**UNITED
        STATES**
 
 **SECURITIES
        AND EXCHANGE COMMISSION**
 WASHINGTON,
        D.C. 20549
 
 **FORM
        10-Q**
 
 (MARK
        ONE)
 
 **[X]
                  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE****SECURITIES
                  EXCHANGE ACT OF 1934**
 
 **FOR
        THE QUARTERLY PERIOD ENDED** **JUNE
        30, 2006**
 
 **Or**
 
 **[   ]
                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE****SECURITIES
                  EXCHANGE ACT OF 1934**
 
 **Transition
        Period From ______________ To ______________**
 
 *COMMISSION
        FILE NUMBER 333-105017*
 
 **VESTIN
                  FUND III, LLC**(Exact
                  name of registrant as specified in its
                  charter)
 
 
 NEVADA
              
              87-0693972(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: 702.227.0965
 
 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 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 [   ]
              Non-accelerated
                  filer [X]
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Securities Exchange Act).
 
 Yes
        [   ] No [ X]
 
 As
        of
        August 7, 2006, 2,882,125 Units of interest in the Company were
        outstanding.
  *Table
            of Contents*
  **TABLE
        OF CONTENTS**
 
 **PAGE**Part
                  I
              FINANCIAL
                  INFORMATIONItem
                  1.
              Consolidated
                  Financial StatementsConsolidated
                  Balance Sheets As of June 30, 2006
                  (unaudited), and December 31, 2005
              3Consolidated
                  Statements of Income (unaudited) for
                  the Three and Six Months Ended June 30, 2006 and 2005
              4Consolidated
                  Statement of Members’ Equity (unaudited) for
                  the Six Months Ended June 30, 2006
              5Consolidated
                  Statements of Cash Flows (unaudited) for the
                  Six Months Ended June 30, 2006 and 2005
              6Notes
                  to Consolidated Financial Statements
                  (unaudited)
              8Report
                  of Independent Registered Public Accounting
                  Firm
              25Item
                  2.
              Management’s
                  Discussion and Analysis of Financial
                  Condition and Results of Operations
              26Item
                  3.
              Quantitative
                  and Qualitative Disclosures About
                  Market Risk
              35Item
                  4.
              Control
                  and Procedures
              36Part
                  II
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              38Item
                  1A.
              Risk
                  Factors
              38Item
                  2.
              Unregistered
                  Sales of Equity - Securities and
                  Use of Proceeds
              38Item
                  3.
              Defaults
                  Upon Senior Securities
              39Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              39Item
                  5.
              Other
                  Information
              39Item
                  6.
              Exhibits
              40SIGNATURES
              41Exhibits
                  31.1Exhibits
                  31.2Exhibits
                  32
 
  -
            2
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 *Table
            of Contents*
   **PART
        I - FINANCIAL INFORMATION**
 
 **ITEM
        1.**  **CONSOLIDATED
        FINANCIALSTATEMENTS**
 
 **VESTIN
                  FUNDIII, LLC****CONSOLIDATED
                  BALANCE SHEETS****ASSETS****(UNAUDITED)****JUNE
                  30, 2006**
              
              **DECEMBER
                  31, 2005**Cash
              
              $
              3,661,000
              
              $
              1,167,000Interest
                  receivable
              
              
              147,000
              
              
              194,000Investment
                  in real estate loans, net of allowance for loan loss of $73,000
                  as of June
                  30, 2006 and December 31, 2005
              
              
              19,394,000
              
              
              22,964,000Investment
                  in real property, net of accumulated depreciation of $393,000 at
                  June 30,
                  2006 and $287,000 as of December 31, 2005, respectively
              
              
              9,485,000
              
              
              9,591,000Capitalized
                  loan fees, net of amortization of $21,000 at June 30, 2006 and
                  $16,000 as
                  of December 31, 2005, respectively
              
              
              94,000
              
              
              99,000Assets
                  under secured borrowings
              
              
              --
              
              
              527,000Deferred
                  rent receivable - related party
              
              
              235,000
              
              
              168,000Total
                  assets
              
              $
              33,016,000
              
              $
              34,710,000**LIABILITIES
                  AND MEMBERS' EQUITY**LiabilitiesAccounts
                  payable
              
              $
              55,000
              
              $
              156,000Due
                  to Manager
              
              
              12,000
              
              
              38,000Secured
                  borrowings
              
              
              --
              
              
              527,000Note
                  payable
              
              
              4,781,000
              
              
              4,830,000Total
                  liabilities
              
              
              4,848,000
              
              
              5,551,000Commitments
                  and ContingenciesMembers'
                  Equity - Authorized 10,000,000 units, 2,869,274 units issued and
                  outstanding at June 30, 2006 and 2,974,419 units issued and outstanding
                  at
                  December 31, 2005
              
              
              28,168,000
              
              
              29,159,000Total
                  members' equity
              
              
              28,168,000
              
              
              29,159,000Total
                  liabilities and members' equity
              
              $
              33,016,000
              
              $
              34,710,000
  The
              accompanying notes are an integral part of these statements.
 See
              review
              report of Independent Registered Public Accounting Firm.
 -
            3
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 *Table
            of Contents*
  
 **VESTIN
                  FUNDIII, LLC****CONSOLIDATED
                  STATEMENTS OF INCOME****(UNAUDITED)****FOR
                  THE THREE MONTHS**
                **ENDED
                  JUNE 30,**
              
              **FOR
                  THE SIX MONTHS**
                **ENDED
                  JUNE 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****Revenues**Interest
                  income from investments in real estate loans
              
              $
              542,000
              
              $
              674,000
              
              $
              1,136,000
              
              $
              1,310,000Rental
                  income - related party
              
              
              257,000
              
              
              215,000
              
              
              514,000
              
              
              430,000Other
              
              
              44,000
              
              
              9,000
              
              
              62,000
              
              
              18,000Total
                  revenues
              
              
              843,000
              
              
              898,000
              
              
              1,712,000
              
              
              1,758,000**Operating
                  expenses**Management
                  fees - related party
              
              
              12,000
              
              
              18,000
              
              
              24,000
              
              
              34,000Interest
                  expense related to secured borrowings
              
              
              1,000
              
              
              57,000
              
              
              14,000
              
              
              120,000Interest
                  expense related to investment in real estate
              
              
              68,000
              
              
              70,000
              
              
              135,000
              
              
              139,000Provision
                  for loan loss
              
              
              --
              
              
              5,000
              
              
              --
              
              
              37,000Depreciation
                  and amortization
              
              
              56,000
              
              
              56,000
              
              
              111,000
              
              
              111,000Professional
                  fees
              
              
              31,000
              
              
              113,000
              
              
              96,000
              
              
              207,000Professional
                  fees - related party
              
              
              3,000
              
              
              4,000
              
              
              4,000
              
              
              5,000Other
              
              
              3,000
              
              
              10,000
              
              
              8,000
              
              
              16,000Total
                  operating expenses
              
              
              174,000
              
              
              333,000
              
              
              392,000
              
              
              669,000**NET
                  INCOME**
              
              $
              669,000
              
              $
              565,000
              
              $
              1,320,000
              
              $
              1,089,000Net
                  income allocated to members
              
              $
              669,000
              
              $
              565,000
              
              $
              1,320,000
              
              $
              1,089,000Net
                  income allocated to members per weighted average membership
                  units
              
              $
              0.23
              
              $
              0.20
              
              $
              0.45
              
              $
              0.40Weighted
                  average membership units
              
              
              2,938,692
              
              
              2,775,381
              
              
              2,962,657
              
              
              2,720,597
 
 
 
 
  The
              accompanying notes are an integral part of these statements.
 See
              review
              report of Independent Registered Public Accounting Firm.
 -
              4
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 *Table
            of Contents*
  
 **VESTIN
                  FUNDIII, LLC****CONSOLIDATED
                  STATEMENT OF MEMBERS' EQUITY********(UNAUDITED)****UNITS**
              
              **AMOUNT**Members'
                  equity at December 31, 2005
              
              
              2,974,419
              
              $
              29,159,000Distributions
              
              
              
              
              
              (1,292,000
              )Reinvestments
                  of distributions
              
              
              41,902
              
              
              440,000Members'
                  redemptions
              
              
              (147,047
              )
              
              (1,523,000
              )Capital
                  contribution from Manager related to forgiveness of management
                  fee
                  incurred
              
              
              
              
              
              64,000Net
                  income
              
              
              
              
              
              1,320,000Members'
                  equity at June 30, 2006 (Unaudited)
              
              
              2,869,274
              
              $
              28,168,000
  The
              accompanying notes are an integral part of these statements.
 See
              review
              report of Independent Registered Public Accounting Firm.
 -
              5
              -
 *Table
            of Contents*
  
 **VESTIN
                  FUNDIII, LLC****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(UNAUDITED)****FOR
                  THE SIX MONTHS**
                **ENDED
                  JUNE 30,****2006**
              
              **2005****Cash
                  flows from operating activities:**Net
                  income
              
              $
              1,320,000
              
              $
              1,089,000Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
              
              
              106,000
              
              
              105,000Amortization
                  of capitalized loan fees
              
              
              5,000
              
              
              6,000Provision
                  for loan loss
              
              
              --
              
              
              37,000Change
                  in operating assets and liabilities:Interest
                  receivable
              
              
              47,000
              
              
              (72,000
              )Deferred
                  rent receivable - related party
              
              
              (67,000
              )
              
              --Accounts
                  payable
              
              
              (101,000
              )
              
              82,000Due
                  from VRM I
              
              
              --
              
              
              (6,000
              )Due
                  to Manager
              
              
              (26,000
              )
              
              165,000Net
                  cash provided by operating activities
              
              
              1,284,000
              
              
              1,406,000**Cash
                  flows from investing activities:**Investments
                  in real estate loans on real estate
              
              
              (10,216,000
              )
              
              (9,084,000
              )Proceeds
                  from loan payoff
              
              
              13,786,000
              
              
              748,000Net
                  cash provided (used) by investing activities
              
              
              3,570,000
              
              
              (8,336,000
              )**Cash
                  flows from financing activities:**Proceeds
                  from issuance of member units
              
              
              --
              
              
              3,336,000Payments
                  on notes payable
              
              
              (49,000
              )
              
              (45,000
              )Capital
                  contribution by Manager
              
              
              64,000
              
              
              --Members'
                  redemptions
              
              
              (1,523,000
              )
              
              (53,000
              )Distributions,
                  net of reinvestments
              
              
              (828,000
              )
              
              (857,000
              )Distributions
                  to Related Party
              
              
              (24,000
              )
              
              --Net
                  cash (used) provided by financing activities
              
              
              (2,360,000
              )
              
              2,381,000**NET
                  CHANGE IN CASH**
              
              
              2,494,000
              
              
              (4,549,000
              )**Cash,
                  beginning**
              
              
              1,167,000
              
              
              6,286,000**Cash,
                  ending**
              
              $
              3,661,000
              
              $
              1,737,000
  The
              accompanying notes are an integral part of these statements.
 See
              review
              report of Independent Registered Public Accounting Firm.
 -
              6
              -
 *Table
            of Contents*
  
  **VESTIN
                    FUND III, LLC****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****(UNAUDITED)****FOR
                    THE SIX MONTHS**
                  **ENDED
                    JUNE 30,****2006**
                
                **2005****Supplemental
                    disclosures of cash flows information:**Income
                    taxes paid
                
                $
                --
                
                $
                --Interest
                    paid during the period
                
                $
                149,000
                
                $
                259,000**Non-cash
                    financing activities:**Offering
                    costs paid by Vestin Mortgage, Inc. recorded as deferred offering
                    costs
                    and due to manager on the accompanying balance sheet
                
                $
                --
                
                $
                14,000Loans
                    paid in full funded through secured borrowings
                
                $
                527,000
                
                $
                676,000
 
 
 The
              accompanying notes are an integral part of these statements.
 See
              review
              report of Independent Registered Public Accounting Firm.
 -
              7
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 *Table
            of Contents*
  
 **VESTIN
        FUNDIII, LLC**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS** ****
 
 **JUNE
        30, 2006**
 
 **(UNAUDITED)**
 
 
 **NOTE
        A — ORGANIZATION**
 
 Vestin
        Fund III, LLC was organized in April 2003 as a Nevada limited liability company
        for the purpose of investing in real estate loans and
        income-producing real property .
        In this
        report we refer to Vestin Fund III, LLC as “the Company”, “our Company”, the
“Fund”, “we”, “us”, or “our”. We commenced operations in February 2004. We will
        continue our operations until December 2023 unless dissolved prior thereto
        or
        extended by vote of the members under the provisions of our Operating
        Agreement.
 
