**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 333-125121





**VESTIN
                REALTY MORTGAGE II, INC.**(Exact
                name of registrant as specified in its
                charter)








MARYLAND
            
            61-1502451(State
                or Other Jurisdiction of
            
            (I.R.S.
                EmployerIncorporation
                or Organization)
            
            Identification
                No.)








8379
      WEST
      SUNSET ROAD, LAS VEGAS, NEVADA  89113


(Address
      of principal executive offices) (Zip Code)





Registrant’s
      telephone number, including area code 702.227.0965





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





None
            
            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
            
            $
            171,571,042





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
            
            
            38,862,128














**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
              46ITEM
                  8.
              FINANCIAL
                  STATEMENTS AND SUPPLEMENTARY
                  DATA
              47ITEM
                  9.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE
              47ITEM
                  9A.
              CONTROLS
                  AND PROCEDURES
              48ITEM
                  9B.
              OTHER
                  INFORMATION
              51PART
                  IIIITEM
                  10.
              DIRECTORS,
                  EXECUTIVE OFFICERS AND CORPORATE
                  GOVERNANCE
              51ITEM
                  11.
              EXECUTIVE
                  COMPENSATION
              55ITEM
                  12.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT AND RELATED STOCKHOLDER MATTERS
              55ITEM
                  13.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND
                  DIRECTOR INDEPENDENCE
              57ITEM
                  14.
              PRINCIPAL
                  ACCOUNTING FEES AND SERVICES
              58PART
                  IVITEM
                  15.
              EXHIBITS,
                  FINANCIAL STATEMENT SCHEDULES
              58EXHIBIT
                  INDEX
              59SIGNATURES
              60BALANCE
                  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-9SUPPLEMENTARY
                  INFORMATION
              F-34











**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 II, LLC (“Fund II”) was organized in December 2000 as a Nevada limited
      liability company for the purpose of investing in real estate loans. Vestin
      Realty Mortgage II, Inc. (“VRM II”) was organized in January 2006 as a Maryland
      corporation for the sole purpose of effecting a merger with Fund II. On March
      31, 2006, Fund II merged into VRM II and the members of Fund II received one
      share of VRM II’s common stock for each membership unit of Fund II. References
      in this report to the “Company”, “we”, “us” or “our” refer to Fund II with
      respect to the period prior to April 1, 2006 and to VRM II with respect to
      the
      period commencing on April 1, 2006. Because we were a limited liability company
      (“LLC”) during the prior periods reflected in this report, we make reference to
      Fund II’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 June
      2001.





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





-
            1
            -





The
      consolidated financial statements include the accounts of the Company and our
      wholly owned taxable REIT subsidiary, TRS II, 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 73% 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
            -





·
            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
      98.91% 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, including loans related to seller financed real estate held
      for
      sale, 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 69.97% on a weighted average basis.




-
            3
            -





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 two of our loans that have both principal and interest payments
      along with a “balloon” payment at the end of the term. As of December 31, 2006,
      these two loans had a balance of approximately $18.5
      million and had original terms of twelve and thirty-six months. In addition,
      we
      invest in real estate loans that require borrowers to maintain interest reserves
      funded from the principal amount of the loan for a period of time. At December
      31, 2006, we had approximately $71.5 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
      $4.3 million. At December 31, 2005, we had approximately $17.7 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 $1.3 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
            -





·
            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 I and/or
      Fund III (collectively, the “Lead Lenders”). In the event of borrower non-
      performance, the Inter-creditor Agreements generally provide that the Lead
      Lenders must repay the Investor’s loan amount either by (i) continuing to remit
      to the Investor the interest due on the participated loan amount; (ii)
      substituting an alternative loan acceptable to the Investor; or (iii)
      repurchasing the participation from the Investor for the outstanding balance
      plus accrued interest.





An
      Investor may participate in certain loans with the Lead Lenders through
      participation agreements. In the event of borrower non-performance, the
      participation agreement may allow the Investor to be repaid up to the amount
      of
      the Investor’s investment prior to the Lead Lenders being repaid.





As
      of
      December 31, 2006, 92% of our loans were loans in which we participated with
      other lenders, most of whom are our affiliates.




-
            5
            -





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 9% of our stockholders’ equity. The loan
      yields interest at 13% per annum and, as of December 31, 2006, our portion
      of
      the outstanding balance of the loan was approximately $25.3
      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 21.43% of our loans were in this
      category.




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            6
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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
      3.54% 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 17.87% 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 57.16% 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 98.91% of our loans were secured by first deeds of
      trust.





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            7
            -





**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 1.09% 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 ten 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 27% 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 $71.5
      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 $4.3 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 two of our loans that have both principal and interest payments
      along with a “balloon” payment at the end of the term. As of December 31, 2006,
      these two loans had a balance of approximately $18.5 million and had terms
      ranging from twelve to thirty-six months. There are no specific criteria used
      in
      evaluating the credit quality of borrowers for real estate loans requiring
      balloon payments. Furthermore, a substantial period of time may elapse between
      the review of the financial statements of the borrower and the date when the
      balloon payment is due. As a result, there is no assurance that a borrower
      will
      have sufficient resources to make a balloon payment when due. To the extent
      that
      a borrower has an obligation to pay real estate loan principal in a large lump
      sum payment, its ability to repay the loan may be dependent upon its ability
      to
      sell the property, obtain suitable refinancing or otherwise raise a substantial
      amount of cash. As a result, these loans can involve a higher risk of default
      than loans where the principal is paid at the same time as the interest
      payments.




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            8
            -





**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 $12.9 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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            9
            -





**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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            10
            -





**Available
      Information**





Our
      Internet website address is www.vestinrealtymortgage2.com .
      We make
      available free of charge through www.vestinrealtymortgage2.com our
      Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
      on
      Form 8-K and all amendments to those reports as soon as reasonably 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 II 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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            11
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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 6% of our net investment in real estate loans, as compared to
      secured borrowings equal to approximately 9% 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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            12
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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 69.97% as compared to 63.31% 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 $19.5 million in
      delinquent loans, net of allowance for loan losses, and approximately $30.1
      million of real estate held for sale not sold through seller financed for a
      total of approximately $49.6 million in non-performing assets, which represented
      approximately 17.8% of our stockholders’ equity. As of December 31, 2006, we
      also had approximately $14.8 million of seller financed real estate held for
      sale and had received approximately $5.5 million in payments from borrowers
      on
      the loans associated with these properties. We do not believe that a rising
      interest rate environment will increase or accelerate our delinquency rate
      because all of our loans are short term.





**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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            13
            -





**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 two 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
            -





·
            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
            -





**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 ten 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.





**Legal
      actions seeking damages and appraisal rights could harm our operating results
      and financial condition.**





We
      have
      recently been named in several
      legal actions seeking damages and appraisal rights in connection with the REIT
      conversion .
      See
      Item 3. *Legal
      Proceedings* below.
      While we believe these actions are without merit, the defense of such actions
      could materially increase our legal costs and may require the substantial
      attention of our management. This in turn might adversely impact our operating
      results. Moreover, any adverse outcome in such actions could result in our
      having to pay substantial damages which would reduce our cash resources and
      harm
      our financial condition.





**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.




-
            16
            -





**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 I, 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 approximately $1.1 million for the twelve months ended
      December 31, 2006 for managing us and Fund II. 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 I, Fund III and inVestin Nevada. Our assets
      represented approximately 70% of the assets managed by Vestin Mortgage as of
      December 31, 2006.




-
            17
            -





**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
      I,
      Fund III and inVestin Nevada, which have the same investment objectives as
      our
      company. There are no restrictions or guidelines on how our manager will
      determine which loans are appropriate for us and which are appropriate for
      VRM
      I, 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 II’s taxable income attributable to its realized net interest
      income.





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





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




-
            18
            -





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





As
      of
      December 31, 2006, we held two properties with a total carrying value of
      approximately $30.1 million recorded as investments in real estate held for
      sale. As of December 31, 2006, we also held interests in two properties with
      a
      total carrying value of approximately $14.8 million, which were sold in
      transactions in which we or an affiliate provided the financing and which were
      recorded as seller financed real estate held for sale. United States generally
      accepted accounting principals (“GAAP”) requires us to include these properties
      in real estate held for sale until the borrower has met and maintained certain
      requirements. The real estate held for sale and the seller financed real estate
      held for sale collectively constituted approximately 14.8% of our assets as
      of
      December 31, 2006. In addition, both of the seller financed real estate held
      for
      sale properties are assisted living facilities, which cannot be operated by
      a
      taxable REIT subsidiary.





**Taxable
      REIT subsidiaries are subject to corporate-level tax, which may devalue 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 II’s intended qualification prior to the REIT
      conversion, which generally are not subject to any U.S. federal income taxation
      on their income and gain.





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





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





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





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




-
            19
            -





**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 May 1, 2006 to
      December 31, 2006 has ranged from $0.77 to $5.76 (adjusted for the 30% stock
      dividend paid in December 2006). 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, 2020 unless the holders of a majority of our common stock determine
      otherwise. As we move closer to the dissolution date, we expect to stop making
      new loans and we expect that our stock price will approach our book value per
      share.





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





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





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





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





·
            changes
                in market valuations of similar
                companies;





·
            changes
                in tax laws affecting REITs;





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





·
            general
                market and economic conditions.





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





One
      of
      the factors that will influence the price of our common stock will be the
      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.




-
            20
            -





**We
      are the subject of shareholder litigation which may depress the price of our
      stock.**





A
      number
      of lawsuits have 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 II into a REIT. We believe the suits are without merit
      and we intend to vigorously defend against such claims. Nonetheless, the outcome
      of the lawsuits 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 claims. 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
            -





·
            *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
            -





·
            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 I and Fund III. We fully cooperated during the course of the investigation.
      On September 27, 2006, the investigation was resolved through the entry of
      an
      Administrative Order by the Commission (the “Order”). Our manager, Vestin
      Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin
      Capital (collectively, the “Respondents”), consented to the entry of the Order
      without admitting or denying the findings therein. In the Order, the Commission
      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 our predecessor, Vestin
      Fund II, LLC. The Respondents consented to the entry of a cease and desist
      order, the payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s
      suspension from association with any broker or dealer for a period of six
      months, which 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.





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 II, 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.




-
            23
            -





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.





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 VRM I.
      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 VRM I 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. The Defendants believe that the
      allegations are without merit and that they have adequate defenses. The
      Defendants intend to undertake a vigorous defense.




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




-
            24
            -





**Legal
      Matters Involving the Company**





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 us alleging that these Vestin entities
      improperly influenced the former RightStar trustees to transfer trust funds
      to
      us. 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,
      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 our 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.





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 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 our 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.





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
            -





**PARTII**





**ITEM
      5.**  **MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
      AND ISSUER PURCHASES OF EQUITY SECURITIES**





**Market
      Information**





Our
      common stock is traded on the Nasdaq National Market under the symbol VRTB
      and
      began trading on May 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, as adjusted for the 30% stock dividend issued
      on
      December 15, 2006.





**2006**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            N/A
            
            $
            N/ASecond
                Quarter
            
            $
            5.38
            
            $
            0.77Third
                Quarter
            
            $
            5.76
            
            $
            3.47Fourth
                Quarter
            
            $
            5.57
            
            $
            5.13





On
      December 15, 2006, a 30% stock dividend was issued to shareholders on record
      as
      of November 30, 2006, effectively increasing the outstanding common shares
      from
      29,870,943 to 38,832,402. All share, per share, membership unit and per
      membership unit information in this Report has been retroactively adjusted
      to
      reflect the stock dividend.





On
      December 18, 2006, our Board of Directors declared a cash dividend of $0.105
      per
      common share for the months ended November 30, 2006 and December 31, 2006
      combined. The dividend was paid on January 26, 2007 to shareholders of record
      as
      of December 31, 2006.





On
      January 22, 2007, our Board of Directors declared a cash dividend of $0.05
      per
      common share for the month ended January 31, 2007, payable on February 26,
      2007
      to shareholders of record as of February 8, 2007.





On
      February 20, 2007, our Board of Directors declared a cash dividend of $0.05
      per
      common share for the month ended February 28, 2007, payable on March 26, 2007
      to
      shareholders of record as of March 9, 2007.





On
      March
      7, 2007, the common stock closed at $5.26 per share.





**Holders**





As
      of
      March 7, 2007, 1,926 accounts held 38,862,128 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. In August 2006, our Board of Directors voted to authorize a
      Dividend Declaration Policy that allows, at the Company’s discretion, for
      dividends to be declared monthly instead of quarterly. Cash
      distributions per membership unit and dividends declared per share for the
      twelve months ended December 31, 2006 are listed below:




-
            26
            -





**Distributions
                During:**
            **Cash
                Distribution to Members Per Membership Unit**January
                2006
            $0.04February
                2006
            $0.04March
                2006
            $0.08Total
                Cash Distributions to Members During Three Months Ended March 31,
                2006
            $0.16**Date
                of Declaration**
            **Record
                Date**
            **Date
                Paid**
            **Dividend
                Per Share***July
                27, 2006
            August
                7, 2006
            August
                21, 2006
            $0.123*August
                25, 2006
            September
                12, 2006
            September
                27, 2006
            $0.046*September
                25, 2006
            October
                12, 2006
            October
                27, 2006
            $0.046*October
                24, 2006
            November
                13, 2006
            November
                29, 2006
            $0.050November
                22, 2006
            December
                11, 2006
            December
                27, 2006
            $0.050December
                18, 2006
            December
                31, 2006
            January
                26, 2007
            $0.105Total
                Dividends Declared During the Nine Months Ended December 31,
                2006
            $0.420Dividends
                Declared Per Common Share / Cash Distributions to Members Per Membership
                Unit for The Twelve Months Ended December 31, 2006
            $0.58





*
      The
      dividend per share prices have been adjusted to reflect the 30% stock dividend
      paid on December 15, 2006.





**Recent
      Sales of Unregistered Securities**





None.





**Equity
      Compensation Plan Information**





None.





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





None.




