $277,000.
 
 As
        of
        December 31, 2006, our manager owned 100,000 of our common shares. For the
        twelve months ended December 31, 2006 we incurred $38,000 in dividends payable
        to our manager based on the number of shares they held on the dividend record
        dates and we recorded pro-rata distributions owed to our manager of
        $25,000.
 
 **Transactions
        with Other Related Parties**
 
 As
        of
        December 31, 2006, we owned 372,655 common shares of VRM II, representing
        approximately 0.96% of their total outstanding common stock. For the twelve
        months ended December 31, 2006 we recognized $151,000 in dividends from VRM
        II
        based on the number of shares we held on the dividend record dates.
 
 As
        of
        December 31, 2006, VRM II owned 407,485 of our common shares, representing
        approximately 5.93% of our total outstanding common stock. On November 29,
        2006
        VRM II filed the required Schedule 13D with the SEC. For the twelve months
        ended
        December 31, 2006 we incurred $72,000 in dividends payable to VRM II based
        on
        the number of shares they held on the dividend record dates.
 
 During
        the twelve months ended December 31, 2006, we sold $1.4 million in real estate
        loans to VRM II and bought $0.5 million in real estate loans from VRM II.
        No
        gain or loss resulted from these transactions.
 
 As
        of
        December 31, 2006, Vestin Originations owed us $1,000 related to a loan payment
        by a borrower. We received payment from Vestin Origination on January 2,
        2007.
 
 For
        the
        twelve months ended December 31, 2006, we incurred $61,000 for legal fees
        to the
        law firm of Levine, Garfinkel & Katz in which the Secretary of Vestin Group
        has an equity ownership interest in the law firm.
  F
            -
            23
 *Table
            of Contents*
  **NOTE
        I — NOTES RECEIVABLE**
 
 During
        October 2004, we and VRM II sold the Castaways Hotel/Casino in Las Vegas,
        Nevada
        of which our portion of the net cash proceeds was $2,118,000. 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 $160,000
        in
        exchange for a release of their personal guarantees. Since payments on the
        note
        did not begin for 18 months from the date of the note, we discounted the
        face
        value of the note to $119,000, which is based on a discount rate of 8% as
        of
        that date. For the twelve months ended December 31, 2006, we received $17,000
        in
        principal payments. The outstanding balance as of December 31, 2006 was
        $102,000, net of allowance.
 
 During
        March 2005, we and VRM II sold the
        126
        unit hotel in Mesquite, Nevada for $5,473,000 of which our share of the proceeds
        were approximately $1.8 million which resulted in a loss of
        $389,000. In
        addition, during June 2005, we and VRM II entered into a settlement agreement
        with the guarantors of the loan in the amount of $2,000,000 in exchange for
        a
        release of their personal guarantees of which our share was $640,000. 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 were entitled to a discount of $782,000 from the principal
        balance in the event the entire balance was paid by December 2006. The first
        installment was received and recognized as income in July 2005, of which
        our
        portion was $32,000. Payments will be recognized as income when received.
        This
        note is fully reserved.
 
 During
        November 2004, we and VRM II sold the 140 Unit/224 beds senior facility in
        Mesa,
        Arizona of which our portion of the consideration received totaled $1,009,000.
        We and VRM II received a promissory note from the original guarantor in the
        amount of $478,000 of which our portion was $67,000. 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
        the uncertainty of collectibility, we have provided a valuation allowance
        for
        the entire remaining balance of the promissory note. Income
        will be recognized when payments are received. For
        the
        twelve months ended December
        31, 2006, we received $25,000 in principal payments. This
        note
        is fully reserved.
 
 During
        December 2005, we and VRM II sold the 460 acre residential subdivision in
        Lake
        Travis, TX for approximately $5.5 million, of which our portion was
        approximately $1.8 million. The purchase price included cash proceeds of
        $5
        million and a $500,000 note receivable with an imputed interest rate of 8%
        in
        July 2006. A net gain of $71,000 resulted in this transaction, of which our
        portion was $24,000. The purchaser has defaulted on the note and our manager
        is
        pursuing litigation. Our portion of the outstanding balance as of December
        31,
        2006 was $171,000. This note is fully reserved.
 
