**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 333-125121*





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








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





**8379
      WEST SUNSET ROAD, LAS VEGAS, NEVADA 89113**


(Address
      of Principal Executive Offices) **** (Zip
      Code)





Registrant’s
      Telephone Number: 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 [X]
            Non-accelerated
                filer [   ]





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
      July 27, 2006, there were 29,838,442 shares of the Company’s Common Stock
      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 March 31, 2006
            2Consolidated
                Statements of Operations (unaudited) for the Three
                Months Ended June 30, 2006 and 2005
            3Consolidated
                Statement of Stockholders’ Equity (unaudited) for
                the Three Months Ended June 30, 2006
            4Consolidated
                Statements of Cash Flows (unaudited) for the Three
                Months Ended June 30, 2006 and 2005
            5Notes
                to Consolidated Financial Statements
                (unaudited)
            6Report
                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
            36Item
                4.
            Control
                and Procedures
            37Part
                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




-
            1
            -
 *Table
            of Contents*




**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1.**  **CONSOLIDATED
      FINANCIAL STATEMENTS**





**VESTIN
                REALTY MORTGAGEII, INC.****(SUCCESSOR
                TO VESTIN FUND II, LLC)****CONSOLIDATED
                BALANCE SHEETS****ASSETS****JUNE
                30, 2006**
            
            **MARCH
                31, 2006****(UNAUDITED)**Cash
            
            $
            45,293,000
            
            $
            17,820,000Certificates
                of deposit
            
            
            14,728,000
            
            
            700,000Interest
                and other receivables, net of allowance of $160,000 at June 30, 2006
                and
                $183,000 at March 31, 2006
            
            
            2,393,000
            
            
            3,434,000Note
                receivable, net of allowance of $2,041,000 at June 30, 2006 and $2,096,000
                at March 31, 2006
            
            
            787,000
            
            
            810,000Real
                estate held for sale
            
            
            38,095,000
            
            
            38,426,000Real
                estate held for sale - seller financed
            
            
            22,887,000
            
            
            22,887,000Investment
                in real estate loans, net of allowance for loan losses of $10,356,000
                at
                June, 2006 and $10,734,000 at March 31, 2006
            
            
            161,923,000
            
            
            212,928,000Due
                from VRM I
            
            
            4,000
            
            
            --Assets
                under secured borrowings
            
            
            --
            
            
            11,611,000Other
                assets
            
            
            273,000
            
            
            63,000Total
                assets
            
            $
            286,383,000
            
            $
            308,679,000**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**LiabilitiesAccounts
                payable and accrued liabilities
            
            $
            407,000
            
            $
            631,000Due
                to Manager
            
            
            --
            
            
            250,000Secured
                borrowings
            
            
            --
            
            
            11,611,000Note
                payable
            
            
            186,000
            
            
            17,200,000Deposit
                liability
            
            
            1,938,000
            
            
            1,365,000Unearned
                revenue
            
            
            1,492,000
            
            
            --Total
                liabilities
            
            
            4,023,000
            
            
            31,057,000Commitments
                and ContingenciesStockholders'
                equityPreferred
                stock, $0.0001 par value; 1,000,000 shares authorized; none
                issued
            
            
            --
            
            
            --Common
                stock, $0.0001 par value; 100,000,000 shares authorized; 29,838,442
                shares
                issued and outstanding at June 30, 2006 and March 31, 2006
            
            
            3,000
            
            
            3,000Capital
                in excess of par
            
            
            277,619,000
            
            
            277,619,000Retained
                earnings
            
            
            4,738,000
            
            
            --Total
                stockholders' equity
            
            
            282,359,000
            
            
            277,622,000Total
                liabilities and stockholders' equity
            
            $
            286,383,000
            
            $
            308,679,000





The
              accompanying notes are an integral part of these statements.
 See
                review report of Independent Registered Public Accounting
                Firm.
 -
            2
            -
 *Table
            of Contents*




**VESTIN
                REALTY MORTGAGEII, INC.****(SUCCESSOR
                TO VESTIN FUND II, LLC)****CONSOLIDATED
                STATEMENTS OF OPERATIONS****(UNAUDITED)****FOR
                THE THREE**
              **MONTHS
                ENDED JUNE 30,****2006**
            
            **2005****Revenues**Interest
                income from investment in real estate loans
            
            $
            4,641,000
            
            $
            5,641,000Other
                income
            
            
            665,000
            
            
            116,000Total
                revenues
            
            
            5,306,000
            
            
            5,757,000**Operating
                expenses**Management
                fees - related party
            
            
            274,000
            
            
            273,000Provision
                for loan loss
            
            
            --
            
            
            2,726,000Interest
                expense
            
            
            236,000
            
            
            515,000Professional
                fees
            
            
            195,000
            
            
            770,000Professional
                fees - related party
            
            
            24,000
            
            
            24,000Other
            
            
            105,000
            
            
            46,000Total
                operating expenses
            
            
            834,000
            
            
            4,354,000**Income
                from Operations**
            
            
            4,472,000
            
            
            1,403,000Revenue
                related to real estate held for sale
            
            
            1,504,000
            
            
            203,000Expenses
                related to real estate held for sale
            
            
            (1,490,000
            )
            
            (493,000
            )Gain
                on sale of real estate held for sale
            
            
            252,000
            
            
            --Write
                downs on real estate held for sale
            
            
            --
            
            
            (1,229,000
            )Total
                income (loss) from real estate held for sale
            
            
            266,000
            
            
            (1,519,000
            )Income
                (loss) before income tax provision
            
            
            4,738,000
            
            
            (116,000
            )Provision
                for income taxes
            
            
            --
            
            
            --**NET
                INCOME (LOSS)**
            
            $
            4,738,000
            
            $
            (116,000
            )Basic
                and diluted earnings per common share
            
            $
            0.16Net
                (loss) per weighted average members’ unit
            
            
            
            
            $
            (0.00
            )Weighted
                average common shares / members’ units
            
            
            29,838,442
            
            
            32,779,034




The
              accompanying notes are an integral part of these
              statements.
 See
              review report of Independent Registered Public Accounting
              Firm.
 -
              3
              -
 *Table
            of Contents*





**VESTIN
                  REALTY MORTGAGEII, INC.****(SUCCESSOR
                  TO VESTIN FUND II, LLC)****CONSOLIDATED
                  STATEMENT OF STOCKHOLDERS' EQUITY****FOR
                  THE THREE MONTHS ENDED JUNE 30, 2006****(UNAUDITED)****Preferred
                  Stock**
              
              **Common
                  Stock****Number
                  of Shares**
              
              **Amount**
              
              **Number
                  of Shares**
              
              **Amount**
              
              **Additional
                  Paid-in- Capital**
              
              **Retained
                  Earnings**
              
              **Total**Stockholders'
                  Equity at March 31, 2006
              --
              $
              --
              
              29,838,442
              $
              3,000
              $
              277,619,000
              $
              --
              $
              277,622,000Net
                  Income
              
              
              
              
              
              
              
              
              
              
              4,738,000
              
              4,738,000Stockholders'
                  Equity at June 30, 2006
              --
              $
              --
              
              29,838,442
              $
              3,000
              $
              277,619,000
              $
              4,738,000
              $
              282,359,000


The
              accompanying notes are an integral part of these
              statements.
 See
              review report of Independent Registered Public Accounting
              Firm.
 -
              4
              -
 *Table
            of Contents*




**VESTIN
                REALTY MORTGAGEII, INC.****(SUCCESSOR
                TO VESTIN FUND II, LLC)****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****(UNAUDITED)****FOR
                THE THREE MONTHS**
              **ENDED
                JUNE 30,****2006**
            
            **2005****Cash
                flows from operating activities:**Net
                income (loss)
            
            $
            4,738,000
            
            $
            (116,000
            )Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Write
                down of real estate held for sale
            
            
            --
            
            
            1,229,000Gain
                on sale of real estate held for sale
            
            
            (252,000
            )
            
            --Provision
                for loan losses
            
            
            --
            
            
            2,726,000Amortized
                interest income
            
            
            (72,000
            )
            
            --Interest
                income accrued to loan balance
            
            
            --
            
            
            122,000Change
                in operating assets and liabilities:Interest
                and other receivables
            
            
            915,000
            
            
            (581,000
            )Allowance
                for investment in real estate loan losses, related to legal
                expense
            
            
            (378,000
            )
            
            --Due
                to/from Manager
            
            
            (250,000
            )
            
            89,000Due
                to/from VRM I
            
            
            (4,000
            )
            
            (35,000
            )Other
                assets
            
            
            28,000
            
            
            20,000Accounts
                payable and accrued liabilities
            
            
            (224,000
            )
            
            223,000Net
                cash provided by operating activities
            
            
            4,501,000
            
            
            3,677,000**Cash
                flows from investing activities:**Investments
                in real estate loans
            
            
            (49,294,000
            )
            
            (7,236,000
            )Purchase
                of investments in real estate loans from:Fund
                III
            
            
            --
            
            
            (5,000,000
            )Other
                related party
            
            
            --
            
            
            (2,700,000
            )Third
                party
            
            
            (13,000,000
            )
            
            (7,000,000
            )Proceeds
                from loan payoffs
            
            
            114,761,000
            
            
            9,415,000Sale
                of investments in real estate loans to:VRM
                I
            
            
            --
            
            
            600,000Fund
                III
            
            
            --
            
            
            5,000,000Third
                party
            
            
            --
            
            
            12,500,000Proceeds
                from sale of investment in real estate held for sale
            