 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
        company investing in real estate loans secured by real estate through deeds
        of
        trust or mortgages (hereafter referred to as “deeds of trust”), investments in
        real estate and raising funds through our Distribution Reinvestment Plan,
        we are
        subject to the North American Securities Administration Act Mortgage Program
        Guidelines and Real Estate Guidelines (collectively, the “NASAA Guidelines”)
        promulgated by the state securities administrators.
 
 On
        November 7, 2003, our Registration Statement as filed with the Securities
        and
        Exchange Commission became effective for the initial public offering of up
        to
        10,000,000 units at $10 per unit (“Unit”). Through June 30, 2006, we had sold
        approximately 2,865,921 Units. Additionally, Members may participate in our
        Distribution Reinvestment Plan whereby the members’ distributions may be used to
        purchase additional Units at the current value. As of June 30, 2006,
        approximately 185,815 Units had been purchased under this plan. On November
        7,
        2005, we discontinued the offering of our Units; however, members may continue
        to purchase additional Units through our Distribution Reinvestment
        Plan.
 
 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, wholly owns Vestin Group, which is engaged in asset management,
        real
        estate lending and other financial services thought 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. As of July 1, 2006, the mortgage
        broker license has been issued to an affiliated company, Vestin Originations,
        who will continue 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 Operating Agreement, the Manager controls the daily operating activities
        of the Company, including the power to assign duties, to determine how to
        invest
        our assets, to sign bills of sale, title documents, leases, notes, security
        agreements, real estate loan investments and contracts, and to direct our
        business operations. Consequently, our operating results are dependent on
        our
        Manager’s ability and intent to continue to service the Company’s assets. The
        Operating Agreement also provides that the members have certain rights,
        including the right to terminate the Manager subject to a majority vote of
        the
        members.
 
 Vestin
        Mortgage, Inc. is also the Manager of Vestin Realty Mortgage I, Inc., as
        the
        successor by merger to Vestin Fund I, LLC, (“VRM I”), Vestin Realty Mortgage II,
        Inc, as the successor by merger to Vestin Fund II, LLC, (“VRM II) and inVestin
        Nevada, Inc., a company wholly owned by our Manager’s CEO. These entities also
        invest in commercial real estate loans.
 
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
              8
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 *Table
            of Contents*
  The
        consolidated financial statements include the accounts of the Company and
        its
        wholly owned subsidiary, VF III HQ, LLC. All significant inter-company
        transactions and balances have been eliminated in consolidation.
 
 The
        results of operations for the interim periods shown in this report are not
        necessarily indicative of results to be expected for the full year. In the
        opinion of management, the information contained herein reflects all adjustments
        necessary to make the results of operations for the interim periods a fair
        statement of such operation. All such adjustments are of a normal recurring
        nature.
 
 **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 recognize interest income on loans
        once
        they are determined to be impaired. A loan is impaired when based on current
        information and events, it is probable that we will be unable to collect
        all
        amounts due according to the contractual terms of the loan agreement or when
        the
        payment of interest is 90 days past due. Cash receipts will be allocated
        to
        interest income, except when such payments are specifically designated by
        the
        terms of the loan as principal reduction or when management does not believe
        our
        investment in the loan is fully recoverable.
 
 Our
        lease
        provides for tenant occupancy during periods for which no rent is due or
        where
        minimum rent payments increase during the term of the lease. Rental revenue
        is
        recorded for the full term of the lease on a straight-line basis. Accordingly,
        the Company records a receivable from tenants for rents that it expects to
        collect over the remaining lease term as deferred rents receivable. When
        the
Company acquires a property, the term of the existing lease is considered
        to
        commence as of the acquisition date for the purposes of this calculation.
        Revenue recognition is considered to be critical because the evaluation of
        the
        reliability of such deferred rent receivable involves management’s assumptions
        relating to such tenant’s viability.
 
 We
        recognize income from rent once all of the following criteria are met in
        accordance with the Statement of Financial Accounting Standards (“FAS”) 13 *Accounting
        for Leases* (“FAS
        13”):
 
 ·
            The
                agreement has been fully executed and
                delivered; 
 ·
            Services
                have been rendered; 
 ·
            The
                amount is fixed or determinable; and 
 ·
            The
                collectibility is reasonably assured. 
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
              9
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 *Table
            of Contents*
  **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 Operating
        Agreement provided the price does not exceed the original cost. The primary
        purpose is to either free up capital to provide liquidity for various reasons,
        such as loan diversification, or place excess capital in investments to maximize
        the use of our capital. For example, our Operating Agreement provides certain
        guidelines with respect to loan concentration by dollar amount, loan type
        and
        lien position. 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 (hereafter
        referred to as “deeds of trust”). Generally, our real estate loans require
        interest only payments with a balloon payment of the principal at maturity.
        We
        have both the intent and ability to hold real estate loans until maturity
        and
        therefore, real estate loans are classified and accounted for as held for
        investment and are carried at amortized cost. Loans sold to or purchased
        from
        affiliates are accounted for at the principal balance and no gain or loss
        is
        recognized by us or any affiliate. Loan to value ratios are based on appraisals
        obtained at the time of loan origination and may not reflect subsequent changes
        in value estimates. Such appraisals are generally dated within 12 months
        of the
        date of loan origination and may be commissioned by the borrower. The appraisals
        may be for the current estimate of the “as-if developed” value of the property,
        which approximates the post-construction value of the collateralized property
        assuming that such property is developed. “As-if developed” values on raw land
        loans or acquisition and development loans often dramatically exceed the
        immediate sales value and may include anticipated zoning changes and timely
        successful development by the purchaser. As most of the appraisals will be
        prepared on an “as-if developed” basis, if a loan goes into default prior to any
        development of a project, the market value of the property may be substantially
        less than the appraised value. As a result, there may be less security than
        anticipated at the time the loan was originally made. If there is less security
        and a default occurs, we may not recover the full amount of the
        loan.
 
 As
        of
        June 30, 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. In
        addition, we also invest in real estate loans that have interest reserves.
        Loans
        with interest reserves require the borrowers to maintain interest reserves
        funded from the principal amount of the loan for a period of time. At June
        30,
        2006, we had $5.7 million in investments in real estate loans that had interest
        reserves where the total outstanding principal was approximately $43.3 million,
        including participating lenders. These loans had interest reserves of
        approximately $2.6 million, of which our portion is $0.4 million. At December
        31, 2005, we had $3.9 million invested in real estate loans that had interest
        reserves where the total outstanding principal was approximately $25.1 million,
        including participating lenders. These loans had interest reserves of
        approximately $2.4 million, of which our portion was $0.7 million.
 
 **Allowance
        for Loan Loss**
 
 We
        maintain an allowance for loan loss 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 loss. Subsequent recoveries of amounts previously
        charged off are added back to the allowance or included as income.
 
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
              10
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            of Contents*
  Estimating
        allowances for loan loss requires significant judgment about the underlying
        collateral, including liquidation value, condition of the collateral, competency
        and cooperation of the related borrower and specific legal issues that affect
        loan collections or taking possession of the property. As a non-conventional
        lender willing to invest in loans to borrowers who may not meet the credit
        standards of conventional lenders, the default rate on our loans could be
        higher
        than those generally experienced in the real estate lending industry. We
        generally approve loans more quickly than other real estate lenders and,
        due to
        our expedited underwriting process, there is a risk that the credit inquiry
        we
        perform will not reveal 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. 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 property; and 
 ·
            Appraisals,
                which are only opinions of value at the time of the appraisal, may
                not
                accurately reflect the value of the
                property. 
 **Investments
        in Real Property**
 
 Real
        property is stated at cost, less accumulated depreciation. Amounts capitalized
        as investments in real property consist of the cost of acquisition or
        construction and any tenant improvements or major improvements that extend
        the
        useful life of the related asset. All repairs and maintenance are expensed
        as
        incurred. Upon acquisition, the purchase price of the property is allocated
        to
        land, building and improvements and other intangible assets and associated
        liabilities as required by FAS 141 - *Business
        Combinations* .
        The
        allocation to land is based on an estimate of its fair value based on available
        information, including appraisals. The allocation to other intangible assets
        represents the value associated with the in-place leases, including leasing
        commissions, legal and other related costs.
 
 Real
        property is depreciated using the straight-line method over the useful lives
        of
        the assets by class generally as follows:
 
 Land
              
              Not
                  DepreciatedBuilding
              
              40
                  YearsBuilding
                  Improvements
              
              10-25
                  YearsLand
                  Improvements
              
              20-25
                  YearsTenant
                  Improvements
              
              Lease
                  TermIntangible
                  Lease Assets including capitalized loan fees
              
              Lease
                  Term
 
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
              11
              -
 *Table
            of Contents*
  Our
        Manager continually monitors events and changes in circumstances that could
        indicate carrying amounts of real estate and related intangible assets may
        not
        be recoverable. When indicators of potential impairment are present, our
        Manager
        assesses the recoverability of the assets by determining whether the carrying
        value of the real estate and related intangible assets will be recovered
        through
        the undiscounted future cash flows expected from the use and eventual
        disposition of the asset. In the event the expected undiscounted future cash
        flows do not exceed the carrying value, we adjust the real estate and intangible
        assets to their fair value and recognize an impairment loss. Our Manager
        has
        determined there has been no impairment in the carrying value of real property
        held by us during the six months ended June 30, 2006.
 
 **Secured
        Borrowings**
 
 Secured
        borrowings provide an additional source of capital for our lending activity.
        Secured borrowings allow us to increase the diversification of our loan
        portfolio and to invest in loans that we might not otherwise invest in. We
        do
        not receive any revenues for entering into secured borrowing arrangements.
        Loans
        in which third party investors have participated through inter-creditor
        Agreements (“Inter-creditor Agreements”) are accounted for as secured borrowings
        in accordance with FAS 140 - *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities* (“FAS
        140”). The Inter-creditor Agreements provide us additional funding sources for
        real estate loans whereby a third party investor (the “Investor”) may
        participate on a senior basis in certain real estate loans with us and/or
        VRM I
        and/or VRM II (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 June 30, 2006, we have
        no
        outstanding secured borrowing arrangements.
 
 **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 loss, 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. 
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
              12
              -
 *Table
            of Contents*
  At
        June
        30, 2006 and December 31, 2005, the estimated fair values of the real estate
        loans was approximately $19.4 million and $23.0 million, respectively. At
        June
        30, 2006 we had no assets under secured borrowings. The estimated fair value
        of
        assets under secured borrowings, as of December 31, 2005, was approximately
        $0.5
        million. These estimates were based upon the present value of expected cash
        flows discounted at rates currently available for similar loans. Fair value
        estimates are made at a specific point in time; based on relevant market
        information; are subjective in nature; and involve uncertainties and matters
        of
        significant judgment. Accordingly, the estimates presented herein are not
        necessarily indicative of the amounts that would be collected upon maturity
        or
        disposition of the loans.
 
 **Net
        Income Allocated to Members Per Weighted Average Membership
        Unit**
 
 Net
        income allocated to members per weighted average membership unit is computed
        by
        dividing net income calculated in accordance with GAAP by the weighted average
        number of membership units outstanding for the period.
 
 **Income
        Taxes**
 
 Income
        tax effects resulting from our operations pass through to our members
        individually and, accordingly, no provision for income taxes is included
        in the
        financial statements.
 
 **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 on
        cash.
        As of June 30, 2006 and December 31, 2005, we had approximately $4.3 million
        and
        $1.2 million, respectively, in excess of the federally insured
        limits.
 
 As
        of
        June 30, 2006, 23.5%, 15.9%, 15.2%, 14.7% and 12.5% of our loans were in
        California, Arizona, Nevada, Washington and Texas, respectively, compared
        to
        23.8%, 25.2%, 18.2%, 5.9% and 11.0% 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
        June
        30, 2006, the aggregate amount of loans to our three largest borrowers
        represented 29.1% of our total investment in real estate loans. These real
        estate loans consisted of construction and acquisition and development, located
        in California, Arizona, and Washington with first lien positions earning
        12%,
        and outstanding balances of approximately $5.7 million. At December 31, 2005,
        the aggregate amount of loans to our three largest borrowers represented
        41% of
        our total investment in real estate loans. These real estate loans consisted
        of
        commercial and land loans, located in Arizona, California and Nevada, with
        a
        first lien position, earning between 10% and 12%, with an aggregate outstanding
        balance of approximately $9.2 million. 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.
 