 **NOTE
        J— SECURED BORROWINGS**
 
 Secured
        borrowings provide an additional source of capital for our lending activity.
        Secured borrowings allow us to increase the diversification of our loan
        portfolio and to invest in loans that we might not otherwise invest in. We
        do
        not receive any fees for entering into secured borrowing arrangements; however,
        we may receive revenue in any differential of the interest spread. Loans
        in
        which unaffiliated investors have participated through inter-creditor agreements
        (“Inter-creditor Agreements”) are accounted for as secured borrowings in
        accordance with Statement of Financial Accounting Standards (“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 an unaffiliated investor (the “Investor”) may
        participate on a non-pari passu basis in certain real estate loans with us
        and/or VRM II 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.
  F
            -
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 *Table
            of Contents*
  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.
 
 During
        October 2006, we, our manager, Vestin Origination, Inc., VRM II and Fund
        III
        entered into an intercreditor agreement with an unrelated third party related
        to
        the funding of a construction real estate loan. (See exhibit 10.8 Intercreditor
        Agreement under the Exhibit Index included in Part IV, Item 15 Exhibits and
        Financial Statement Schedules of this Report Form 10-K). The secured borrowing
        will be recognized pro rata between us, VRM II and Fund III for the amount
        each
        entity has funded for the loan. As of December 31, 2006, approximately $24.3
        million has been funded on this loan, of which our portion was $97,000. As
        of
        December 31, 2006, this secured borrowing totaled approximately $18.5 million,
        of which our portion was $310,000. In the event VRM II and Fund III were
        unable
        to pay their pro rata share of the secured borrowing, we would be liable
        for the
        full outstanding balance. As of December 31, 2005, we had approximately $2.7
        million in funds being used under Inter-creditor Agreements.
 
 **NOTE
        K — NOTE PAYABLE**
 
 In
        May
        2006, we financed a 12 month insurance policy for Directors and Officers
        liability, with an annual interest rate of 6.92%. The agreement required
        a down
        payment of $49,000 and nine monthly payments of $22,000 beginning on May
        27,
        2006. As of December 31, 2006 the outstanding balance of the note was $22,000,
        which was subsequently paid in full.
 
 In
        addition, during the twelve months ended December 31, 2006, we paid in full
        borrowings from a margin account collateralized by securities held at a
        brokerage firm totaling approximately $2.7 million.
 
 **NOTE
        L — RECENT ACCOUNTING PRONOUNCEMENTS**
 
 In
        July
        2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
        in
        Income Taxes" ("FIN 48"). This interpretation, among other things, creates
        a two
        step approach for evaluating uncertain tax positions. Recognition (step one)
        occurs when an enterprise concludes that a tax position, based solely on
        its
        technical merits, is more-likely-than-not to be sustained upon examination.
        Measurement (step two) determines the amount of benefit that
        more-likely-than-not will be realized upon settlement. Derecognition of a
        tax
        position that was previously recognized would occur when a company subsequently
        determines that a tax position no longer meets the more-likely-than-not
        threshold of being sustained. FIN 48 specifically prohibits the use of a
        valuation allowance as a substitute for derecognition of tax positions, and
        it
        has expanded disclosure requirements. FIN 48 is effective for fiscal years
        beginning after December 15, 2006, in which the impact of adoption should
        be
        accounted for as a cumulative - effect adjustment to the beginning balance
        of
        retained earnings. The Company is evaluating FIN 48 and has not yet determined
        the impact the adoption will have on the consolidated financial statements,
        but
        it is not expected to be significant.
  On
          September 13, 2006, the SEC issued Staff Accounting Bulletin 108 (“SAB 108”),
“Considering the Effects of Prior Year Misstatements when Qualifying
          Misstatements in Current Year Financial Statements,” which provides interpretive
          guidance on the consideration of the effects of prior year misstatements
          in
          quantifying current year misstatements for the purpose of a materiality
          assessment. SAB 108 is effective for companies with fiscal years ending
          after
          November 15, 2006 and is required to be adopted by the Company in its fiscal
          year ending December 31, 2006. The adoption of this bulletin did not have
          a
          significant impact on the consolidated financial statements.
  F
            -
            25
 *Table
            of Contents*
  In
        September 2006, the Financial
        Accounting Standards Board ( FASB)
        issued FAS 158 - *Employers’
        Accounting for Defined Benefit Pension and Other Postretirement Plans, an
        amendment of FASB Statements No. 87, 88, 106, and 132(R)* .
        FAS 58
        requires an employer to: (a) recognize in its statement of financial position
        the funded status of a benefit plan; (b) measure defined benefit plan assets
        and
        obligations as of the end of the employer’s fiscal year (with limited
        exceptions); and (c) recognize as a component of other comprehensive income,
        net
        of tax, the gains or losses and prior service costs or credits that arise
        but
        are not recognized as components of net periodic benefit costs pursuant to
        prior
        existing guidance. The provisions governing recognition of the funded status
        of
        a defined benefit plan and related disclosures are effective as of the end
        of
        fiscal years ending after December 15, 2006. The requirement to measure plan
        assets and benefit obligations as of the date of the employer’s fiscal year-end
        statement of financial position is effective for fiscal years ending after
        December 15, 2008. Because we currently do not have defined benefit or other
        post retirement plans the standard will have no effect on us.
 