-
            27
            -





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




**Balance
                  at****Vestin
                  Realty Mortgage II, Inc.**
              
              **12/31/2006**
              
              **12/31/2005**
              
              **12/31/2004**
              
              **6/30/2005**
              
              **6/30/2004**
              
              **6/30/2003****(Unaudited)**Balance
                  Sheet Data:Investments
                  in real estate loans (net of allowance)
              
              $
              221,849,000
              
              $
              227,875,000
              
              $
              222,716,000
              
              $
              217,553,000
              
              $
              303,853,000
              
              $
              338,681,000Cash,
                  cash equivalents, certificates of deposits and short-term investments
              
              
              19,178,000
              
              
              47,893,000
              
              
              78,690,000
              
              
              11,566,000
              
              
              14,362,000
              
              
              16,816,000Interest
                  and other receivables
              
              
              2,709,000
              
              
              3,079,000
              
              
              2,495,000
              
              
              3,234,000
              
              
              4,224,000
              
              
              3,898,000Investment
                  in Local Agency Bonds
              
              
              --
              
              
              --
              
              
              --
              
              
              15,701,000
              
              
              --
              
              
              --Due
                  from Manager
              
              
              --
              
              
              325,000
              
              
              
              
              
              --
              
              
              --
              
              
              --Due
                  from VRM I
              
              
              --
              
              
              --
              
              
              1,504,000
              
              
              1,560,000
              
              
              2,987,000
              
              
              216,000Due
                  from Vestin Originations
              
              
              31,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Real
                  estate held for sale
              
              
              30,079,000
              
              
              38,639,000
              
              
              39,805,000
              
              
              51,215,000
              
              
              28,264,000
              
              
              13,696,000Real
                  estate held for sale-seller financed
              
              
              14,774,000
              
              
              22,887,000
              
              
              13,131,000
              
              
              12,631,000
              
              
              5,708,000
              
              
              2,137,000Note
                  receivable
              
              
              282,000
              
              
              810,000
              
              
              328,000
              
              
              328,000
              
              
              --
              
              
              --Note
                  receivable form Manager
              
              
              --
              
              
              --
              
              
              1,000,000
              
              
              --
              
              
              --
              
              
              --Note
                  receivable VRM I
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              4,278,000
              
              
              4,599,000Assets
                  under secured borrowing
              
              
              13,796,000
              
              
              19,754,000
              
              
              25,689,000
              
              
              25,655,000
              
              
              61,924,000
              
              
              26,730,000Other
                  assets
              
              
              344,000
              
              
              687,000
              
              
              --
              
              
              27,000
              
              
              --
              
              
              --Total
                  assets
              
              $
              303,042,000
              
              $
              361,949,000
              
              $
              385,358,000
              
              $
              339,470,000
              
              $
              425,600,000
              
              $
              406,773,000Liabilities
              
              
              24,556,000
              
              
              46,809,000
              
              
              28,316,000
              
              
              28,390,000
              
              
              64,531,000
              
              
              31,583,000Stockholders'
                  equity
              
              
              278,486,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Members’
                  equity
              
              
              --
              
              
              315,140,000
              
              
              357,042,000
              
              
              311,080,000
              
              
              361,069,000
              
              
              375,190,000Total
                  liabilities and stockholders' / members’ equity
              
              $
              303,042,000
              
              $
              361,949,000
              
              $
              385,358,000
              
              $
              339,470,000
              
              $
              425,600,000
              
              $
              406,773,000




-
            28
            -





**For
                the Twelve Months Ended**
            
            **For
                the Six**
              **Months
                Ended**
            
            **For
                the Six**
              **Months
                Ended**
            
            **For
                the Year Ended****12/31/2006**
            
            **12/31/2005**
            
            **12/31/2004**
            
            **6/30/2005**
            
            **6/30/2004**
            
            **6/30/2003****(Unaudited)**Income
                Statement Data:Revenues
            
            $
            23,479,000
            
            
            12,228,000
            
            $
            16,199,000
            
            $
            27,958,000
            
            $
            41,136,000
            
            $
            40,313,000Operating
                expenses
            
            
            10,624,000
            
            
            1,514,000
            
            
            3,410,000
            
            
            8,730,000
            
            
            10,169,000
            
            
            14,468,000Income
                (loss) from real estate held for sale
            
            
            2,996,000
            
            
            (170,000
            )
            
            (903,000
            )
            
            (10,340,000
            )
            
            764,000
            
            
            (2,073,000
            )Income
                before provision for income taxes
            
            
            15,851,000
            
            
            10,544,000
            
            
            11,886,000
            
            
            8,888,000
            
            
            31,731,000
            
            
            23,772,000Provision
                for income taxes
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Net
                income
            
            $
            15,851,000
            
            
            10,544,000
            
            $
            11,886,000
            
            $
            8,888,000
            
            $
            31,731,000
            
            $
            23,772,000Basic
                and diluted earnings per common share
            
            $
            0.41Dividends
                declared per common share / cash distributions per membership
                units
            
            $
            0.58Net
                income allocated to Members
            
            
            
            
            
            10,544,000
            
            $
            11,886,000
            
            $
            8,888,000
            
            $
            31,731,000
            
            $
            23,772,000Annualized
                Rate of Return to Members**(a)**
            
            
            
            
            
            4.89
            %
            
            4.94
            %
            
            1.97
            %
            
            6.63
            %
            
            5.82
            %Net
                income allocated to Members per weighted average membership units
            
            
            
            
            
            0.25
            
            $
            0.25
            
            $
            0.20
            
            $
            0.66
            
            $
            0.58Cash
                distributions to Members
            
            $
            6,073,000
            
            $
            8,586,000
            
            $
            11,160,000
            
            $
            20,113,000
            
            $
            29,097,000
            
            $
            34,688,000Cash
                distributions per weighted average membership units
            
            
            
            
            $
            0.20
            
            $
            0.23
            
            $
            0.45
            
            $
            0.61
            
            $
            0.85Weighted
                average common shares / membership units
            
            
            38,832,458
            
            
            42,747,725
            
            
            47,756,928
            
            
            45,188,004
            
            
            47,729,256
            
            
            40,860,031Weighted
                Average Term of Outstanding Loans**(b)**
            
            
            19
                months
            
            
            22
                months
            
            
            20
                months
            
            
            24
                months
            
            
            20
                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 , including 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
            -





**ITEM
      7.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND 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, the six
      months ended December 31, 2005 and 2004, the fiscal year ended June 30, 2005
      and
      the fiscal year 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
            -





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 $19.5 million, net of allowance for loan losses
      of
      approximately $9.3 million for the RightStar loans. These loans have been placed
      on non-accrual of interest status and are the subject of pending foreclosure
      proceedings. In addition to the RightStar allowance, we have also provided
      $500,000 for an impairment on a restructured loan. 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 $49.6 million or 16.4% of
      our
      total assets as of December 31, 2006 as compared to approximately $70.2 million
      or 19.4% of our total assets as of December 31, 2005. At December 31, 2006,
      non-performing assets consisted of approximately $30.1 million of real estate
      held for sale not sold through seller financing and approximately $19.5 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
                March 2006, we sold the parcel in Cedar Park, Texas. Our net proceeds
                were
                $260,000, resulting in a gain of
                $60,000.





·
            During
                June 2006, we sold the parcel in Austin, Texas. Our net proceeds
                were
                $550,000, resulting in a gain of
                $252,000.





·
            During
                July 2006, we sold a 504 unit apartment complex in Austin, Texas,
                for
                approximately $16.1 million. This resulted in a net gain of approximately
                $1.6 million.





·
            During
                July 2006, we and VRM I sold the land containing residential lots
                in
                Henderson, NV, for approximately $3.8 million, of which we received
                approximately $1.3 million, which resulted in a net gain of
                $21,000.





·
            During
                September 2006, we sold the “Windrush” property in Fort Worth, Texas, for
                a sales price of $8,019,000, resulting in net proceeds of $7,885,000.
                During the three months ended December 31, 2006, we received an additional
                payment of $230,000 from cash reserves held by the apartment manager,
                which resulted in a net gain of $56,000 on the sale of the
                property.





**·**
            During
                December 2006, we sold the 150 unit condominium conversion in Houston,
                TX
                “The Club at Stablechase” for a sales price of approximately $8.5 million,
                with net proceeds of approximately $8.2 million, which resulted in
                a net
                loss of approximately $0.5 million**.**





·
            During
                November 2006, we, VRM I 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 $25.6 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 22 months, respectively.




-
            31
            -





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, including loans
      related to seller financed real estate held for sale, which, as of December
      31,
      2006, was 69.97% on a weighted average basis, generally using appraisals
      prepared on an “as-if developed basis” in connection with the loan origination.
      The increase in the weighted average loan to value ratio from 63.31%, as of
      December 31, 2005, to 69.97%, as of December 31, 2006, is primarily due to
      14
      loans that were funded during the twelve-month period, totaling approximately
      $103.4 million, with a loan to value ratios ranging from 67.52% to 80.00%.
      The
      majority of these loans were to repeat borrowers with a history of good standing
      with us. In addition, the original terms of these loans were 18 months or less.
      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.





**The
      Twelve Months Ended December 31, 2006**





*Total
      Revenues* :
      For the
      twelve months ended December 31, 2006 total revenues were approximately $23.5
      million due in significant part to the following factors:





·
            We
                recognized interest income from investments in real estate loans
                of
                approximately $21.7 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,
                including loans related to seller financed real estate held for sale,
                was
                approximately $242.4 million with a weighted average interest rate
                of
                10.94%. As of December 31, 2005, our investment in real estate loans,
                including loans related to seller financed real estate held for sale,
                was
                approximately $256.5 million with a weighted average interest rate
                of
                10.06%. The decline in investments in real estate loans is attributable
                to
                a decline in the capital we had available for investments. Our capital
                was
                reduced by redemptions of approximately $30.5 million paid to our
                members
                during the three months ended March 31,
                2006.





In
      addition, our interest income was affected by the performances of our loans.
      During the twelve months ended December 31, 2006, four loans totaling
      approximately $37.0 million became non-performing. In addition, one of the
      non-performing loans, with a balance of approximately $25.6 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
                earned approximately $1.3 million in bank interest income on certificates
                of deposits held at banking institutions. This was attributable to
                the
                purchase of investments in certificates of deposits of approximately
                $17.1
                million during the twelve months ended December 31,
                2006.




-
            32
            -





*Total
      Operating Expenses* :
      For the
      twelve months ended December 31, 2006, total operating expenses were
      approximately $10.6 million. Expenses were primarily affected by the following
      factors:





·
            Recognition
                of provisions for loan loss of $5.5 million related to the loans
                secured
                by 4 cemeteries and 8 mortuaries in Hawaii. See “Specific Loan Allowance”
                in Note D -*Investment Real Estate Loans*of
                the Notes to the Consolidated Financial Statements included in Part
                IV of
                this Report on Form 10-K.





·
            Interest
                expense was approximately $1.4 million primarily due to $906,000
                of
                interest expenses related to secured borrowings. In addition, we
                incurred
                $522,000 of expense related to notes payable on three real estate
                owned
                apartment properties. These notes were paid in full in April
                2006.





·
            Professional
                fees of approximately $1.3 million include $720,000 of accounting
                fees
                related to our public filings during the twelve months ended December
                31,
                2006. In addition, we incurred legal expense of $587,000 due in part
                to
                several legal actions, seeking damages and appraisal rights in connection
                with the REIT conversion, during the twelve months ended December
                31,
                2006. For additional information see Item 3 -*Legal
                Proceedings*included in Part I of this Report on Form
                10-K.





·
            We
                recognized a provision for doubtful receivable relating to a note
                receivable in default of $329,000 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 $371,000 related to the liability
                insurance expense 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 approximately $3 million.





·
            During
                the twelve months ended December 31, 2006, we recorded approximately
                $4.1
                million in rental revenue related to three apartment complexes that
                were
                classified as real estate held for sale. During the twelve months
                ended
                December 31, 2006, we sold these properties as described
                below.





·
            The
                sale of the apartment complex in Austin, TX, resulted in a gain of
                approximately $1.6 million. In addition, we sold the 278- unit apartment
                complex in Fort Worth, TX “Windrush” during September 2006, which resulted
                in a net gain of $56,000. These gains were offset by a loss of
                approximately $0.5 million recognized on the sale of a 150 unit
                condominium conversion complex in Houston, TX “The Club at Stablechase”
                during December 2006.





·
            In
                addition to the gain and losses on the sale of real estate held for
                sale
                referred above, we recorded a gain of $60,000 on the sale of a real
                estate
                parcel in Cedar Park, TX.





·
            During
                the twelve months ended December 31, 2006, we incurred expenses related
                to
                real estate held for sale not sold through seller financed of
                approximately $4.9 million, primarily related to the three apartment
                complexes referred to above.




-
            33
            -





·
            We
                recorded a gain on sale of real estate held for sale because of the
                recognition of approximately $2.3 million of deposit liabilities
                received
                from seller financed loans during the twelve months ended December
                31,
                2006. As of December 31, 2006, we had approximately $14.8 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 of 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.





*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. From
      April 1 through December 31, 2006, we declared dividends to our shareholders
      of
      approximately $16.3 million.





*Distributions
      to Members:* During
      the three months ended March 31, 2006, we distributed approximately $6.1 million
      to Fund II’s members, resulting in a distribution in excess of net income
      available for distribution of approximately $2.4 million. Distributions made
      during this period included approximately $2.1 million in respect of net income
      available for distribution generated during the six months ended December 31,
      2005.





**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 decreased compared to the same period
      in 2004 by approximately $4 million or 25.5% primarily due to the
      following:





·
            Decrease
                in interest income of approximately $3.1 million is related to the
                decrease in investments in real estate loans and secured borrowings
                of
                approximately $7.2 million and $27.8 million, respectively, from
                September
                30, 2004 to September 30, 2005. This decrease was partially offset
                by the
                increase in real estate loans during the three months ended December
                31,
                2005.





·
            Included
                in other income for the six months ended December 31, 2004 is an
                insurance
                settlement we received of approximately $0.8 resulting from deficient
                procedures performed by the voucher control company we used for
                construction control on a golf course in Austin,
                Texas.





Non-performing
      assets include loans in non-accrual status of approximately $36.4 million as
      of
      December 31, 2005 compared to approximately $34.4 million as of December 31,
      2004 and real estate held for sale not sold through seller financed of
      approximately $38.6 million as of December 31, 2005 compared to approximately
      $39.8 million as of December 31, 2004.





*Total
      Operating Expenses:* For
      the
      six months ended December 31, 2005 and 2004, total expenses were approximately
      $1.5 million and $3.4 million, a decrease of approximately $1.9 million or
      55.6%. Expenses were affected by the following factors:





·
            Interest
                expense decreased by approximately $2 million due to the decrease
                in
                secured borrowing of approximately $5.9 million for the six months
                ended
                December 31, 2005 compared to the same period in
                2004.





·
            For
                the six months ended December 31, 2004, we recorded approximately
                $0.2
                million in provision for loan losses. No provision for loan losses
                was
                recorded during the same period in
                2005.




-
            34
            -





These
      decreases were partially offset by the following increases:





·
            Included
                in other expenses for the six months ended December 31, 2005 is allowance
                for bad debt of $183,000 related to an accounts receivable balance
                from a
                third party for reimbursement of expenses incurred by us related
                to the
                loan secured by 4 cemeteries and 8 mortuaries in
                Hawaii.





·
            Also
                included in other expenses during the six months ended December 31,
                2005,
                is a loan fee of $100,000 related to two loans which a third party
                investor participated through an Inter-creditor
                Agreement.





*Total
      Loss from real estate held for sale:* For the
      six months ended December 31, 2005 and 2004, total loss from real estate held
      for sale was approximately $0.2 million and $0.9 million,
      respectively.





·
            Gain
                on sale of real estate held for sale related to seller financed loans,
                which were paid during the six months ended December 31, 2005 of
                approximately $1.1 million.





·
            For
                the six months ended December 31, 2005, we recorded operating income
                of
                approximately $2.3 million related to the three real estate owned
                apartment complexes, which were acquired through foreclosure during
                2005.
                We had no similar income during the same period in
                2004.





·
            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 $0.8
                million.