 At
        June
        30, 2006, there was one loan with a balance of approximately $2.4 million,
        representing 12.4%, of our total investment in real estate loans. This
        acquisition and development loan is located in California, with a first lien
        position, earning 12% interest.
 
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
              13
              -
 *Table
            of Contents*
  As
        of
        June 30, 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. The
        success of a borrower’s ability to repay our 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
        June 30, 2006 and December 31, 2005, we have four real estate loan products
        consisting of commercial, construction, acquisition and development and land
        loans. The effective interest rates on all product categories range from
        6% to
        14%. Revenue by product will fluctuate based upon relative balances during
        the
        period.
 
 Investments
        in real estate loans as of June 30, 2006 were as follows:
 
 **Loan
                  Type**
              
              **Number
                  Of Loans**
              
              **Fund
                  Balance**
              
              **Weighted
                  Average Interest Rate**
              
              **Portfolio
                  Percentage**
              
              **Weighted
                  Average Loan To Value (1)**Acquisition
                  and development
              
              
              4
              
              $
              5,492,000
              
              
              11.57
              %
              
              28.21
              %
              
              80.61
              %Commercial
              
              
              9
              
              
              7,315,000
              
              
              8.37
              %
              
              37.58
              %
              
              70.40
              %Construction
              
              
              3
              
              
              2,731,000
              
              
              12.00
              %
              
              14.03
              %
              
              61.43
              %Land
              
              
              5
              
              
              3,929,000
              
              
              11.64
              %
              
              20.18
              %
              
              52.12
              %21
              
              $
              19,467,000
              
              
              10.44
              %
              
              100.00
              %
              
              61.29
              %
 
 Investments
        in real estate loans as of December 31, 2005 were as follows:
 
 **Loan
                  Type**
              
              **Number
                  Of Loans**
              
              **Fund
                  Balance**
              
              **Weighted
                  Average Interest Rate**
              
              **Portfolio
                  Percentage**
              
              **Weighted
                  Average Loan To Value (1)**Acquisition
                  and development
              
              
              3
              
              $
              3,806,000
              
              
              11.30
              %
              
              16.52
              %
              
              47.74
              %Commercial
              
              
              12
              
              
              12,244,000
              
              
              9.63
              %
              
              53.15
              %
              
              65.33
              %Construction
              
              
              2
              
              
              1,231,000
              
              
              12.00
              %
              
              5.34
              %
              
              64.50
              %Land
              
              
              3
              
              
              5,756,000
              
              
              11.01
              %
              
              24.99
              %
              
              56.44
              %20
              
              $
              23,037,000
              
              
              10.38
              %
              
              100.00
              %
              
              60.16
              %
 
 (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. 
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
              14
              -
 *Table
            of Contents*
  The
        following table reconciles the balance of the loan portfolio to the amount
        shown
        on the accompanying Consolidated Balance Sheets:
 
 **June
                  30, 2006 Balance**
              
              **December
                  31, 2005 Balance**Balance
                  Per Loan Portfolio
              
              $
              19,467,000
              
              $
              23,037,000Less:Allowance
                  for Loan Loss
              
              
              (73,000
              )
              
              (73,000
              )Balance
                  per Balance Sheet
              
              $
              19,394,000
              
              $
              22,964,000
 
 The
        following is a schedule of priority of real estate loans as of June 30, 2006
        and
        December 31, 2005.
 
 **Loan
                  Type**
              
              **Number
                  of Loans**
              
              **June
                  30, 2006**
                **Balance**
              
              **Portfolio**
                **Percentage**
              
              **Number
                  of Loans**
              
              **December
                  31, 2005**
                **Balance**
              
              **Portfolio**
                **Percentage**First
                  Deeds of Trust
              
              
              20
              
              $
              19,167,000
              
              
              98.46
              %
              
              18
              
              $
              21,527,000
              
              
              93.45
              %Second
                  Deeds of Trust**
              
              
              1
              
              
              300,000
              
              
              1.54
              %
              
              2
              
              
              1,510,000
              
              
              6.55
              %21
              
              $
              19,467,000
              
              
              100.00
              %
              
              20
              
              $
              23,037,000
              
              
              100.00
              %
 
 **Generally,
        our second trust deeds are junior to first trust deeds position held by either
        us or our Manager.
 
 The
        following is a schedule of contractual maturities of investments in real
        estate
        loans as of June 30, 2006:
 
 July
                  - December 2006
              
              $
              10,317,000January
                  - December 2007
              
              
              9,150,000$
              19,467,000
 
 
 The
        following is a schedule by geographic location of investments in real estate
        loans as of June 30, 2006 and December 31, 2005:
 
 **June
                  30, 2006**
              
              **Portfolio
                  Percentage**
              
              **December
                  31, 2005**
              
              **Portfolio
                  Percentage**Arizona
              
              $
              3,088,000
              
              
              15.86
              %
              $
              5,807,000
              
              
              25.21
              %California
              
              
              4,575,000
              
              
              23.50
              %
              
              5,490,000
              
              
              23.83
              %Nevada
              
              
              2,960,000
              
              
              15.20
              %
              
              4,194,000
              
              
              18.21
              %North
                  Carolina
              
              
              --
              
              
              --
              %
              
              102,000
              
              
              0.44
              %Oklahoma
              
              
              1,000,000
              
              
              5.14
              %
              
              1,000,000
              
              
              4.34
              %Oregon
              
              
              1,356,000
              
              
              6.97
              %
              
              1,356,000
              
              
              5.89
              %Texas
              
              
              2,425,000
              
              
              12.46
              %
              
              2,525,000
              
              
              10.96
              %Washington
              
              
              2,860,000
              
              
              14.69
              %
              
              1,360,000
              
              
              5.90
              %Wisconsin
              
              
              1,203,000
              
              
              6.18
              %
              
              1,203,000
              
              
              5.22
              %Total
              
              $
              19,467,000
              
              
              100.00
              %
              $
              23,037,000
              
              
              100.00
              %
 
 Our
        Manager periodically reviews and makes a determination as to whether the
        allowance for loan loss is adequate to cover any potential losses. Additions
        to
        the allowance for loan loss are made by charges to the provision for loan
        loss.
        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 June
        30,
        2006, we have provided an allowance for loan loss of $73,000. 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 loss should be recorded. As of June 30, 2006, all of our loans were
        performing.
 
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
              15
              -
 *Table
            of Contents*
  Because
        any decision regarding the allowance for loan loss reflects a judgment about
        the
        probability of future events, there is an inherent risk that such judgments
        will
        prove incorrect. In such event, actual losses may exceed (or be less than)
        the
        amount of any reserve. To the extent that we experience losses greater than
        the
        amount of our reserves, we may incur a charge to our earnings that will
        adversely affect our operating results and the amount of any distributions
        payable to our members.
 
 The
        following is a roll-forward of the allowance for loan loss for the six months
        ended June 30, 2006:
 
 **Description**
              
              **Balance
                  at**
                **December
                  31, 2005**
              
              **Provisions**
              
              **Deductions**
              
              **Balance
                  at**
                **June
                  30, 2006**Valuation
                  Allowance
              
              $
              73,000
              
              
              --
              
              
              --
              
              $
              73,000
 
 In
        addition, our Manager had granted extensions on four loans pursuant to the
        terms
        of the original loan agreements, which permit extensions by mutual consent.
        Such
        extensions are generally provided on loans where the original term was 12
        months
        or less and where a borrower requires additional time to complete a construction
        project or negotiate take-out financing. However, our Manager only grants
        extensions when a borrower is in full compliance with the terms of the loan,
        including, but not limited to, the borrower’s obligation to make interest
        payments on the loan. The aggregate amount due from borrowers whose loans
        had
        been extended as of June 30, 2006 was approximately $4.3 million. Our Manager
        concluded that no allowance for loan loss was necessary with respect to these
        loans as of June 30, 2006.
 
 **Asset
        Quality and Loan Reserves**
 
 Losses
        may occur from investing in real estate loans. The amounts of losses will
        vary
        as the loan portfolio is affected by changing economic conditions and the
        financial condition of borrowers.
 
 The
        conclusion that a real estate loan is uncollectible or that collectibility
        is
        doubtful is a matter of judgment. On a quarterly basis, the Manager evaluates
        our real estate loan portfolio for impairment. The fact that a loan is
        temporarily past due does not necessarily mean that the loan is impaired.
        Rather, all relevant circumstances are considered by our Manager to determine
        impairment and the need for specific reserves. Such evaluation, which includes
        a
        review of all loans on which full collectibility may not be reasonably assured,
        considers among other matters:
 
 ·
            Prevailing
                economic conditions; 
 ·
            Historical
                experience; 
 ·
            The
                nature and volume of the loan portfolio; 
 ·
            The
                borrowers’ financial condition and adverse situations that may affect the
                borrowers’ ability to pay; 
 ·
            Evaluation
                of industry trends; and 
 ·
            Estimated
                net realizable value of any underlying collateral in relation to
                the loan
                amount. 
 Based
        upon this evaluation, a determination was made as to whether the allowance
        for
        loan loss was adequate to cover any potential losses. Additions to the allowance
        for loan loss are made by charges to the provision for loan loss. Recoveries
        of
        previously charged off amounts are credited to the allowance for loan loss
        or
        included as income. As of June 30, 2006, our Manager had provided $73,000
        for an
        allowance for loan loss.
 
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
              16
              -
 *Table
            of Contents*
  **NOTE
        E — INVESTMENT IN REAL PROPERTY**
 
 Investment
        in real property consists of an approximately 42,000 square foot office building
        located at 8379 West Sunset Road in Las Vegas, Nevada. The purchase price
        and
        related closing costs was approximately $9,800,000. As of June 30, 2006,
        the
        building was fully leased by Vestin Group, earning us monthly rent revenue
        of
        approximately $87,000. Vestin Group has sub-leased office space in the building
        as permitted by the lease agreement at rates equal to or less than rates
        we
        receive. We provided $4,850,000 of the purchase price from our capital and
        borrowed $4,950,000 for the remainder of the purchase price. We subsequently
        conveyed the real property to our wholly-owned subsidiary, VF III HQ,
        LLC.
 
 Subsequent
        to the purchase of this property we invested an additional $90,000 in tenant
        improvements. As of June 30, 2006, the carrying value of this property was
        $9.5
        million, net of accumulated depreciation of $393,000.
 
 We
        have
        entered into a purchase agreement to sell the building to a third party at
        a
        price of $14,250,000. No assurance can be given that the foregoing sale will
        close.
 
 As
        further discussed in Note N - *Segment
        Information* below,
        net income on this segment of our business was approximately $231,000, which
        represents six months of operating activity. The following represents our
        estimated yield on this investment from a cash flow perspective.
 
 **June
                  30, 2006**
              
              **June
                  30, 2005**Net
                  Income From Real Estate Segment
              
              $
              231,000
              
              $
              96,000Less
                  Principal Payments
              
              
              (49,000
              )
              
              (45,000
              )Less
                  Deferred Rent Receivable - Related Party
              
              
              (67,000
              )
              
              --Add
                  Back Depreciation and Amortization
              
              
              111,000
              
              
              111,000Yield
              
              $
              226,000
              
              $
              162,000Investment
                  Provided from Capital
              
              $
              4,850,000
              
              $
              4,850,000Months
                  of Operation
              
              
              6
              
              
              6Annualized
                  Yield on Real Estate Segment
              
              
              9.32
              %
              
              6.68
              %
 
 Annualized
        yield on real estate segment is a non-GAAP measure. We have presented this
        annualized yield on real estate segment because management believes this
        information is useful and important to members. 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.
 
 **NOTE
        F — LEASING ACTIVITY**
 
 We
        lease
        a facility, described in Note E- *Investment in Real Property* above,
        to
        Vestin Group under a 10 year non-cancelable lease agreement, expiring March
        2014, with two, five-year optional extensions. The agreement calls for an
        annual
        base rent of approximately $894,000, plus a 4% annual increase. Rental income
        recognized for the leased facility is recognized on a straight line basis
        over
        the term of the lease. For six months ended June 30, 2006 and 2005, rental
        income totaled $514,000 and $430,000, respectively. Deferred rent receivable
        -
        related party as of June 30, 2006 was $235,000.
 
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
              17
              -
 *Table
            of Contents*
  Future
        minimum base rent to be received, due under non-cancelable leases with Vestin
        Group in effect as of June 30, 2006 are as follows:
 
 July
                  1, 2006 Through June 30, 2007
              
              $
              924,000July
                  1, 2006 Through June 30, 2008
              
              
              961,000July
                  1, 2006 Through June 30, 2009
              
              
              999,000July
                  1, 2006 Through June 30, 2010
              
              
              1,039,000July
                  1, 2006 Through June 30, 2011
              
              
              1,081,000Thereafter:
              
              
              3,662,000Total:
              
              $
              8,666,000
 
 We
        have
        entered into a purchase agreement to sell the building we lease to Vestin
        Group
        to a third party at a price of $14,250,000. No assurance can be given that
        the
        foregoing sale will close.
 