 In
        September 2006, the FASB issued FAS 157 - *Fair
        Value Measurements* (“FAS
        157”), which defines fair value, establishes a framework for measuring fair
        value in generally accepted accounting principles, and expands disclosures
        about
        fair value measurements. This Statement applies under other accounting
        pronouncements that require or permit fair value measurements, the FASB having
        previously concluded in those accounting pronouncements that fair value is
        the
        relevant measurement attribute. Accordingly, this Statement does not require
        any
        new fair value measurements. FAS 157 is effective for financial statements
        issued for fiscal years beginning after November 15, 2007, and interim periods
        within those fiscal years. This Statement is required to be adopted by the
        Company in the first quarter of its fiscal year 2008. The Company is currently
        assessing the impact of the adoption of this Statement.
 
 **NOTE
        M — LEGAL MATTERS INVOLVING THE MANAGER**
 
 The
        United States Securities and Exchange Commission (the “Commission”), conducted
        an investigation of certain matters related to us, our manager, Vestin Capital,
        VRM II and Fund III. We fully cooperated during the course of the investigation.
        On September 27, 2006, the investigation was resolved through the entry of
        an
        Administrative Order by the Commission (the “Order”). Our manager, Vestin
        Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin
        Capital (collectively, the “Respondents”), consented to the entry of the Order
        without admitting or denying the findings therein. In the Order, the Commission
        finds that the Respondents violated Sections 17(a)(2) and 17(a)(3) of the
        Securities Act of 1933 through the use of certain slide presentations in
        connection with the sale of units in Fund III and in Fund II, the predecessor
        to
        VRM II. The Respondents consented to the entry of a cease and desist order,
        the
        payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s suspension from
        association with any broker or dealer for a period of six months, which expires
        in March 2007. In addition, the Respondents agreed to implement certain
        undertakings with respect to future sales of securities. We are not a party
        to
        the Order and we do not expect that the sanctions imposed upon the Respondents
        will have any material affect upon our operations.
 
 VRM
        II,
        Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
        civil action filed by 88 separate plaintiffs (“Plaintiffs”) in Superior Court
        for Clark County, Nevada. The Plaintiffs allege, among other things, that
        Defendants: breached certain alleged contractual obligations owed to Plaintiffs;
        breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented
        or
        omitted material facts regarding the conversion of Fund II into VRM II. The
        Action seeks monetary damages and a rescission of the REIT conversion. The
        Defendants believe that the allegations are without merit and that they have
        adequate defenses. The Defendants intend to undertake a vigorous defense.
        The
        terms of VRM II’s management agreement and Fund II’s operating agreement contain
        indemnity provisions whereby, Vestin Mortgage and Michael V. Shustek may
        be
        eligible for indemnification by the Company with respect to the above
        actions.
  F
            -
            26
 *Table
            of Contents*
 VRM
          II
          and Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
          action filed in San Diego Superior Court by certain plaintiffs who allege,
          among
          other things, that they were wrongfully denied appraisal rights in connection
          with the merger of Fund II into Vestin Realty Mortgage II, Inc. The action
          is
          being brought as a purported class action on behalf of all members of Vestin
          Fund II who did not vote in favor of the merger.  The Defendants believe
          that the allegations are without merit and that they have adequate defenses.
          The
          Defendants intend to undertake a vigorous defense.  The terms of VRM
          II's management agreement and Fund II’s Operating Agreement contain
          indemnity provisions whereby, Vestin Mortgage and Michael V. Shustek may
          be
          eligible for indemnification by VRM II with respect to the above
          actions.
 