            
            583,000
            
            
            --Proceeds
                from note receivable
            
            
            22,000
            
            
            --Purchase
                of marketable securities
            
            
            --
            
            
            (5,884,000
            )Cash
                proceeds form local agency bond
            
            
            --
            
            
            565,000Purchase
                of fixed assets
            
            
            --
            
            
            (7,000
            )Purchase/Sale
                of investments in certificates of deposit
            
            
            (14,028,000
            )
            
            --Unearned
                revenue proceeds related to loan restructuring
            
            
            607,000
            
            
            --Deposit
                liability
            
            
            573,000
            
            
            277,000Net
                cash provided by investing activities
            
            $
            40,224,000
            
            $
            530,000




The
              accompanying notes are an integral part of these
              statements.
 See
              review report of Independent Registered Public Accounting
              Firm.
 -
              5
              -
 *Table
            of Contents*




**VESTIN
                REALTY MORTGAGE II, INC.****(SUCCESSOR
                TO VESTIN FUND II, LLC)****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****(UNAUDITED)****FOR
                THE THREE MONTHS**
              **ENDED
                JUNE 30,****2006**
            
            **2005****Cash
                flows from financing activities:**Principal
                payments on note payable
            
            $
            (17,252,000
            )
            $
            --Members'
                distributions, net of reinvestments
            
            
            --
            
            
            (3,753,000
            )Members'
                distributions, net of reinvestments - related party
            
            
            --
            
            
            (15,000
            )Members'
                redemptions
            
            
            --
            
            
            (1,000
            )Net
                cash used in financing activities
            
            
            (17,252,000
            )
            
            (3,769,000
            )**NET
                CHANGE IN CASH**
            
            
            27,473,000
            
            
            438,000**Cash,
                beginning of period**
            
            
            17,820,000
            
            
            10,128,000**Cash,
                end of period**
            
            $
            45,293,000
            
            $
            10,566,000**Supplemental
                disclosures of cash flows information:**Income
                taxes paid
            
            $
            --
            
            $
            --Interest
                paid
            
            $
            236,000
            
            $
            515,000Non-cash
                investing and financing activities:Loans
                funded through secured borrowing
            
            $
            --
            
            $
            34,000Loan
                payoffs of loans funded through secured borrowings
            
            $
            11,611,000
            
            $
            --Real
                estate held for sale acquired through foreclosure
            
            $
            --
            
            $
            9,989,000Note
                payable relating to prepaid E & O insurance policy
            
            $
            238,000
            
            $
            --Unrealized
                loss on marketable securities
            
            $
            --
            
            $
            681,000Receivable
                related to loan rewritten with same or similar property, net of allowance,
                as collateral applied to unearned income
            
            $
            127,000
            
            $
            --Other
                receivable related to local agency bond liquidation
            
            $
            --
            
            $
            446,000Unearned
                revenue from loans rewritten with same or similar property as
                collateral
            
            $
            1,012,000
            
            $
            --










The
              accompanying notes are an integral part of these
              statements.
 See
              review report of Independent Registered Public Accounting
              Firm.
 -
              6
              -
 *Table
            of Contents*





**VESTIN
      REALTY MORTGAGEII, INC**


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





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**JUNE
      30, 2006**





**(UNAUDITED)**


**NOTE
      A — ORGANIZATION**





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





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





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





Our
      Manager is Vestin Mortgage, Inc. (the “Manager” or “Vestin Mortgage”), a Nevada
      corporation, which is a wholly owned subsidiary of Vestin Group, Inc. (“Vestin
      Group”), a Delaware corporation. Michael Shustek, the CEO and director of the
      Manager and us wholly owns Vestin Group, Inc., which is engaged in asset
      management, real estate lending and other financial services though its
      subsidiaries. Our Manager, prior to June 30, 2006, also operated as a licensed
      Nevada mortgage broker and was engaged in the business of brokerage, placement
      and servicing of commercial loans secured by real property. As of July 1, 2006,
      the mortgage broker license has been issued to an affiliated company, Vestin
      Originations (“Vestin”), who will continue the business of brokerage, placement
      and servicing of commercial real estate loans. Vestin is a wholly owned
      subsidiary of Vestin Group.





Pursuant
      to our management agreement, the Manager controls the daily operating activities
      of the Company, including the power to assign duties, to determine how to invest
      our assets, to sign bills of sale, title documents, leases, notes, security
      agreements, real estate loan investments and contracts, and to direct our
      business operations. Consequently, our operating results are dependent upon
      the
      Manager’s ability and performance in managing our operations and servicing our
      assets.





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





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





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.








See
              review report of Independent Registered Public Accounting
              Firm.
 -
              7
              -
 *Table
            of Contents*





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





**Management
      Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America (“GAAP”) requires management
      to make estimates and assumptions that affect the reported amounts of assets
      and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.





**Cash
      and Cash Equivalents**





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





**Revenue
      Recognition**





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





**Investments
      in Real Estate Loans**





We
      may
      from time to time acquire or sell investments in real estate loans from or
      to
      the Manager or other related parties pursuant to the terms of our Management
      Agreement provided the price does not exceed the 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. 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. 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.








See
              review report of Independent Registered Public Accounting
              Firm.
 -
              8
              -
 *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, with the
      exception of two of our loans which include principal and interest payments.
      As
      of June 30, 2006, these two loans had a balance of approximately $18.6 million
      and had terms ranging from twelve to thirty-six months. 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
      $31.2 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 $1.7 million. At March 31, 2006, we had $8.5
      million invested in real estate loans which had interest reserves where the
      total outstanding principal was approximately $14.7 million, including
      participating lenders. These loans had interest reserves of approximately $1.6
      million, of which our portion is $0.8 million.





**Allowance
      for Loan Losses**





We
      maintain an allowance for loan losses on our investments in real estate loans
      for estimated credit impairment. The Manager’s estimate of losses is based on a
      number of factors including the types and dollar amounts of loans in the
      portfolio, adverse situations that may affect the borrower’s ability to repay,
      prevailing economic conditions and the underlying collateral securing the loan.
      Additions to the allowance are provided through a charge to earnings and are
      based on an assessment of certain factors, which may indicate estimated losses
      on the loans. Actual losses on loans are recorded as a charge-off or a reduction
      to the allowance for loan losses. Subsequent recoveries of amounts previously
      charged off are added back to the allowance or included as income.





Estimating
      allowances for loan losses requires significant judgment about the underlying
      collateral, including liquidation value, condition of the collateral, competency
      and cooperation of the related borrower and specific legal issues that affect
      loan collections or taking possession of the property. As a non-conventional
      lender willing to invest in loans to borrowers who may not meet the credit
      standards of conventional lenders, the default rate on our loans could be higher
      than those generally experienced in the real estate lending industry. We
      generally approve loans more quickly than other real estate lenders and, due
      to
      our expedited underwriting process; there is a risk that the credit inquiry
      we
      perform will not reveal the material facts pertaining to a borrower and the
      security.





Additional
      facts and circumstances are discovered as we continue our efforts in the
      collection and foreclosure processes. This additional information often causes
      management to reassess its estimates. In recent years, we have revised estimates
      of our allowance for loan losses. Circumstances that have caused significant
      changes in our estimated allowance include, but are not limited to:





·
            Declines
                in real estate market conditions, which can cause a decrease in expected
                market value;





·
            Discovery
                of undisclosed liens for community improvement bonds, easements and
                delinquent property taxes;





·
            Lack
                of progress on real estate developments after we advance funds. We
                customarily utilize disbursement agents to monitor the progress of
                real
                estate developments and approve loan advances. After further inspection
                of
                the related property, progress on construction occasionally does
                not
                substantiate an increase in value to support the related loan
                advances;





·
            Unanticipated
                legal or business issues that may arise subsequent to loan origination
                or
                upon the sale of foreclosed upon property;
                and





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








See
              review report of Independent Registered Public Accounting
              Firm.
 -
              9
              -
 *Table
            of Contents*





**Real
      Estate Held For Sale**





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





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





·
            Management
                commits to a plan to sell the
                properties;





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





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





·
            The
                sale of the property is probable;





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





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





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





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





Because
      we occasionally foreclose on loans with raw land or developments in progress,
      available financing for such properties is often limited and we frequently
      provide financing up to 100% of the selling price on these properties. In
      addition, we may make additional loans to the buyer to continue development
      of a
      property. Although sale agreements are consummated at closing, they lack
      adequate initial investment by the buyer to qualify as a sales transaction
      as
      defined in FAS 66. These sale agreements are not recorded as a sale until the
      requirements of FAS 66 are met.





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





In
      cases
      where the investment by the buyer is significant (generally 20% or more) and
      the
      buyer has an adequate continuing investment, the purchase money debt is not
      subject to future subordination, and a full transfer of risks and rewards has
      occurred, we will use the full accrual method. Under the full accrual method
      a
      sale is recorded and the balance remaining to be paid is recorded as a normal
      note. Interest is recorded as income when received.








See
              review report of Independent Registered Public Accounting
              Firm.
 -
              10
              -
 *Table
            of Contents*





**Classification
      of Operating Results from Real Estate Held for Sale**





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





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





Additionally,
      an Investor may participate in certain loans with the Lead Lenders through
      Participation Agreements. In the event of borrower non-performance, the
      Participation Agreement may allow the Investor to be repaid up to the amount
      of
      the Investor’s investment prior to the Lead Lender being repaid. Real estate
      loan financing under the Participation Agreements are also accounted for as
      a
      secured borrowing in accordance with FAS 140. The Company does not receive
      any
      revenues for entering into secured borrowing arrangements. 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 losses, approximates the fair value due to their
                short-term maturities. Fair values for loans, which are delinquent
                and/or
                in foreclosure are determined by underlying collateral securing the
                loans.