·
            During
                the six months ended December 31, 2004, we recorded approximately
                $0.1
                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 expenses related to real estate held for sale for the six
                months
                ended December 31, 2005 of approximately $3.6 million related to
                the three
                real estate owned apartment complexes, which were acquired through
                foreclosure during 2005





As
      of
      December 31, 2005 and 2004, we had approximately $22.9 million and $13.1
      million, respectively, in real estate held for sale-seller financed. As of
      December 31, 2005 and 2004, we had approximately $0.9 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 4.89% and 4.94%,
      respectively





*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
            
            $
            8,586,000
            
            $
            11,160,000Distributions
                in Excess of Net Income Available for a Distribution Generated During
                the
                Period
            
            
            --
            
            
            --Total
                Distributions
            
            $
            8,586,000
            
            $
            11,160,000




-
            35
            -





Net
      Income Available for Distributions is a non-GAAP financial measure that is
      defined in the operating agreement, which governed Fund II 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**(Unaudited)Distribution
                of Net Income Available for Distribution
            
            $
            8,586,000
            
            $
            11,160,000Additions
                to Working Capital Reserves (Amount Not Distributed)
            
            
            2,052,000
            
            
            1,016,000Gain
                on Sale of Marketable Securities
            
            
            (203,000
            )
            
            --Gain
                on Real Estate Held for Sale
            
            
            (47,000
            )
            
            (758,000
            )Gain
                on Real Estate Held for Sale - Seller Financed
            
            
            (1,079,000
            )
            
            --Amortized
                Interest Income
            
            
            (272,000
            )
            
            --Interest
                Income Accrued to Loan Balance
            
            
            --
            
            
            280,000Change
                in Operating Assets and Liabilities:Net
                Change in Amounts Due from Fund I
            
            
            1,560,000
            
            
            5,761,000Net
                Change in Other Operating Assets
            
            
            (247,000
            )
            
            680,000Net
                Change in Accounts Payable and Accrued Liabilities
            
            
            (842,000
            )
            
            143,000Net
                Change in Amounts Due to Related Parties
            
            
            (540,000
            )
            
            (553,000
            )Net
                Cash Provided by Operating Activities
            
            $
            8,968,000
            
            $
            17,729,000Net
                Cash Provided by Investing Activities
            
            $
            1,521,000
            
            $
            39,928,000Net
                Cash Provided (Used) in Financing Activities
            
            $
            18,578,000
            
            $
            (16,827,000
            )





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





*Total
      Revenues* .
      For the
      fiscal year ended June 30, 2005, total revenues were approximately $28.0 million
      compared to approximately $41.1 million for the fiscal year ended June 30,
      2004,
      a decrease of approximately $13.2 million or 32.04%. The decline in revenue
      was
      primarily due to the following:





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




-
            36
            -





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





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





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





*Total
      Operating Expenses* .
      For the
      year ended June 30, 2005, total expenses were approximately $8.7 million
      compared to $10.2 million for the year ended June 30, 2004, a decrease of
      approximately $1.5 million or 14.15%. The decrease is primarily related to
      the
      following:





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





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




-
            37
            -





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





·
            We
                recognized an allowance for loan loss of approximately $2.3 million,
                for
                the year ended June 30, 2005, on a loan secured by 4 cemeteries and
                8
                mortuaries in Hawaii (RightStar).





*Total
      Income (Loss) from Real Estate Held for Sale:* For
      the
      year ended June 30, 2005, total loss from real estate held for sale totaled
      approximately $10.3 million, compared to total income of approximately $0.8
      million for the year ended June 30, 2004, a decrease in income of approximately
      1,453.40% due in significant part to the following factors:





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





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





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





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





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





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





*Annualized
      Rate of Return to Members* .
      For the
      year ended June 30, 2005, the annualized rate of return to members, as
      calculated in accordance with GAAP, was 1.97% compared to 6.63% for fiscal
      2004.





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





**For
                the Year Ended**
              **June
                30, 2005**
            
            **For
                the Year Ended**
              **June
                30, 2004**Distributions
                of Net Income Available for Distribution
            
            $
            19,006,000
            
            $
            29,097,000Distributions
                in Excess of Net Income Available for a Distribution Generated During
                the
                Period
            
            
            1,107,000
            
            
            --Total
                Distributions
            
            $
            20,113,000
            
            $
            29,097,000




-
            38
            -





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 Year Ended**
              **June
                30, 2005**
            
            **For
                the Year Ended**
              **June
                30, 2004**Distribution
                of Net Income Available for Distribution
            
            $
            19,006,000
            
            $
            29,097,000Additions
                to Working Capital Reserves (Amount Not Distributed)
            
            
            --
            
            
            5,249,000Gain
                on sale of real estate held for sale
            
            
            (760,000
            )
            
            --Loss
                on sale of real estate held for sale
            
            
            932,000
            
            
            --Interest
                income accrued to loan balance
            
            
            402,000
            
            
            --Change
                in operating assets and liabilities:Interest
                and other receivables
            
            
            216,000
            
            
            (444,000
            )Due
                to Manager
            
            
            (289,000
            )
            
            (1,072,000
            )Due
                to Vestin Group
            
            
            (384,000
            )
            
            (23,000
            )Due
                to/from VRM I
            
            
            1,427,000
            
            
            (2,771,000
            )Note
                receivable from VRM I
            
            
            4,278,000
            
            
            --Prepaid
                expenses
            
            
            (20,000
            )
            
            --Accounts
                payable and accrued liabilities
            
            
            811,000
            
            
            219,000Net
                cash provided by operating activities
            
            $
            25,619,000
            
            $
            30,255,000Net
                cash provided by investing
            
            $
            33,067,000
            
            $
            23,792,000Net
                cash (used) by financing
            
            $
            (60,057,000
            )
            $
            (47,851,000
            )





**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 II from the sale of shares or membership
      units.




-
            39
            -





During
      the twelve months ended December 31, 2006, cash flows provided by operating
      activities approximated $18.1 million. Investing activities consisted of cash
      provided by loan payoffs of approximately $203.1 million. Cash used for new
      investments and purchases of real estate loans totaled approximately $234.6
      million, proceeds from the sale of real estate held for sale totaled
      approximately $35.6 million and proceeds from full payment of loans related
      to
      real estate held for sale - seller financed totaled approximately $8.1 million.
      In addition, investing activities consisted of the purchase of approximately
      $17.1 million in certificates of deposit and proceeds from maturities of
      certificates of deposit totaling approximately $17.8 million. Financing
      activities consisted of payments on notes payable in the amount of approximately
      $26.1 million and dividends to stockholders, net of reinvestment, of
      approximately $12.0 million. In addition, financing activities consisted of
      members’ redemptions in the amount of approximately $30.5 million and
      distributions of approximately $5.3 million, net of reinvestments.





At
      December 31, 2006, we had approximately $16.8 million in cash, $0.25 million
      in
      certificates of deposit, $2.1 million in marketable securities - related party
      and approximately $303 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 8% 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 $19.5 million and $30.1 million, respectively,
      as of December 31, 2006 compared to approximately $31.7 million and $38.6
      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 noncash 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 I and/or Fund III (collectively, the “Lead Lenders”). In the event of
      borrower non- performance, the Inter-creditor Agreements generally provide
      that
      the Lead Lenders must repay the Investor’s loan amount either by (i) continuing
      to remit to the Investor the interest due on the participated loan amount;
      (ii)
      substituting an alternative loan acceptable to the Investor; or (iii)
      repurchasing the participation from the Investor for the outstanding balance
      plus accrued interest.




-
            40
            -





During
      October 2006, we, our manager, Vestin Origination, Inc., VRM I 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 I 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 approximately
      $4.3 million. As of December 31, 2006, this secured borrowing totaled
      approximately $18.5 million, of which our portion was approximately $13.8
      million. In the event VRM I 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 $19.8 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
      37 real estate loans, including loans related to seller financed real estate
      held for sale, as of December 31, 2006, with a balance of approximately $242.4
      million as compared to investments in 34 real estate loans as of December 31,
      2005, with a balance of approximately $256.5 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 $19.5 million, net
      of
      allowance for loan losses of approximately $9.3 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 I received the
      following:





·
            A
                new first deed of trust was received from the buyer, Vernon Downs
                Acquisition, LLC, approximating $22.8 million, of which our portion
                is
                approximately $19.6 million. The new terms included a $1.2 million
                principal payment, reducing our principal balance by approximately
                $1.0
                million. This transaction resulted in us recording unearned revenue
                of
                approximately $1.0 million, 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
                $429,000.





·
            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
                $242,000.





·
            Payment
                of past due forbearance fees of $555,000 of which our portion was
                $476,000, to be recognized as unearned revenue and amortized through
                March
                2007.




-
            41
            -





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 $9.3 million. In addition, our manager recognized
      a
      specific reserve for the impairment of a restructured loan in the amount of
      $500,000. Our manager evaluated the loans and concluded that the remaining
      underlying collateral was sufficient to protect us against further losses of
      principal or interest. Our manager will continue to evaluate these loans in
      order to determine if any other allowance for loan losses should be recorded.
      For additional information on our investments in real estate loans, refer to
      Note D - *Investments
      In Real Estate Loans* of the
      Notes to the Financial Statements included in Part IV, Item *15
      Exhibits and Financial Statement Schedules* of this
      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 two properties with a total carrying value of
      approximately $30.1 million, which were 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:




-
            42
            -





·
            During
                March 2006, we sold the parcel in Cedar Park, Texas. Our net proceeds
                were
                $260,000, resulting in a gain of
                $60,000.





·
            During
                June 2006, we sold the parcel in Austin, Texas. Our net proceeds
                were
                $550,000, resulting in a gain of
                $252,000.





·
            During
                July 2006, we sold a 504 unit apartment complex in Austin, Texas,
                for
                approximately $16.1 million. This resulted in a net gain of approximately
                $1.6 million.





·
            During
                July 2006, we and VRM I sold the land containing residential lots
                in
                Henderson, NV, for approximately $3.8 million, of which we received
                approximately $1.3 million, which resulted in a net gain of
                $21,000.





·
            During
                September 2006, we sold the “Windrush” property in Fort Worth, Texas, for
                a sales price of $8,019,000, resulting in net proceeds of $7,885,000.
                During the three months ended December 31, 2006, we received an additional
                payment of $230,000 from cash reserves held by the apartment manager,
                which resulted in a net gain of $56,000 on the sale of the
                property.





**·**
            During
                December 2006, we sold the 150 unit condominium conversion in Houston,
                TX
                “The Club at Stablechase” for a sales price of approximately $8.5 million,
                with net proceeds of approximately $8.2 million, which resulted in
                a net
                loss of approximately $0.5 million**.**





·
            During
                November 2006, we, VRM I 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 $25.6 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 two **** properties
      with a total carrying value of approximately $14.8 million, which have 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 I, Fund III, the manager, or other related and/or unrelated
      parties. These investments in real estate held for sale are accounted for at
      the
      lower of cost or fair value less costs to sell with fair value based on
      appraisals and knowledge of local market conditions. For additional information
      on our investments in real estate loans, refer to Note G - *Real
      Estate Held for Sale-Seller Financed* of the
      Notes to the Financial Statements included in Part IV, Item *15
      Exhibits and Financial Statement Schedules* of this
      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:




-
            43
            -





**Contractual
                Obligation**
            
            **Total**
            
            **Less
                Than 1 Year**
            
            **1-3
                Years**
            
            **3-5
                Years**
            
            **More
                Than**
              **5
                Years**Secured
                borrowings (1)
            
            $
            13,796,000
            
            $
            13,796,000
            
            $
            --
            
            $
            --
            
            $
            --Note
                Payable (2)
            
            
            27,000
            
            
            27,000
            
            
            --
            
            
            --
            
            
            --Total
            
            $
            13,823,000
            
            $
            13,823,000
            
            $
            --
            
            $
            --
            
            $
            --




(1)
            In
                the event VRM I 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.





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
            
            $
            2,424,000Weighted
                average interest rate assumption increased by 5.0% or 500 basis
                points
            
            $
            12,122,000Weighted
                average interest rate assumption decreased by 1.0% or 100 basis
                points
            
            $
            (2,424,000
            )Weighted
                average interest rate assumption decreased by 5.0% or 500 basis
                points
            
            $
            (12,122,000
            )





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:




-
            44
            -





**Changed
                Assumption**
            
            **Increase
                (Decrease) in Allowance for Loan Losses**Allowance
                for loan losses assumption increased by 1.0% of loan
                portfolio
            
            $
            2,424,000Allowance
                for loan losses assumption increased by 5.0% of loan
                portfolio
            
            $
            12,120,000Allowance
                for loan losses assumption decreased by 1.0% of loan
                portfolio
            
            $
            (2,424,000
            )Allowance
                for loan losses assumption decreased by 4.1% of loan
                portfolio
            
            $
            (9,828,000
            )





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;





·
            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.




-
            45
            -





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
      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 $221.8 million, net of allowance, with a weighted average
      effective interest rate of 10.94%. We had one loan financed under an
      Inter-creditor Agreement at December 31, 2006, which was classified as assets
      under secured borrowing totaling approximately $13.8 million. 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 ten had an exit fee.




-
            46
            -





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
            
            $
            242,395,000
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            242,395,000Weighted
                Average Interest Rates
            
            
            10.94%
            
            
            --%
            
            
            --%
            
            
            --%
            
            
            --%
            
            
            10.94%





At
      December 31, 2006, we also had approximately $19.2 million invested in cash,
      cash equivalents, certificates of deposit, and marketable securities - related
      party (VRM I). Approximately 3% of our assets will be held in such accounts
      as a
      cash reserve; additional deposits in such accounts will be made as funds are
      received from investors and repayment of loans pending the deployment of such
      funds in new real estate loans. We believe that these financial assets do not
      give rise to significant interest rate risk due to their short-term
      nature.





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





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





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





None.




-
            47
            -





**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.





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.




-
            48
            -





**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.




-
            49
            -





**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors and Stockholders of
 Vestin
        Realty Mortgage II, Inc.
 
 We
        have
        audited management’s assessment, included in the accompanying Management’s
        Report on Internal Control over Financial Reporting, that Vestin Realty Mortgage
        II, 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 II’s management is responsible for
        maintaining effective internal control over financial reporting and for its
        assessment of the effectiveness of internal control over financial reporting.
        Our responsibility is to express an opinion on management’s assessment and an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting based on our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether effective
        internal control over financial reporting was maintained in all material
        respects. Our audit included obtaining an understanding of internal control
        over
        financial reporting, evaluating management’s assessment, testing and evaluating
        the design and operating effectiveness of internal control, and performing
        such
        other procedures as we considered necessary in the circumstances. We believe
        that our audit provides a reasonable basis for our opinion.
 
 A
        company’s internal control over financial reporting is a process designed to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles. A company’s internal control over
        financial reporting includes those policies and procedures that (1) pertain
        to
        the maintenance of records that, in reasonable detail, accurately and fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company’s
        assets that could have a material effect on the financial
        statements.
 
 Because
        of the inherent limitations, 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 II, 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 II, 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 II, 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, and the years ended June 30, 2005 and 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





-
            50
            -





**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 II, Vestin Mortgage (our
      manager), Vestin Group, Vestin Originations or our
      affiliates**




-
            51
            -





*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 II 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 I
      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.




-
            52
            -





*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 II**





The
      principal occupation and business experience for the independent and
      unaffiliated directors of Vestin Realty Mortgage II 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 I 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 I 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 I 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.




-
            53
            -





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:




-
            54
            -





·
            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.vestinrealtymortgage2.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 II 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 approximately $1.1 million for its management services, which
      represented less than 10% of the revenues received by our manager and its
      affiliates in 2006.





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 38,862,128 shares of our common stock as of
      March 9, 2007.




-
            55
            -





**Name
                and Address of**
              **Beneficial
                Owner**
            
            **Amount
                and Nature of**
              **Beneficial
                Ownership**
            
            **Percent
                of Class**Comerica
                Bank
              One
                Detroit Center
              Detroit,
                MI 48275
            
            Sole
                voting power of 2,720,606 shares with no dispositive power
                (1)
            
            7.00%





(1)
            Based
                upon a Schedule 13G, dated February 13, 2007, filed with the SEC
                by
                Comerica Bank, which is deemed to be the beneficial owner of 2,720,606
                shares with sole voting power and no dispositive
                power.