 In
        addition to the matters described above, our manager is involved in a number
        of
        other legal proceedings concerning matters arising in connection with the
        conduct of its business activities. Our manager believes it has meritorious
        defenses to each of these actions and intends to defend them vigorously.
        Other
        than the pending state court litigation involving Desert Land as further
        described above and the matters described in Note N - *Legal
        Matters Involving the Company* below,
        our 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**
 
 Vestin
        Group, Vestin Mortgage, and Del Mar Mortgage, Inc., a company wholly owned
        by
        Michael V. Shustek, the sole stockholder 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 in 1999, prior to the formation of Vestin Fund I, LLC. 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. were 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. had indemnified Vestin Group and Vestin Mortgage for any losses and
        expenses in connection with the Action, and Mr. Shustek had 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.
 
 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. The U.S. Supreme
        Court denied Desert Land’s Writ of Certiorari on June 12, 2006, effectively
        ending this action.
  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 us 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 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. 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. We believe that the allegations
        are without merit and that we have adequate defenses. We intend to undertake
        a
        vigorous defense.
 
 In
        April
        2006, the lenders filed suit against the State of Hawaii listing 26 causes
        of
        action, including allegations that the State of Hawaii has illegally blocked
        the
        lender’s right to foreclose and take title to its collateral by inappropriately
        attaching conditions to the granting of licenses needed to operate the business,
        the pre-need trust funds and the perpetual care trust funds and that the
        State
        of Hawaii has attempted to force the lenders to accept liability for any
        statutory trust fund deficits while no such lender liability exists under
        the
        laws of the State of Hawaii. The State of Hawaii responded by filing allegations
        against Vestin Mortgage, Inc. and VRM II alleging that these Vestin entities
        improperly influenced the former RightStar trustees to transfer trust funds
        to
        VRM II. We believe the State’s claims to be without merit and intend to
        vigorously pursue our remedies while defending against any allegations made
        by
        the State.
 
 In
        October 2006, a Judge of the Circuit Court of the First Circuit in Hawaii
        imposed new restrictions upon our right to foreclose and denied any subsequent
        owner the licensing necessary to operate the funeral service until the alleged
        pre-need and perpetual care trust funds shortages are cured. We believe these
        restrictions are both unauthorized under state law and unconstitutional under
        federal law. In January 2007, the Lenders filed a petition with the Supreme
        Court of Hawaii seeking mandamus relief from that ruling. As of March 9,
        2007,
        the Supreme Court of Hawaii has not ruled on the Lender’s petition, but has
        requested briefing from the State of Hawaii regarding the petition. 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
          and
          Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
          action filed in San Diego Superior Court by certain plaintiffs who allege,
          among
          other things, that they were wrongfully denied appraisal rights in connection
          with the merger of Fund I into Vestin Realty Mortgage I, Inc. The action
          has
          been removed to the United States District Court for the Southern District
          of
          California, but the Company has agreed to stipulate to remand this action
          to San
          Diego Superior Court. The action is being brought as a purported class
          action on
          behalf of all members of Vestin Fund I who did not vote in favor of the
          merger.
          The Defendants believe that the allegations are without merit and that
          they have
          adequate defenses. The Defendants intend to undertake a vigorous defense.
          The
          terms of our management agreement and Fund I’s Operating Agreement contain
          indemnity provisions whereby, Vestin Mortgage and Michael V. Shustek may
          be
          eligible for indemnification by the Company with respect to the above
          actions.
 