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





At
      June
      30, 2006 and March 31, 2006, the estimated fair values of the real estate loans,
      including seller financed loans, were approximately $181.4 million and $232.9
      million, respectively. At June 30, 2006 we had no assets under secured
      borrowings. The
      estimated fair value of assets under secured borrowings, as of March 31, 2006,
      was approximately $11.6
      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.





See
              review report of Independent Registered Public Accounting
              Firm.
 -
              11
              -
 *Table
            of Contents*





**Net
      Basic and Diluted Earnings Per Share**





Basic
      earnings per share (“EPS”) is computed, in accordance with FAS 128 - *Earnings
      per Share* (“FAS
      128”), by dividing net income available to common stockholders by the weighted
      average number of common shares outstanding. Diluted EPS is similar to basic
      EPS
      except that the weighted average of common shares outstanding is increased
      to
      include the number of additional common shares that would have been outstanding
      if the dilutive potential common shares had been exercised. We had no
      outstanding common shares equivalents during the period presented. The following
      is a computation of the EPS data for the three months ended June 30,
      2006:





**For
                the Three Months Ended June 30, 2006**Net
                Income available to common stockholders
            
            $
            4,738,000Weighted
                average number of common shares outstanding during the
                period
            
            
            29,838,442Net
                basic and diluted earnings per share
            
            $
            0.16





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





Because
      Fund II was an LLC prior to the merger, it stated net loss allocated to members
      per weighted average members’ unit, which is computed by dividing net loss
      calculated in accordance with GAAP by the weighted average number of members’
units outstanding for the period. The following is a computation of the net
      loss
      per weighted average unit for the three months ended June 30, 2005:





**For
                the Three Months Ended June 30, 2005**Net
                loss available to members’
            
            $
            (116,000
            )Weighted
                average number of members’ units outstanding during the
                period
            
            
            32,779,034Net
                loss per weighted average members’ unit
            
            $
            (0.00
            )





**Segments**





We
      operate as one business segment.





**Income
      Taxes**





The
      Company is organized and conducts its operations to qualify as a real estate
      investment trust (“REIT”) and to comply with the provisions of the Internal
      Revenue Code with respect thereto. A REIT is generally not subject to federal
      income tax on that portion of its REIT taxable income (“Taxable Income”) which
      is distributed to its stockholders, provided that at least 90% of Taxable Income
      is distributed and provided that certain other requirements are met.





Certain
      assets of the Company are held in a taxable REIT subsidiary. Unlike other
      subsidiaries of a REIT, the income of a taxable REIT subsidiary is subject
      to
      federal and state income taxes. For the three months ended June 30, 2006, the
      Company’s taxable REIT subsidiary did not record any income tax provision due to
      losses it generated. The Company’s taxable REIT subsidiary deferred tax assets
      have been fully offset by a valuation allowance.








See
              review report of Independent Registered Public Accounting
              Firm.
 -
              12
              -
 *Table
            of Contents*





**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 March 31, 2006, we had $59.5 million and $19.7 million,
      respectively, in excess of the federally insured limits.





As
      of
      June 30, 2006, 12% of our real estate loans were in Nevada compared to 17%
      at
      March 31, 2006 and 20% of our real estate loans were in California compared
      to
      22% at March 31, 2006. Additionally, as of June 30, 2006; 16% of our loans
      were
      in Arizona compared to 18% at March 31, 2006, 9% of our loans were in Hawaii
      compared to 14% at March 31, 2006, 14% of our loans were in Texas compared
      to
      10% at March 31, 2006, and 11% of our loans were in Washington at June 30,
      2006
      compared to 4% at March 31, 2006. 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 33.2% of our total investment in real estate loans. These real
      estate loans consisted of commercial, construction and acquisition and
      development loans, located in New York, Washington and California, with a first
      lien position, earning between 8% and 12%, with an aggregate outstanding balance
      of approximately $65.4 million and maturing from September 2006 through May
      2007. At March 31, 2006, the aggregate amount of loans to our three largest
      borrowers represented 32% of our total investment in real estate loans. These
      real estate loans consisted of land and acquisition and development loans,
      located in Nevada, Arizona and California, with a first lien position, earning
      between 8% and 12%, with an aggregate outstanding balance of approximately
      $79.5
      million and maturing from April 2006 through June 2006. Because we have a
      significant concentration of credit risk with our three largest borrowers,
      a
      default by any of such borrowers could have a material adverse effect on
      us.





As
      of
      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, with the
      exception of two of our loans which include principal and interest payments.
      The
      success of a borrower’s ability to repay its real estate loan obligation in a
      large lump-sum payment may be dependent upon the borrower’s ability to refinance
      the obligation or otherwise raise a substantial amount of cash. An increase
      in
      interest rates over the loan rate applicable at origination of the loan may
      have
      an adverse effect on the borrower’s ability to refinance.





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





We
      have
      four real estate loan products, as of June 30, 2006 and March 31, 2006,
      consisting of commercial, construction, acquisition and development, and land.
      The effective interest rates on all product categories range from 5% to 14%.
      Revenue by product will fluctuate based upon relative balances during the
      period.





See
              review report of Independent Registered Public Accounting
              Firm.
 -
              13
              -
 *Table
            of Contents*





Investments
      in real estate loans as of June 30, 2006 are as follows:





**Loan
                Type**
            
            **Number
                Of Loans**
            
            **Balance
                (2)**
            
            **Weighted
                Average Interest Rate**
            
            **Portfolio
                Percentage**
            
            **Weighted
                Average Loan To Value (1)**Acquisition
                and development
            
            
            4
            
            $
            29,537,000
            
            
            8.50
            %
            
            15.07
            %
            
            79.98
            %Commercial
            
            
            21
            
            
            111,006,000
            
            
            9.14
            %
            
            56.62
            %
            
            77.25
            %Construction
            
            
            3
            
            
            28,353,000
            
            
            12.00
            %
            
            14.46
            %
            
            60.87
            %Land
            
            
            5
            
            
            27,154,000
            
            
            11.18
            %
            
            13.85
            %
            
            54.39
            %33
            
            $
            196,050,000
            
            
            9.74
            %
            
            100.00
            %
            
            71.54
            %





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





**Loan
                Type**
            
            **Number
                Of Loans**
            
            **Balance
                (2)**
            
            **Weighted
                Average Interest Rate**
            
            **Portfolio
                Percentage**
            
            **Weighted
                Average Loan To Value (1)**Acquisition
                and development
            
            
            3
            
            $
            51,603,000
            
            
            9.76
            %
            
            20.85
            %
            
            48.82
            %Commercial
            
            
            23
            
            
            127,159,000
            
            
            9.10
            %
            
            51.38
            %
            
            74.04
            %Construction
            
            
            3
            
            
            15,781,000
            
            
            12.00
            %
            
            6.38
            %
            
            62.21
            %Land
            
            
            4
            
            
            52,930,000
            
            
            11.55
            %
            
            21.39
            %
            
            58.54
            %33
            
            $
            247,473,000
            
            
            9.96
            %
            
            100.00
            %
            
            64.62
            %





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





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





**June
                30, 2006**
              **Balance**
            
            **March
                31, 2006**
              **Balance**Balance
                Per Loan Portfolio
            
            $
            196,050,000
            
            $
            247,473,000Less:Seller
                Financed Loans Included in Real Estate Held for Sale
            
            
            (22,887,000
            )
            
            (22,887,000
            )Proceeds
                of Principal on Seller Financed Loans Included in Deposit
                Liability
            
            
            472,000
            
            
            432,000Unrealized
                Gain on Seller Financed Loans
            
            
            (1,356,000
            )
            
            (1,356,000
            )Allowance
                for Loan Losses
            
            
            (10,356,000
            )
            
            (10,734,000
            )Balance
                per Balance Sheet
            
            $
            161,923,000
            
            $
            212,928,000




See
              review report of Independent Registered Public Accounting
              Firm.
 -
              14
              -
 *Table
            of Contents*





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





**Loan
                Type**
            
            **Number
                of Loans**
            
            **June
                30, 2006**
              **Balance***
            
            **Portfolio**
              **Percentage**
            
            **Number
                of Loans**
            
            **March
                31, 2006**
              **Balance***
            
            **Portfolio**
              **Percentage**First
                Deeds of Trust
            
            
            31
            
            $
            193,882,000
            
            
            98.89
            %
            
            31
            
            $
            247,028,000
            
            
            99.82
            %Second
                Deeds of Trust**
            
            
            2
            
            
            2,168,000
            
            
            1.11
            %
            
            2
            
            
            445,000
            
            
            0.18
            %33
            
            $
            196,050,000
            
            
            100.00
            %
            
            33
            
            $
            247,473,000
            
            
            100.00
            %





*
      Please
      see note (2) above


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





The
      following is a schedule of contractual maturities of investments in real estate
      loans as of June 30, 2006:





July
                - December 2006
            
            $
            110,110,000January
                - December 2007
            
            
            85,940,000$
            196,050,000





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





**June
                30, 2006**
              **Balance***
            
            **Portfolio
                Percentage**
            
            **March
                31, 2006**
              **Balance***
            
            **Portfolio
                Percentage**Arizona
            
            $
            31,403,000
            
            
            16.02
            %
            $
            44,868,000
            
            
            18.13
            %California
            
            
            39,226,000
            
            
            20.01
            %
            
            53,397,000
            
            
            21.58
            %Hawaii
            
            
            17,291,000
            
            
            8.82
            %
            
            35,291,000
            
            
            14.26
            %Nevada
            
            
            23,549,000
            
            
            12.01
            %
            
            43,058,000
            
            
            17.40
            %New
                York
            
            
            19,554,000
            
            
            9.97
            %
            
            19,571,000
            
            
            7.91
            %North
                Carolina
            
            
            --
            
            
            0.00
            %
            
            1,583,000
            
            
            0.64
            %Oklahoma
            
            
            7,682,000
            
            
            3.92
            %
            
            7,682,000
            
            
            3.10
            %Oregon
            
            
            5,193,000
            
            
            2.65
            %
            
            5,193,000
            
            
            2.10
            %Texas
            
            
            27,360,000
            
            
            13.96
            %
            
            24,219,000
            
            
            9.79
            %Washington
            
            
            21,495,000
            
            
            10.96
            %
            
            9,314,000
            
            
            3.76
            %Wisconsin
            
            
            3,297,000
            
            
            1.68
            %
            
            3,297,000
            
            
            1.33
            %Total
            
            $
            196,050,000
            
            
            100.00
            %
            $
            247,473,000
            
            
            100.00
            %





*
      Please
      see note (2) above





At
      June
      30, 2006, our RightStar loans were non-performing (more than 90 days past due
      on
      interest payments or past due on principal). These loans are currently carried
      on our books at a value of approximately $7.4 million, net of allowance for
      loan
      losses of approximately $9.9 million. These loans have been placed on
      non-accrual of interest status and are the subject of pending foreclosure
      proceedings. The following schedule summarizes the non-performing
      loans:





**Description
                of Collateral**
            
            **Balance**
              **June
                30, 2006**
            
            **Maturity
                Date**
            
            **Number
                of Months Non-Performing**
            
            **Percentage
                of Total Loan Balance**4
                cemeteries and 8 mortuaries in Hawaii Part I***
            
            $
            8,183,000
            
            
            03/31/2004
            
            
            27
            
            
            39%
                of Part I4
                cemeteries and 8 mortuaries in Hawaii Part II***
            
            
            9,107,000
            
            
            03/31/2004
            
            
            27
            
            
            65%
                of Part II$
            17,290,000




See
              review report of Independent Registered Public Accounting
              Firm.
 -
              15
              -
 *Table
            of Contents*





***
      Please refer to note (3) *Specific
      Reserve Allowance* below.





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





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





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





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





·
            Delay
                fees from the date of the bankruptcy confirmation until the effective
                date
                in the aggregate amount of $282,000 of which our portion was approximately
                $242,000.





·
            Payment
                of past due forbearance fees of approximately $555,000 of which our
                portion was approximately $476,000, to be recognized as unearned
                revenue
                and amortized over the next 6
                months.





Our
      Manager periodically reviews and makes a determination as to whether the
      allowance for loan losses is adequate to cover any potential losses. Additions
      to the allowance for loan losses are made by charges to the provision for loan
      losses. Recoveries of previously charged off amounts are credited to the
      allowance for loan losses or included as income when the asset is disposed.
      As
      of June 30, 2006, we have provided a specific reserve related to the two loans
      secured by four cemeteries and eight mortuaries in Hawaii, of which our portion
      of the specific reserve is $9,856,000. In addition, our Manager recognized
      a
      specific reserve for the impairment of a restructured loan in the amount of
      $500,000. Our Manager evaluated the loans and concluded that the remaining
      underlying collateral was sufficient to protect us against further losses of
      principal or interest. Our Manager will continue to evaluate these loans in
      order to determine if any other allowance for loan losses should be
      recorded.





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





The
      following is a roll-forward of the allowance for loan losses for the three
      months ended June 30, 2006:





**Description**
            
            **Balance**
              **March
                31, 2006**
            
            **Specific
                Reserve Allocation**
            
            **RightStar
                Legal Reserve**
            
            **Balance**
              **June
                30, 2006**Specific
                allowance (3)
            
            $
            10,734,000
            
            $
            --
            
            $
            (378,000
            )
            $
            10,356,000Total
            
            $
            10,734,000
            
            $
            --
            
            $
            (378,000
            )
            $
            10,356,000





**(3)**
            **Specific
                Reserve Allowance**





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








See
              review report of Independent Registered Public Accounting
              Firm.
 -
              16
              -
 *Table
            of Contents*








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





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





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





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





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





·
            Fourth
                to pay Senior Principal; and





·
            Fifth
                to pay Junior Principal.





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





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





Foreclosure
      proceedings are being delayed by the State of Hawaii which has refused to issue
      licenses to potential buyers or the lenders to: (1) operate the facility, (2)
      operate a pre-need program and (3) operate a perpetual care program. During
      the
      nine month transition period ended March 31, 2006, the State of Hawaii notified
      the lenders of a potential statutory trust fund deficiency, estimated to be
      between $20 million and $30 million and claimed that this balance has priority
      over all lenders. The lenders dispute the amount and priority of this deficit.
      On April 20, 2006, the lenders filed suit against the State of Hawaii listing
      26
      causes of action, including allegations that the State of Hawaii has illegally
      blocked the lender’s right to foreclose and take title to its collateral by
      inappropriately attaching conditions to the granting of licenses needed to
      operate the business, the pre-need trust funds and the perpetual care trust
      funds and that the State of Hawaii has attempted to force the lenders to accept
      liability for any statutory trust fund deficits while no such lender liability
      exists under the laws of the State of Hawaii. On April 24, 2006, the State
      of
      Hawaii responded by filing allegations against Vestin Mortgage, Inc. and us
      alleging that these Vestin entities improperly influenced the former RightStar
      trustees to transfer trust funds to us. 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. We cannot estimate when the
      foreclosure will ultimately be completed or when the lenders may obtain title
      to
      the underlying properties.








See
              review report of Independent Registered Public Accounting
              Firm.
 -
              17
              -
 *Table
            of Contents*





We
      have
      evaluated the estimated value of the underlying collateral, the potential trust
      fund deficit, and the expected cost and length of litigation. Based on this
      estimate we increased our total specific reserve allowance for loss by
      approximately $5.5 million during the nine month transition period ended March
      31, 2006 and specifically allocated our general allowance of approximately
      $2.5
      million to the RightStar loans. The increase in the reserve allowance includes
      approximately $1.0 million for estimated litigation fees and expenses which
      we
      anticipate incurring in enforcing our rights against the underlying collateral.
      We will continue to evaluate our position in the RightStar loan as the situation
      progresses. As of June 30, 2006 our specific reserve allowance on the RightStar
      loans totaled approximately $9.9 million.





*Impairment
      on Restructured Loan* —
As
      of
      June 30, 2006, included in the specific reserve allowance is an impairment
      of
      $500,000 on a restructured loan.





In
      addition, our Manager had granted extensions on seven loans pursuant to the
      terms of the original loan agreements, which permit extensions by mutual
      consent. Such extensions are generally provided on loans where the original
      term
      was 12 months or less and where a borrower requires additional time to complete
      a construction project or negotiate take-out financing. However, our Manager
      only grants extensions when a borrower is in full compliance with the terms
      of
      the loan, including, but not limited to the borrower’s obligation to make
      interest payments on the loan. The aggregate amount due from borrowers whose
      loans had been extended as of June 30, 2006 was approximately $47.9 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 is made as to whether the allowance for
      loan losses is adequate to cover any potential losses. Additions to the
      allowance for loan losses are made by charges to the provision for loan losses.
      As of June 30, 2006, our Manager had provided approximately $10.4 million as
      a
      specific allowance for loan losses. At June 30, 2006, our RightStar loans were
      non-performing (more than 90 days past due on interest payments or past due
      on
      principal). These loans are currently carried on our books at a value of
      approximately $7.4 million, net of allowance for loan losses of approximately
      $9.9 million. Our Manager evaluated the loans and concluded that the underlying
      collateral was sufficient to protect us against further losses of principal
      or
      interest. Our Manager will continue to evaluate these loans in order to
      determine if any other allowance for loan losses should be
      recorded.








See
              review report of Independent Registered Public Accounting
              Firm.
 -
              18
              -
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            of Contents*





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





At
      June
      30, 2006, we held five properties with a total carrying value of approximately
      $38.1 million, which were acquired through foreclosure and recorded as
      investments in real estate held for sale. The summary below includes our
      percentage ownership in each property. These investments in real estate held
      for
      sale are accounted for at the lower of cost or fair value less costs to sell
      with fair value based on appraisals and knowledge of local market conditions.
      It
      is not our intent to invest in or own real estate as a long-term investment.
      We
      seek to sell properties acquired through foreclosure as quickly as circumstances
      permit. The following is a roll-forward of investments in real estate held
      for
      sale for the three months ended June 30, 2006:





**Description**
            **Date
                Acquired**
            **Percentage
                of Ownership**
            
            **Balance
                at**
              **March
                31, 2006**
            
            **Acquisitions
                (Reductions)**
            
            **Seller
                Financed Sales**
            
            **Sales**
            
            **Gain
                on Sale of Real Estate**
            
            **Balance
                at**
              **June
                30, 2006**Land
                containing (82) residential lots in Henderson, NV**(2)**
            2/28/2003
            34%
            $
            1,262,000
            $
            (13,000)
            $
            --
            $
            --
            $
            --
            $
            1,249,000278
                unit apartment complex in Fort Worth, TX “Windrush”**(2)**
            8/2/2005
            100%
            
            8,059,000
            
            --
            
            --
            
            --
            
            --
            
            8,059,000One
                real estate parcel in Austin, TX**(1)**
            3/2/2004
            100%
            
            298,000
            
            --
            
            --
            
            (550,000)
            
            252,000
            
            --Partially
                completed golf course on 570 acres of land near Austin, TX
            8/3/2004
            100%
            
            5,333,000
            
            5,000
            
            --
            
            --
            
            --
            
            5,338,000150
                unit condominium conversion in Houston, TX aka “The Club at Stablechase”
            6/15/2005
            100%
            
            9,006,000
            
            (25,000)
            
            --
            
            --
            
            --
            
            8,981,000504
                unit apartment complex in Austin, TX “Lakeview”**(2)**
            6/7/2005
            100%
            
            14,468,000
            
            --
            
            --
            
            --
            
            --
            
            14,468,000$
            38,426,000
            $
            (33,000)
            $
            --
            $
            (550,000)
            $
            252,000
            $
            38,095,000





**(1)**
            **Sales
                of Real Estate Held for Sale for the Three Months Ended June 30,
                2006:**





During
      the three months ended June 30, 2006, we sold the parcel in Austin, Texas.
      Our
      net proceeds were approximately $550,000, resulting in a gain of approximately
      $252,000.





