**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** **SEPTEMBER
        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
        October 25, 2006, there were 29,859,597 shares of the Company’s Common Stock
        outstanding.
 
 **TABLE
        OFCONTENTS**
 
 **PAGE**Part
                  I
              FINANCIAL
                  INFORMATIONItem
                  1.
              Consolidated
                  Financial StatementsConsolidated
                  Balance Sheets as of September 30, 2006
                  (unaudited) and March 31, 2006
              2Consolidated
                  Statements of Operations (unaudited) for the Three
                  and Six Months Ended September 30, 2006 and 2005
              3Consolidated
                  Statement of Stockholders’ Equity and Other
                  Comprehensive Income (unaudited) for the Six Months Ended September
                  30,
                  2006
              4Consolidated
                  Statements of Cash Flows (unaudited) for the Six
                  Months Ended September 30, 2006 and 2005
              5Notes
                  to Consolidated Financial Statements
                  (unaudited)
              7Report
                  of Independent Registered Public Accounting
                  Firm
              27Item
                  2.
              Management’s
                  Discussion and Analysis of Financial
                  Condition and Results of Operations
              28Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              39Item
                  4.
              Control
                  and Procedures
              40Part
                  II
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              42Item
                  1A.
              Risk
                  Factors
              43Item
                  2.
              Unregistered
                  Sales of Equity - Securities and Use of
                  Proceeds
              43Item
                  3.
              Defaults
                  Upon Senior
                  Securities
              43Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              43Item
                  5.
              Other
                  Information
              43Item
                  6.
              Exhibits
              44SIGNATURES
              45Exhibit
                  31.1Exhibit
                  31.2Exhibit
                  32Exhibit
                  10.8
  -
            1
            -
 *Table
            of Contents*
 **PART
        I - FINANCIALINFORMATION**
 
 **ITEM
        1.**  **CONSOLIDATED
        FINANCIALSTATEMENTS**
 
 **VESTIN
                  REALTY MORTGAGEII, INC.****(SUCCESSOR
                  TO VESTIN FUND II, LLC)****CONSOLIDATED
                  BALANCE SHEETS****ASSETS****September
                  30, 2006**
              
              **March
                  31, 2006****(UNAUDITED)**AssetsCash
              
              $
              7,914,000
              
              $
              17,820,000Certificates
                    of deposit
              
              
              4,325,000
              
              
              700,000Investment
                  in marketable securities - related party
              
              
              1,478,000
              
              
              --Interest
                  and other receivables, net of allowance of $160,000 at September
                  30, 2006
                  and $183,000 at March 31, 2006
              
              
              2,641,000
              
              
              3,434,000Note
                  receivable, net of allowance of $1,973,000 at September 30, 2006
                  and
                  $2,096,000 at March 31, 2006
              
              
              759,000
              
              
              810,000Real
                  estate held for sale
              
              
              14,294,000
              
              
              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 $10,123,000
                  at
                  September 30, 2006 and $10,734,000 at March 31, 2006
              
              
              233,306,000
              
              
              212,928,000Assets
                  under secured borrowings
              
              
              --
              
              
              11,611,000Other
                  assets
              
              
              185,000
              
              
              63,000Total
                  assets
              
              $
              287,789,000
              
              $
              308,679,000**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**LiabilitiesAccounts
                  payable and accrued liabilities
              
              $
              787,000
              
              $
              631,000Due
                  to Manager
              
              
              --
              
              
              250,000Due
                  to Vestin Originations
              
              
              13,000
              
              
              --Secured
                  borrowings
              
              
              --
              
              
              11,611,000Note
                  payable
              
              
              107,000
              
              
              17,200,000Deposit
                  liability
              
              
              3,821,000
              
              
              1,365,000Unearned
                  revenue
              
              
              907,000
              
              
              --Dividend
                  liability
              
              
              1,792,000
              
              
              --Income
                  tax liability
              
              
              452,000
              
              
              --Total
                  liabilities
              
              
              7,879,000
              
              
              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; 29,859,597
                  shares
                  issued and outstanding at September 30, 2006 and 29,838,442 shares
                  issued
                  and outstanding at March 31, 2006
              