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 38,862,128
      shares of our total outstanding common stock as of March 9, 2007.





**Common
                Shares Beneficially Owned****Beneficial
                Owner**
            
            **Number**
            
            **Percent**Michael
                V. Shustek (1)
            
            330,717
            
            **John
                W. Alderfer (3)
            
            2,569
            
            **James
                M. Townsend (2) (3)
            
            307,558
            
            **Robert
                J. Aalberts (3)
            
            494
            
            **Frederick
                J. Zaffarese Leavitt
            
            --
            
            --Roland
                M. Sansone
            
            --
            
            --All
                directors and executive officers as a group (6 persons)
            
            641,338
            
            1.65%





**
      Less
      than one percent of our total outstanding common stock.





(1)
            Includes
                241,020 shares held by our manager and 89,697 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.
                Mr. Townsend directly owns 139,074 shares and indirectly owns 168,484
                shares through FMR Holdings, Inc., which is wholly owned by Mr.
                Townsend.





(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.




-
            56
            -





**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.





**Transactions
      with the Manager**





Our
      manager is entitled to receive from us an annual management fee of up to 0.25%
      of our aggregate capital contributions received by us and Fund II from the
      sale
      of shares or membership units, paid monthly. The amount of management fees
      paid
      to our manager for the twelve months ended December 31, 2006 was approximately
      $1.1 million.





As
      of
      December 31, 2006, our manager owned 241,020 of our common shares. For the
      twelve months ended December 31, 2006, we incurred $46,000 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
      $16,000.





**Transactions
      with Other Related Parties**





As
      of
      December 31, 2006, we owned 407,485 common shares of VRM I, representing
      approximately 5.93% of their total outstanding common stock. On November 29,
      2006, we filed the required Schedule 13D with the SEC. For the twelve months
      ended December 31, 2006 we recognized $72,000 in dividends from VRM I based
      on
      the number of shares we held on the dividend record dates.





As
      of
      December 31, 2006, VRM I owned 372,655 of our common shares, representing
      approximately 0.96% of our total outstanding common stock. For the twelve months
      ended December 31, 2006, we incurred $151,000 in dividends payable to VRM I
      based on the number of shares they held on the dividend record
      dates.





During
      the twelve months ended December 31, 2006 we bought approximately $1.4 million
      in real estate loans from VRM I and sold approximately $0.5 million in real
      estate loans to VRM I. No gain or loss resulted from these
      transactions.





As
      of
      December 31, 2006, Fund III owned 158,191 of our common shares. For the twelve
      months ended December 31, 2006, we incurred $47,000 in dividends payable to
      Fund
      III based on the number of shares they held on the dividend record
      dates.





During
      the twelve months ended December 31, 2006, we purchased $4.9 million in
      real
      estate loans from Fund III .
      In
      addition, during the twelve months period ended December 31 2006, we sold $6.0
      million in real estate loans to Fund III. No gain or loss resulted from these
      transactions.





During
      January 2006, Michael V. Shustek, the manager’s CEO, purchased a $2 million
      trust deed investment from us, of which, the total balance of $2 million was
      repurchased by us. No gain or loss resulted from these
      transactions.





During
      the twelve months ended December 31, 2006, we purchased $556,000 in performing
      real estate loans from LTD, a company wholly owned by our CEO Michael V.
      Shustek. No gain or loss resulted from these transactions.





As
      of
      December 31, 2006, Vestin Originations owed us $31,000 related to a loan payment
      by a borrower. We received the payment from Vestin Originations on January
      2,
      2007.





For
      the
      twelve months ended December 31, 2006, we incurred $88,000 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.




-
            57
            -





**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
              
              $
              412,000
              
              $
              455,000Audit
                  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 April 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.





**PARTIV**





**ITEM
      15.**  **EXHIBITS,
      FINANCIAL STATEMENTSCHEDULES**





(a)
      1. Financial
      Statements





The
      financial statement are contained on Pages F-2 through F-31 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




-
            58
            -





**EXHIBITINDEX**





**Exhibit
                No.**
            
            **Description
                of Exhibits**2.1(3)
            
            Agreement
                and Plan of Merger between Vestin Fund II, LLC and the
                Registrant3.1(3)
            
            Articles
                of Incorporation of the Registrant3.2(3)
            
            Bylaws
                of the Registrant3.3(3)
            
            Form
                of Articles Supplementary of the Registrant4.1(3)
            
            Reference
                is made to Exhibits 3.1, 3.2 and 3.34.2(4)
            
            Specimen
                Common Stock Certificate4.3(3)
            
            Form
                of Rights Certificate10.1(3)
            
            Form
                of Management Agreement between Vestin Mortgage, Inc. and the
                Registrant10.2(3)
            
            Form
                of Rights Agreement between the Registrant and the rights
                agent10.3(1)
            
            Assignment
                Agreement, dated January 23, 2004, by and between Vestin Mortgage,
                Inc.,
                Vestin Fund I, LLC, Vestin Fund III, LLC, Owens Financial Group,
                Inc. and
                Owens Mortgage Investment Fund10.4(1)
            
            Intercreditor
                Agreement, dated January 17, 2003, by and among Vestin Mortgage,
                Inc.,
                Vestin Fund I, LLC, Vestin Fund III, LLC and Western United Life
                Assurance
                Company10.5(1)
            
            Intercreditor
                Agreement, dated April 22, 2004, by and between Vestin Mortgage,
                Inc. and
                Owens Mortgage Investment Fund10.6(1)
            
            Intercreditor
                Agreement, dated June 24, 2004, by and between Vestin Mortgage, Inc.
                and
                Owens Mortgage Investment Fund10.7(1)
            
            Participation
                Agreement, dated May 13, 2004, by and among the Registrant, Vestin
                Fund I,
                LLC, Vestin Fund III, LLC and Royal Bank of America10.8(6)
            
            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(4)
            
            List
                of subsidiaries of the Registrant31.1
            
            Section
                302 Certification of Michael V.
                Shustek31.2
            
            Section
                302 Certification of John
                Alderfer32
            
            Certification
                Pursuant to U.S.C. 18 Section
                135099.2R(5)
            
            Vestin
                Realty Mortgage II, Inc. Code of Business Conduct and
                Ethics





(1)
            
            Incorporated
                herein by reference to our Form S-4 Registration Statement filed
                on May
                20, 2005 (File No. 333-125121).(2)
            
            Incorporated
                herein by reference to Post-Effective Amendment No. 5 to our Form
                S-4
                Registration Statement filed on December 20, 2005 (File No.
                333-125121).(3)
            
            Incorporated
                herein by reference to Post-Effective Amendment No. 6 to our Form
                S-4
                Registration Statement filed on January 4, 2006 (File No.
                333-125121).(4)
            
            Incorporated
                herein by reference to Post-Effective Amendment No. 7 to our Form
                S-4
                Registration Statement filed on January 13, 2006 (File No.
                333-125121).(5)
            
            Incorporated
                herein by reference to the Transition Report on Form 10-K for the
                nine
                month transition period ended March 31, 2006 filed on September 7,
                2006
                (File No. 000-51892)(6)
            
            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.
                000-51892)




-
          59
          -





**SIGNATURES**





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





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











-
          60
          -




**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 Equity and Other
                Comprehensive Income
            F-5Consolidated
                Statements of Cash Flows
            F-6Notes
                to the Consolidated Financial
                Statements
            F-9SUPPLEMENTARY
                INFORMATIONInvestments
                in Real Estate Loans:Real
                estate loan Roll Forward
            F-34Real
                estate loans by Type of
                Property
            F-35Real
                estate loans by Lien Position
            F-35Real
                estate loans that Exceed Three Percent of the
                Portfolio
            F-36










F
            -
            1







**REPORT
        OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING
        FIRM**
 
 To
        Board
        of Directors and Stockholders of Vestin Realty Mortgage II, Inc.
 
 We
        have
        audited the accompanying consolidated balance sheets of Vestin Realty Mortgage
        II, Inc., (“the Company”) as of December 31, 2006 and 2005 and 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, and the years ended June 30, 2005 and 2004. These
        consolidated financial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these consolidated
        financial statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Accounting
        Oversight Board (United States). Those standards require that we plan and
        perform the audit to obtain reasonable assurance about whether the 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
        II,
        Inc. as of December 31, 2006 and 2005 and the results of its operations and
        its
        cash flows for the twelve months ended December 31, 2006, the six months
        ended
        December 31, 2005, and for the years ended June 30, 2005 and 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
        II,
        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
        thereon.
 
 /s/Moore
        Stephens Wurth Frazer and Torbet, LLP
 
 Orange,
        California
 March
        12,
        2007





F
          -
          2


**FINANCIALSTATEMENTS**




**VESTIN
                REALTY MORTGAGEII, INC.****(SUCCESSOR
                TO VESTIN FUND II, LLC)****CONSOLIDATED
                BALANCE SHEETS****ASSETS****December
                31, 2006**
            
            **December
                31, 2005**AssetsCash
            
            $
            16,841,000
            
            $
            39,633,000Certificates
                of deposit
            
            
            250,000
            
            
            1,000,000Investment
                in marketable securities
            
            
            --
            
            
            7,260,000Investment
                in marketable securities - related party
            
            
            2,087,000
            
            
            --Interest
                and other receivables, net of allowance of $160,000 at December 31,
                2006
                and $693,000 at December 31, 2005
            
            
            2,709,000
            
            
            3,079,000Note
                receivable, net of allowance of $2,000,000 at December 31, 2006 and
                $2,158,000 at December 31, 2005
            
            
            282,000
            
            
            810,000Real
                estate held for sale
            
            
            30,079,000
            
            
            38,639,000Real
                estate held for sale - seller financed
            
            
            14,774,000
            
            
            22,887,000Investment
                in real estate loans, net of allowance for loan losses of $9,828,000
                at
                December 31, 2006 and $4,724,000 at December 31, 2005
            
            
            221,849,000
            
            
            227,875,000Due
                from Manager - related party
            
            
            --
            
            
            325,000Due
                from Vestin Originations - related party
            
            
            31,000
            
            
            --Assets
                under secured borrowings
            
            
            13,796,000
            
            
            19,754,000Other
                assets
            
            
            344,000
            
            
            687,000Total
                assets
            
            $
            303,042,000
            
            $
            361,949,000**LIABILITIES,
                STOCKHOLDERS' EQUITY & MEMBERS' EQUITY**LiabilitiesAccounts
                payable and accrued liabilities
            
            $
            687,000
            
            $
            306,000Secured
                borrowings
            
            
            13,796,000
            
            
            19,754,000Note
                payable
            
            
            27,000
            
            
            25,884,000Deposit
                liability
            
            
            5,514,000
            
            
            865,000Unearned
                revenue
            
            
            454,000
            
            
            --Dividend
                payable
            
            
            4,078,000
            
            
            --Total
                liabilities
            
            
            24,556,000
            
            
            46,809,000Commitments
                and ContingencesMembers’
                equity - authorized 50,000,000 units at $10 per unit, 32,937,162
                units
                issued and outstanding at December 31, 2005
            
            
            --
            
            
            315,122,000Stockholders'
                equityPreferred
                stock, $0.0001 par value; 1,000,000 shares authorized; none
                issued
            
            
            --
            
            
            --Common
                stock, $0.0001 par value; 100,000,000 shares authorized; 38,839,710
                shares
                issued and outstanding at December 31, 2006
            
            
            4,000
            
            
            --Additional
                paid in capital
            
            
            277,853,000
            
            
            --Retained
                earnings
            
            
            1,242,000
            
            
            --Accumulated
                other comprehensive income (loss)
            
            
            (613,000
            )
            
            18,000Total
                stockholders' equity & members' equity
            
            
            278,486,000
            
            
            315,140,000Total
                liabilities and stockholders' equity & members’ equity
            
            $
            303,042,000
            
            $
            361,949,000




The
            accompanying notes are an integral part of these consolidate
            statements.
 F
            -
            3





**VESTIN
                REALTY MORTGAGE II, INC.****(SUCCESSOR
                TO VESTIN FUND II, LLC)****CONSOLIDATED
                STATEMENTS OF INCOME****For
                the Twelve**
              **Months
                Ended**
            
            **For
                the Six**
              **Months
                Ended**
            
            **For
                the Six**
              **Months
                Ended**
            
            **For
                the Year Ended**
            
            **For
                the Year Ended****12/31/2006**
            
            **12/31/2005**
            
            **12/31/2004**
            
            **6/30/2005**
            
            **6/30/2004****(Unaudited)****Revenues**Interest
                income from investment in real estate loans
            
            $
            21,718,000
            
            $
            11,301,000
            
            $
            14,388,000
            
            $
            25,301,000
            
            $
            38,825,000Adjustment
                to allowance for loan losses
            
            
            --
            
            
            
            
            
            --
            
            
            41,000
            
            
            --Gain
                on sale marketable securities
            
            
            21,000
            
            
            203,000
            
            
            --
            
            
            --
            
            
            --Dividend
                income - related party
            
            
            72,000
            
            
            --
            
            
            --
            
            
            --
            
            
            --Interest
                income from banking institutions
            
            
            1,333,000
            
            
            287,000
            
            
            249,000
            
            
            409,000
            
            
            365,000Other
                income
            
            
            335,000
            
            
            437,000
            
            
            1,562,000
            
            
            2,207,000
            
            
            1,946,000Total
                revenues
            
            
            23,479,000
            
            
            12,228,000
            
            
            16,199,000
            
            
            27,958,000
            
            
            41,136,000**Operating
                expenses**Management
                fees - related party
            
            
            1,096,000
            
            
            546,000
            
            
            515,000
            
            
            1,060,000
            
            
            1,025,000Provision
                for loan loss
            
            
            5,500,000
            
            
            --
            
            
            167,000
            
            
            2,775,000
            
            
            2,605,000Interest
                expense
            
            
            1,446,000
            
            
            412,000
            
            
            2,441,000
            
            
            3,526,000
            
            
            5,681,000Professional
                fees
            
            
            1,219,000
            
            
            116,000
            
            
            154,000
            
            
            996,000
            
            
            626,000Professional
                fees - related party
            
            
            88,000
            
            
            127,000
            
            
            108,000
            
            
            206,000
            
            
            50,000Provision
                of doubtful accounts related to receivable
            
            
            329,000
            
            
            183,000
            
            
            --
            
            
            --
            
            
            80,000Other
            
            
            946,000
            
            
            130,000
            
            
            25,000
            
            
            167,000
            
            
            102,000Total
                operating expenses
            
            
            10,624,000
            
            
            1,514,000
            
            
            3,410,000
            
            
            8,730,000
            
            
            10,169,000**Income
                from Operations**
            
            
            12,855,000
            
            
            10,714,000
            
            
            12,789,000
            
            
            19,228,000
            
            
            30,967,000**Income
                from real estate held for sale**Revenue
                related to real estate held for sale
            
            
            4,101,000
            
            
            2,311,000
            
            
            --
            
            
            --
            
            
            2,333,000Net
                gain (loss) on sale of real estate held for sale
            
            
            1,517,000
            
            
            47,000
            
            
            758,000
            
            
            (172,000
            )
            
            --Gain
                on sale of real estate held for sale - seller financed
            
            
            2,293,000
            
            
            1,079,000
            
            
            --
            
            
            --
            
            
            --Expenses
                related to real estate held for sale
            
            
            (4,915,000
            )
            
            (3,607,000
            )
            
            (1,538,000
            )
            
            (2,784,000
            )
            
            (1,559,000
            )Write
                downs on real estate held for sale
            
            
            --
            
            
            --
            
            
            (123,000
            )
            