**(2)**
            **Sales
                Agreements for Real Estate Held for
                Sale:**





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





·
            During
                July 2006, we sold a 504 unit apartment complex in Austin, Texas,
                for
                approximately $17.5 million. This will result in a net gain after
                taxes of
                approximately $1.2 million.




See
              review report of Independent Registered Public Accounting
              Firm.
 -
              19
              -
 *Table
            of Contents*








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





·
            During
                July 2006, we and VRM I sold the land containing residential lots
                in
                Henderson, NV, for approximately $3.8 million, of which we received
                approximately $1.27 million which will result in a gain of
                $18,000.





No
      assurance can be given that the foregoing sales contracts will
      close.





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





At
      June
      30, 2006, we held an interest in three **** properties
      with a total carrying value of $22.9 million, which have been sold in
      transactions where we provided the financing to the purchaser. GAAP requires
      us
      to include these properties in real estate held for sale until the borrower
      has
      met and maintained a certain percentage of equity ownership, which ranges from
      10% to 25%. We may share ownership of such properties with VRM I, Fund III,
      the
      Manager, or other related and/or unrelated parties. The summary below includes
      our percentage ownership in each property. These investments in real estate
      held
      for sale are accounted for at the lower of cost or fair value less costs to
      sell
      with fair value based on appraisals and knowledge of local market conditions.
      The following is a roll-forward of seller financed real estate held for sale
      for
      the three months ended June 30, 2006:





**Description**
            **Date
                Acquired**
            **Percentage
                of Ownership**
            
            **Balance
                at**
              **March
                31, 2006**
            
            **Acquisitions**
            
            **Adjustments**
            
            **Principal
                Payments Received from Borrower**
            
            **Balance
                at**
              **June
                30, 2006**74
                unit (90) bed assisted living facility in San Bernardino,
                CA
            4/06/2004
            100%
            $
            7,350,000
            $
            --
            $
            --
            $
            --
            $
            7,350,000126
                unit (207) bed assisted living facility in Phoenix, AZ
            9/08/2004
            90%
            
            8,113,000
            
            --
            
            --
            
            --
            
            8,113,000Assisted
                living facility in Las Vegas, Nevada
            9/23/2004
            48%
            
            7,424,000
            
            --
            
            --
            
            --
            
            7,424,000$
            22,887,000
            $
            --
            $
            --
            $
            --
            $
            22,887,000





We
      received $1,938,000 in payments from borrowers on the loans associated with
      the
      sale of the properties held as of June 30, 2006. These payments are recorded
      as
      a deposit liability.





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





**NOTE
      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 Management
      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.








See
              review report of Independent Registered Public Accounting
              Firm.
 -
              20
              -
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            of Contents*





**Transactions
      with the Manager**





Our
      Manager is entitled to receive from us an annual management fee of up to 0.25%
      of our aggregate capital received by us and Fund II from the sale of shares
      or
      membership units, paid monthly in arrears. The amount of management fees paid
      to
      our Manager for the three months ended June 30, 2006 and 2005 approximated
      $274,000 and $273,000, respectively.





As
      of
      June 30, 2006, Vestin Mortgage had an investment in us of approximately $1.1
      million, which consists of certain costs paid on our behalf related to the
      registration and start-up costs. Vestin Mortgage has received 110,000 units
      from
      Fund II related to this investment, which were converted into VRM II shares
      when
      we merged with Fund II. For the three months ended June 30, 2005 we recorded
      pro-rata distributions owed to our Manager of approximately
      $45,000.





**Transactions
      with Other Related Parties**





During
      the three months ended June 30, 2006 and 2005, we incurred $42,000 and $24,000,
      respectively, for legal fees to the law firm of Levine, Garfinkel & Katz in
      which the Secretary of Vestin Group has an equity ownership interest in the
      law
      firm.





**NOTE
      H — NOTES RECEIVABLE**





During
      October 2004, we and VRM I sold the Castaways Hotel/Casino in Las Vegas, Nevada
      of which our portion of the net cash proceeds was approximately $5.8 million.
      We
      originally sold this property under a 100% seller financing arrangement. The
      borrowers then sold the property to an unrelated third party that resulted
      in a
      payoff of the note and also allowed us to record the sale and remove the asset
      from seller financed real estate held for sale. In addition, during September
      2004, we received a promissory note from the guarantors of the loan in the
      amount of $440,000 in exchange for a release of their personal guarantees.
      Since
      payments on the note did not begin for 18 months from the date of the note,
      we
      discounted the face value of the note to $328,000, which is based on a discount
      rate of 8% as of that date. For the three months ended June 30, 2006, we
      received approximately $23,000 in principal payments.





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





During
      June 2005, we took title to 133 units of a 150 unit condominium conversion
      know
      as “The Club at Stablechase” located in Houston, Texas. Our
      Manager has evaluated the carrying value of approximately $9.0 million and
      based
      on its estimated value and the underlying personal guarantee from the borrower,
      no valuation allowance was deemed necessary as of June 30, 2006. Additionally,
      the guarantor entered into an unsecured promissory note totaling $375,000
      bearing an annual interest rate of 8.0%, payable in monthly payments of
      principal of approximately $6,000 plus interest and maturing during June 2010. As
      of
      June 30, 2006, we received approximately $101,000 in principal and interest
      payments.








See
              review report of Independent Registered Public Accounting
              Firm.
 -
              21
              -
 *Table
            of Contents*





During
      November 2004, we and VRM I sold the 140 Unit/224 beds senior facility in Mesa,
      Arizona of which our consideration received totaled $6,043,000. We and VRM
      I
      received a promissory note from the original guarantor in the amount of $478,000
      of which our portion was $409,000. The promissory note is payable in interest
      only payments of 8% on the principal balance outstanding. Commencing June 25,
      2005 through May 25, 2006, monthly payments shall increase to $15,000 and be
      applied to principal and accrued interest. Beginning June 25, 2006 through
      May
      25, 2009 payments are to increase to $20,000 monthly. Due to uncertainty of
      collectibility, we have provided a valuation allowance for the entire balance
      of
      the promissory note. Income will be recognized when payments are received.
      As of
      June 30, 2006, we received approximately $137,000 in payments.





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





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





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





As
      of
      June 30, 2006 we had no funds being used under any Inter-creditor Agreements
      where we have potential obligations.





**NOTE
      J — NOTES PAYABLE**





During
      the three months ended June 30, 2006, we paid two notes payable totaling $17.2
      million in full.





In
      May
      2006, we financed a 12 month E & O insurance policy for Directors and
      Officers liability, with an annual interest rate of 6.92%. The agreement
      required $60,000 down and nine monthly payments of approximately $27,000
      beginning on May 27, 2006. At June 30, 2006 the outstanding balance of the
      note
      was approximately $186,000.





**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 consolidated financial statements.





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            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 us for that purpose.
      The state court complaint further alleges that Desert Land is entitled to avoid
      such transfers and that pursuant to NRS 112.20, Desert Land is entitled to
      an
      injunction to enjoin defendants from further disposition of assets.
      Additionally, Del Mar Mortgage, Inc. has indemnified Vestin Group and Vestin
      Mortgage for any losses and expenses in connection with the Action, and Mr.
      Shustek has guaranteed the indemnification.





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. The Manager believes it has meritorious
      defenses to each of these actions and intends to defend them vigorously. Other
      than the pending state court litigation involving Desert Land as further
      described above, 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.








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            of Contents*





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





The
      United States Securities and Exchange Commission, (“SEC” or the “Commission”),
      conducted an investigation into certain matters related to us, Vestin Group,
      Vestin Capital, VRM I and Fund III (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 Fund II and Fund III 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 II and Fund III will be named as parties in the enforcement action. We
      do
      not know if the Commission will approve the proposed settlement.





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





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





**NOTE
      N — DIVIDEND REQUIREMENT**





To
      maintain our status as a REIT, we are required to make dividend distributions,
      other than capital gain dividends, to our stockholders each year in an amount
      at
      least equal to (1) the sum of (a) 90% of our taxable income, computed without
      regards to the dividends paid deduction and our net capital gain, and (b) 90%
      of
      the net income, after tax, from foreclosure property, minus (2) the sum of
      certain specified items of non-cash income over 5% of our REIT taxable income.
      All dividend distributions will be made at the discretion of our Board of
      Directors and will depend on our earnings, both tax and GAAP, financial
      condition, maintenance of REIT status and such other factors as the Board of
      Directors deems relevant.