              
              3,000
              
              
              3,000Additional
                  paid in capital
              
              
              277,741,000
              
              
              277,619,000Retained
                  earnings
              
              
              2,329,000
              
              
              --Accumulated
                  other comprehensive loss
              
              
              (163,000
              )
              
              --Total
                  stockholders' equity
              
              
              279,910,000
              
              
              277,622,000Total
                  liabilities and stockholders' equity
              
              $
              287,789,000
              
              $
              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
                  SEPTEMBER 30,**
              
              **FOR
                  THE SIX MONTHS**
                **ENDED
                  SEPTEMBER 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****Revenues**Interest
                  income from investment in real estate loans
              
              $
              5,096,000
              
              $
              6,508,000
              
              $
              9,737,000
              
              $
              12,149,000Gain
                  on sale marketable securities
              
              
              --
              
              
              10,000
              
              
              --
              
              
              10,000Other
                  income
              
              
              550,000
              
              
              453,000
              
              
              1,215,000
              
              
              569,000Total
                  revenues
              
              
              5,646,000
              
              
              6,971,000
              
              
              10,952,000
              
              
              12,728,000**Operating
                  expenses**Management
                  fees - related party
              
              
              274,000
              
              
              273,000
              
              
              548,000
              
              
              546,000Provision
                  for loan loss
              
              
              --
              
              
              --
              
              
              --
              
              
              2,726,000Interest
                  expense
              
              
              3,000
              
              
              151,000
              
              
              239,000
              
              
              621,000Professional
                  fees
              
              
              286,000
              
              
              73,000
              
              
              480,000
              
              
              843,000Professional
                  fees - related party
              
              
              34,000
              
              
              19,000
              
              
              58,000
              
              
              43,000Other
              
              
              210,000
              
              
              6,000
              
              
              404,000
              
              
              20,000Total
                  operating expenses
              
              
              807,000
              
              
              522,000
              
              
              1,729,000
              
              
              4,799,000**Income
                  from Operations**
              
              
              4,839,000
              
              
              6,449,000
              
              
              9,223,000
              
              
              7,929,000**Income
                  from real estate****held
                  for sale**Revenue
                  related to real estate held for sale
              
              
              938,000
              
              
              1,000,000
              
              
              2,441,000
              
              
              1,203,000Net
                  gain on sale of real estate held for sale
              
              
              1,472,000
              
              
              --
              
              
              1,725,000
              
              
              -Expenses
                  related to real estate held for sale
              
              
              (849,000
              )
              
              (1,639,000
              )
              
              (2,251,000
              )
              
              (2,209,000
              )Write
                  downs on real estate held for sale
              
              
              --
              
              
              --
              
              
              --
              
              
              (1,229,000
              )Total
                  income (loss) from real estate held for sale
              
              
              1,561,000
              
              
              (639,000
              )
              
              1,915,000
              
              
              (2,235,000
              )Income
                  before provision for income taxes
              
              
              6,400,000
              
              
              5,810,000
              
              
              11,138,000
              
              
              5,694,000Provision
                  for income taxes
              
              
              452,000
              
              
              
              
              
              452,000**NET
                  INCOME**
              
              $
              5,948,000
              
              $
              5,810,000
              
              $
              10,686,000
              
              $
              5,694,000Basic
                  and diluted earnings per common share
              
              $
              0.20
              
              
              
              
              $
              0.36Dividends
                  declared per common share
              
              $
              0.28
              
              
              
              
              $
              0.28Net
                  income per weighted average membership unit
              
              
              
              
              $
              0.18
              
              
              
              
              $
              0.17Weighted
                  average common shares / membership units
              
              
              29,845,807
              
              
              32,851,440
              
              
              29,842,145
              
              
              32,815,435
  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 AND OTHER COMPREHENSIVE
                  INCOME****FOR
                  THE SIX MONTHS ENDED SEPTEMBER 30, 2006****(UNAUDITED)****Preferred
                  Stock**
              
              **Common
                  Stock****Number
                  of Shares**
              
              **Amount**
              
              **Number
                  of Shares**
              
              **Amount**
              
              **Additional**
                **Paid-in-Capital**
              
              **Retained
                  Earnings**
              
              **Accumulated
                  Other Comprehensive Loss**
              
              **Total**Stockholders'
                  Equity at March 31, 2006
              
              --
              $
              --
              
              29,838,442
              $
              3,000
              $
              277,619,000
              $
              --
              $
              --
              $
              277,622,000Comprehensive
                  Income:Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              10,686,000
              