            (7,384,000
            )
            
            (10,000
            )Total
                income (loss) from real estate held for sale
            
            
            2,996,000
            
            
            (170,000
            )
            
            (903,000
            )
            
            (10,340,000
            )
            
            764,000Income
                before provision for income taxes
            
            
            15,851,000
            
            
            10,544,000
            
            
            11,886,000
            
            
            8,888,000
            
            
            31,731,000Provision
                for income taxes
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --**NET
                INCOME**
            
            $
            15,851,000
            
            $
            10,544,000
            
            $
            11,886,000
            
            $
            8,888,000
            
            $
            31,731,000Basic
                and diluted earnings per common weighted average share / membership
                unit
            
            $
            0.41Dividends
                declared per common share / cash distributions per membership
                unit
            
            $
            0.58Net
                income per weighted average membership unit
            
            
            
            
            $
            0.25
            
            $
            0.25
            
            $
            0.20
            
            $
            0.66Weighted
                average common shares / membership units
            
            
            38,832,458
            
            
            42,747,725
            
            
            47,756,928
            
            
            45,188,004
            
            
            47,729,256




The
            accompanying notes are an integral part of these consolidate
            statements.
 F
            -
            4




**VESTIN
                  REALTY MORTGAGEII, INC.****(SUCCESSOR
                  TO VESTIN FUND II, LLC)****CONSOLIDATED
                  STATEMENTS OF EQUITY & OTHER COMPREHENSIVE
                  INCOME****Common
                  Stock****Membership
                  Units**
              
              **Number
                  of Shares**
              
              **Amount**
              
              **Additional
                  Paid-in-Capital**
              
              **Retained
                  Earnings**
              
              **Accumulated
                  Other Comprehensive Loss**
              
              **Members'
                  Equity**
              
              **Total****Members'
                  Equity at June 30, 2003**
              
              50,183,702
              
              --
              $
              --
              $
              --
              $
              --
              $
              --
              $
              375,189,000
              $
              375,189,000Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              31,731,000
              
              31,731,000Issuance
                  of Units
              
              3,468,010
              
              
              
              
              
              
              
              
              
              
              
              26,677,000
              
              26,677,000Distributions
                  to Members
              
              
              
              
              
              
              
              
              
              
              
              
              
              (29,097,000)
              
              (29,097,000)Reinvestment
                  of Distributions
              
              1,016,990
              
              
              
              
              
              
              
              
              
              
              
              7,823,000
              
              7,823,000Members'
                  Redemptions
              
              (6,823,282)
              
              
              
              
              
              
              
              
              
              
              
              (51,254,000)
              
              (51,254,000)**Members'
                  Equity at June 30, 2004**
              
              47,845,420
              
              --
              $
              --
              $
              --
              $
              --
              $
              --
              $
              361,069,000
              $
              361,069,000Comprehensive
                  Income:Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,888,000
              
              8,888,000Unrealized
                  Loss on Marketable Securities
              
              
              
              
              
              
              
              
              
              
              
              (804,000)
              
              
              
              (804,000)Total
                  Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,084,000Capital
                  Contribution from Manager
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,984,000
              
              1,984,000Distributions
                  to Members
              
              
              
              
              
              
              
              
              
              
              
              
              
              (20,113,000)
              
              (20,113,000)Reinvestment
                  of Distributions
              
              515,600
              
              
              
              
              
              
              
              
              
              
              
              3,966,000
              
              3,966,000Members'
                  Redemptions
              
              (5,707,304)
              
              
              
              
              
              
              
              
              
              
              
              (43,910,000)
              
              (43,910,000)**Members'
                  Equity at June 30, 2005**
              
              42,653,716
              
              --
              $
              --
              $
              --
              $
              --
              $
              (804,000)
              $
              311,884,000
              $
              311,080,000Comprehensive
                  Income:Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              10,544,000
              
              10,544,000Reversal
                  of Unrealized Loss on Marketable Securities
              
              
              
              
              
              
              
              
              
              
              
              804,000
              
              
              
              804,000Unrealized
                  Gain on Marketable Securities
              
              
              
              
              
              
              
              
              
              
              
              18,000
              
              
              
              18,000Total
                  Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              11,366,000Distributions
                  to Members
              
              
              
              
              
              
              
              
              
              
              
              
              
              (8,586,000)
              
              (8,586,000)Reinvestment
                  of Distributions
              
              164,729
              
              
              
              
              
              
              
              
              
              
              
              1,281,000
              
              1,281,000Members'
                  Redemptions
              
              (135)
              
              
              
              
              
              
              
              
              
              
              
              (1,000)
              
              (1,000)**Members'
                  Equity at****December
                  31, 2005**
              
              42,818,310
              
              --
              $
              --
              $
              --
              $
              --
              $
              18,000
              $
              315,122,000
              $
              315,140,000Comprehensive
                  Income:Net
                  Income (Loss)
              
              
              
              
              
              
              
              
              
              17,561,000
              
              
              
              (1,710,000)
              
              15,851,000Reversal
                  of Unrealized Gain on Marketable Securities
              
              
              
              
              
              
              
              
              
              
              
              (18,000)
              
              
              
              (18,000)Unrealized
                  Loss on Marketable Securities - Related Party
              
              
              
              
              
              
              
              
              
              
              
              (613,000)
              
              
              
              (613,000)Total
                  Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              15,220,000Distributions
                  to Members
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,073,000)
              
              (6,073,000)Reinvestment
                  of Distributions
              
              98,489
              
              
              
              
              
              
              
              
              
              
              
              742,000
              
              742,000Members'
                  Redemptions
              
              (4,126,824)
              
              
              
              
              
              
              
              
              
              
              
              (30,459,000)
              
              (30,459,000)Reclassify
                  members' equity to stockholders' equity
              
              (38,789,975)
              
              38,789,975
              
              3,000
              
              277,619,000
              
              
              
              
              
              (277,622,000)
              
              --Dividends
                  to Stockholder
              
              
              
              
              
              
              
              
              
              (16,319,000)
              
              
              
              
              
              (16,319,000)Reinvestment
                  of Dividends
              
              
              
              49,735
              
              1,000
              
              234,000
              
              
              
              
              
              
              
              235,000**Stockholders'
                  Equity at****December
                  31, 2006**
              
              --
              
              38,839,710
              $
              4,000
              $
              277,853,000
              $
              1,242,000
              $
              (613,000)
              $
              --
              $
              278,486,000




The
            accompanying notes are an integral part of these consolidate
            statements.
 F
            -
            5





**VESTIN
                      REALTY MORTGAGE II, INC.****(SUCCESSOR
                      TO VESTIN FUND II, LLC)****CONSOLIDATED
                      STATEMENTS OF CASH FLOWS****For
                      the Twelve Months Ended**
                  
                  **For
                      the Six Months Ended**
                  
                  **For
                      the Six Months Ended**
                  
                  **For
                      the Year Ended**
                  
                  **For
                      the Year Ended****12/31/2006**
                  
                  **12/31/2005**
                  
                  **12/31/2004**
                  
                  **6/30/2005**
                  
                  **6/30/2004****(Unaudited)****Cash
                      flows from operating activities:**Net
                      income
                  
                  $
                  15,851,000
                  
                  $
                  10,544,000
                  
                  $
                  11,886,000
                  
                  $
                  8,888,000
                  
                  $
                  31,731,000Adjustments
                      to reconcile net income to net cash provided by operating
                      activities:
                  
                  
                  --Provision
                      of doubtful accounts related to receivable
                  
                  
                  329,000
                  
                  
                  183,000
                  
                  
                  167,000
                  
                  
                  --
                  
                  
                  --Gain
                      /loss on sale of marketable securities
                  
                  
                  (21,000
                  )
                  
                  (203,000
                  )
                  
                  --
                  
                  
                  --
                  
                  
                  --Write
                      down of real estate held for sale
                  
                  
                  --
                  
                  
                  --
                  
                  
                  123,000
                  
                  
                  7,384,000
                  
                  
                  10,000Gain
                      on sale of real estate held for sale
                  
                  
                  (2,014,000
                  )
                  
                  (47,000
                  )
                  
                  (758,000
                  )
                  
                  (760,000
                  )
                  
                  --Loss
                      on sale of real estate held for sale
                  
                  
                  497,000
                  
                  
                  --
                  
                  
                  --
                  
                  
                  932,000
                  
                  
                  --Gain
                      on sale of real estate held for sale - seller financed
                  
                  
                  (2,293,000
                  )
                  
                  (1,079,000
                  )
                  
                  --
                  
                  
                  --
                  
                  
                  --Provision
                      for loan loss
                  
                  
                  5,500,000
                  
                  
                  --
                  
                  
                  --
                  
                  
                  2,775,000
                  
                  
                  2,605,000Adjustment
                      to allowance for loan losses
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --
                  
                  
                  (41,000
                  )
                  
                  --Amortized
                      interest income
                  
                  
                  (1,328,000
                  )
                  
                  (272,000
                  )
                  
                  --
                  
                  
                  402,000
                  
                  
                  --Interest
                      income accrued to loan balance
                  
                  
                  --
                  
                  
                  --
                  
                  
                  280,000
                  
                  
                  --
                  
                  
                  --Change
                      in operating assets and liabilities:
                  
                  
                  --Interest
                      and other receivables
                  
                  
                  273,000
                  
                  
                  420,000
                  
                  
                  680,000
                  
                  
                  216,000
                  
                  
                  (444,000
                  )Due
                      to/from Manager
                  
                  
                  325,000
                  
                  
                  (539,000
                  )
                  
                  (199,000
                  )
                  
                  (289,000
                  )
                  
                  (1,072,000
                  )Due
                      to/from Vestin Group
                  
                  
                  --
                  
                  
                  (1,000
                  )
                  
                  (354,000
                  )
                  
                  (384,000
                  )
                  
                  (23,000
                  )Due
                      to/from Vestin Originations
                  
                  
                  (31,000
                  )
                  
                  --
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --Due
                      to/from VRM I
                  
                  
                  --
                  
                  
                  1,560,000
                  
                  
                  1,483,000
                  
                  
                  1,427,000
                  
                  
                  (2,771,000
                  )Note
                      receivable from VRM I
                  
                  
                  --
                  
                  
                  --
                  
                  
                  4,278,000
                  
                  
                  4,278,000
                  
                  
                  --Prepaid
                      expenses
                  
                  
                  343,000
                  
                  
                  (667,000
                  )
                  
                  --
                  
                  
                  (20,000
                  )
                  
                  --Accounts
                      payable and accrued liabilities
                  
                  
                  381,000
                  
                  
                  (842,000
                  )
                  
                  143,000
                  
                  
                  811,000
                  
                  
                  219,000Net
                      cash provided by operating activities
                  
                  
                  17,812,000
                  
                  
                  9,057,000
                  
                  
                  17,729,000
                  
                  
                  25,619,000
                  
                  
                  30,255,000




The
            accompanying notes are an integral part of these consolidate
            statements.
 F
            -
            6





**VESTIN
                    REALTY MORTGAGE II, INC.****(SUCCESSOR
                    TO VESTIN FUND II, LLC)****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****For
                    the Twelve Months Ended**
                
                **For
                    the Six Months Ended**
                
                **For
                    the Six Months Ended**
                
                **For
                    the Year Ended**
                
                **For
                    the Year Ended****12/31/2006**
                
                **12/31/2005**
                
                **12/31/2004**
                
                **6/30/2005**
                
                **6/30/2004****(Unaudited)****Cash
                    flows from investing activities:**Investments
                    in real estate loans
                
                $
                (202,748,000
                )
                $
                (104,346,000
                )
                $
                (42,380,000
                )
                $
                (77,218,000
                )
                $
                (215,225,000
                )Purchase
                    of investments in real estate loans including interest
                    receivable
                
                
                --
                
                
                (10,065,000
                )
                
                --
                
                
                --
                
                
                --Purchase
                    of investments in real estate loans from:
                
                
                --VRM
                    I
                
                
                (1,350,000
                )
                
                (7,600,000
                )
                
                --
                
                
                --
                
                
                (10,000,000
                )Fund
                    III
                
                
                (4,900,000
                )
                
                (500,000
                )
                
                (5,000,000
                )
                
                (10,000,000
                )
                
                --Other
                    related parties
                
                
                (2,556,000
                )
                
                (11,824,000
                )
                
                --
                
                
                (2,700,000
                )
                
                --Third
                    Party
                
                
                (23,000,000
                )
                
                (1,334,000
                )
                
                (11,000,000
                )
                
                (27,058,000
                )
                
                (32,653,000
                )Proceeds
                    from loan payoff
                
                
                203,106,000
                
                
                103,858,000
                
                
                105,546,000
                
                
                136,158,000
                
                
                183,048,000Sale
                    of investments in real estate loans to:
                
                
                --VRM
                    I
                
                
                500,000
                
                
                --
                
                
                --
                
                
                600,000
                
                
                806,000Fund
                    III
                
                
                6,000,000
                
                
                --
                
                
                --
                
                
                5,000,000
                
                
                10,000,000Other
                    related parties
                
                
                2,000,000
                
                
                7,000,000
                
                
                --
                
                
                4,000,000
                
                
                --Third
                    party
                
                
                175,000
                
                
                10,000,000
                
                
                4,533,000
                
                
                17,033,000
                
                
                77,928,000Proceeds
                    from investment in real estate held for sale
                
                
                35,553,000
                
                
                4,767,000
                
                
                12,542,000
                
                
                16,397,000
                
                
                3,754,000Principal
                    payments on real estate held for sale - seller financed
                
                
                8,113,000
                
                
                9,635,000
                
                
                --
                
                
                --
                
                
                --Allowance
                    for investment in real estate loan losses, related to legal
                    expense
                
                
                (906,000
                )
                
                --
                
                
                --
                
                
                --
                
                
                --Repayment
                    of secured borrowings
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                (2,442,000
                )Proceeds
                    from note receivable
                
                
                686,000
                
                
                89,000
                
                
                --
                
                
                --
                
                
                --Notes
                    receivable
                
                
                --
                
                
                (154,000
                )Recovery
                    of allowance for doubtful notes receivable
                
                
                (487,000
                )
                
                (89,000
                )Purchase
                    of marketable securities
                
                
                --
                
                
                (14,827,000
                )
                
                (25,993,000
                )
                
                (31,942,000
                )
                
                --Purchase
                    of marketable securities - related party
                
                
                (2,700,000
                )
                
                --
                
                
                --
                
                
                565,000
                
                
                --Proceeds
                    from sale of marketable securities
                
                
                7,263,000
                
                
                16,354,000
                
                
                --
                
                
                --
                
                
                --Purchase
                    of fixed asset
                
                
                --
                
                
                --
                
                
                --
                
                
                (7,000
                )
                
                --Purchase
                    of investments in certificates of deposit
                
                
                (17,061,000
                )
                
                --
                
                
                --
                
                
                --
                
                
                (265,000
                )Proceeds
                    from investments in certificates of deposit
                
                
                17,811,000
                
                
                --
                
                
                1,425,000
                
                
                1,425,000
                
                
                8,915,000Cash
                    outlays for real estate held for sale
                
                
                --
                
                
                --
                
                
                (177,000
                )
                
                (177,000
                )
                
                (455,000
                )Unearned
                    revenue proceeds related to loan restructuring
                