 In
        addition to the matters described above, we are involved in a number of other
        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. Other than the matters
        described above, we believe that we are not a party to any pending legal
        or
        arbitration proceedings that would have a material adverse effect on our
        financial condition or results of operations or cash flows, although it is
        possible that the outcome of any such proceedings could have a material impact
        on our net income in any particular period.
  F
            -
            28
 *Table
            of Contents*
  **NOTE
        O — DIVIDEND REQUIREMENT**
 
 To
        maintain our status as a REIT, we are required to make dividend 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 non-cash income over 5% of our REIT taxable income.
        All dividend distributions will be made at the discretion of our Board of
        Directors and will depend on our earnings, both tax and GAAP, financial
        condition, maintenance of REIT status and such other factors as the Board
        of
        Directors deems relevant.
 
 **NOTE
        P — SUBSEQUENT EVENTS**
 
 Our
        manager commenced foreclosure proceedings on a second mortgage on a 233 unit
        apartment complex that was additional collateral for the Monterrey Associates,
        L.P. loan. Subsequent to December 31, 2006, we completed the foreclosure
        of the
        second mortgage and took title to the property subject to a non-recourse
        first
        mortgage, which is held by an unrelated third party. We sold this property
        to an
        unrelated third party who will assume the non-recourse first mortgage. This
        transaction did not result in any gain or loss.
 
 Subsequent
        to December 31, 2006, Vestin Mortgage, Inc. purchased the junior principal
        amount owned by the unrelated third party for $500,000 cash. Vestin Mortgage,
        Inc. has agreed that any monies it receives as a result of payment of the
        notes
        or proceeds from a foreclosure sale are limited to its $500,000 investment
        in
        the notes plus expenses.
 
 **NOTE
        Q — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)**
 
 The
        following schedule is a selected quarterly financial data for the twelve
        months
        ended December 31, 2006:
  **For
                    the 12 Months Ended December 31, 2006****1st
                    Quarter**
                
                **2nd
                    Quarter**
                
                **3rd
                    Quarter**
                
                **4th
                    Quarter**
                
                **Year**Total
                    Revenues
                
                $
                1,164,000
                
                $
                1,097,000
                
                $
                1,350,000
                
                $
                1,352,000
                
                $
                4,963,000Total
                    Operating Expenses
                
                
                3,440,000
                
                
                279,000
                
                
                390,000
                
                
                487,000
                
                
                4,596,000Total
                    Income (Loss) from Real Estate Held for Sale
                
                
                (16,000
                )
                
                (1,000
                )
                
                40,000
                
                
                197,000
                
                
                220,000Net
                    income before income tax provision
                
                
                (2,292,000
                )
                
                817,000
                
                
                1,000,000
                
                
                1,062,000
                
                
                587,000Income
                    tax provision
                
                $
                --
                
                $
                --
                
                $
                15,000
                
                $
                (15,000
                )
                $
                --**NET
                    INCOME (LOSS)**
                
                $
                (2,292,000
                )
                $
                817,000
                
                $
                985,000
                
                $
                1,077,000
                
                $
                587,000Basic
                    and diluted earnings per share
                
                $
                (0.33
                )
                $
                0.12
                
                
                0.14
                
                
                0.16
                
                
                0.09Dividends
                    declared per common share / cash distributions per membership
                    unit
                
                $
                0.16
                
                $
                0.10
                
                
                0.08
                
                
                0.30
                
                
                0.64Weighted
                    average common shares / membership units
                
                
                6,925,788
                
                
                6,867,957
                
                
                6,868,907
                
                
                6,869,357
                
                
                6,882,809Weighted
                    average term of outstanding loans**(b)**
                
                
                20
                    months
                
                
                20
                    months
                
                
                20
                    months
                
                
                19
                    months
                
                
                19
                    months
   F
            -
            29
 *Table
            of Contents*
  The
        following schedule is a selected quarterly financial data for the six months
        ended December 31, 2005:
 
 **For
                  The Three Months Ended**
              
              **For
                  The Three Months Ended**
              
              **For
                  The**
                **Six
                  Months Ended****September
                  31, 2005**
              