              
              
              10,686,000Unrealized
                  Loss on Marketable Securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              (163,000)
              
              (163,000)Total
                  Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              10,523,000Dividends
                  to Stockholder $0.28 per common share
              
              
              
              
              
              
              
              
              
              
              
              (8,357,000)
              
              
              
              (8,357,000)Reinvestment
                  of Dividends
              
              
              
              
              
              21,155
              
              --
              
              122,000
              
              
              
              
              
              122,000Stockholders'
                  Equity at September 30, 2006
              
              --
              $
              --
              
              29,859,597
              $
              3,000
              $
              277,741,000
              $
              2,329,000
              $
              (163,000)
              $
              279,910,000
  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 SIX MONTHS**
                **ENDED
                  SEPTEMBER 30,****2006**
              
              **2005****Cash
                  flows from operating activities:**Net
                  income
              
              $
              10,686,000
              
              $
              5,694,000Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Provision
                  of doubtful accounts related to receivable
              
              
              --
              
              
              2,726,000Recovery
                  of losses on the sale of real estate held for sale
              
              
              --
              
              
              (48,000
              )Gain
                  /loss on sale of marketable securities
              
              
              --
              
              
              (10,000
              )Write
                  down of real estate held for sale
              
              
              --
              
              
              1,229,000Gain
                  on sale of real estate held for sale
              
              
              (1,725,000
              )
              
              --Provision
                  for loan loss
              
              
              (611,000
              )
              
              --Amortized
                  interest income
              
              
              (730,000
              )
              
              --Provision
                  for income taxes
              
              
              452,000
              
              
              --Interest
                  income accrued to loan balance
              
              
              --
              
              
              122,000Change
                  in operating assets and liabilities:Interest
                  and other receivables
              
              
              665,000
              
              
              147,000Due
                  to Manager
              
              
              (250,000
              )
              
              (414,000
              )Due
                  to Vestin Group
              
              
              --
              
              
              (1,000
              )Due
                  to Vestin Originations
              
              
              13,000
              
              
              --Due
                  to VRM I
              
              
              --
              
              
              (70,000
              )Note
                  receivable
              
              
              --
              
              
              48,000Prepaid
                  expenses
              
              
              117,000
              
              
              (98,000
              )Accounts
                  payable and accrued liabilities
              
              
              156,000
              
              
              431,000Net
                  cash provided by operating activities
              
              
              8,773,000
              
              
              9,756,000**Cash
                  flows from investing activities:**Investments
                  in real estate loans
              
              
              (128,542,000
              )
              
              (68,669,000
              )Purchase
                  of investments in real estate loans including interest receivable
                  of
                  $958,000.
              
              
              --
              
              
              (10,065,000
              )Purchase
                  of investments in real estate loans from:Fund
                  III
              
              
              (4,900,000
              )
              
              (5,500,000
              )Other
                  related parties
              
              
              --
              
              
              (13,889,000
              )Third
                  Party
              
              
              (13,000,000
              )
              
              (8,334,000
              )Proceeds
                  from loan payoff
              
              
              127,783,000
              
              
              89,472,000Sale
                  of investments in real estate loans to:VRM
                  I
              
              
              --
              
              
              600,000Fund
                  III
              
              
              --
              
              
              5,000,000Other
                  related parties
              
              
              --
              
              
              7,000,000Third
                  party
              
              
              50,000
              
              
              12,500,000Proceeds
                  from sale of investment in real estate held for sale
              
              
              25,857,000
              
              
              1,265,000Proceeds
                  from note receivable
              
              
              50,000
              
              
              --Purchase
                  of marketable securities
              
              
              --
              
              
              (5,884,000
              )Purchase
                  of marketable securities - related party
              
              
              (1,641,000
              )
              
              --Cash
                  proceeds form local agency bond
              
              
              --
              
              
              9,141,000Purchase
                  of fixed asset
              
              
              --
              
              
              (7,000
              )Purchase
                  of certificates of deposit
              
              
              (17,061,000
              )
              