 **NOTE
        G — RELATED PARTY TRANSACTIONS**
 
 From
        time
        to time we may acquire or sell investments in real estate loans from/to our
        Manager or other related parties pursuant to the terms of our Operating
        Agreement provided the price does not exceed the original cost. No gain or
        loss
        is recorded on these transactions, as it is not our intent to make a profit
        on
        the purchase or sale of such investments. The purpose is generally to diversify
        our portfolio by syndicating loans, thereby providing us with additional
        capital
        to make additional loans.
 
 **Transactions
        with the Manager**
 
 Our
        Manager is entitled to receive from us a management (acquisition and advisory)
        fee up to 2.5% of the gross offering proceeds and up to 3% of our rental
        income.
        For the three and six months ended June 30, 2006 and 2005, we recorded fees
        to
        our Manager of approximately $12,000 and $18,000, $24,000 and $34,000
        respectively. During April 2006, we recognized a capital contribution from
        our
        Manager related to a forgiveness of management fee incurred in the amount
        of
        $64,000.
 
 For
        the
        six months ended, June 30, 2006, we paid pro rata distributions owed to our
        manager of approximately $24,000 based upon the total 54,862 units owned
        by our
        manager.
 
 We
        lease
        an office building, located in Las Vegas, NV, to Vestin Group, earning us
        monthly rent revenue of approximately $87,000. During the three and six months
        ended June 30, 2006 we earned rental income of $257,000 and $514,000,
        respectively, as compared to $215,000 and $430,000 for the three and six
        months
        ended June 30, 2005.
 
 **Transactions
        with Other Related Parties**
 
 During
        the three and six months ended June 30, 2006, we incurred expense of $3,000
        and
        $4,000, respectively, for legal fees to the law firm of Levine, Garfinkel,
        and
        Katz in which the Secretary of Vestin Group has an equity ownership interest
        in
        the law firm, as compared to $4,000 and $5,000 for the three and six months
        ended June 30, 2005.
 
  See
              review
              report of Independent Registered Public Accounting Firm.
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              18
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            of Contents*
  **NOTE
        H — SECURED BORROWINGS**
 
 Secured
        borrowings provide an additional source of capital for our lending activity.
        Secured borrowings allow us to increase the diversification of our loan
        portfolio and to invest in loans that we might not otherwise invest in. We
        do
        not receive any revenues for entering into secured borrowing arrangements.
        Loans
        in which third party investors have participated through inter-creditor
        Agreements (“Inter-creditor Agreements”) are accounted for as secured borrowings
        in accordance with FAS 140 - *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities* (“FAS
        140”). The Inter-creditor Agreements provide us additional funding sources for
        mortgage loans whereby a third party investor (the “Investor”) may participate
        on a senior basis in certain mortgage loans with us and/or VRM I and/or VRM
        II
        (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
        June 30, 2006, we had no funds being used under any Inter-creditor Agreements
        where we have potential obligations. As of December 31, 2005, funds being
        used
        under Inter-creditor Agreements where we had potential obligations as defined
        above totaled $527,000.
 
 **NOTE
        I — NOTE PAYABLE**
 
 Note
        payable consists of the following:
 
 **Balance
                  at**
                **June
                  30, 2006**10-
                  year note payable secured by real property, bearing interest at
                  5.6% per
                  annum, payable in monthly principal and interest installments of
                  $31,000
              
              $
              4,781,000
 
 As
        of
        June 30, 2006, the scheduled principal reduction of the note payable was
        as
        follows:
 
 July
                  1, 2006 Through June 30, 2007
              
              $
              103,000July
                  1, 2006 Through June 30, 2008
              
              
              109,000July
                  1, 2006 Through June 30, 2009
              
              
              115,000July
                  1, 2006 Through June 30, 2010
              
              
              122,000July
                  1, 2006 Through June 30, 2011
              
              
              129,000Thereafter:
              
              
              4,203,000Total
              
              $
              4,781,000
 
 **NOTE
        J — MEMBERS’ EQUITY**
 
 **Membership
        Units**
 
 During
        the six months ended June 30, 2006, members received 41,902 units as a result
        of
        reinvestments of distributions.
 
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
              19
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 *Table
            of Contents*
  **Allocations
        and Distributions**
 
 In
        accordance with our Operating Agreement, profits, gains and losses are to
        be
        credited to and charged against each member’s capital account in proportion to
        their respective capital accounts as of the close of business on the last
        day of
        each calendar month.
 
 Distributions
        are paid monthly to members. Members may elect to reinvest their distributions.
        For the six months ended June 30, 2006, distributions to members were
        approximately $1,292,000.
 
 **Working
        Capital Reserves**
 
 We
        are
        required by our Operating Agreement to maintain working capital reserves
        of
        approximately 3% of the aggregate capital accounts of the members. This reserve
        is available to pay any future expenses in excess of revenues, satisfy
        obligations of underlying secured properties, expend money to satisfy our
        unforeseen obligations and other permitted uses of our working capital. Working
        capital reserves up to 3% in cash or cash equivalents are excluded from the
        funds committed to investments in determining what proportion of the offering
        proceeds and reinvested distributions have been invested in real estate loans
        or
        real property.
 
 **Value
        of Members’ Capital Accounts**
 
 In
        accordance with Section 7.8 of our Operating Agreement, our Manager reviewed
        the
        value of our assets during the last quarter of fiscal year 2005. Based on
        this
        review, as a result of an increase in the value of our assets, the value
        of
        members’ capital accounts was adjusted from $10.30 per unit to $10.50 per unit.
        As a result, new units sold through our Distribution Reinvestment Plan and
        units
        redeemed on or after December 15, 2005 have been sold or redeemed at $10.50
        per
        unit. The change in valuation is primarily for tax and capital account purposes
        and does not reflect the change in the value of the units calculated in
        accordance with GAAP. Accordingly, unit prices calculated under GAAP may
        be
        different than the adjusted price per unit.
 
 **Redemption
        Limitation**
 
 In
        order
        to comply with our Operating Agreement and Internal Revenue Code, we may
        redeem
        no more than 10% of the aggregate Members’ capital in any calendar year. As of
        June 30, 2006, the total of redemptions made from inception was $1.9 million.
        Balances in Members’ capital accounts as of January 1, 2006 were $29.2 million,
        which limited redemptions to $2.9 million for calendar 2006. As of June 30,
        2006, remaining requests to redeem of approximately $1.4 million in 2006
        and
        $1.8 million in 2007, had been logged, subject to unit valuation adjustments.
        Total redemptions during the six months ended June 30, 2006 were approximately
        $1.5 million.
 
 In
        order
        to satisfy these redemption requests, in the past, we have accumulated by
        the
        end of a calendar year a cash reserve equal to approximately 10% of our total
        capital. This is in addition to the 3% reserve we maintained for working
        capital
        purposes. This reserve is generally accumulated by retaining funds received
        upon
        the pay-off of loans and not reinvesting them in new loans or through
        borrowings. This has the effect of reducing the amount of capital we deploy
        in
        real estate loans, which in turn reduces our revenues and distributions to
        members.
 
 **NOTE
        K — RECENT ACCOUNTING PRONOUNCEMENTS**
 
 In
        July
        2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
        No. 48 - *Accounting
        for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
        109* (FIN
        48), which clarifies the accounting for uncertainty in tax positions. This
        Interpretation requires that we recognize in our financial statements, the
        impact of a tax position, if that position is more likely than not of being
        sustained on audit, based on the technical merits of the position. The
        provisions of FIN 48 are effective as of the beginning of our 2007 fiscal
        year,
        with the cumulative effect of the change in accounting principle recorded
        as an
        adjustment to opening retained earnings. We are currently evaluating the
        impact
        of adopting FIN 48 on our financial statements.
 
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
              20
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 *Table
            of Contents*
  **NOTE
        L — LEGAL MATTERS INVOLVING THE MANAGER**
 
 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. 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.
 
 Most
        recently, on or about April 6, 2006, Desert Land filed a Writ of Certiorari
        seeking review of the 9th Circuit’s decision by the United States Supreme Court.
        The U.S. Supreme Court denied Desert Land’s Writ of Certiorari on June 12,
        2006.
 
 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. Our Manager believes these claims
        to
        be without merit and intend to vigorously defend those allegations. The outcome
        of this litigation is unforeseeable at this time.
 
 On
        April
        21, 2006, our Manager, Vestin Mortgage Inc., filed a complaint in the Circuit
        Court of the First Circuit in Hawaii to expedite VRM I and VRM II’s efforts to
        foreclose upon first trust deeds secured by the assets of Rightstar
        International, Inc. (the “Rightstar Trust Deeds”). In the filing, Vestin
        Mortgage Inc. alleges that the State of Hawaii has unreasonably blocked the
        foreclosure without any legal basis for doing so. On April 24, 2006, the
        State
        of Hawaii responded by filing allegations against Vestin Mortgage, Inc.,
        and VRM
        II alleging that these Vestin entities improperly influenced the former
        RightStar trustees to transfer trust funds to Vestin. Our Manager believes
        these
        claims to be without merit and intend to vigorously defend those allegations.
        The outcome of this litigation is unforeseeable at this time.
 
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
              21
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            of Contents*
  In
        addition to the matters described above, our Manager is involved in a number
        of
        other legal proceedings concerning matters arising in connection with the
        conduct of its business activities. Our Manager believes it has meritorious
        defenses to each of these actions and intends to defend them vigorously.
        Other
        than the matters described above, the Manager believes that it is not a party
        to
        any pending legal or arbitration proceedings that would have a material adverse
        effect on the Manager’s financial condition or results of operations or cash
        flows, although it is possible that the outcome of any such proceedings could
        have a material impact on the Manager’s net income in any particular
        period.
 
 **NOTE
        M — LEGAL MATTERS INVOLVING THE COMPANY**
 
 The
        United States Securities and Exchange Commission, (the “Commission”), conducted
        an investigation into certain matters related to us, Vestin Group, Vestin
        Mortgage, Vestin Capital, VRM I and VRM II (the “Vestin Entities”). We have
        fully cooperated during the course of the investigation.
 
 The
        SEC
        Staff has notified the Vestin Entities that they believe certain slides used
        at
        sales seminars held to promote the sale of our and Fund II’s units included
        disclosure regarding distributions to members of Fund I and Fund II that
        were
        allegedly misleading. The Vestin Entities have engaged in discussions with
        the
        Staff regarding a possible resolution of this matter and have reached a
        tentative agreement, subject to Commission review and approval, to resolve
        the
        matter. Based upon these discussions, we currently believe that neither we
        nor
        VRM I and VRM II will be named as parties in the enforcement action. We do
        not
        know if the Commission will approve the proposed settlement.
 
 Other
        than the matter 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
        N — SEGMENT INFORMATION**
 
 Operating
        segments are components of an enterprise in which separate financial information
        is available that is regularly reviewed by the chief operating decision makers
        in assessing performance and deciding how to allocate resources. Reportable
        segments consist of one or more operating segments with similar economic
        characteristics, products and services, production processes, type of customer,
        distribution system and regulatory environment.
 
 The
        information provided for Segment Reporting is based on internal reports utilized
        by management. The presentation and allocation of overhead and the net
        contribution for the operating segments may not reflect the actual economic
        costs, contribution or results of operations of the segments as stand alone
        businesses. If a different basis of allocation were utilized, the relative
        contributions of the segments might differ, but the relative trends in segments
        would, in management’s view, likely not be impacted.
 
 Our
        two
        reportable segments are investments in real estate loans and investments
        in real
        estate.
 