                
                608,000
                
                
                --
                
                
                --
                
                
                --
                
                
                --Deposit
                    liability
                
                
                6,942,000
                
                
                468,000
                
                
                432,000
                
                
                991,000
                
                
                381,000Net
                    cash provided by investing activities
                
                $
                33,049,000
                
                $
                1,432,000
                
                $
                39,928,000
                
                $
                33,067,000
                
                $
                23,792,000




The
            accompanying notes are an integral part of these consolidate
            statements.
 F
            -
            7





**VESTIN
                  REALTY MORTGAGE II, INC.****(SUCCESSOR
                  TO VESTIN FUND II, LLC)****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****For
                  the Twelve Months Ended**
              
              **For
                  the Six**
                **Months
                  Ended**
              
              **For
                  the Six**
                **Months
                  Ended**
              
              **For
                  the Year Ended**
              
              **For
                  the Year Ended****12/31/2006**
              
              **12/31/2005**
              
              **12/31/2004**
              
              **6/30/2005**
              
              **6/30/2004****Cash
                  flows from financing activities:**
              
              
              
              
              
              **(Unaudited)**Payment
                  on line of credit
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              (2,000,000
              )Payment
                  on note payable
              
              
              (25,857,000
              )
              
              --
              
              
              --
              
              
              --
              
              
              --Proceeds
                  from issuance of note payable
              
              
              --
              
              
              25,884,000
              
              
              --
              
              
              --
              
              
              --Dividends
                  to stockholders, net of reinvestments
              
              
              (11,906,000
              )
              
              --
              
              
              --
              
              
              --
              
              
              --Dividends
                  to stockholders - related party
              
              
              (100,000
              )
              
              --
              
              
              --
              
              
              --
              
              
              --Proceeds
                  from issuance of membership units
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              26,677,000Members'
                  distributions, net of reinvestments
              
              
              (5,315,000
              )
              
              (7,276,000
              )
              
              (8,722,000
              )
              
              (16,086,000
              )
              
              (21,195,000
              )Members'
                  distributions - related party
              
              
              (16,000
              )
              
              (29,000
              )
              
              (15,000
              )
              
              (61,000
              )
              
              (79,000
              )Members'
                  redemptions
              
              
              (30,459,000
              )
              
              (1,000
              )
              
              (8,090,000
              )
              
              (43,910,000
              )
              
              (51,254,000
              )Net
                  cash used in financing activities
              
              
              (73,653,000
              )
              
              18,578,000
              
              
              (16,827,000
              )
              
              (60,057,000
              )
              
              (47,851,000
              )**NET
                  CHANGE IN CASH**
              
              
              (22,792,000
              )
              
              29,067,000
              
              
              40,830,000
              
              
              (1,371,000
              )
              
              6,196,000**Cash,
                  beginning of period**
              
              
              39,633,000
              
              
              10,566,000
              
              
              11,937,000
              
              
              11,937,000
              
              
              5,741,000**Cash,
                  end of period**
              
              $
              16,841,000
              
              $
              39,633,000
              
              $
              52,767,000
              
              $
              10,566,000
              
              $
              11,937,000**Supplemental
                  disclosures of cash flows information:**Interest
                  paid
              
              $
              1,446,000
              
              $
              412,000
              
              $
              2,441,000
              
              $
              3,526,000
              
              $
              5,681,000Non-cash
                  investing and financing activities:Dividend
                  liability
              
              $
              4,078,000
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              --Reinvestment
                  of dividends
              
              $
              235,000
              
              $
              --
              
              $
              --
              
              $
              --
              
              
              --Reinvestment
                  of member distributions
              
              $
              742,000
              
              $
              1,281,000
              
              $
              2,423,000
              
              $
              3,966,000
              
              $
              7,823,000Capital
                  contribution from Manager related to sale of rights to receive
                  proceeds of
                  guarantee
              
              $
              --
              
              $
              --
              
              $
              1,984,000
              
              $
              1,984,000
              
              $
              --Investment
                  in real estate held for sale reclassified from interest
                  receivable
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              9,000
              
              $
              --Loan
                  payoffs of loans funded through secured borrowings
              
              $
              23,518,000
              
              $
              22,037,000
              
              $
              42,294,000
              
              $
              14,837,000
              
              $
              42,343,000Loans
                  funded through secured borrowing
              
              $
              17,560,000
              
              $
              16,136,000
              
              $
              6,058,000
              
              $
              51,106,000
              
              $
              79,979,000Note
                  payable relating to prepaid E & O insurance
              
              $
              238,000
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              --Note
                  receivable from Vestin Mortgage paid off through relief of Due
                  to
                  Manager
              
              $
              --
              
              $
              --
              
              $
              1,000,000
              
              $
              1,000,000
              
              $
              --Note
                  receivable received from guarantor in exchange from release of
                  guarantee
              
              $
              --
              
              $
              --
              
              $
              328,000
              
              $
              328,000
              
              $
              --Other
                  receivable related to local agency bond liquidation
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              446,000
              
              $
              --Ownership
                  of real estate held for sale assigned from Fund I
              
              $
              --
              
              $
              --
              
              $
              7,424,000
              
              $
              7,424,000
              
              $
              --Real
                  estate held for sale acquired through foreclosure
              
              $
              25,476,000
              
              $
              7,939,000
              
              $
              27,638,000
              
              $
              37,627,000
              
              $
              15,456,000Receivable
                  related to loan rewritten with same or similar property, net of
                  allowance,
                  as collateral applied to unearned income
              
              $
              127,000
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              --Sale
                  of real estate held for sale where we provided the
                  financing
              
              $
              --
              
              $
              15,464,000
              
              $
              --
              
              $
              --
              
              $
              --Unearned
                  revenue from loans rewritten with same or similar property as
                  collateral
              
              $
              27,000
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              41,331,000Unrealized
                  gain (loss) on marketable securities
              
              $
              --
              
              
              822,000
              
              $
              (123,000
              )
              $
              (804,000
              )
              $
              --Unrealized
                  loss on marketable securities - related party
              
              $
              (613,000
              )
              $
              --
              
              $
              --
              
              $
              --
              
              $
              --


The
            accompanying notes are an integral part of these consolidate
            statements.
 F
            -
            8








**VESTIN
      REALTY MORTGAGEII, INC.**


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





**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**





**DECEMBER
      31, 2006**





**NOTE
      A — ORGANIZATION**





Vestin
      Fund II, LLC (“Fund II”) was organized in December 2000 as a Nevada limited
      liability company for the purpose of investing in real estate loans. Vestin
      Realty Mortgage II, Inc. (“VRM II”) was organized in January 2006 as a Maryland
      corporation for the sole purpose of effecting a merger with Fund II. On March
      31, 2006, Fund II merged into VRM II and the members of Fund II received one
      share of VRM II’s common stock for each membership unit of Fund II. References
      in this report to the “Company”, “we”, “us” or “our” refer to Fund II with
      respect to the period prior to April 1, 2006 and to VRM II with respect to
      the
      period commencing on April 1, 2006. Because we were a limited liability company
      (“LLC”) during the prior periods reflected in this report, we make reference to
      Fund II’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 June
      2001.





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





The
      consolidated financial statements include the accounts of the Company and our
      wholly owned taxable REIT subsidiary, TRS II, Inc. All significant inter-company
      transactions and balances have been eliminated in consolidation.




F
            -
            9





**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
            -
            10





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 two of our loans that have both principal and interest payments
      along with a “balloon” payment at the end of the term. As of December 31, 2006,
      these two loans had a balance of approximately $18.5 million and had original
      terms of twelve and thirty-six months. In addition, we invest in real estate
      loans that require borrowers to maintain interest reserves funded from the
      principal amount of the loan for a period of time. At December 31, 2006, we
      had
      approximately $71.5 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 $4.3
      million. At December
      31, 2005, we had approximately $17.7 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
      $1.3 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
            -
            11





**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
            -
            12





**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 I and/or Fund III (collectively, the “Lead Lenders”). In the event of
      borrower non- performance, the Inter-creditor Agreements generally provide
      that
      the Lead Lenders must repay the Investor’s loan amount either by (i) continuing
      to remit to the Investor the interest due on the participated loan amount;
      (ii)
      substituting an alternative loan acceptable to the Investor; or (iii)
      repurchasing the participation from the Investor for the outstanding balance
      plus accrued interest.





Additionally,
      an Investor may participate in certain loans with the Lead Lenders through
      Participation Agreements. In the event of borrower non-performance, the
      Participation Agreement may allow the Investor to be repaid up to the amount
      of
      the Investor’s investment prior to the Lead Lender being repaid. Real estate
      loan financing under the Participation Agreements are also accounted for as
      a
      secured borrowing in accordance with FAS 140. We do not receive any revenues
      for
      entering into secured borrowing arrangements. As of December 31, 2006, we had
      approximately $13.8 million in outstanding secured borrowing
      arrangements.





**Investment
      in Marketable Securities - Related Party**





Investment
      in marketable securities - related party consists of stock in VRM I. The
      securities are stated at fair value as determined by the 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
            -
            13





At
      December 31, 2006 and 2005, the estimated fair values of the real estate loans,
      including seller financed loans, were approximately $227.9 million and $249.8
      million, respectively. At
      December 31, 2006 and 2005, we had approximately $13.8 million and $19.7
      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 Three**
              **Months
                Ended**
              **March
                31, 2006**
            
            **For
                the Nine**
              **Months
                Ended**
              **December
                31, 2006**
            
            **For
                the Twelve**
              **Months
                Ended**
              **December
                31, 2006**Net
                income available to common stockholders / members
            
            $
            (1,710,000
            )
            $
            17,561,000
            
            $
            15,851,000Weighted
                average number of common shares / units outstanding during the
                period
            
            
            38,915,994
            
            
            38,805,119
            
            
            38,832,458Basic
                and diluted earnings per common share / membership unit
            
            $
            (0.04
            )
            $
            0.45
            
            $
            0.41





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





Because
      Fund II 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
            
            $
            10,544,000Weighted
                average number of membership units outstanding during the
                period
            
            
            42,747,725Net
                income per weighted average membership unit
            
            $
            0.25




F
            -
            14





**Common
      Stock Dividends**




Cash
        dividends declared during the twelve months ended December 31, 2006, were
        $0.42
        per common share. Included in the $0.42 was a cash dividend of $0.105 per
        common
        share declared on December 18, 2006, by our Board of Directors for the months
        ended November 30, 2006 and December 31, 2006 combined. The dividend was
        paid on
        January 26, 2007 to shareholders of record as of December 31,
        2006.





On
      December 15, 2006, a 30% common stock dividend was issued to shareholders on
      record as of November 30, 2006, effectively increasing the outstanding common
      shares from 29,870,943 to 38,832,402. All share, per share, membership unit
      and
      per membership unit information in this Report has been retroactively adjusted
      to reflect the stock dividend.





On
      January 22, 2007, our Board of Directors declared a cash dividend of $0.05
      per
      common share for the month ended January 31, 2007, payable on February 26,
      2007
      to shareholders of record as of February 8, 2007.





On
      February 20, 2007, our Board of Directors declared a cash dividend of $0.05
      per
      common share for the month ended February 28, 2007, payable on March 26, 2007
      to
      shareholders of record as of March 9, 2007.





**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 $17.0
      million and $39.9 million, respectively, in excess of the federally insured
      limits.




F
            -
            15




As of December 31, 2006, 26%, 18%, 11% and 10% of our loans
      were in Nevada, Oregon, Arizona and California, respectively, compared to 13%,
      2%, 18% and 27%, 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 26.29% 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 construction loans, located in Oregon, New York
      and
      Washington with a first lien position, interest rates between 9% and 13%, with
      an aggregate outstanding balance of approximately $63.7 million and maturing
      from March 2007 through June 2007. At December 31, 2005, the aggregate amount
      of
      loans to our three largest borrowers represented 30.10% of our total investment
      in real estate loans. These real estate loans consisted of land, commercial,
      and
      acquisition and development loans, located in Arizona and California, with
      a
      first lien position, interest rates between 8% and 10.25%, with an aggregate
      outstanding balance of approximately $77.2 million and maturing from March
      2006
      through August 2006. 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.





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 two of our loans that have 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
            
            $
            8,569,000
            
            
            12.54%
            
            
            3.54%
            
            
            54.58%Commercial
            
            
            17
            
            
            138,556,000
            
            
            10.31%
            
            
            57.16%
            
            
            76.87%Construction
            
            
            6
            
            
            43,319,000
            
            
            11.48%
            
            
            17.87%
            
            
            67.24%Land
            
            
            10
            
            
            51,951,000
            
            
            11.92%
            
            
            21.43%
            
            
            56.38%37
            
            $
            242,395,000
            
            
            10.94%
            
            
            100.00%
            
            
            69.97%





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
            
            $
            43,275,000
            
            
            9.52%
            
            
            16.87%
            
            
            52.93%Commercial
            
            
            24
            
            
            158,746,000
            
            
            9.67%
            
            
            61.91%
            
            
            67.66%Construction
            
            
            3
            
            
            11,128,000
            
            
            12.00%
            
            
            4.34%
            
            
            63.14%Land
            
            
            4
            
            
            43,301,000
            
            
            11.31%
            
            
            16.88%
            
            
            56.10%34
            
            $
            256,450,000
            
            
            10.06%
            
            
            100.00%
            
            
            63.31%




F
          -
          16




(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.





(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
            
            $
            242,395,000
            
            $
            256,450,000Less:Seller
                Financed Loans Included in Real Estate Held for Sale
            
            
            (14,774,000
            )
            
            (22,887,000
            )Proceeds
                of Principal on Seller Financed Loans Included in Deposit
                Liability
            
            
            4,056,000
            
            
            392,000Unrealized
                Gain on Seller Financed Loans
            
            
            --
            
            
            (1,356,000
            )Allowance
                for Loan Losses
            
            
            (9,828,000
            )
            
            (4,724,000
            )Balance
                per Balance Sheet
            
            $
            221,849,000
            
            $
            227,875,000





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
            
            
            35
            
            $
            239,748,000
            
            
            98.91%
            
            
            33
            
            $
            256,241,000
            
            
            99.92%Second
                Deeds of Trust**
            
            
            2
            
            
            2,647,000
            
            
            1.09%
            
            
            1
            
            
            209,000
            
            
            0.08%37
            
            $
            242,395,000
            
            
            100.00%
            
            
            34
            
            $
            256,450,000
            
            
            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
            
            $
            69,842,000April
                2007 - June 2007
            
            
            77,410,000July
                2007 - September 2007
            
            
            51,074,000October
                2007 - December 2007
            
            
            44,069,000Thereafter
            
            
            --Total
            
            $
            242,395,000





F
            -
            17





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
            
            $
            27,827,000
            
            
            11.48%
            
            $
            44,869,000
            
            
            17.50%California
            
            
            24,167,000
            
            
            9.97%
            
            
            68,819,000
            
            
            26.84%Hawaii
            
            
            17,291,000
            
            
            7.13%
            
            
            34,811,000
            
            
            13.57%Nevada
            
            
            62,215,000
            
            
            25.67%
            
            
            33,830,000
            
            
            13.19%New
                York
            
            
            19,554,000
            
            
            8.07%
            
            
            19,571,000
            
            
            7.63%North
                Carolina
            
            
            --
            
            
            --%
            
            
            1,560,000
            
            
            0.61%Oklahoma
            
            
            5,237,000
            
            
            2.16%
            
            
            2,155,000
            
            
            0.84%Oregon
            
            
            44,423,000
            
            
            18.33%
            
            
            5,193,000
            
            
            2.02%Texas
            
            
            22,812,000
            
            
            9.41%
            
            
            37,528,000
            
            
            14.63%Washington
            
            
            18,869,000
            
            
            7.78%
            
            
            4,900,000
            
            
            1.91%Wisconsin
            
            
            --
            
            
            --%
            
            
            3,214,000
            
            
            1.26%Total
            
            $
            242,395,000
            
            
            100.00%
            
            $
            256,450,000
            
            
            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 $19.5 million, net
      of
      allowance for loan losses of approximately $9.3 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 $17.3 million
                ($8.2
                million for Part I and $9.1 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 $2.2 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 approximately $1.7 million.
                The loan
                istwo
                monthsin
                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
            -
            18





·
            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
                $7.7
                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***
            
            $
            8,183,000
            
            
            3/31/2004
            
            
            33
            
            
            45%
                of Part I4
                cemeteries and 8 mortuaries in Hawaii Part II***
            
            
            9,108,000
            
            
            3/31/2004
            
            
            33
            
            
            65%
                of Part II248-unit
                apartment complex in Oklahoma City, OK
            
            
            2,155,000
            
            
            9/1/2006
            
            
            4
            
            
            49%2
                single family residences, with 4 remaining lots in the subdivision
                in Mt.
                Charleston, NV
            
            
            1,681,000
            
            
            10/27/2006
            
            
            2
            
            
            64%9.23
                +- acres of land in Las Vegas, NV
            
            
            7,707,000
            
            
            3/17/2007
            
            
            1
            
            
            81%$
            28,834,000





***
      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 I received the
      following:





·
            A
                new first deed of trust was received from the buyer, Vernon Downs
                Acquisition, LLC, approximating $22.8 million, of which our portion
                is
                approximately $19.6 million. The new terms included a $1.2 million
                principal payment, reducing our principal balance by approximately
                $1.0
                million. This transaction resulted in us recording unearned revenue
                of
                approximately $1.0 million, 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
                $429,000.