              **December
                  31, 2005**
              
              **December
                  31, 2005**Total
                  Revenues
              
              $
              1,719,000
              
              $
              1,420,000
              
              $
              3,139,000Total
                  Operating Expenses
              
              
              230,000
              
              
              262,000
              
              
              492,000Total
                  Income (Loss) from Real Estate Held for Sale
              
              $
              420,000
              
              $
              (1,000
              )
              $
              419,000**NET
                  INCOME**
              
              $
              1,909,000
              
              $
              1,157,000
              
              $
              3,066,000Net
                  Income Allocated to Members
              
              $
              1,909,000
              
              $
              1,157,000
              
              $
              3,066,000Net
                  Income Allocated to Members Per Weighted Average Membership
                  Units
              
              $
              0.25
              
              $
              0.15
              
              $
              0.40Weighted
                  Average Membership Units
              
              
              7,667,852
              
              
              7,668,345
              
              
              7,668,098Annualized
                  Rate of Return to Members**(a)**
              
              
              9.88%
              
              
              5.99%
              
              
              7.93%Cash
                  Distributions
              
              $
              1,160,000
              
              $
              1,146,000
              
              $
              2,306,000Cash
                  Distributions Per Weighted Average Membership Units
              
              $
              0.15
              
              $
              0.15
              
              $
              0.30Weighted
                  Average Term of Outstanding Loans**(b)**
              
              
              18
                  months
              
              
              18
                  months
              
              
              18
                  months
 
 **(a)**
            The
                annualized rate of return to members is calculated based upon the
                net GAAP
                income allocated to members per weighted average units, divided by
                the
                number of days during the period and multiplied by three hundred
                sixty
                five (365) days, then divided by the cost per unit
                ($10.00). 
 **(b)**
            The
                weighted average term of our outstanding loans includes extensions
                and
                loans related to seller financed real estate held for
                sale.  F
            -
            30
 *Table
            of Contents*
  **SUPPLEMENTARYINFORMATION**
 
 **ScheduleI****VESTIN
                  REALTY MORTGAGE I, INC.****REAL
                  ESTATE LOANS ON REAL ESTATE *****REAL
                  ESTATE LOAN ROLL FORWARD****Balance,
                  September 30, 2004**
              
              $
              58,745,000Additions
                  during the periodNew
                  real estate loans and additions
              
              
              20,566,000Real
                  estate loans bought
              
              
              600,000Deductions
                  during the periodCollections
                  of principal and reductions
              
              
              11,490,000Foreclosed
                  loans (Real estate held for sale)
              
              
              1,273,000Real
                  estate loans sold
              
              
              --Net
                  Change in 2004 - 2005
              
              
              8,403,000**Balance,
                  June 30, 2005**
              
              $
              67,148,000Additions
                  during the periodNew
                  real estate loans and additions
              
              
              17,009,000Real
                  estate loans bought
              
              
              5,923,000Deductions
                  during the periodCollections
                  of principal and reductions
              
              
              20,495,000Real
                  estate loans sold
              
              
              7,937,000Net
                  Change in 2005
              
              
              (5,500,000
              )**Balance,
                  December 31, 2005**
              
              $
              61,648,000Additions
                  during the periodNew
                  real estate loans and additions
              
              
              37,898,000Real
                  estate loans bought
              
              
              575,000Deductions
                  during the periodCollections
                  of principal and reductions
              
              
              34,247,000Foreclosed
                  loans (Real estate held for sale)
              
              
              3,702,000Real
                  estate loans sold
              
              
              1,475,000Net
                  Change in 2006
              
              
              (951,000
              )**Balance,
                  December 31, 2006**
              
              $
              60,697,000
 
 *
        Includes loans related to seller financed real estate held for
        sale.
  F
            -
            31
 *Table
            of Contents*
 
 **ScheduleII****VESTIN
                  REALTY MORTGAGE I, INC.****REAL
                  ESTATE LOANS ON REAL ESTATE *****REAL
                  ESTATE LOANS BY TYPE OF PROPERTY****As
                  of December 31, 2006:****Type
                  of Property**
              