**NOTE
      O — SUBSEQUENT EVENTS**





During
      July 2006, four of our loans in our investment in real estate loans totaling
      approximately $9.4 million were paid in full. In addition, $24.5 million was
      invested in new investments in real estate loans.





The
      Board
      of Directors declared a first quarter dividend of $0.16 per share on July 27,
      2006 to be paid on August 21, 2006, to the stockholders of record as of August
      7, 2006.





During
      July 2006 we sold a 504 unit apartment complex in Austin, Texas, for
      approximately $17.5 million. This resulted in a net gain after taxes of
      approximately $1.2 million.





During
      July 2006, we and VRM I sold the land containing residential lots in Henderson,
      NV, for approximately $3.8 million, of which we received approximately $1.27
      million resulting in a gain of $18,000.








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            of Contents*





REPORT
      OF
      INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM








To
      the
      Board of Directors and Stockholders of Vestin Realty Mortgage II,
      Inc.:





We
      have
      reviewed the accompanying consolidated balance sheet of Vestin Realty Mortgage
      II, Inc. as of June 30, 2006, and the related consolidated statements of
      operations, stockholders’ equity, and cash flows for the quarters ended June 30,
      2006 and 2005. All information included in these consolidated financial
      statements is the representation of the management of Vestin Realty Mortgage
      II,
      Inc.





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 Realty Mortgage II, Inc. as of March 31, 2006 and the related
      consolidated statements of operations, stockholders’ equity and cash flows for
      the nine month transition period ended March 31, 2006 (not presented herein);
      and in our report dated June 6, 2006, we expressed an unqualified opinion on
      those consolidated financial statements. In our opinion, the information set
      forth in the accompanying consolidated balance sheet as of March 31, 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


July
      24,
      2006





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**ITEM
      2.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND** **RESULTS
      OF OPERATIONS**





The
      following is a financial review and analysis of our financial condition and
      results of operations for the three 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
      nine month transition period ended March 31, 2006.





**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 Item 1A of our Transition Report on Form 10-K for
      the
      nine month transition period ended March 31, 2006 and in our other securities
      filings with the Securities and Exchange Commission. Our future financial
      condition and results of operations, as well as any forward-looking statements,
      are subject to change and involve inherent risks and uncertainties. The
      forward-looking statements contained in this report are made only as of the
      date
      hereof. We undertake no obligation to update or revise information contained
      herein to reflect events or circumstances after the date hereof or to reflect
      the occurrence of unanticipated events.





**Overview**





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





Our
      operating results are affected primarily by: (i) the amount of capital we have
      to invest in real estate loans, (ii) the level of real estate lending activity
      in the markets we service, (iii) our ability to identify and work with suitable
      borrowers, (iv) the interest rates we are able to charge on our loans and (v)
      the level of non-performing assets, foreclosures and related loan losses which
      we may experience. Our capital, subject to a 3% reserve, will constitute the
      bulk of the funds we have available for investment in real estate loans. We
      do
      not have any arrangements in place to materially increase the funds we will
      have
      available to invest from any other sources. See discussion under — “Capital and
      Liquidity.”








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Our
      operating results during the past several years have been adversely affected
      by
      allowances for non-performing loans. As of June 30, 2006, we have provided
      a
      specific allowance of approximately $9.9 million on loans secured by 4
      cemeteries and 8 mortuaries in Hawaii and $500,000 for an impairment on a
      restructured loan. For additional information see “Specific Loan Allowance” in
      Note D - *Investment
      Real Estate Loans* of the
      Notes to Financial Statements included in Part I, Item 1 *Financial
      Statements* of this
      Report Form 10-Q. Non-performing
      assets ,
      net of
      allowance for loan losses, totaled approximately $45.5 million or 15.9% of
      our
      total assets as of June 30, 2006 as compared to $65.1 million or 21.0% of our
      total assets as of March 31, 2006. At June 30, 2006, non-performing assets
      consist of approximately $38.1 million of real estate held for sale not sold
      through seller financing and approximately $7.4 million of non-performing loans,
      net of allowance for loan losses. We have entered into definitive agreements
      to
      sell three of the five properties included in real estate held for sale to
      third
      parties at or above book value for cash. No assurance can be given that the
      sales contracts for the properties will actually close. During July 2006 we
      sold
      a 504 unit apartment complex in Austin, Texas, for approximately $17.5 million.
      This resulted in a net gain after taxes of approximately $1.2 million. During
      July 2006, we and VRM I sold the land containing residential lots in Henderson,
      NV, for approximately $3.8 million, of which we received approximately $1.27
      million resulting in a gain of $18,000. The level of non-performing assets
      may
      reflect the continuing weakness in certain sectors of the economy and the risk
      inherent in our business strategy which entails more lenient underwriting
      standards and expedited loan approval procedures. If the economy weakens and
      our
      borrowers who develop and sell commercial real estate projects are unable to
      complete their projects or obtain takeout financing or are otherwise adversely
      impacted, we may experience an increase in loan defaults which may reduce the
      amount of funds we have for dividend distribution to our stockholders. Such
      conditions may also require us to restructure loans. The weighted average term
      of our outstanding loans as of June 30, 2006 was 17 months, compared to 16
      months at March 31, 2006.





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 71.54% 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, Hawaii, Nevada, New York,
      Oklahoma, Oregon, Texas, Washington and Wisconsin.








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**Summarization
      of Financial Results**





**For
                the Three Months**
              **Ended
                June 30,****2006**
            
            **2005**Total
                Revenues
            
            $
            5,306,000
            
            $
            5,757,000Total
                Operating Expenses
            
            
            834,000
            
            
            4,354,000Total
                Income (Loss) from Real Estate Held for Sale
            
            $
            266,000
            
            $
            (1,519,000
            )**NET
                INCOME (LOSS)**
            
            $
            4,738,000
            
            $
            (116,000
            )Net
                Income Allocated to Members Per Weighted Average Members’
                Units
            
            
            
            
            $
            (0.00
            )Basic
                and Diluted Earnings Per Common Share
            
            $
            0.16Weighted
                Average Common Shares / Members’ Units
            
            
            29,838,442
            
            
            32,779,034Annualized
                Rate of Return to Members’ (a)
            
            
            --
            
            
            -0.14
            %Dividends
                / Cash Distributions
            
            $
            --
            
            $
            4,595,000Dividends
                / Cash Distributions Per Weighted Average Common Share / Members’
                Units
            
            $
            --
            
            $
            0.14Weighted
                Average Term of Outstanding Loans
            
            
            17
                months
            
            
            18
                months





(a)
            The
                annualized rate of return to members is calculated based upon the
                net GAAP
                income allocated to members per weighted average units as of June
                30, 2005
                divided by the number of days during the period (91 days for the
                three
                months ended June 30, 2005) and multiplied by three hundred sixty
                five
                (365) days, then divided by ten (the cost per
                unit).





*Total
      Revenues* :
      For the
      three months ended June 30, 2006 total revenues decreased by approximately
      $0.5
      million or 9% compared to the same period in 2005 due in significant part to
      the
      following factors:





·
            Our
                interest income decreased by approximately $1 million as a result
                of a
                decrease in investments in real estate loans. Investment in real
                estate
                loans, net of allowance, declined by $55.6 million form $217.6 million
                at
                June 30, 2005 to $161.9 million at June 30, 2006. the decline in
                investments in real estate loans is attributable to the reduction
                in
                capital, resulting from membership unit redemptions, we had available
                for
                investments. See further discussion in Note D -*Investment
                Real Estate Loans*of
                the Notes to Financial Statements included in Part I of this Report
                on
                Form 10-Q. Fund II’s capital was reduced by redemptions of membership
                units of approximately $30.5 million paid to its’ members during the nine
                months ended March 31, 2006.





This
      decline was partially offset by the following items:





·
            During
                the three months ended June 30, 2006, we recorded a gain of approximately
                $252,000 on the sale of a real estate parcel in Austin, Texas. There
                was
                no gain on sale of real estate held for sale during the same period
                in
                2005.








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·
            Included
                in other income is bank interest income earned on cash accounts held
                at
                banking institutions. Bank interest income increased by approximately
                $547,000 for the three months ended June 30, 2006 compared to the
                same
                period in 2005. This increase is due to the increase of approximately
                $48.5 million in cash and cash equivalents as of June 30, 2006 compared
                to
                June 30, 2005. The increase in cash is attributable to the proceeds
                received from loan payoffs of approximately $114.8 million during
                the
                three months ended June 30, 2006.





*Total
      Expenses* :
      For the
      three months ended June 30, 2006, total expenses were approximately $834,000
      compared to approximately $4.4 million for the three months ended June 30,
      2005,
      a decrease of approximately $3.5 million or 81%. Expenses were primarily
      affected by the following factors:





·
            During
                the three months ended June 30, 2005, expenses were significantly
                impacted
                by the recognition of additions for loan loss of approximately $2.3
                million related to the loans secured by 4 cemeteries and 8 mortuaries
                in
                Hawaii and $500,000 for an impairment on a restructured loan. See
                “Specific Loan Allowance” in Note D -*Investment Real Estate Loans*of
                the Notes to Financial Statements included in Part I of this Report
                on
                Form 10-Q. There were no additions to the provision for loan loss
                during
                the three months ended June 30,
                2006.





·
            Interest
                expense decreased by approximately $279,000 primarily due to the
                payoffs
                of secured borrowing of approximately $25.7 million from June 30,
                2005 to
                June 30, 2006.