·
            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
                $242,000.





·
            Payment
                of past due forbearance fees of $555,000 of which our portion was
                $476,000, to be recognized as unearned revenue and amortized through
                March
                2007, the maturity of the loan.




F
            -
            19





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 $9.3 million. In
      addition, our manager recognized a specific reserve for the impairment of a
      restructured loan in the amount of $500,000. Our manager evaluated the loans
      and
      concluded that the remaining underlying collateral was sufficient to protect
      us
      against further losses of principal. Our manager will continue to evaluate
      these
      loans in order to determine if any other allowance for loan losses should be
      recorded.





Because
      any decision regarding the allowance for loan losses reflects a judgment about
      the probability of future events, there is an inherent risk that such judgments
      will prove incorrect. In such event, actual losses may exceed (or be less than)
      the amount of any reserve. To the extent that we experience losses greater
      than
      the amount of our reserves, we may incur a charge to our earnings that will
      adversely affect our operating results and the amount of any distributions
      payable to our 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
              
              $
              1,949,000
              
              $
              (1,949,000
              )
              $
              --
              
              $
              --Specific
                  allowance (3)
              
              
              2,775,000
              
              
              6,959,000
              
              
              94,000
              
              
              9,828,000Total
              
              $
              4,724,000
              
              $
              5,010,000
              
              $
              94,000
              
              $
              9,828,000





**(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.




F
            -
            20





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





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
      three months ended March 31, 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 us alleging that these Vestin entities
      improperly influenced the former RightStar trustees to transfer trust funds
      to
      us. 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 $5.0 million during the twelve months ended December 31, 2006
      and
      specifically allocated our general allowance of approximately $1.9 million
      to
      the RightStar loans. The increase in the reserve allowance included
      approximately $1.0 million for estimated litigation fees and expenses which
      we
      anticipate incurring in enforcing our rights against the underlying collateral.
      We will continue to evaluate our position in the RightStar loan as the situation
      progresses. As of December 31, 2006, our specific reserve allowance on the
      RightStar loans totaled approximately $9.3 million ,
      which
      includes a legal reserve balance of $94,000.





*Impairment
      on Restructured Loan* —
As
      of
      December 31, 2006, included in the specific reserve allowance is an impairment
      of $500,000 on a restructured loan.




F
            -
            21





In
      addition, our manager had granted extensions on ten 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 $53.2 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.





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 $11.5 million and $19.6 million,
      respectively, in non-performing loans had no specific allowance for loan losses.
      As of December 31, 2006 and 2005, approximately $17.3 million and $16.8 million,
      respectively, in non-performing loans had a specific allowance for loan losses
      of approximately $9.3 million and 4.2 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 $19.5 million, net of allowance
      for loan losses of approximately $9.3 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 407,485 shares of VRM
      I’s common stock, representing approximately 5.93% of their total outstanding
      common stock. On November 29, 2006, we filed the required Schedule 13D with
      the
      SEC.




F
            -
            22





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





At
      December 2006, we held two properties with a total carrying value of
      approximately $30.1 million, which were acquired through foreclosure and
      recorded as investments in real estate held for sale. The summary below includes
      our percentage ownership in each property. These investments in real estate
      held
      for sale are accounted for at the lower of cost or fair value less costs to
      sell
      with fair value based on appraisals and knowledge of local market conditions.
      It
      is not our intent to invest in or own real estate as a long-term investment.
      We
      seek to sell properties acquired through foreclosure as quickly as circumstances
      permit. The following is a roll-forward of investments in real estate held
      for
      sale during the twelve months ended December 31, 2006:





**Description**
            **Date
                Acquired**
            **Percentage
                of Ownership**
            
            **Balance**
              **December
                31, 2005**
            
            **Acquisitions
                (Reductions)**
            
            **Seller
                Financed Sales**
            
            **Proceeds
                from Sales**
            
            **Gain
                (Loss) on Sale of Real Estate**
            
            **Balance
                at December 31, 2006**Land
                containing (82) residential lots in Henderson, NV
                **(1)**
            2/28/2003
            34%
            $
            1,262,000
            $
            (13,000)
            $
            --
            $
            (1,270,000)
            $
            21,000
            $
            --278
                unit apartment complex in Fort Worth, TX “Windrush”
                **(1)**
            8/2/2005
            100%
            
            8,059,000
            
            --
            
            --
            
            (8,115,000)
            
            56,000
            
            --One
                real estate parcel in Austin, TX **(1)**
            3/2/2004
            100%
            
            298,000
            
            --
            
            --
            
            (550,000)
            
            252,000
            
            --One
                real estate parcel in Cedar Park, TX **(1)**
            3/2/2004
            100%
            
            200,000
            
            --
            
            --
            
            (260,000)
            
            60,000
            
            --Partially
                completed golf course on 570 acres of land near Austin, TX
            8/3/2004
            100%
            
            5,333,000
            
            (645,000)
            
            --
            
            --
            
            --
            
            4,688,000150
                unit condominium conversion in Houston, TX “The Club at Stablechase”
                **(1)**
            6/15/2005
            100%
            
            9,019,000
            
            (317,000)
            
            --
            
            (8,205,000)
            
            (497,000)
            
            --504
                unit apartment complex in Austin, TX “Lakeview”
                **(1)**
            6/7/2005
            100%
            
            14,468,000
            
            --
            
            --
            
            (16,093,000)
            
            1,625,000
            
            --480
                residential building lots & 2 single family dwellings in Rio Vista
                Village Subdivision in Cathedral City, CA
                **(2)**
            12/21/2006
            86%
            
            --
            
            25,391,000
            
            --
            
            --
            
            --
            
            25,391,000$
            38,639,000
            $
            24,416,000
            $
            --
            $
            (34,493,000)
            $
            1,517,000
            $
            30,079,000





During
      the twelve months ended December 31, 2006, we receive $650,000 from an account
      held in escrow related to the partially completed golf course on 570 acres
      of
      land near Austin, Texas.





**(1)**
            **Sales
                of Real Estate Held for Sale for the Twelve Months Ended December
                31,
                2006:**





During
      March 2006, we sold the parcel in Cedar Park, Texas. Our net proceeds were
      $260,000, resulting in a gain of $60,000.





During
      June 2006, we sold the parcel in Austin, Texas. Our net proceeds were $550,000,
      resulting in a gain of $252,000.





F
            -
            23





During
      July 2006, we sold a 504 unit apartment complex in Austin, Texas, for
      approximately $16.1 million. This resulted in a net gain of approximately $1.6
      million.





During
      July 2006, we and VRM I sold the land containing residential lots in Henderson,
      NV, for approximately $3.8 million, of which we received approximately $1.3
      million, which resulted in a net gain of $21,000.





During
      September 2006, we sold the “Windrush” property in Fort Worth, Texas, for a
      sales price of $8,019,000, resulting in net proceeds of $7,885,000. During
      the
      three months ended December 31, 2006, we received an additional payment of
      $230,000 from cash reserves held by the apartment manager, which resulted in
      a
      net gain of $56,000 on the sale of the property.





During
      December 2006, we sold the 150 unit condominium conversion in Houston, TX “The
      Club at Stablechase” for a sales price of approximately $8.5 million, with net
      proceeds of approximately $8.2 million, which resulted in a net loss of
      approximately $0.5 million **.**





**(2)**
            **Acquisitions
                of Real Estate Held for Sale for the Twelve Months Ended December
                31,
                2006:**





During
      November 2006, we, VRM I 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 $25.6
      million.





Subsequent
      to December 31, 2006, we entered into a sales contract for the partially
      completed golf course near Austin, Texas at a price that would not result in
      a
      material gain or loss. The sale contract requires that the buyer complete the
      purchase on or before June 29, 2007, however there can be no assurance that
      the
      sales contract will actually be completed.





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





At
      December 31, 2006, we held an interest in two **** properties
      with a total carrying value of approximately $14.8 million, which have been
      sold
      in transactions where we provided the financing to the purchaser. GAAP requires
      us to include these properties in real estate held for sale until the borrower
      has met and maintained certain requirements. We may share ownership of such
      properties with VRM I, 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**74
                unit (90) bed assisted living facility in San Bernardino, CA
                **(1)**
            4/6/2004
            100%
            $
            7,350,000
            $
            --
            $
            --
            $
            --
            $
            7,350,000126
                unit (207) bed assisted living facility in Phoenix, AZ
                **(2)**
            9/8/2004
            90%
            
            8,113,000
            
            --
            
            (10,406,000)
            
            2,293,000
            
            --Assisted
                living facility in Las Vegas, Nevada **(3)**
            9/23/2004
            48%
            
            7,424,000
            
            --
            
            --
            
            --
            
            7,424,000$
            22,887,000
            $
            --
            $
            (10,406,000)
            $
            2,293,000
            $
            14,774,000




F
            -
            24





**(1)**
            During
                October 2005, we sold the 74 unit (90 bed) assisted living facility
                in San
                Bernardino, CA and financed 97% of the purchased price of approximately
                $7.6 million maturing in November 2006, which resulted in a $200,000
                deferred gain. Recorded as a deposit liability are approximately
                $4.3
                million in payments we received from the borrower. The unrealized
                gain and
                payments received from the borrower will be recognized as income
                once the
                equity requirement has been met or the loan is paid in
                full.





**(2)**
            During
                August 2005, we and VRM I 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 $1.4 million deferred gain.In
                December 2006, the borrower paid the loan in full resulting in us
                recognizing a gain on sale of approximately $2.3 million, which included
                the deferred gain and payments received from the borrower during
                the life
                of the loan.





**(3)**
            During
                September 2004, we and VRM I 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 $1.2
                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 II 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 approximately
      $1.1 million.





As
      of
      December 31, 2006, our manager owned 241,020 of our common shares. For the
      twelve months ended December 31, 2006, we incurred $46,000 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
      approximately $16,000.





**Transactions
      with Other Related Parties**





As
      of
      December 31, 2006, we owned 407,485 common shares of VRM I, representing
      approximately 5.93% of their total outstanding common stock. On November 29,
      2006, we filed the required Schedule 13D with the SEC. For the twelve months
      ended December 31, 2006 we recognized $72,000 in dividends from VRM I based
      on
      the number of shares we held on the dividend record dates.





As
      of
      December 31, 2006, VRM I owned 372,655 of our common shares, representing
      approximately 0.96% of our total outstanding common stock. For the twelve months
      ended December 31, 2006, we incurred $151,000 in dividends payable to VRM I
      based on the number of shares they held on the dividend record
      dates.




F
            -
            25





During
      the twelve months ended December 31, 2006 we bought $1.4 million in real estate
      loans from VRM I and sold $0.5 million in real estate loans to VRM I. No gain
      or
      loss resulted from these transactions.





As
      of
      December 31, 2006, Fund III owned 158,191 of our common shares. For the twelve
      months ended December 31, 2006, we incurred $47,000 in dividends payable to
      Fund
      III based on the number of shares they held on the dividend record
      dates.





During
      the twelve months ended December 31, 2006, we purchased $4.9 million in real
      estate loans from Fund III. In addition, during the twelve months period ended
      December 31 2006, we sold $6.0 million in real estate loans to Fund III. No
      gain
      or loss resulted from these transactions.





During
      January 2006, Michael V. Shustek, the manager’s CEO, purchased a $2 million
      trust deed investment from us, of which, the total balance of $2 million was
      repurchased by us. No gain or loss resulted from these
      transactions.





During
      the twelve months ended December 31, 2006, we purchased $556,000 in performing
      real estate loans from LTD, a company wholly owned by our CEO Michael V.
      Shustek. No gain or loss resulted from these transactions.





As
      of
      December 31, 2006, Vestin Originations owed us $31,000 related to a loan payment
      by a borrower. We received the payment from Vestin Originations on January
      2,
      2007.





During
      the twelve months ended December 31, 2006 , we incurred $88,000, 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.





**NOTE
      I — NOTES RECEIVABLE**





During
      October 2004, we and VRM I sold the Castaways Hotel/Casino in Las Vegas, Nevada
      of which our portion of the net cash proceeds was approximately $5.8 million.
      We
      originally sold this property under a 100% seller financing arrangement. The
      borrowers then sold the property to an unrelated third party that resulted
      in a
      payoff of the note and also allowed us to record the sale and remove the asset
      from seller financed real estate held for sale. In addition, during September
      2004, we received a promissory note from the guarantors of the loan in the
      amount of $440,000 in exchange for a release of their personal guarantees.
      Since
      payments on the note did not begin for 18 months from the date of the note,
      we
      discounted the face value of the note to $328,000, which is based on a discount
      rate of 8% as of that date. For the twelve months ended December 31, 2006,
      we
      received $46,000 in principal payments. The outstanding balance as of December
      31, 2006 was $282,000, net of allowance.





During
      March 2005, we and VRM I sold the
      126
      unit hotel in Mesquite, Nevada for $5,473,000 of which our share of the proceeds
      were approximately $3.8 million, which resulted in a loss of
      $829,000. In
      addition, during September 2005, we and VRM I 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
      $1,350,000. The balance is secured by a second trust deed and is payable in
      a
      first installment of $100,000 due in July 2005 and monthly interest only
      payments of 5% on $1,100,000 from July 2005 through July 2008, at which time
      the
      entire balance is due. The guarantors 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 $68,000. Payments will be recognized as income when
      received. This note is fully reserved.





During
      June 2005, we took title to 133 units of a 150 unit condominium conversion
      know
      as “The Club at Stablechase” located in Houston, Texas. Our
      manager has evaluated the carrying value of approximately $9.0 million and
      based
      on its estimated value and the underlying personal guarantee from the borrower,
      no valuation allowance was deemed necessary as of September 30, 2006.
      Additionally, the guarantor entered into an unsecured promissory note totaling
      $375,000 bearing an annual interest rate of 8.0%, payable in monthly payments
      of
      principal of $6,000 plus interest and maturing during September 2010. This
      note
      is fully reserved. In addition, the guarantors entered into a second unsecured
      note totaling $125,000. These notes were paid in full during October
      2006.