              **Interest
                  Rate**
              
              **Face
                  Amount of Loan**
              
              **Carrying
                  Amount of Loan**
              
              **Maturity
                  Date**
              
              **Amount
                  Subject to Delinquency**Commercial
              
              
              5%
                  - 14%
              
              $
              182,715,000
              
              $
              36,072,000
              
              
              03/04
                  - 12/07
              
              $
              10,544,000Construction
              
              
              10%
                  - 12%
              
              $
              100,466,000
              
              $
              5,994,000
              
              
              10/06
                  - 11/07
              
              $
              631,000Acquisition
                  and Development
              
              
              12%
                  - 13%
              
              $
              18,932,000
              
              $
              2,788,000
              
              
              01/07
                  - 07/07
              
              $
              -Land
              
              
              10%
                  - 13%
              
              $
              77,750,000
              
              $
              15,843,000
              
              
              03/07
                  - 12/07
              
              $
              1,500,000$
              60,697,000**As
                  of December 31, 2005:****Type
                  of Property**
              
              
              **Interest
                  Rate**
              
              
              **Face
                  Amount of Loan**
              
              
              **Carrying
                  Amount of Loan**
              
              
              **Maturity
                  Date**
              
              
              **Amount
                  Subject to Delinquency**Commercial
              
              
              5%
                  - 14%
              
              $
              190,555,000
              
              $
              47,094,000
              
              
              03/04
                  - 09/07
              
              $
              12,280,000Construction
              
              
              12%
              
              $
              42,050,000
              
              $
              2,298,000
              
              
              03/06
                  - 05/07
              
              $
              --Acquisition
                  and Development
              
              
              8%
                  - 12%
              
              $
              75,662,000
              
              $
              6,603,000
              
              
              04/06
                  - 05/06
              
              $
              --Land
              
              
              10%
                  - 14%
              
              $
              63,158,000
              
              $
              5,653,000
              
              
              02/06
                  - 04/06
              
              $
              --61,648,000
 
 
 **ScheduleIII****VESTIN
                  REALTY MORTGAGE I, INC.****REAL
                  ESTATE LOANS ON REAL ESTATE *****REAL
                  ESTATE LOANS BY LIEN POSITION****As
                  of December 31, 2006:****Lien
                  Position**
              
              **Face
                  Amount of Loan**
              
              **Interest
                  Rate**
              
              **Carrying
                  Amount of Loan**
              
              **Maturity
                  Date**
              
              **Amount
                  Subject to Delinquency**1st
              
              $
              371,201,000
              
              
              5%
                  - 14%
              
              $
              60,359,000
              
              
              03/04
                  - 12/07
              
              $
              12,676,0002nd
              
              $
              8,662,000
              
              
              10.5%
                  - 13%
              
              $
              338,000
              
              
              07/07
                  - 12/07
              
              $
              --$
              60,697,000**As
                  of December 31, 2005:****Lien
                  Position**
              
              
              **Face
                  Amount of Loan**
              
              
              **Interest
                  Rate**
              
              
              **Carrying
                  Amount of Loan**
              
              
              **Maturity
                  Date**
              
              
              **Amount
                  Subject to Delinquency**1st
              
              $
              363,763,000
              
              
              12%
              
              $
              61,610,000
              
              
              03/04
                  - 09/07
              
              $
              12,280,0002nd
              
              $
              7,662,000
              
              
              5%
                  - 14%
              
              $
              38,000
              
              
              04/06
              
              $
              --$
              61,648,000
 
 *
        Includes loans related to seller financed real estate held for
        sale.
  F
            -
            32
 *Table
            of Contents*
 
 **ScheduleIV****VESTIN
                  REALTY MORTGAGE I, INC.****REAL
                  ESTATE LOANS ON REAL ESTATE *****REAL
                  ESTATE LOANS THAT EXCEED THREE PERCENT OF THE
                  PORTFOLIO****As
                  of December 31, 2006:****Description
                  of Loan**
              