·
            Professional
                fees decreased approximately $575,000 for the three months ended
                June 30,
                2006, as compared to the same period in 2005, primarily due to expenses
                incurred on a restructured loan during the three months ended June
                30,
                2005.





*Total
      Income(Loss) from Real Estate Held for Sale* :
      For the
      three months ended June 30, 2006, total income from real estate held for sale
      increased by approximately $1.7 million or 118% compared to the same period
      in
      2005 due in significant part to the following factors:





·
            During
                the three months ended June 30, 2006, we recorded approximately $1.5
                million in rental revenue related to three apartment complexes which
                are
                classified as real estate held for sale. During the same period in
                2005,
                we recognized approximately $203,000 in rental revenue which represented
                one month of rental revenue for one apartment complex located in
                Austin,
                Texas. We will continue to recognize rental revenue from these properties
                until they are sold.





·
            During
                the three months ended June 30, 2005 we recorded a charge of approximately
                $1.3 million in connection with two write downs on real estate for
                sale
                related to a 126 unit assisted living facility in Phoenix, Arizona
                and
                residential lots in Henderson, Nevada. There were no write downs
                on real
                estate held for sale during the three months ended June 30,
                2006.





These
      increases were offset by the increase in expenses related to real estate held
      for sale during the three months ended June 30, 2006 compared to the same period
      in 2005. The increase is primarily due to expenses of approximately $1.5 million
      related to the three real estate owned apartment complexes incurred during
      the
      three months ended June 30, 2006. We will continue to incur rental expenses
      until these properties are sold.





*Net
      Income (Loss)* :
      Overall, net income (loss) for the three months ended June 30, 2006 and 2005
      totaled approximately $4.7 million and $(116,000), respectively.





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*Dividends* .
      To
      maintain our status as a REIT, we are required to make distributions, other
      than
      capital gain dividends, to our stockholders each year in an amount at least
      equal to (1) the sum of (a) 90% of our taxable income, computed without regards
      to the dividends paid deduction and our net capital gain, and (b) 90% of the
      net
      income, after tax, from foreclosure property, minus (2) the sum of certain
      specified items of noncash income over 5% of our REIT taxable income. The Board
      of Directors declared a first quarter dividend of $0.16 per share on July 27,
      2006 to be paid on August 21, 2006, to the stockholders of record as of August
      7, 2006.





**CAPITAL
      AND LIQUIDITY**





Liquidity
      is a measure of a company’s ability to meet potential cash requirements,
      including ongoing commitments to fund lending activities and general operating
      purposes. Subject to a 3% reserve, we generally use all of our available funds
      to invest in real estate loans. Distributable cash flow generated from such
      loans is paid out to our stockholders, in the form of a dividend. We do not
      anticipate the need for hiring any employees, acquiring fixed assets such as
      office equipment or furniture, or incurring material office expenses during
      the
      next twelve months because Vestin Mortgage will manage our affairs. We may
      pay
      Vestin Mortgage an annual management fee of up to 0.25% of our aggregate capital
      received by us and Fund II from the sale of shares or membership
      units.





During
      the three months ended June 30, 2006, cash flows provided by operating
      activities approximated $4.5 million. Investing activities consisted of cash
      provided by loan payoffs of approximately $114.8 million. Cash used for new
      investments and purchases of real estate loans totaled approximately $62.3
      million, and proceeds from the sale of real estate held for sale totaled
      approximately $0.6 million. In addition, investing activities consisted of
      the
      purchase of $14.0 million in certificates of deposit. Financing activities
      consisted of payments on notes payable in the amount of approximately $17.2
      million.





At
      June
      30, 2006, we had approximately $45.3 million in cash, $14.7 million in
      certificates of deposit, and approximately $286.4 million in total assets.
      We
      intend to meet short-term working capital needs through a combination of
      proceeds from loan payoffs, loan sales and/or borrowings. We believe we have
      sufficient working capital to meet our operating needs in the near
      term.





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





We
      have
      no current plans to sell any new shares except through our dividend reinvestment
      program. The level of dividend reinvestment in the future will depend upon
      our
      performance, as well as the number of our stockholders who prefer to reinvest
      rather than receive current dividends.





We
      rely
      primarily upon repayment of outstanding loans to provide capital for investment
      in new loans. Any significant level of defaults on outstanding loans could
      reduce the funds we have available for investment in new loans. Resulting
      foreclosure proceedings may not generate full repayment of our loans and may
      result in significant delays in the return of invested funds. This would
      diminish our capital resources and would impair our ability to invest in new
      loans. Non-performing assets include loans in non-accrual status, net of
      allowance for loan losses, and real estate held for sale totaling $7.4 million
      and $38.1 million, respectively, as of June 30, 2006 compared to $26.6 million
      and $38.4 million, respectively, as of March 31, 2006. It is possible that
      no
      earnings will be recognized from these assets until they are disposed of, or
      that no earnings will be recognized at all, and the time it will take to dispose
      of these assets cannot be predicted. Our Manager believes that these
      non-performing assets are a result of factors unique to specific borrowers
      and
      properties. Because of the estimated value of the underlying properties, we
      do
      not currently believe that any losses beyond those already recognized will
      be
      incurred from these assets upon final disposition. However, it is possible
      that
      we will not be able to realize the full estimated carrying values upon
      disposition.





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





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





As
      of
      June 30, 2006, we had no funds being used under Inter-creditor Agreements where
      we have potential obligations as defined above compared to $11.6 million at
      March 31, 2006.





We
      maintain working capital reserves of approximately 3% in cash and cash
      equivalents, certificates of deposits and short-term investments or liquid
      marketable securities. This reserve is available to pay expenses in excess
      of
      revenues, satisfy obligations of underlying properties, expend money to satisfy
      our unforeseen obligations and for other permitted uses of working
      capital.





**INVESTMENTS
      IN REAL ESTATE LOANS SECURED BY REAL ESTATE PORTFOLIO**





We
      offer
      five real estate loan products consisting of commercial, construction,
      acquisition and development, land, and residential loans. The effective interest
      rates on all product categories range from 5% to 14%. Revenue by product will
      fluctuate based upon relative balances during the period. We had investments
      in
      33 real estate loans as of June 30, 2006, with a balance of $196.1 million
      as
      compared to investments in 33 real estate loans as of March 31, 2006, with
      a
      balance of $247.5 million.





At
      June
      30, 2006, our RightStar loans were non-performing (more than 90 days past due
      on
      interest payments or past due on principal). These loans are currently carried
      on our books at a value of approximately $7.4 million, net of allowance for
      loan
      losses of approximately $9.9 million. These loans have been placed on
      non-accrual of interest status and are the subject of pending foreclosure
      proceedings.





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





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





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





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








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·
            Delay
                fees from the date of the bankruptcy confirmation until the effective
                date
                in the aggregate amount of $282,000 of which our portion was approximately
                $242,000.





·
            Payment
                of past due forbearance fees of approximately $555,000 of which our
                portion was approximately $476,000, to be recognized as unearned
                revenue
                and amortized over the next 6
                months.





Our
      Manager periodically reviews and makes a determination as to whether the
      allowance for loan losses is adequate to cover any potential losses. Additions
      to the allowance for loan losses are made by charges to the provision for loan
      losses. Recoveries of previously charged off amounts are credited to the
      allowance for loan losses or included as income when the asset is disposed.
      As
      of June 30, 2006, we have provided a specific reserve related to the four
      cemeteries and eight mortuaries in Hawaii, of which our portion of the specific
      reserve is approximately $9.9 million. In addition, our manager recognized
      a
      specific reserve for the impairment of a restructured loan in the amount of
      $500,000. Our Manager evaluated the loans and concluded that the remaining
      underlying collateral was sufficient to protect us against further losses of
      principal or interest. Our Manager will continue to evaluate these loans in
      order to determine if any other allowance for loan losses should be recorded.
      For additional information on our investments in real estate loans, refer to
      Note D - *Investments
      In Real Estate Loans* of the
      Notes to the Financial Statements included in Part I, Item 1 *Financial Statements* of this
      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 loan
                amount.





Based
      upon this evaluation, a determination is made as to whether the allowance for
      loan losses is adequate to cover any potential losses. Additions to the
      allowance for loan losses are made by charges to the provision for loan losses.
      Recoveries of previously charged off amounts are credited to the allowance
      for
      loan losses. For additional information regarding the roll-forward of the
      allowance for loan losses for the three months ended June 30, 2006, 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.








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**Investments
      in Real Estate Held for Sale**





At
      June
      30, 2006, we held five properties with a total carrying value of approximately
      $38.1 million, which were acquired through foreclosure and recorded as
      investments in real estate held for sale. These investments in real estate
      held
      for sale are accounted for at the lower of cost or fair value less costs to
      sell
      with fair value based on appraisals and knowledge of local market conditions.
      It
      is not our intent to invest in or own real estate as a long-term investment.
      We
      seek to sell properties acquired through foreclosure as quickly as circumstances
      permit. We have entered into definitive agreements to sell three of the five
      properties included in real estate held for sale to third parties at or above
      book value for cash, as described below:





·
            During
                July 2006, we sold a 504 unit apartment complex in Austin, Texas,
                for
                approximately $17.5 million. This resulted in a net gain after taxes
                of
                approximately $1.2 million.





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





·
            During
                July 2006, we and VRM I sold the land containing residential lots
                in
                Henderson, Nevada, for approximately $3.8 million, of which we received
                approximately $1.27 million resulting in a gain of
                $18,000.