              ---Proceeds
                  from investments in certificates of deposit
              
              
              13,436,000
              
              
              --Unearned
                  revenue proceeds related to loan restructuring
              
              
              607,000
              
              
              --Deposit
                  liability
              
              
              2,456,000
              
              
              (713,000
              )Net
                  cash provided by investing activities
              
              $
              5,095,000
              
              $
              11,917,000
  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 SIX MONTHS**
                **ENDED
                  SEPTEMBER 30,****2006**
              
              **2005****Cash
                  flows from financing activities:**Payment
                  on note payable
              
              $
              (17,331,000
              )
              $
              --Dividends
                  to stockholders, net of reinvestments
              
              
              (6,343,000
              )
              
              --Dividends
                  to stockholders, net of reinvestments - related party
              
              
              (100,000
              )Members'
                  distributions, net of reinvestments
              
              
              --
              
              
              (7,303,000
              )Members'
                  distributions, net of reinvestments - related party
              
              
              --
              
              
              (29,000
              )Members'
                  redemptions
              
              
              --
              
              
              (2,000
              )Net
                  cash used in financing activities
              
              
              (23,774,000
              )
              
              (7,334,000
              )**NET
                  CHANGE IN CASH**
              
              
              (9,906,000
              )
              
              14,339,000**Cash,
                  beginning of period**
              
              
              17,820,000
              
              
              10,128,000**Cash,
                  end of period**
              
              $
              7,914,000
              
              $
              24,467,000**Supplemental
                  disclosures of cash flows information:**Income
                  taxes paid
              
              $
              --
              
              $
              --Interest
                  paid
              
              $
              239,000
              
              $
              666,000Non-cash
                  investing and financing activities:Loans
                  funded through secured borrowings
              
              $
              --
              
              $
              20,949,000Loan
                  payoffs of loans funded through secured borrowings
              
              $
              11,611,000
              
              $
              --Real
                  estate held for sale acquired through foreclosure
              
              $
              --
              
              $
              17,928,000Note
                  payable relating to prepaid directors and officers liability insurance
                  policy
              
              $
              238,000
              
              $
              --Unrealized
                  gain on marketable securities
              
              $
              --
              
              $
              123,000Unrealized
                  loss on marketable securities - related party
              
              $
              (163,000
              )
              $
              --Receivable
                  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
              
              $
              427,000
              
              $
              --Accrued
                  dividend liability
              
              $
              1,792,000
              
              $
              --Deferred
                  gain on sale of real estate where we provided the
                  financing
              
              $
              --
              
              $
              1,357,000Sale
                  of real estate held for sale where we provided the
                  financing
              
              $
              --
              
              $
              8,114,000
  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**
 
 **SEPTEMBER
        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 CEO, President and a director of us, wholly owns Vestin Group,
        Inc.,
        which is engaged in asset management, real estate lending and other financial
        services though its subsidiaries. Our Manager, prior to June 30, 2006, also
        operated as a licensed Nevada mortgage broker and was engaged in the business
        of
        brokerage, placement and servicing of commercial loans secured by real property.
        On July 1, 2006, the mortgage broker license was issued to an affiliated
        company, Vestin Originations, Inc. which has continued the business of
        brokerage, placement and servicing of commercial real estate loans. Vestin
        Originations, Inc. is a wholly owned subsidiary of Vestin Group.
 
 Pursuant
        to our management agreement, 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 or mortgages (hereafter
        referred to as “deeds of trust”). Generally, our real estate loans require
        interest only payments with a balloon payment of the principal at maturity.
        We
        have both the intent and ability to hold real estate loans until maturity
        and
        therefore, real estate loans are classified and accounted for as held for
        investment and are carried at amortized cost. Loans sold to or purchased
        from
        affiliates are accounted for at the principal balance and no gain or loss
        is
        recognized by us or any affiliate. Loan to value ratios are based on appraisals
        obtained at the time of loan origination and may not reflect subsequent changes
        in value estimates. Such appraisals are generally dated within 12 months
        of the
        date of loan origination and may be commissioned by the borrower. The appraisals
        may be for the current estimate of the “as-if developed” value of the property,
        which approximates the post-construction value of the collateralized property
        assuming that such property is developed. As-if developed values on raw land
        loans or acquisition and development loans often dramatically exceed the
        immediate sales value and may include anticipated zoning changes and timely
        successful development by the purchaser. As most of the appraisals will be
        prepared on an as-if developed basis, if a loan goes into default prior to
        any
        development of a project, the market value of the property may be substantially
        less than the appraised value. As a result, there may be less security than
        anticipated at the time the loan was originally made. If there is less security
        and a default occurs, we may not recover the full amount of the
        loan.
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
            8
            -
 *Table
            of Contents*
 As
        of
        September 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 September 30, 2006, these two loans had a balance of approximately
        $18.5
        million and have terms ranging from 12 to 36 months, maturing in the next
        15
        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 September 30, 2006, we had $97.6 million in investments in real
        estate
        loans that had interest reserves where the total outstanding principal was
        approximately $134.0 million, including participating lenders. These loans
        had
        interest reserves of approximately $7.2 million, of which our portion was
        $5.2
        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 was
        $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 material facts pertaining to a borrower and the
        security.
 