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
              22
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 *Table
            of Contents*
  Financial
        information concerning our reportable segments is presented as follows for
        the
        six months ended June 30, 2006 and 2005:
 
 **For
                  the Six Months Ended June 30, 2006**
              
              **Investment
                  in Real Estate Loans**
              
              **Investment
                  in Real Estate****Revenues**Interest
                  income from investments in real estate loans
              
              $
              1,121,000
              
              $
              1,121,000
              
              $
              --Interest
                  income from secured borrowings
              
              
              15,000
              
              
              15,000
              
              
              --Rental
                  income-related party
              
              
              514,000
              
              
              --
              
              
              514,000Other
              
              
              62,000
              
              
              62,000
              
              
              --Total
                  revenues
              
              
              1,712,000
              
              
              1,198,000
              
              
              514,000**Operating
                  expenses**Management
                  fees - related party
              
              
              24,000
              
              
              17,000
              
              
              7,000Provision
                  for loan loss
              
              
              --
              
              
              --
              
              
              --Professional
                  fees
              
              
              96,000
              
              
              69,000
              
              
              27,000Professional
                  fees-related party
              
              
              4,000
              
              
              3,000
              
              
              1,000Other
              
              
              8,000
              
              
              6,000
              
              
              2,000Total
                  operating expenses
              
              
              132,000
              
              
              95,000
              
              
              37,000**EBITDA***
              
              
              1,580,000
              
              
              1,103,000
              
              
              477,000Less:Depreciation
                  and Amortization
              
              
              111,000
              
              
              --
              
              
              111,000Interest
                  expense related to secured borrowings
              
              
              14,000
              
              
              14,000
              
              
              --Interest
                  expense related to investment in real estate
              
              
              135,000
              
              
              --
              
              
              135,000**NET
                  INCOME**
              
              $
              1,320,000
              
              $
              1,089,000
              
              $
              231,000
 
  See
              review
              report of Independent Registered Public Accounting Firm.
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              23
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 *Table
            of Contents*
  
 **For
                  the Six Months Ended June 30, 2005**
              
              **Investment
                  in Real Estate Loans**
              
              **Investment
                  in Real Estate****Revenues**Interest
                  income from investments in real estate loans
              
              $
              1,171,000
              
              $
              1,171,000
              
              $
              --Interest
                  income from secured borrowings
              
              
              139,000
              
              
              139,000
              
              
              --Rental
                  income-related party
              
              
              430,000
              
              
              --
              
              
              430,000Other
              
              
              18,000
              
              
              18,000
              
              
              --Total
                  revenues
              
              
              1,758,000
              
              
              1,328,000
              
              
              430,000**Operating
                  expenses**Management
                  fees-related party
              
              
              34,000
              
              
              21,000
              
              
              13,000Provision
                  for loan loss
              
              
              37,000
              
              
              37,000
              
              
              --Professional
                  fees
              
              
              207,000
              
              
              143,000
              
              
              64,000Professional
                  fees-related party
              
              
              5,000
              
              
              3,000
              
              
              2,000Other
              
              
              16,000
              
              
              11,000
              
              
              5,000Total
                  operating expenses
              
              
              299,000
              
              
              215,000
              
              
              84,000**EBITDA***
              
              
              1,459,000
              
              
              1,113,000
              
              
              346,000Less:Depreciation
                  and Amortization
              
              
              111,000
              
              
              --
              
              
              111,000Interest
                  expense related to secured borrowings
              
              
              120,000
              
              
              120,000
              
              
              --Interest
                  expense related to investment in real estate
              
              
              139,000
              
              
              --
              
              
              139,000**NET
                  INCOME**
              
              $
              1,089,000
              
              $
              993,000
              
              $
              96,000
 
 *EBITDA
        represents Earnings Before Interest, Taxes, Depreciation, and Amortization.
        We
        present EBITDA because we consider it an important supplemental measure of
        our
        performance but it does not represent cash flows. EBITDA is a measure of
        our
        performance that is not required by, or presented in accordance with, GAAP.
        EBITDA is not a measurement of our financial performance under GAAP and should
        not be considered as an alternative to net earnings, operating income or
        any
        other performance measures derived in accordance with GAAP or as an alternative
        to cash flow from operating activities as a measure of our liquidity. We
        compensate for these limitations by relying primarily on our GAAP results
        and
        using EBITDA only supplementally. A reconciliation of EBITDA to net income
        is
        set forth above.
 
 Although
        depreciation and amortization are non-cash charges, the assets being depreciated
        or amortized often will have to be replaced in the future, and EBITDA does
        not
        reflect any cash requirements for such replacements. Other companies in our
        industry may calculate EBITDA differently than we do, limiting its usefulness
        as
        a comparative measure. In addition, EBITDA does not reflect the impact
        of earnings or charges resulting from matters we consider not to be indicative
        of our ongoing operations.
 
 
 
  See
              review
              report of Independent Registered Public Accounting Firm.
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              24
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 *Table
            of Contents*
   REPORT
        OF
        INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM
 
 
 To
        the
        Board of Directors and the members of Vestin Fund III, LLC:
 
 We
        have
        reviewed the accompanying consolidated balance sheet of Vestin Fund III,
        LLC as
        of June 30, 2006, and the related consolidated statements of income, members’
equity, and cash flows for the three and six month periods ended June 30,
        2006
        and 2005. All information included in these consolidated financial statements
        is
        the representation of the management of Vestin Fund III, LLC.
 
 We
        conducted our review in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). A review of interim financial
        information consists principally of applying analytical procedures and making
        inquiries of persons responsible for financial and accounting matters. It
        is
        substantially less in scope than an audit conducted in accordance with the
        standards of the Public Company Accounting Oversight Board, the objective
        of
        which is the expression of an opinion regarding the financial statements
        taken
        as a whole. Accordingly, we do not express such an opinion.
 
 Based
        on
        our review, we are not aware of any material modifications that should be
        made
        to the accompanying consolidated financial statements referred to above for
        them
        to be in conformity with accounting principles generally accepted in the
        United
        States of America.
 
 We
        have
        previously audited, in accordance with the standards of the Public Company
        Accounting Oversight Board (United States), the consolidated balance sheet
        of
        Vestin Fund III, LLC as of December 31, 2005 and the related consolidated
        statements of income, members’ equity and cash flows for the year then ended
        (not presented herein). In our opinion, the information set forth in the
        accompanying consolidated balance sheet as of June 30, 2006, is fairly stated,
        in all material respects, in relation to the consolidated balance sheet from
        which it has been derived.
 
 
 
 /s/Moore
        Stephens Wurth Frazer and Torbet, LLP
 
 
 Orange,
        California
 August
        7,
        2006
 
 
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            25
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 *Table
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   **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS**
 
 The
        following is a financial review and analysis of our financial condition and
        results of operations for the three and six months ended June 30, 2006. This
        discussion should be read in conjunction with our financial statements and
        accompanying notes and other detailed information regarding us appearing
        elsewhere in this Form 10-Q and our report on Form 10-K, Part II, Item 7 *Management’s
        Discussion and Analysis of Financial Conditions and Results of
        Operations* for the
        year ended December 31, 2005.
 
 **FORWARD
        LOOKING STATEMENTS**
 
 Certain
        statements in this report, including, without limitation, matters discussed
        under this Item 2, “Management’s Discussion and Analysis of Financial Condition
        and Results of Operations,” should be read in conjunction with the financial
        statements, related notes, and other detailed information included elsewhere
        in
        this Quarterly Report on Form 10-Q. We are including this cautionary statement
        to make applicable and take advantage of the safe harbor provisions of the
        Private Securities Litigation Reform Act of 1995. Statements that are not
        historical fact are forward-looking statements. Certain of these forward-looking
        statements can be identified by the use of words such as “believes,”
“anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,”
“assumes,” “may,” “should,” “will,” or other similar expressions. Such
        forward-looking statements involve known and unknown risks, uncertainties
        and
        other important factors, which could cause actual results, performance or
        achievements to differ materially from future results, performance or
        achievements. These forward-looking statements are based on our current beliefs,
        intentions and expectations. These statements are not guarantees or indicative
        of future performance. Important assumptions and other important factors
        that
        could cause actual results to differ materially from those forward-looking
        statements include, but are not limited to, those factors, risks and
        uncertainties described in Part II Item 1A *Risk
        Factors* of our
        Quarterly Report on Form 10-Q for the three months ended March 31, 2006,
        Part I
        Item 1A *Risk
        Factors* of our
        Annual Report on Form 10-K for the year ended December 31, 2005 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.
 
 **Overview**
 
 Our
        real
        estate loan program objective is to generate income by investing in real
        estate
        loans and income producing real property. We believe there is a significant
        market opportunity to make real estate loans to owners and developers of
        real
        property whose financing needs are not met by traditional real estate lenders.
        The loan underwriting standards our Manager utilizes are less strict than
        traditional real estate lenders. In addition, we believe one of our competitive
        advantages is our ability to approve loan applications more quickly than
        traditional lenders. As a result, in certain cases, we may make real estate
        loans, which are riskier than real estate loans made by commercial banks.
        However, in return we seek a higher interest rate and our Manager takes steps
        to
        mitigate the lending risks such as imposing a lower loan to value ratio.
        While
        we may assume more risk than traditional real estate lenders, in return,
        we seek
        to generate higher yields from our real estate loans.
 
 Our
        real
        estate program objective is to invest in income-producing multifamily
        residential units, assisted living facilities, office buildings, industrial
        and
        retail properties and other income-producing real property, such as hotels
        and
        resorts, restaurants, parking lots and amusement parks. Our Manager intends
        to
        apply its prior experience in investing in real estate loans to its evaluation
        and investment in real property on our behalf. Accordingly, we intend to
        invest
        in real property throughout the areas in which Vestin Mortgage and its
        correspondents have experience.
 
  -
            26
            -
 *Table
            of Contents*
  Our
        operating results depend primarily upon (i) the amount of capital we have
        to
        invest in real estate loans and income producing real estate, (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, (v) our ability to identify and acquire suitable
        income-producing properties, (vi) the level of rents or other income we are
        able
        to generate from our acquired properties, (vii) the level of non-performing
        assets and loan loss which we experience, and (viii) negative fluctuations
        in
        the fair market value of income-producing properties that we own. Our capital,
        subject to an approximate 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.”
 
 Uncertain
        economic conditions during the next year could have a material impact on
        the
        collectibility of our loans. Recognizing the risk, we seek to maintain an
        adequate loan-to-value ratio which, as of June 30, 2006, was 61.29% on a
        weighted average basis, generally using appraisals prepared on an “as-if
        developed” basis in connection with the loan origination. In this manner, we
        hope to retain sufficient cushion in the underlying equity position to protect
        the value of our loan in the event of a default. Nevertheless, no assurances
        can
        be given that a marked increase in loan defaults accompanied by a rapid decline
        in real estate values will not have a material adverse effect upon our financial
        condition and operating results.
 
 We
        generally invest in real estate loans throughout the areas in which Vestin
        Mortgage and its correspondents have experience. As of June 30, 2006 our
        loans
        were in the following states; Arizona, California, Nevada, Oklahoma, Oregon,
        Texas, Washington and Wisconsin.
 
 **SUMMARY
        OF FINANCIAL RESULTS**
 
 **FOR
                  THE THREE**
                **MONTHS
                  ENDED**
              
              **FOR
                  THE SIX**
                **MONTHS
                  ENDED****June
                  30, 2006**
              
              **June
                  30, 2005**
              
              **June
                  30, 2006**
              
              **June
                  30, 2005**Total
                  Revenues
              
              $
              843,000
              
              $
              898,000
              
              $
              1,712,000
              
              $
              1,758,000Total
                  Operating Expenses
              
              $
              174,000
              
              $
              333,000
              
              $
              392,000
              
              $
              669,000**NET
                  INCOME**
              
              $
              669,000
              
              $
              565,000
              
              $
              1,320,000
              
              $
              1,089,000Net
                  Income Allocated to Members
              
              $
              669,000
              
              $
              565,000
              
              $
              1,320,000
              
              $
              1,089,000Net
                  Income Allocated to Members Per Weighted Average Membership
                  Units
              
              $
              0.23
              
              $
              0.20
              
              $
              0.45
              
              $
              0.40Weighted
                  Average Membership Units
              
              
              2,938,692
              
              
              2,775,381
              
              
              2,962,657
              
              
              2,720,597Annualized
                  Rate of Return to Members
              
              
              8.70
              %
              
              7.93
              %
              
              8.56
              %
              
              7.84
              %Cash
                  Distributions
              
              $
              647,000
              
              $
              697,000
              
              $
              1,292,000
              
              $
              1,346,000Cash
                  Distributions Per Weighted Average Membership Units
              
              $
              0.22
              
              $
              0.25
              
              $
              0.44
              
              $
              0.49Weighted
                  Average Term of Outstanding Loans
              
              
              14
                  months
              
              
              17
                  months
              
              
              14
                  months
              
              
              17
                  months
 
 (a)
            The
                annualized rate of return to members is calculated based upon the
                GAAP net
                income allocated to members per weighted average units as of June
                30,
                divided by the number of days during the period (91 and 181 days
                for the
                three and six months ended June 30, 2006 and 2005) and multiplied
                by three
                hundred and sixty five (365) days, then divided by the cost per unit
                ($10.50 and $10.30 for 2006 and 2005,
                respectively). 
  -
            27
            -
 *Table
            of Contents*
  **RESULTS
        OF OPERATIONS**
 
 *Total
        Revenues:* Revenues
        for the three months ended June 30, 2006 decreased compared to the same period
        in 2005, by approximately $55,000 or 6.12% primarily due to the following
        factors:
 
 ·
            Interest
                income from investment in real estate loans decreased approximately
                $132,000 or 19.58% as a result of a decrease in investment in real
                estate
                loans and a decrease in the weighted average interest rate. Investment
                in
                real estate loans declined by approximately $2.3 million from $21.8
                million at June 30, 2005 to $19.5 million as of June 30, 2006. The
                decline
                in investment in real estate loans is attributable in part to the
                reduction in capital, resulting from membership unit redemptions,
                we had
                available for investments. Our capital was reduced by redemption
                of
                membership units of approximately $1.8 million from June 30, 2005
                to June
                30, 2006. In addition, there was a decrease in the weighted average
                interest rate from 11.65% as of June 30, 2005 to 10.44% as of June
                30,
                2006. 
 This
        decrease was partially offset by the increase in bank interest income earned
        on
        cash accounts held at banking institutions. Bank interest income increased
        by
        approximately $35,000 for the three months ended June 30, 2006 compared to
        the
        same period in 2005. The increase is due to the increase of approximately
        $1.9
        million in cash and cash equivalents as of June 30, 2006 compared to June
        30,
        2005. The increase in cash is attributable to the net proceeds received from
        pay
        offs and reinvestments of investment in real estate loans of approximately
        $1.9
        million during the three months ended June 30, 2006.
 