F
            -
            26





During
      November 2004, we and VRM I sold the 140 Unit/224 beds senior facility in Mesa,
      Arizona of which our portion of the consideration received totaled $6,043,000.
      We and VRM I received a promissory note from the original guarantor in the
      amount of $478,000 of which our portion was $409,000. The promissory note is
      payable in interest only payments of 8% on the principal balance outstanding.
      Commencing June 25, 2005 through May 25, 2006, monthly payments shall increase
      to $15,000 and be applied to principal and accrued interest. Beginning June
      25,
      2006 through May 25, 2009, payments are to increase to $20,000 monthly. Due
      to
      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. As of December 31, 2006, we received $220,000 in
      payments. This note is fully reserved.





During
      December 2005, we and VRM I sold the 460 acre residential subdivision in Lake
      Travis, TX for approximately $5.5 million, of which our portion was
      approximately $3.5 million. The purchase price included cash proceeds of $5
      million and a $500,000 note receivable, with an imputed interest rate of 8%
      in
      July 2006. A net gain of $71,000 resulted in this transaction, of which our
      portion was $47,000. 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 $329,000. 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 I and/or Fund III (collectively, the “Lead Lenders”). In the event of
      borrower non- performance, the Inter-creditor Agreements generally provide
      that
      the Lead Lenders must repay the Investor’s loan amount either by (i) continuing
      to remit to the Investor the interest due on the participated loan amount;
      (ii)
      substituting an alternative loan acceptable to the Investor; or (iii)
      repurchasing the participation from the Investor for the outstanding balance
      plus accrued interest.





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





During
      October 2006, we, our manager, Vestin Origination, Inc., VRM I 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 I 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 approximately $4.3 million. As
      of
      December 31, 2006, this secured borrowing totaled approximately $18.5 million,
      of which our portion was approximately $13.8 million. In the event VRM I 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 $19.8 million in funds being used under Inter-creditor
      Agreements.





**NOTE
      K — NOTE PAYABLE**





During
      the twelve months ended December 31, 2006, three notes payable totaling
      approximately $23 million were paid in full.




F
            -
            27





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 $60,000 and nine monthly payments of $27,000 beginning on May 27,
      2006. As of December 31, 2006, the outstanding balance of the note was
      approximately $27,000, 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 $2.9 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.





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.




F
            -
            28





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





The
      United States Securities and Exchange Commission (the “Commission”), conducted
      an investigation of certain matters related to us, our manager, Vestin Capital,
      VRM I and Fund III. We fully cooperated during the course of the investigation.
      On September 27, 2006, the investigation was resolved through the entry of
      an
      Administrative Order by the Commission (the “Order”). Our manager, Vestin
      Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin
      Capital (collectively, the “Respondents”), consented to the entry of the Order
      without admitting or denying the findings therein. In the Order, the Commission
      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 our predecessor, Vestin
      Fund II, LLC. The Respondents consented to the entry of a cease and desist
      order, the payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s
      suspension from association with any broker or dealer for a period of six
      months, which 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.





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 II, 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
            -
            29





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 VRM I.
      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 VRM I 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. The Defendants believe that the
      allegations are without merit and that they have adequate defenses. The
      Defendants intend to undertake a vigorous defense.




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





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





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 us alleging that these Vestin entities
      improperly influenced the former RightStar trustees to transfer trust funds
      to
      us. 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.




F
            -
            30





We,
      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 our 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.




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 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 our 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.





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.





**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**





On
      January 22, 2007, our Board of Directors declared a cash dividend of $0.05
      per
      common share for the month ended January 31, 2007, payable on February 26,
      2007
      to shareholders of record as of February 8, 2007.





On
      February 20, 2007, our Board of Directors declared a cash dividend of $0.05
      per
      common share for the month ended February 28, 2007, payable on March 26, 2007
      to
      shareholders of record as of March 9, 2007.





Subsequent
      to December 31, 2006, we entered into a sales contract for the partially
      completed golf course near Austin, Texas at a price that would not result in
      a
      material gain or loss. The sale contract requires that the buyer complete the
      purchase on or before June 29, 2007, however there can be no assurance that
      the
      sales contract will actually be completed.





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.




F
            -
            31




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
              
              $
              6,111,000
              
              $
              5,306,000
              
              $
              5,645,000
              
              $
              6,417,000
              
              $
              23,479,000Total
                  Operating Expenses
              
              
              7,233,000
              
              
              922,000
              
              
              806,000
              
              
              1,663,000
              
              
              10,624,000Total
                  Income from Real Estate Held for Sale
              
              
              (588,000
              )
              
              354,000
              
              
              1,561,000
              
              
              1,669,000
              
              
              2,996,000Income
                  before provision for income taxes
              
              
              (1,710,000
              )
              
              4,738,000
              
              
              6,400,000
              
              
              6,423,000
              
              
              15,851,000Provision
                  for income taxes
              
              
              --
              
              
              --
              
              
              452,000
              
              
              (452,000
              )
              
              --**NET
                  INCOME (LOSS)**
              
              $
              (1,710,000
              )
              $
              4,738,000
              
              $
              5,948,000
              
              $
              6,875,000
              
              $
              15,851,000Basic
                  and diluted earnings per common share / membership unit
              
              $
              (0.04
              )
              $
              0.12
              
              $
              0.15
              
              $
              0.18
              
              $
              0.41Dividends
                  declared per common share / cash distributions per membership
                  unit
              
              $
              0.16
              
              $
              --
              
              $
              0.215
              
              $
              0.205
              
              $
              0.58Weighted
                  average common shares / membership units
              
              
              38,915,994
              
              
              38,789,975
              
              
              38,799,550
              
              
              38,825,669
              
              
              38,805,119Weighted
                  Average Term of Outstanding Loans**(b)**
              
              
              23
                  months
              
              
              25
                  months
              
              
              22
                  months
              
              
              19
                  months
              
              
              19
                  months








F
            -
            32





The
      following schedule is a selected quarterly financial data for the six months
      ended December 31, 2005.





**For
                The Three**
              **Months
                Ended**
              **September
                30, 2005**
            
            **For
                The Three**
              **Months
                Ended**
              **December
                31, 2005**
            
            **For
                The Six**
              **Months
                Ended**
              **December
                31, 2005**Total
                Revenues
            
            $
            6,971,000
            
            $
            5,257,000
            
            $
            12,228,000Total
                Operating Expenses
            
            $
            528,000
            
            $
            986,000
            
            $
            1,514,000Total
                Income from Real Estate Held for Sale
            
            $
            (633,000
            )
            $
            463,000
            
            $
            (170,000
            )**NET
                INCOME**
            
            $
            5,810,000
            
            $
            4,734,000
            
            $
            10,544,000Net
                Income Allocated to Members
            
            $
            5,810,000
            
            $
            4,734,000
            
            $
            10,544,000Net
                Income Allocated to Members Per Weighted Average Membership
                Units
            
            $
            0.14
            
            $
            0.11
            
            $
            0.25Weighted
                Average Membership Units
            
            
            42,706,872
            
            
            42,788,578
            
            
            42,747,725Annualized
                Rate of Return to Members**(a)**
            
            
            5.40%
            
            
            4.39%
            
            
            9.79%Cash
                Distributions
            
            $
            4,230,000
            
            $
            4,356,000
            
            $
            4,356,000Cash
                Distributions Per Weighted Average Membership Units
            
            $
            0.10
            
            $
            0.10
            
            $
            0.10Weighted
                Average Term of Outstanding Loans**(b)**
            
            
            22
                months
            
            
            22
                months
            
            
            22
                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
            -
            33





**SUPPLEMENTARY** **INFORMATION**





**ScheduleI****VESTIN
                REALTY MORTGAGE II, INC.****REAL
                ESTATE LOANS ON REAL ESTATE *****REAL
                ESTATE LOAN ROLL FORWARD****Balance,
                June 30, 2004**
            
            $
            319,061,000Additions
                during the periodNew
                real estate loans and additions
            
            
            72,219,000Real
                estate loans bought
            
            
            39,758,000Deductions
                during the periodCollections
                of principal and reductions
            
            
            135,959,000Foreclosed
                loans (Real estate held for sale)
            
            
            37,627,000Real
                estate loans sold
            
            
            22,034,000Net
                Change in 2004 - 2005
            
            
            (83,643,000
            )**Balance,
                June 30, 2005**
            
            $
            235,418,000Additions
                during the periodNew
                real estate loans and additions
            
            
            121,406,000Real
                estate loans bought
            
            
            30,365,000Deductions
                during the periodCollections
                of principal and reductions
            
            
            113,739,000Real
                estate loans sold
            
            
            17,000,000Net
                Change in 2005
            
            
            21,032,000**Balance,
                December 31, 2005**
            
            $
            256,450,000Additions
                during the periodNew
                real estate loans and additions
            
            
            204,497,000Real
                estate loans bought
            
            
            31,806,000Deductions
                during the periodCollections
                of principal and reductions
            
            
            216,207,000Foreclosed
                loans (Real estate held for sale)
            
            
            25,476,000Real
                estate loans sold
            
            
            8,675,000Net
                Change in 2006
            
            
            (14,055,000
            )**Balance,
                December 31, 2006**
            
            $
            242,395,000





*
      Includes loans related to seller financed real estate held for
      sale.





F
            -
            34





**ScheduleII****VESTIN
                REALTY MORTGAGE II, 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%
            
            $
            204,285,000
            
            $
            138,556,000
            
            
            03/04-12/07
            
            $
            19,446,000Construction
            
            
            10%-12%
            
            $
            100,466,000
            
            $
            43,319,000
            
            
            10/06-11/07
            
            $
            1,681,000Acquisition
                and Development
            
            
            12%-13%
            
            $
            18,932,000
            
            $
            8,569,000
            
            
            01/07-07/07
            
            $
            --Land
            
            
            10%-13%
            
            $
            82,475,000
            
            $
            51,951,000
            
            
            03/07-12/07
            
            $
            7,707,000242,395,000**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%
            
            $
            234,185,000
            
            $
            158,746,000
            
            
            03/04
                - 12/07
            
            $
            36,382,000Construction
            
            
            12%
            
            $
            42,050,000
            
            $
            11,128,000
            
            
            03/06
                - 07/06
            
            $
            --Acquisition
                and Development
            
            
            8%
                - 12%
            
            $
            75,662,000
            
            $
            43,275,000
            
            
            04/06
                - 05/06
            
            $
            --Land
            
            
            10%
                - 14%
            
            $
            72,557,000
            
            $
            43,301,000
            
            
            02/06
                - 10/06
            
            $
            --256,450,000







**ScheduleIII****VESTIN
                REALTY MORTGAGE II, 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
            
            $
            397,496,000
            
            
            5%-14%
            
            $
            239,748,000
            
            
            03/04-12/07
            
            $
            28,834,0002nd
            
            $
            8,662,000
            
            
            10.5%-13%
            
            $
            2,647,000
            
            
            01/07-12/07
            
            $
            --242,395,000**As
                of December 31, 2005:****Lien
                Position**
            
            
            **Face
                Amount of Loan**
            
            
            **Interest
                Rate**
            
            
            **Carrying
                Amount of Loan**
            
            
            **Maturity
                Date**
            
            
            **Amount
                Subject to Delinquency**1st
            
            $
            416,092,000
            
            
            5%
                - 14%
            
            $
            256,241,000
            
            
            03/04
                - 12/07
            
            $
            36,382,0002nd
            
            $
            8,362,000
            
            
            12%
                - 14%
            
            $
            209,000
            
            
            03/06
                - 04/06
            
            $
            --256,450,000





*
      Includes loans related to seller financed real estate held for
      sale.








F
            -
            35





**ScheduleIV****VESTIN
                REALTY MORTGAGE II, 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
            
            
            11.50%
            
            
            10/05/07
            
            
            1st
            
            $
            18,000,000
            
            $
            10,760,000
            
            $
            --Commercial
            
            
            10.00%
            
            
            06/30/07
            
            
            1st
            
            $
            16,000,000
            
            $
            11,549,000
            
            $
            --Commercial
            
            
            9.00%
            
            
            07/12/07
            
            
            1st
            
            $
            23,900,000
            
            $
            17,177,000
            
            $
            --Commercial
            
            
            13.00%
            
            
            06/28/07
            
            
            1st
            
            $
            26,400,000
            
            $
            25,304,000
            
            $
            --Commercial
            
            
            6.25%
            
            
            12/25/07
            
            
            1st
            
            $
            12,500,000
            
            $
            11,404,000
            
            $
            --Commercial
            
            
            14.00%
            
            
            03/31/04
            
            
            1st
            
            $
            34,000,000
            
            $
            17,291,000
            
            $
            17,291,000Commercial
            
            
            9.00%
            
            
            03/31/07
            
            
            1st
            
            $
            24,500,000
            
            $
            19,554,000
            
            $
            --Construction
            
            
            12.00%
            
            
            05/16/07
            
            
            1st
            
            $
            26,000,000
            
            $
            18,869,000
            
            $
            --Construction
            
            
            10.00%
            
            
            05/28/07
            
            
            1st
            
            $
            21,166,000
            
            $
            10,529,000
            
            $
            --Land
            
            
            12.00%
            
            
            03/17/07
            
            
            1st
            
            $
            9,500,000
            
            $
            7,707,000
            
            $
            7,707,000Land
            
            
            10.00%
            
            
            12/30/07
            
            
            1st
            
            $
            18,000,000
            
            $
            12,945,000
            
            $
            --Land
            
            
            13.00%
            
            
            07/28/07
            
            
            1st
            
            $
            15,000,000
            
            $
            9,771,000
            
            $
            --**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
            
            $
            16,025,000
            
            $
            --A/D
            
            
            8.00%
            
            
            04/25/06
            
            
            1st
            
            $
            35,000,000
            
            $
            26,840,000
            
            $
            --Commercial
            
            
            7.50%
            
            
            07/15/06
            
            
            1st
            
            $
            10,500,000
            
            $
            9,470,000
            
            $
            --Commercial
            
            
            10.25%
            
            
            08/18/06
            
            
            1st
            
            $
            24,500,000
            
            $
            21,750,000
            
            $
            --Commercial
            
            
            13.00%
            
            
            09/30/06
            
            
            1st
            
            $
            19,500,000
            
            $
            13,832,000
            
            $
            --Commercial
            
            
            6.25%
            
            
            12/25/07
            
            
            1st
            
            $
            12,500,000
            
            $
            11,477,000
            
            $
            --Commercial
            
            
            14.00%
            
            
            03/31/04
            
            
            1st
            
            $
            34,000,000
            
            $
            16,811,000
            
            $
            16,811,000Commercial
            
            
            8.00%
            
            
            05/20/06
            
            
            1st
            
            $
            18,000,000
            
            $
            18,000,000
            
            $
            --Commercial
            
            
            11.00%
            
            
            06/30/05
            
            
            1st
            
            $
            26,000,000
            
            $
            19,571,000
            
            $
            19,571,000Land
            
            
            10.00%
            
            
            03/30/06
            
            
            1st
            
            $
            35,000,000
            
            $
            28,598,000
            
            $
            --Land
            
            
            14.00%
            
            
            02/15/06
            
            
            1st
            
            $
            21,632,000
            
            $
            10,419,000
            
            $
            --





*
      Includes loans related to seller financed real estate held for
      sale.




F
          -
          36