 Additional
        facts and circumstances are discovered as we continue our efforts in the
        collection and foreclosure processes. This additional information often causes
        management to reassess its estimates. In recent years, we have revised estimates
        of our allowance for loan losses. Circumstances that may cause significant
        changes in our estimated allowance include, but are not limited to:
 
 ·
            Declines
                in real estate market conditions, which can cause a decrease in expected
                market value; 
 ·
            Discovery
                of undisclosed liens for community improvement bonds, easements and
                delinquent property taxes; 
 ·
            Lack
                of progress on real estate developments after we advance funds. We
                customarily utilize disbursement agents to monitor the progress of
                real
                estate developments and approve loan advances. After further inspection
                of
                the related property, progress on construction occasionally does
                not
                substantiate an increase in value to support the related loan
                advances; 
 ·
            Unanticipated
                legal or business issues that may arise subsequent to loan origination
                or
                upon the sale of foreclosed upon property;
                and 
 ·
            Appraisals,
                which are only opinions of value at the time of the appraisal, may
                not
                accurately reflect the value of the
                property.  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
        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.
 
 Additionally,
        an Investor may participate in certain loans with the Lead Lenders through
        Participation Agreements. In the event of borrower non-performance, the
        Participation Agreement may allow the Investor to be repaid up to the amount
        of
        the Investor’s investment prior to the Lead Lender being repaid. Real estate
        loan financing under the Participation Agreements are also accounted for
        as a
        secured borrowing in accordance with FAS 140. We do not receive any revenues
        for
        entering into secured borrowing arrangements. As of September 30, 2006, we
        have
        no outstanding secured borrowing arrangements.
 
 **Investment
        in Marketable Securities - Related Party**
 
 Investment
        in marketable securities - related party consists of stock in VRM I. The
        securities are stated at fair value as determined by the market price as
        of
        September 30, 2006. All securities are classified as available -for-sale
        under
        the provisions of FAS No. 115 Accounting for Certain Investments in Debt
        and
        Equity Securities.
 
 **Fair
        Value of Financial Instruments**
 
 FAS
        107 - *Disclosures
        about Fair Value of Financial Instruments* (“FAS
        107”), requires the determination of fair value of the Company’s financial
        assets. The following methods and assumptions were used to estimate the fair
        value of financial instruments included in the following
        categories:
 
 (a)
            Certificate
                of Deposits and Short-Term Investments: The carrying amounts of these
                instruments are at amortized cost, which approximates fair
                value. 
 (b)
            Investment
                in Real Estate Loans: The carrying value of these instruments, net
                of the
                allowance for loan losses, approximates the fair value due to their
                short-term maturities. Fair values for loans, which are delinquent
                and/or
                in foreclosure are determined by underlying collateral securing the
                loans. 
 (c)
            Assets
                under Secured Borrowing: The carrying amount of these instruments
                approximate fair value. The fair value is estimated based upon projected
                cash flows discounted at the estimated current interest rates at
                which
                similar loans would be made.  See
              review
              report of Independent Registered Public Accounting Firm.
 -
            11
            -
 *Table
            of Contents*
 At
        September 30, 2006 and March 31, 2006, the estimated fair values of the real
        estate loans, including seller financed loans, were approximately $251.2
        million
        and $232.9 million, respectively. At September 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.
 