 Total
        revenues for the six months ended June 30, 2006 remained comparable to the
        six
        months ended June 30 2005, approximately $1,712,000 and $1,758,000,
        respectively.
 
 ·
            Interest
                income from investment in real estate loans for the six months ended
                June
                30, 2006 compared to the same period in 2005 decreased approximately
                $174,000 or 13% as a result of a decrease in investment in real estate
                loans and a decrease in the weighted average interest rate as noted
                above.
                While there has been a general increase in interest rates in the
                U.S.,
                such increases have not yet affected our operating results and it
                is not
                clear when, if ever, higher interest rates might impact our
                revenues. 
 This
        decrease was partially offset by the increase in bank interest income referred
        to above and an increase in rental income by approximately $84,000 due to
        the
        increase in deferred rent receivable during the six months ended June 30,
        2006.
 
 *Total
        Operating Expenses:* For the
        three months ended June 30, 2006, total expenses were approximately $174,000
        compared to approximately $333,000 for the same period in 2005, a decrease
        of
        approximately $159,000 or 47.75%. Expenses were primarily affected by the
        following factors:
 
 ·
            Our
                interest expense related to secured borrowings decreased approximately
                $56,000 due to the decrease in the amount of loans financed under
                secured
                borrowings from $1.9 million at June 30, 2005 to zero at June 30,
                2006. 
 ·
            Expenses
                related to professional fees decreased by approximately $83,000.
                During
                the 2005 period, we incurred accounting fees related to the preparation
                of
                our public filings. In addition, our manager undertook a number of
                measures to contain costs, including an enhancement of its internal
                accounting capabilities. 
 For
        the
        six months ended June 30, 2006 and 2005, total expenses were approximately
        $392,000 and $669,000, respectively. Expenses were affected by the following
        factors:
 
 ·
            Interest
                expense related to secured borrowings decreased approximately $106,000
                during the six months ended June 30, 2006 compared to the same period
                in
                2005 due to the decrease in the amount of loans financed under secured
                borrowing referred to above. 
  -
            28
            -
 *Table
            of Contents*
  
 ·
            Expenses
                related to professional fees decreased by approximately $112,000
                for the
                reasons described above. 
 *Net
        Income* :
        Overall
        net income for the three and six months ended June 30, 2006, totaled
        approximately $669,000 and $1,320,000, respectively, as compared to $565,000
        and
        $1,089,000 for the three and six months ended June 30, 2005.
 
 *Annualized
        Rate of Return to Members:* For the
        three and six months ended June 30, 2006, the annualized rate of return to
        members as calculated based on GAAP net income was 8.70% and 8.56%,
        respectively, as compared to 7.93%, and 7.84% for the three and six months
        ended
        June 30, 2005.
 
 *Distributions
        to Members* :
        The
        following is a schedule of distributions made to members for the year ended
        June
        30, 2006 and 2005.
 
 **For
                  the Six Months Ended June 30, 2006**
              
              **For
                  the Six Months Ended June 30, 2005**Distributions
                  of Net Income Available for Distribution
              
              $
              1,292,000
              
              $
              1,237,000Distributions
                  in Excess of Net Income Available for Distribution Generated During
                  the
                  Period
              
              
              --
              
              
              109,000Total
                  Distributions
              
              $
              1,292,000
              
              $
              1,346,000
 
 Net
        Income Available for Distributions 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. 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 June 30, 2006**
              
              **For
                  the Six Months Ended June 30, 2005**Distribution
                  of Net Income Available for Distribution
              
              $
              1,292,000
              
              $
              1,237,000Addition
                  to working capital reserves (Amount not distributed)
              
              
              139,000
              
              
              --Change
                  in Operating Assets and Liabilities:Interest
                  receivable
              
              
              47,000
              
              
              (72,000
              )Deferred
                  rent receivable - related party
              
              
              (67,000
              )
              
              --Accounts
                  payable
              
              
              (101,000
              )
              
              82,000Due
                  from VRM I
              
              
              --
              
              
              (6,000
              )Due
                  to Manager
              
              
              (26,000
              )
              
              165,000Net
                  Cash Provided by Operating Activities
              
              $
              1,284,000
              
              $
              1,406,000Net
                  Cash Provided (Used) by Investing Activities
              
              $
              3,570,000
              
              $
              (8,336,000
              )Net
                  Cash Provided (Used) in Financing Activities
              
              $
              (2,360,000
              )
              $
              2,381,000
 
  -
            29
            -
 *Table
            of Contents*
  *Stated
        Unit Value Adjustment* :
        Following a periodic review by our Manager as required pursuant to the Operating
        Agreement, as a result of a the increase in the estimated fair value of real
        estate held for investment, effective December 15, 2005 we adjusted the stated
        unit value from $10.30 per unit to $10.50 per unit to reflect the estimated
        net
        unit value of each unit at that date. The periodic review of the estimated
        net
        unit value includes an analysis of unrealized gains that our Manager reasonably
        believes exist at the time of the review, but that cannot be added to net
        asset
        value under GAAP.
 
 *Redemptions* :
        In
        accordance with the terms of our Operating Agreement and Internal Revenue
        Code,
        we may redeem no more than 10% of the aggregate Members’ capital in any calendar
        year. As of June 30, 2006, the total of redemptions made from inception was
        $1.9
        million. Balances in Members’ capital accounts as of January 1, 2006 were $29.2
        million, which limited redemptions to $2.9 million for calendar 2006. As
        of June
        30, 2006, remaining requests to redeem of approximately $1.4 million in 2006
        and
        $1.8 million in 2007, had been logged, subject to unit valuation adjustments.
        Total redemptions during the six months ended June 30, 2006 were approximately
        $1.5 million.
 
 **CAPITAL
        AND LIQUIDITY**
 
 Liquidity
        is a measure of a company’s ability to meet potential cash requirements,
        including ongoing commitments to fund investing activities and for general
        operating purposes. Subject to an approximate 3% reserve, we seek to use
        most of
        our available funds to invest in real estate loans or purchase income producing
        property. Distributable cash flow generated from such investments is paid
        out to
        our members unless they have elected to reinvest their distributions. We
        do not
        anticipate the need for hiring any employees, acquiring fixed assets such
        as
        office equipment or furniture, or incurring material office expenses during
        the
        next twelve months because Vestin Mortgage will manage our affairs. With
        respect
to real estate that we acquire, Vestin Mortgage may charge a monthly management
        fee of up to 3% of our gross rental revenues. In addition, Vestin Mortgage
        may
        charge acquisition and advisory fees in connection with real estate acquisition,
        provided that such amounts do not exceed 2.5% of our gross offering
        proceeds.
 
 During
        the six months ended June 30, 2006, cash flows provided by our operating
        activities approximated $1.3 million. Our investing activities for the six
        months ended June 30, 2006 consisted of cash used from the purchase of new
        investments in loans secured by real estate in the amount of $10.2 million
        and
        cash proceeds from loan payoffs of investment in real estate loans of
        approximately $13.8 million. Our financing activities primarily consisted
        of
        cash used for members’ distributions, net of reinvestments, of approximately
        $0.9 million, members’ redemptions of approximately $1.5 million, capital
        contributions by the Manager for forgiveness of management fee incurred totaling
        $64,000 and payments from a note payable of approximately $49,000.
 
 Since
        we
        distribute most or all of our operating income, our sources of liquidity
        include: repayments of outstanding loans, distribution reinvestments by our
        members and arrangements with third parties to participate in our loans.
        Effective November 7, 2005, we discontinued the offering of our Units, except
        for Units sold through our Distribution Reinvestment Plan. In the future,
        we may
        also generate liquidity through the sale of our real property investments.
        However, under our Operating Agreement, the proceeds from any sale of real
        property occurring after November 2010 must be distributed to members and
        will
        not be available for reinvestment.
 
 We
        rely
        primarily upon repayment of outstanding loans to provide capital for investment
        in new loans and real estate properties. 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. Additionally, if there is a downturn in the economies in which
        we
        invest in real estate, the level of rents we can charge to lease our properties
        can diminish our capital resources and would diminish our ability to invest
        in
        new properties or service any related debt.
 
  -
            30
            -
 *Table
            of Contents*
  In
        addition, any significant level of redemptions by our members would reduce
        the
        capital we have available for investment. In order to comply with our Operating
        Agreement and Internal Revenue Code, we may redeem no more than 10% of the
        aggregate Members’ capital in any calendar year. As of June 30, 2006, the total
        of redemptions made from inception was $1.9 million. Balances in Members’
capital accounts as of January 1, 2006 were $29.2 million, which limited
        redemptions to $2.9 million for calendar 2006. As of June 30, 2006, remaining
        requests to redeem of approximately $1.4 million in 2006 and $1.8 million
        in
        2007, had been logged, subject to unit valuation adjustments. Total redemptions
        during the six months ended June 30, 2006 were approximately $1.5
        million.
 
 In
        order
        to satisfy these redemption requests, in the past, we have accumulated by
        the
        end of a calendar year a cash reserve equal to approximately 10% of our total
        capital. This is in addition to the 3% reserve we maintained for working
        capital
        purposes. This reserve is generally accumulated by retaining funds received
        upon
        the pay-off of loans and not reinvesting them in new loans or through
        borrowings. This has the effect of reducing the amount of capital we deploy
        in
        real estate loans, which in turn reduces our revenues and distributions to
        members.
 
 Any
        significant level of redemptions by our members would reduce the amount of
        capital available for investment. In order to comply with our Operating
        Agreement and the Internal Revenue Code, we may redeem no more than 10% of
        the
        aggregate members’ capital in any calendar year. Our Operating Agreement also
        provides other conditions limiting redemptions.
 
 Approximately
        47% of our members currently reinvest their distributions. The level of
        reinvested distributions is likely to be affected by our operating performance.
        If our performance does not meet the expectations of our members, the level
        of
        reinvestment may decline.
 
 Inter-creditor
        Agreements provide us additional funding sources for real estate loans whereby
        a
        third party investor (the “Investor”) may participate in certain real estate
        loans with us, Vestin Originations, VRM I, and VRM II (collectively, the
“Lead
        Lenders”). In the event of borrower non-performance, the Lead Lenders are
        required to protect the Investor by (i) continuing to remit to the Investor
        the
        interest due on the participation amount; (ii) substituting an alternative
        loan
        acceptable to the Investor; or (iii) repurchasing the participation from
        the
        Investor for the outstanding balance of the participation plus accrued
        interest.
 
 Additionally,
        an Investor may participate in certain loans with Lead Lenders through
        participation agreements. In the event of borrower non-performance, the
        participation agreement allows the Investor to be repaid up to the amount
        of the
        Investor’s investment prior to the Lead Lenders being repaid.
 
 As
        of
        June 30, 2006, we had no funds being used under Inter-creditor Agreements
        where
        we have potential obligations as defined above.
 