              **Interest
                  Rate**
              
              **Maturity
                  Date**
              
              **Lien
                  Position**
              
              **Face
                  Amount of Loan**
              
              **Carrying
                  Amount of Loan**
              
              **Amount
                  Subject to Delinquency**Commercial
              
              
              14.0%
              
              
              03/31/04
              
              
              1st
              
              $
              34,000,000
              
              $
              9,307,000
              
              $
              9,307,000Commercial
              
              
              5.0%
              
              
              09/21/07
              
              
              1st
              
              $
              15,334,000
              
              $
              7,532,000
              
              $
              --Commercial
              
              
              9.0%
              
              
              03/31/07
              
              
              1st
              
              $
              24,500,000
              
              $
              3,246,000
              
              $
              --Commercial
              
              
              10.0%
              
              
              06/30/07
              
              
              1st
              
              $
              16,000,000
              
              $
              3,000,000
              
              $
              --Commercial
              
              
              9.0%
              
              
              07/12/07
              
              
              1st
              
              $
              23,900,000
              
              $
              3,000,000
              
              $
              --Commercial
              
              
              10.5%
              
              
              12/14/07
              
              
              1st
              
              $
              8,750,000
              
              $
              2,750,000
              
              $
              --Commercial
              
              
              11.5%
              
              
              10/05/07
              
              
              1st
              
              $
              18,000,000
              
              $
              2,500,000
              
              $
              --Construction
              
              
              12.0%
              
              
              05/16/07
              
              
              1st
              
              $
              26,000,000
              
              $
              3,032,000
              
              $
              --Land
              
              
              13.0%
              
              
              07/28/07
              
              
              1st
              
              $
              15,000,000
              
              $
              3,414,000
              
              $
              --Land
              
              
              12.0%
              
              
              04/11/07
              
              
              1st
              
              $
              8,400,000
              
              $
              3,200,000
              
              $
              --Land
              
              
              13.0%
              
              
              06/30/07
              
              
              1st
              
              $
              10,000,000
              
              $
              3,000,000
              
              $
              --Land
              
              
              10.0%
              
              
              12/30/07
              
              
              1st
              
              $
              18,000,000
              
              $
              2,000,000
              
              $
              --Land
              
              
              13.0%
              
              
              08/10/07
              
              
              1st
              
              $
              8,500,000
              
              $
              1,986,000
              
              $
              --**As
                  of December 31, 2005:****Description
                  of Loan**
              
              
              **Interest
                  Rate**
              
              
              **Maturity
                  Date**
              
              
              **Lien
                  Position**
              
              
              **Face
                  Amount of Loan**
              
              
              **Carrying
                  Amount of Loan**
              
              
              **Amount
                  Subject to Delinquency**A/D
              
              
              12.00%
              
              
              05/10/06
              
              
              1st
              
              $
              33,000,000
              
              $
              2,260,000
              
              $
              --A/D
              
              
              8.00%
              
              
              04/25/06
              
              
              1st
              
              $
              35,000,000
              
              $
              4,305,000
              
              $
              --Commercial
              
              
              12.00%
              
              
              02/08/06
              
              
              1st
              
              $
              6,000,000
              
              $
              3,652,000
              
              $
              --Commercial
              
              
              6.00%
              
              
              07/15/06
              
              
              1st
              
              $
              6,500,000
              
              $
              2,000,000
              
              $
              --Commercial
              
              
              10.00%
              
              
              04/30/06
              
              
              1st
              
              $
              15,000,000
              
              $
              6,684,000
              
              $
              --Commercial
              
              
              5.00%
              
              
              09/21/07
              
              
              1st
              
              $
              15,334,000
              
              $
              7,705,000
              
              $
              --Commercial
              
              
              13.00%
              
              
              09/30/06
              
              
              1st
              
              $
              19,500,000
              
              $
              2,400,000
              
              $
              --Commercial
              
              
              11.00%
              
              
              06/30/05
              
              
              1st
              
              $
              26,000,000
              
              $
              3,249,000
              
              $
              3,249,000Commercial
              
              
              14.00%
              
              
              03/31/04
              
              
              1st
              
              $
              34,000,000
              
              $
              9,031,000
              
              $
              9,031,000Land
              
              
              14.00%
              
              
              04/15/06
              
              
              1st
              
              $
              6,526,000
              
              $
              3,400,000
              
              $
              --
 
 
 *
        Includes loans related to seller financed real estate held for
        sale.
  F
            -
            33