No
      assurance can be given that the sales contracts for the properties will actually
      close. For additional information on our investments in real estate held for
      sale, refer to Note E - *Real
      Estate Held for Sale* of the
      Notes to the Financial Statements included in Part I, Item *Financial
      Statements* of
      this
      Report Form 10-Q.





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





At
      June
      30, 2006, we held an interest in three **** properties
      with a total carrying value of approximately $22.9 million, which have been
      sold
      in transactions where we provided the financing to the purchaser. GAAP requires
      us to include these properties in real estate held for sale until the borrower
      has met and maintained a certain percentage of equity ownership, which ranges
      from 10% to 25%. We may share ownership of such properties with VRM I, Fund
      III,
      the Manager, or other related and/or unrelated parties. These investments in
      real estate held for sale are accounted for at the lower of cost or fair value
      less costs to sell with fair value based on appraisals and knowledge of local
      market conditions. For additional information on our investments in real estate
      loans, refer to Note G - *Real
      Estate Held for Sale-Seller Financed* of the
      Notes to the Financial Statements included in Part I, Item 1 *Financial Statements* of
      this
      Report Form 10-Q.





**OFF-BALANCE
      SHEET ARRANGEMENTS**





We
      do not
      have any interests in off-balance sheet special purpose entities nor do we
      have
      any interests in non-exchange traded commodity contracts.





**CONTRACTUAL
      OBLIGATIONS**





The
      following summarizes our contractual obligation at June 30, 2006:





**Contractual
                Obligation**
            
            **Total**
            
            **Less
                Than 1 Year**
            
            **1-3
                Years**
            
            **3-5
                Years**
            
            **More
                Than**
              **5
                Years**Note
                Payable
            
            $
            186,000
            
            $
            186,000
            
            $
            --
            
            $
            --
            
            $
            --Total
            
            $
            186,000
            
            $
            186,000
            
            $
            --
            
            $
            --
            
            $
            --








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            33
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            of Contents*





**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
            
            $
            2,395,000Weighted
                average interest rate assumption increased by 5% or 500 basis
                points
            
            $
            11,976,000Weighted
                average interest rate assumption decreased by 1% or 100 basis
                points
            
            $
            (2,395,000
            )Weighted
                average interest rate assumption decreased by 5% or 500 basis
                points
            
            $
            (11,976,000
            )





The
      purpose of this analysis is to provide an indication of the impact that the
      weighted average interest rate fluctuations would have on our financial results.
      It is not intended to imply our expectation of future revenues or to estimate
      earnings. We believe that the assumptions used above are appropriate to
      illustrate the possible material impact on the financial
      statements.





**Allowance
      for Loan Losses**





We
      maintain an allowance for loan losses on our investments in real estate loans
      for estimated credit impairment. The Manager’s estimate of losses is based on a
      number of factors including the types and dollar amounts of loans in the
      portfolio, adverse situations that may affect the borrower’s ability to repay,
      prevailing economic conditions and the underlying collateral securing the loan.
      Additions to the allowance are provided through a charge to earnings and are
      based on an assessment of certain factors, which may indicate estimated losses
      on the loans. Actual losses on loans are recorded as a charge-off or a reduction
      to the allowance for loan losses. Subsequent recoveries of amounts previously
      charged off are added back to the allowance or included as income.





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 losses as a percentage of the loan portfolio:





**Changed
                Assumption**
            
            **Increase
                (Decrease) in Allowance for Loan Losses**Allowance
                for loan losses assumption increased by 1.0% of loan
                portfolio
            
            $
            1,960,000Allowance
                for loan losses assumption increased by 5.0% of loan
                portfolio
            
            $
            9,802,000Allowance
                for loan losses assumption decreased by 1.0% of loan
                portfolio
            
            $
            (1,960,000
            )Allowance
                for loan losses assumption decreased by 5.0% of loan
                portfolio
            
            $
            (9,802,000
            )





Estimating
      allowances for loan losses requires significant judgment about the underlying
      collateral, including liquidation value, condition of the collateral, competency
      and cooperation of the related borrower and specific legal issues that affect
      loan collections or taking possession of the property. As a non-conventional
      lender willing to invest in loans to borrowers who may not meet the credit
      standards of conventional lenders, the default rate on our loans could be higher
      than those generally experienced in the mortgage lending industry. We generally
      approve loans more quickly than other real estate lenders and, due to our
      expedited underwriting process, there is a risk that the credit inquiry we
      perform will not reveal the material facts pertaining to a borrower and the
      security.








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            34
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            of Contents*





We
      may
      discover additional facts and circumstances as we continue our efforts in the
      collection and foreclosure processes. This additional information often causes
      management to reassess its estimates. In recent years, we have revised estimates
      of our allowance for loan losses. Circumstances that have caused significant
      changes in our estimated allowance include:





·
            Declines
                in real estate market conditions that can cause a decrease in expected
                market value;





·
            Discovery
                of undisclosed liens for community improvement bonds, easements and
                delinquent property taxes;





·
            Lack
                of progress on real estate developments after we advance funds. We
                customarily utilize disbursement agents to monitor the progress of
                real
                estate developments and approve loan advances. After further inspection
                of
                the related property, progress on construction occasionally does
                not
                substantiate an increase in value to support the related loan
                advances;





·
            Unanticipated
                legal or business issues that may arise subsequent to loan origination
                or
                upon the sale of foreclosed upon property;
                and





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





**Real
      Estate Held for Sale**





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





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





·
            Management
                commits to a plan to sell the
                properties;





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





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





·
            The
                sale of the property is probable;





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





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





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





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








-
            35
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            of Contents*





Because
      we occasionally foreclose on loans with raw land or developments in progress,
      available financing for such properties is often limited and we frequently
      provide financing up to 100% of the selling price on these properties. In
      addition, we may make additional loans to the buyer to continue development
      of a
      property. Although sale agreements are consummated at closing, they lack
      adequate initial investment by the buyer to qualify as a sales transaction
      as
      defined in FAS 66. These sale agreements are not recorded as a sale until the
      requirements of FAS 66 are met.





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





**ITEM
      3.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**





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





Most
      of
      our assets consist of investments in real estate loans, including those that
      are
      financed under Inter-creditor Agreements. At June 30, 2006, our aggregate
      investment in real estate loans was approximately $161.9 million, net of
      allowance, with a weighted average effective interest rate of 9.74%. 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 17 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.





Market
      fluctuations in interest rates generally do not affect the carrying value of
      our
      investment in real estate loans. However, significant and sustained changes
      in
      interest rates could affect our operating results. If interest rates decline
      significantly, some of the borrowers could prepay their loans with the proceeds
      of a refinancing at lower interest rates. This would reduce our earnings and
      funds available for dividend distribution to stockholders. On the other hand,
      a
      significant increase in interest rates could result in a slowdown in real estate
      development activity 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 thereafter and separately aggregates
      the information for all maturities arising after 2010. 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
            
            $
            110,110,000
            
            $
            85,940,000
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            196,050,000Weighted
                Average Interest Rates
            
            
            9.63
            %
            
            9.88
            %
            
            --
            %
            
            --
            %
            
            --
            %
            
            9.74
            %








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            of Contents*





At
      June
      30, 2006, we also had approximately $60 million invested in cash, cash
      equivalents, and certificates of deposit. Approximately 3% of our assets will
      be
      held in such accounts as a cash reserve; additional deposits in such accounts
      will be made as funds are received from investors and repayment of loans pending
      the deployment of such funds in new real estate loans. We believe that these
      financial assets do not give rise to significant interest rate risk due to
      their
      short-term nature.





**ITEM
      4.**  **CONTROLS
      AND 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.





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.








-
            37
            -
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            of Contents*





**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.





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 - OTHER INFORMATION**





**ITEM
      1.**  **LEGAL
      PROCEEDINGS**





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.**  **RISK
      FACTORS**





There
      have been no material changes to the risk factors disclosed in Item 1A - *Risk
      Factors* of the
      Company’s Transition Report on Form 10-K for the nine month transition period
      ended March 31, 2006 (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-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 Part I,
      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.**  **UNREGISTERED
      SALES OF EQUITY AND USE OF PROCEEDS**





None.








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**ITEM
      3.**  **DEFAULTS
      UPON SENIOR SECURITIES**





None.





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





None.





**ITEM
      5.**  **OTHER
      INFORMATION**





None.





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**ITEM
      6.**  **EXHIBITS**





**EXHIBIT
      INDEX**





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





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











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**SIGNATURES**





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





**Vestin
                Realty Mortgage II, Inc.**By:
            */s/
                Michael V. Shustek*Michael
                V. ShustekPresident
                and Chief Executive OfficerDate:
            July
                28, 2006





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





**Signature**
            
            **Capacity**
            
            **Date***/s/
                Michael V. Shustek*
            
            President
                and Chief Executive Officer and Director
            
            July
                28, 2006Michael
                V. Shustek
            
            (Principal
                Executive Officer)*/s/
                John W. Alderfer*
            
            Chief
                Financial Officer and Director
            
            July
                28, 2006John
                W. Alderfer
            
            (Principal
                Financial and Accounting Officer)*/s/
                Robert J. Aalberts*
            
            Director
            
            July
                28, 2006Robert
                J. Aalberts*/s/
                Fredrick J.**Zaffarese**Leavitt*
            
            Director
            
            July
                28, 2006Fredrick
                J.ZaffareseLeavitt*/s/
                Roland M. Sansone*
            
            Director
            
            July
                28, 2006Roland
                M. Sansone











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