 We
        may
        seek to expand our capital resources through borrowings from institutional
        lenders or through securitization of our loan portfolio or similar arrangements.
        We currently do not have in place any commitments to borrow any funds or
        securitize any of our assets. No assurance can be given that, if we should
        seek
        to borrow funds or to securitize our assets we would be able to do so on
        commercially attractive terms. Our ability to expand our capital resources
        in
        this manner is subject to many factors, some of which are beyond our control,
        including the state of the economy, the state of the capital markets and
        the
        perceived quality of our loan portfolio.
 
 **INVESTMENTS
        IN REAL ESTATE LOANS SECURED BY REAL ESTATE PORTFOLIO**
 
 As
        of
        June 30, 2006, we had investments in real estate loans secured by real estate
        totaling $19.5 million including 20 loans with an aggregate principal value
        of
        approximately $19.2 million secured by first trust deeds and one loan secured
        by
        a second trust deed totaling approximately $0.3 million.
 
  -
            31
            -
 *Table
            of Contents*
  The
        weighted average contractual term of outstanding loans at June 30, 2006 was
        14
        months. As of June 30, 2006, our real estate loans mature during the next
        18
        months. All of the outstanding real estate loans at June 30, 2006 were fixed
        rate loans. All of the real estate loans are held for investment purposes;
        none
        are held for sale. We intend to hold such real estate loans to maturity.
        None of
        the real estate loans have prepayment penalties. 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 I, Item 1 *Financial Statements* of this
        Interim Report Form 10-Q.
 
 **INVESTMENT
        IN REAL PROPERTY**
 
 Investment
        in real property consists of an approximately 42,000 square foot office building
        located at 8379 West Sunset Road in Las Vegas, Nevada. The purchase price
        and
        related closing costs were approximately $9,800,000. As of June 30, 2006,
        the
        building was fully leased by Vestin Group, earning us monthly rent revenue
        of
        approximately $87,000. Vestin Group has sub-leased office space in the building
        as permitted by the lease agreement at rates equal to or less than rates
        we
        receive. We have entered into a purchase agreement to sell the building to
        a
        third party at a price of $14,250,000. No assurance can be given that the
        foregoing sale will close. For additional information on our investments
        in real
        property, refer to Note E - *Investments
        In Real Property,* Note
        F - *Leasing
        Activity* and
        Note
        N - *Segment
        Information* of
        the
        Notes to the Financial Statements included in Part I, Item 1 *Financial Statements* of this
        Interim Report Form 10-Q.
 
 **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 loss is adequate to cover any potential losses. Additions to the allowance
        for loan loss are made by charges to the provision for loan loss. Recoveries
        of
        previously charged off amounts would be credited to the provision for loan
        loss
        or included in income. For
        additional information on asset quality and loan reserve, refer to Note D
        - *Investments
        In Real Estate Loans* of the
        Notes to the Financial Statements included in Part I, Item 1 *Financial Statements* of this
        Interim Report Form 10-Q.
 
  -
            32
            -
 *Table
            of Contents*
  **Segment
        Information**
 
 Operating
        segments are components of an enterprise about which separate financial
        information is available that is regularly reviewed by the chief operating
        decision makers in assessing performance and deciding how to allocate resources.
        Reportable segments consist of one or more operating segments with similar
        economic characteristics, products and services, production processes, type
        of
        customer, distribution system and regulatory environment.
 
 The
        information provided for Segment Reporting is based on internal reports utilized
        by management. The presentation and allocation of overhead and the net
        contribution for the operating segments may not reflect the actual economic
        costs, contribution or results of operations of the segments as stand alone
        businesses. If a different basis of allocation were utilized, the relative
        contributions of the segments might differ but the relative trends in segments
        would, in management’s view, likely not be impacted. For additional information
        on our investments in real property, refer to Note N - *Segment
        Information* of
        the
        Notes to the Financial Statements included in Part I, Item 1 *Financial Statements* of this
        Interim Report Form 10-Q.
 
 **OFF-BALANCE
        SHEET ARRANGEMENTS**
 
 We
        do not
        currently have any interest in any special purpose entities, which are not
        reflected on our balance sheet nor do we have any commitments or obligations,
        which are not reflected on our balance sheet. We do not have any interest
        in
        derivative contracts.
 
 We
        maintain working capital reserves of approximately 3% of aggregate members’
capital accounts in cash and cash equivalents. This reserve is available
        to pay
        expenses in excess of revenues, satisfy obligations of underlying secured
        properties, expend money to satisfy our unforeseen obligations and for other
        permitted uses of the working capital. At June 30, 2006, we had $3.7 million
        in
        cash and $33.0 million in total assets.
 
 **CONTRACTUAL
        OBLIGATIONS**
 
 Our
        contractual obligations as of June 30, 2006 consisted of a 10 year note payable
        secured by real property.
 
 
 **Total
                  Contractual Obligations**July
                  1, 2006 Through June 30, 2007
              
              $
              103,000July
                  1, 2006 Through June 30, 2008
              
              
              109,000July
                  1, 2006 Through June 30, 2009
              
              
              115,000July
                  1, 2006 Through June 30, 2010
              
              
              122,000July
                  1, 2006 Through June 30, 2011
              
              
              129,000Thereafter:
              
              
              4,203,000Total:
              
              $
              4,781,000
 
 Cash
        provided by the operating activities of our investments in real estate segment
        is primarily dependent on the occupancy level of our properties, the rental
        rates on our leases, the collectibility of rents from our tenants, and the
        level
        of operating and other expenses. Since we intend on leveraging our capital
        for
        property acquisitions, we will depend on cash provided by operating activities
        to service such debt. The following table summarizes future minimum base
        rent to
        be received from our Manager under a non-cancelable lease on our sole real
        estate property at June 30, 2006:
 
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            33
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 *Table
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 July
                  1, 2006 Through June 30, 2007
              
              $
              924,000July
                  1, 2006 Through June 30, 2008
              
              
              961,000July
                  1, 2006 Through June 30, 2009
              
              
              999,000July
                  1, 2006 Through June 30, 2010
              
              
              1,039,000July
                  1, 2006 Through June 30, 2011
              
              
              1,081,000Thereafter:
              
              
              3,662,000Total:
              
              $
              8,666,000
 
 
 **CRITICAL
        ACCOUNTING ESTIMATES**
 
 **Revenue
        Recognition**
 
 Interest
        income on loans is accrued by the effective interest method. We do not recognize
        interest income from loans once they are determined to be impaired. A loan
        is
        impaired when, based on current information and events, it is probable that
        we
        will be unable to collect all amounts due according to the contractual terms
        of
        the loan agreement or when the payment of interest is 90 days past
        due.
 
 The
        following table presents a sensitivity analysis to show the impact on our
        financial condition at June 30, 2006 from fluctuations in weighted average
        interest rate charged on loans as a percentage of the loan
        portfolio:
 
 **Changed
                  Assumption**
              
              **Increase
                  (Decrease) in Interest Income**Weighted
                  average interest rate assumption increased by 1% or 100 basis
                  points
              
              $
              191,000Weighted
                  average interest rate assumption increased by 5% or 500 basis
                  points
              
              $
              955,000Weighted
                  average interest rate assumption decreased by 1% or 100 basis
                  points
              
              $
              (191,000
              )Weighted
                  average interest rate assumption decreased by 5% or 500 basis
                  points
              
              $
              (955,000
              )
 
 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.
 
 Our
        lease
        provides for tenant occupancy during periods for which no rent is due or
        where
        minimum rent payments increase during the term of the lease. Rental revenue
        is
        recorded for the full term of the lease on a straight-line basis. Accordingly,
        the Company records a receivable from tenants for rents that it expects to
        collect over the remaining lease term as deferred rent receivable. When the
        Company acquires a property, the term of the existing lease is considered
        to
        commence as of the acquisition date for the purposes of this calculation.
        Revenue recognition is considered to be critical because the evaluation of
        the
        reliability of such deferred rent receivable involves management’s assumptions
        relating to such tenant’s viability.
 
 We
        recognize income from rent once all of the following criteria are met in
        accordance with the FAS 13 - *Accounting
        for Leases* (“FAS
        13”):
 
 ·
            The
                agreement has been fully executed and
                delivered; 
 ·
            Services
                have been rendered; 
 ·
            The
                amount is fixed or determinable, and 
 ·
            The
                collectibility is reasonable assure. 
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            34
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 *Table
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  **Allowance
        for Loan loss**
 
 We
        maintain an allowance for loan loss 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 loss.
        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 June 30, 2006 from increases and decreases to our
        allowance for loan loss as a percentage of the loan portfolio:
 
 **Changed
                  Assumption**
              
              **Increase
                  (Decrease) in Allowance for Loan loss**Allowance
                  for loan loss assumption increased by 1.0% of loan
                  portfolio
              
              $
              195,000Allowance
                  for loan loss assumption increased by 5.0% of loan
                  portfolio
              
              $
              973,000Allowance
                  for loan loss assumption decreased by 0.1% of loan
                  portfolio
              
              $
              (73,000
              )
 
 Estimating
        allowances for loan loss requires significant judgment about the underlying
        collateral, including liquidation value, condition of the collateral, competency
        and cooperation of the related borrower and specific legal issues that affect
        loan collections or taking possession of the property. As a non-conventional
        lender willing to invest in loans to borrowers who may not meet the credit
        standards of conventional lenders, the default rate on our loans could be
        higher
        than those generally experienced in the real estate lending industry. We
        generally approve loans more quickly than other real estate lenders and,
        due to
        our expedited underwriting process, there is a risk that the credit inquiry
        we
        perform will not reveal 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. Circumstances that may cause significant
        changes in our estimated allowance include:
 
 ·
            Declines
                in real estate market conditions that can cause a decrease in expected
                market value; 
 ·
            Discovery
                of undisclosed liens for community improvement bonds, easements and
                delinquent property taxes; 
 ·
            Lack
                of progress on real estate developments after we advance funds. We
                customarily utilize disbursement agents to monitor the progress of
                real
                estate developments and approve loan advances. After further inspection
                of
                the related property, progress on construction occasionally does
                not
                substantiate an increase in value to support the related loan
                advances; 
 ·
            Unanticipated
                legal or business issues that may arise subsequent to loan origination
                or
                upon the sale of foreclosed upon property;
                and 
 ·
            Appraisals,
                which are only opinions of value at the time of the appraisal, may
                not
                accurately reflect the value of the
                property. 
 **ITEM
        3.**  **QUANTITATIVE
        AND QUALITATIVEDISCLOSURES ABOUT
        MARKET
        RISK**
 
 We
        are
        exposed to market risk, primarily from changes in interest rates. We do not
        deal
        in any foreign currencies and do not own any options, futures or other
        derivative instruments. We do not have a significant amount of
        debt.
 
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            35
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            of Contents*
  Most
        of
        our assets consist of investments in real estate loans, which from time to
        time
        include those that are financed under Inter-creditor Agreements. At June
        30,
        2006, our aggregate investment in real estate loans was approximately $19.5
        million, net of allowance, with a weighted average effective interest rate
        of
        10.4%. We had no loans financed under Inter-creditor Agreements at June 30,
        2006
        which would be classified as assets under secured borrowing. Most of the
        real
        estate loans have an initial term of 12 months; the weighted average term
        of
        outstanding loans at June 30, 2006 was 14 months. All of the outstanding
        real
        estate loans at June 30, 2006 were fixed rate loans. All of the real estate
        loans are held for investment purposes; none are held for sale. We intend
        to
        hold such real estate loans to maturity. None of the real estate loans have
        prepayment penalties and one has an exit fee.
 
 As
        of
        June 30, 2006, approximately $9.5 million or 28.7% of our assets consist
        of
        investment in income producing real property, net of accumulated depreciation.
        This property is located in Las Vegas, Nevada and is leased entirely by our
        Manager, earning us monthly rent revenue of approximately $87,000. Vestin
        Group
        has sub-leased office space in the building as permitted by the lease agreement
        at rates equal to or less than rates we receive.
 
 Market
        fluctuations in interest rates generally do not affect the carrying value
        of our
        investment in real estate loans. However, significant and sustained changes
        in
        interest rates could affect our operating results. If interest rates decline
        significantly, some of the borrowers could prepay their loans with the proceeds
        of a refinancing at lower interest rates. This would reduce our earnings
        and
        funds available for distribution to members. On the other hand, a significant
        increase in interest rates could result in a slowdown in real estate development
        activity, which would reduce the demand for commercial real estate loans.
        As a
        result, we might encounter greater difficulty in identifying appropriate
        borrowers. We are not in a position to quantify the potential impact on our
        operating results from a material change in interest rates.
 
 The
        following table contains information about the investment in real estate
        loans
        held in our portfolio as of June 30, 2006. The presentation aggregates the
        investment in real estate loans by their maturity dates for maturities occurring
        in each of the years 2006 through 2009 and separately aggregates the information
        for all maturities arising after 2009. The carrying values of these assets
        approximate their fair value as of June 30, 2006.
 
 **Interest
                  Earning Assets**
                **Aggregated
                  by Maturity at June 30, 2006****Interest
                  Earning Assets**
              
              **2006**
              
              **2007**
              
              **2008**
              
              **2009**
              
              **Thereafter**
              
              **Total**Investments
                  In Real Estate Loans
              
              $
              10,317,000
              
              $
              9,150,000
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              19,467,000Weighted
                  Average Interest Rates
              
              
              9.23
              %
              
              11.81
              %
              
              --
              %
              
              --
              %
              
              --
              %
              
              10.44
              %
 
 At
        June
        30, 2006, we also had approximately $3.7 million invested in cash and cash
        equivalents. 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
        4.**  **CONTROLSAND
        PROCEDURES**
 
 **Disclosure
        Controls and Procedures**
 
 Our
        Manager’s Chief Executive Officer and Chief Financial Officer have reviewed and
        evaluated the effectiveness of the design and operation of our Company’s
        disclosure controls and procedures (as defined in the Securities Exchange
        Act of
        1934 Rules 13a-15(e) and 15d-15(e)) as of June 30, 2006.
 
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            36
            -
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            of Contents*
  Our
        Manager’s Chief Executive Officer and Chief Financial Officer concluded that our
        Company’s disclosure controls and procedures as of the end of the period covered
        by this report were not effective as a result of material weaknesses in internal
        controls as of June 30, 2006 as discussed below.
 
 **Management’s
        Report on Internal Control Over Financial Reporting**
 
 Management
        is responsible for establishing and maintaining adequate internal control
        over
        financial reporting for our Company, as such term is defined in Rules 13a−15(f)
        and 15d−15(f) under the Exchange Act. Our internal control over financial
        reporting is a process designed to provide reasonable assurance regarding
        the
        reliability of financial reporting and the preparation of financial statements
        for external reporting purposes in accordance with accounting principles
        generally accepted in the United States. Internal control over financial
        reporting includes those policies and procedures that: pertain to the
        maintenance of records that, in reasonable detail, accurately and fairly
        reflect
        the transactions and dispositions of the assets of our Company; provide
        reasonable assurance that transactions are recorded as necessary to permit
        preparation of financial statements in accordance with accounting principles
        generally accepted in the United States, and that receipts and expenditures
        of
        our Company are being made only in accordance with authorizations of management
        and directors of our Company; and provide reasonable assurance regarding
        prevention or timely detection of unauthorized acquisition, use or disposition
        of our Company’s assets that could have a material effect on our financial
        statements. Because of its inherent limitations, internal control over financial
        reporting may not prevent or detect misstatements. Also, projections of any
        evaluation of effectiveness to future periods are subject to the risk that
        controls may become inadequate because of changes in conditions, or that
        the
        degree of compliance with the policies or procedures may
        deteriorate.
 
 A
        material weakness is a control deficiency, or combination of control
        deficiencies, that results in more than a remote likelihood that a material
        misstatement of the annual or interim financial statements will not be prevented
        or detected. As of June 30, 2006, management identified the following material
        weaknesses in their assessment of the effectiveness of our internal control
        over
        financial reporting:
 
 ·
            We
                did not adequately implement certain controls over investments in
                real
                estate loans, specifically relating to the computer database of
                investments in real estate loans which summarizes information used
                to
                prepare the related disclosures, including the classification of
                types of
                loan, portfolio percentage, loan to value percentage, and the geographical
                location of the investment in real estate loans. We also identified
                errors
                in recording transactions specifically related to interest income
                from
                investment in real estate loans. These areas included logical access
                security controls to the computer database, and we have therefore
                identified a material weakness in our information technology general
                controls as of June 30, 2006. 
 **Remediation
        Plan**
 
 To
        remediate our material weakness over the computer database of investments
        in
        real estate loans, management has established and implemented controls, policies
        and procedures, which are being tested, within our information technology
        department that are intended to provide monitoring and management of the
        computer systems access rights. Such procedures provide for various levels
        of
        access by certain individuals as deemed appropriate by management. These
        procedures also provide for appropriate approvals for programming changes,
        along
        with supporting documentation of such approvals. Management has reviewed
        all
        individuals and their functions and duties within our information technology
        department to establish these access and approval controls. Management will
        also
        continue evaluating controls related to the recognition of interest income
        from
        investment in real estate loans to determine whether additional controls
        and
        procedures should be implemented.
 
 **Changes
        in Internal Control Over Financial Reporting**
 
 Our
        management has commenced with the remediation plan discussed above which
        includes establishing
        and implementing controls, policies and procedures within our information
        technology department that are intended to provide monitoring and management
        of
        the computer systems access rights. Additionally, our management has implemented
        controls and procedures related to the recognition of interest income from
        investment in real estate loans. These controls have been implemented and
        will
        be tested during our quarter ending September 30, 2006 to determine their
        effectiveness.
 
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            of Contents*
  Because
        of the inherent limitations in all control systems, no evaluation of controls
        can provide absolute assurance that all control issues within our Company
        have
        been or will be detected. Even effective internal control over financial
        reporting can only provide reasonable assurance with respect to financial
        statement preparation. Furthermore, because of changes in conditions, the
        effectiveness of internal control over financial reporting may vary over
        time.
        Our management, including our Chief Executive Officer and Chief Financial
        Officer, does not expect that our controls and procedures will prevent all
        errors.
 
 Notwithstanding
        the above, nothing has come to the attention of management which would cause
        management to believe that the material weaknesses noted above have resulted
        in
        material misstatements or errors in our financial statements as of June 30,
        2006, or for any prior periods.
 
 **PART
        II - OTHERINFORMATION**
 
 **ITEM
        1.**  **LEGALPROCEEDINGS**
 
 Please
        refer to Note L *Legal
        Matters Involving the Manager* and Note
        M *Legal
        Matters Involving the Company* in Part
        I Item 1 *Financial
        Statements* of this
        Form 10-Q for information regarding our legal proceedings, which are
        incorporated herein by reference.
 
 **ITEM
        1A.**  **RISKFACTORS**
 
 There
        have been no material changes to the risk factors disclosed in Part II Other
        Item 1A - *Risk
        Factors* of the
        Company’s Quarterly Report on Form 10-Q for the three months ended March 31,
        2006 (the “Form 10-Q”) and Form 10-K for the year ended December 31, 2005 (the
“Form 10-K”). The materialization of any risks and uncertainties identified in
        the Company’s Forward Looking Statements contained herein together with those
        previously disclosed in the Form 10-Q, Form 10-K or those that are presently
        unforeseen could result in significant adverse effects on the Company’s
        financial condition, results of operations and cash flows. See Item 2. *Management’s
        Discussion and Analysis of Financial Condition and Results of Operations
        -
        Forward Looking Statements* in this
        Quarterly Report on Form 10-Q.
 
 **ITEM
        2.**  **UNREGISTEREDSALES
        OF EQUITY AND USE OF
        PROCEEDS**
 
 **Market
        Information**
 
 There
        is
        no established public trading market for the trading of Units.
 
 **Holders**
 
 As
        of
        June 30, 2006, 754 accounts held 2,869,274 Units of interest in the Company.
 
 **Distribution
        Policy**
 
 We
        generally distribute to Unit holders on a monthly basis most of our Net Income
        Available for Distribution (as defined in our Operating Agreement). Net Income
        Available for Distribution is based upon cash flow from operations, less
        certain
        reserves, and may exceed net income as calculated in accordance with accounting
        principles generally accepted in the United States (“GAAP”). Our Operating
        Agreement also permits distributions of capital. We made distributions of
        approximately $1,292,000 (prior to reinvested distributions) during the six
        months ended June 30, 2006, all of which were paid from Net Income Available
        for
        Distribution. It is our intention to continue to distribute our Net Income
        Available for Distribution to our Unit holders.
 
 **Recent
        Sales of Unregistered Securities**
 
 None.
 
  -
            38
            -
 *Table
            of Contents*
  **Equity
        Compensation Plan Information**
 
 None.
 
 **Purchases
        of Equity Securities by the Issuer and Affiliated
        Purchasers**
 
 
 **Period**
              
              **Total
                  Number of Units Purchased (1)**
              
              **Average
                  Price Paid per Unit**
              
              **Total
                  Number of Units Purchased as Part of Publicly Announced Plans or
                  Programs**
              
              **Maximum
                  Number (or Approximate Dollar Value) of Units that May Yet be Purchased
                  under the Plans or Programs**April
                  2006
              
              
              476
              
              $
              10.50
              
              
              None
              
              
              NoneMay
                  2006
              
              
              --
              
              
              --
              
              
              None
              
              
              NoneJune
                  2006
              
              
              77,849
              
              $
              10.50
              
              
              None
              
              
              None
 
 (1)
            Pursuant
                to our Operating Agreement, members may request to have their units
                redeemed. However, in order to comply with our Operating Agreement
                and
                Internal Revenue Code, we may redeem no more than 10% of the aggregate
                Members’ capital in any calendar year. Balances in Members’ capital
                accounts as of January 1, 2006 were approximately $29.2 million,
                which
                limited redemptions to approximately $2.9 million for calendar year
                2006. 
 **ITEM
        3.**  **DEFAULTSUPON
        SENIOR SECURITIES**
 
 None.
 
 **ITEM
        4.**  **SUBMISSIONOF
        MATTERS TO A VOTE OF SECURITY
        HOLDERS**
 None.
 
 **ITEM
        5.**  **OTHERINFORMATION**
 
 None.
  -
            39
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            of Contents*
  
 **ITEM
        6.**  **EXHIBITS**
 
 **EXHIBIT
        INDEX**
 
 **Exhibit****No.**
              
              **Description
                  of Exhibits**3.1(1)
              
              Articles
                  of Organization3.2(2)
              
              Certificate
                  of Amendment to Articles of Organization3.3(3)
              
              Amended
                  and Restated Operating Agreement (included as Exhibit A to the
                  prospectus)4(4)
              
              Distribution
                  Reinvestment Plan10.7
                  (5)
              
              Purchase
                  and Sale Agreement, dated August 1, 2004, by and between Luke Properties,
                  LLC and Vestin Fund III, LLC10.8
                  (5)
              
              Assignment
                  and Assumption Agreement dated August 16, 2004 by and between Vestin
                  Fund III, LLC and VF III HQ, LLC10.9(6)
              
              Office
                  lease agreement dated March 31, 2003 by and between Luke Properties,
                  LLC
                  and Vestin Group, Inc.31.1
              
              Section
                  302 Certification of Michael V.
                  Shustek31.2
              
              Section
                  302 Certification of John
                  Alderfer32
              
              Certification
                  Pursuant to U.S.C. 18 Section
                  1350
 
 (1)
              
              Incorporated
                  herein by reference to our Pre-Effective Amendment No. 3 to Form S-11
                  Registration Statement filed on September 2, 2003, File No.
                  333-105017.(2)
              
              Incorporated
                  herein by reference to our Form 10-Q filed on August 16, 2004,
                  File No.
                  333-105017.(3)
              
              Incorporated
                  herein by reference to our Post-Effective Amendment No. 1 to Form
                  S-11
                  Registration Statement filed on April 29, 2004, File No.
                  333-105017.(4)
              
              Incorporated
                  herein by reference to Exhibit 4.4 of our Post-Effective Amendment
                  No. 5
                  to Form S-11 Registration Statement filed on April 28, 2006, File
                  No.
                  333-105017.(5)
              
              Incorporated
                  herein by reference to our Form 10-Q filed on November 15, 2004,
                  File No.
                  333-105017.(6)
              
              Incorporated
                  herein by reference to our Form 10-KSB filed on March 30, 2005,
                  File No.
                  333-105017.
 
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            of Contents*
  
 **SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the Registrant has duly caused this report to be signed on its behalf
        by
        the undersigned thereunto duly authorized.
 
 
 **Vestin
                  Fund III, LLC**By:
              Vestin
                  Mortgage, Inc., its Sole ManagerBy:
              /s/
                  Michael V. ShustekMichael
                  V. ShustekChief
                  Executive Office and Director of the Manager(Principal
                  Executive Officer of the Manager)By:
              /s/
                  John AlderferJohn
                  AlderferChief
                  Financial Officer of the Manager(Principal
                  Financial and Accounting Officer of the
                  Manager)
 
 Dated:
        August 8, 2006
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