 **Basic
        and Diluted Earnings Per Common Share**
 
 Basic
        earnings per share (“EPS”) is computed, in accordance with FAS 128 - *Earnings
        per Share* (“FAS
        128”), by dividing net income available to common stockholders by the weighted
        average number of common shares outstanding. Diluted EPS is similar to basic
        EPS
        except that the weighted average number of common shares outstanding is
        increased to include the number of additional common shares that would have
        been
        outstanding if the dilutive potential common shares had been exercised. We
        had
        no outstanding common shares equivalents during the period presented. The
        following is a computation of the EPS data for the six months ended September
        30, 2006:
 
 **For
                  the Six Months Ended September 30, 2006**Net
                  income available to common stockholders
              
              $
              10,686,000Weighted
                  average number of common shares outstanding during the
                  period
              
              
              29,842,145Basic
                  and diluted earnings per common share
              
              $
              0.36
 
 **Net
        Income Allocated to Members Per Weighted Average Membership
        Unit**
 
 Because
        Fund II was an LLC prior to the merger, it stated net income allocated to
        members per weighted average members’ unit, which is computed by dividing net
        income 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 income per weighted average unit for the six months ended September 30,
        2005:
 
 **For
                  the Six Months Ended September 30, 2005**Net
                  income available to members
              
              $
              5,694,000Weighted
                  average number of members’ units outstanding during the
                  period
              
              
              32,815,435Net
                  income per weighted average members’ unit
              
              $
              0.17
 
 **Common
          Stock Dividends**
 
 Common
          stock dividends declared during the six months ended September 30, 2006,
          were $0.28 per common share. The Board of Directors declared a monthly
          cash
          dividend of $0.065 per share for the month of September 2006 on October
          24, 2006
          to be paid on November 29, 2006, to the stockholders of record as of November
          13, 2006.
  **Segments**
 
 We
        operate as one business segment.
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
            12
            -
 *Table
            of Contents*
 **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. The income of
        a
        taxable REIT subsidiary is subject to federal and state income taxes. For
        the
        six months ended September 30, 2006, the Company’s taxable REIT subsidiary
        recorded an income tax provision of $452,000.
 
 **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 September 30, 2006 and March 31, 2006, we had $11.8 million and $19.7
        million, respectively, in excess of the federally insured limits.
 
 As
        of
        September 30, 2006, 24%, 22%, 12% and 10% of our loans were in California,
        Nevada, Arizona and Texas, respectively, compared to 22%, 17%, 18% and 10%,
        at
        March 31, 2006, respectively. As a result of this geographical concentration
        of
        our real estate loans, a downturn in the local real estate markets in these
        states could have a material adverse effect on us.
 
 At
        September 30, 2006, the aggregate amount of loans to our three largest borrowers
        represented 24% of our total investment in real estate loans. These real
        estate
        loans consisted of acquisition and development, commercial and construction
        loans, located in California , New York and Washington with a first lien
        position, earning between 8% and 12%, with an aggregate outstanding balance
        of
        approximately $63.9 million and maturing from October 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 September 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
        September 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**
 
 As
        of
        September 30, 2006 and March 31, 2006, we had four real estate loan products
        consisting of commercial, construction, acquisition and development, and
        land.
        The effective interest rates on all product categories range from 5% to 14%.
        Revenue by product will fluctuate based upon relative balances during the
        period.
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
            13
            -
 *Table
            of Contents*
 Investments
        in real estate loans as of September 30, 2006 were as follows:
 
 **Loan
                  Type**
              
              **Number
                  Of Loans**
              
              **Balance
                  (2)**
              
              **Weighted
                  Average Interest Rate**
              
              **Portfolio
                  Percentage**
              
              **Weighted
                  Average Loan To Value (1)**Acquisition
                  and development
              
              
              5
              
              $
              34,695,000
              
              
              9.06%
              
              
              13.06%
              
              
              73.06%Commercial
              
              
              19
              
              
              130,241,000
              
              
              9.59%
              
              
              49.01%
              
              
              77.48%Construction
              
              
              3
              
              
              27,186,000
              
              
              12.00%
              
              
              10.23%
              
              
              60.91%Land
              
              
              11
              
              
              73,616,000
              
              
              11.25%
              
              
              27.70%
              
              
              59.70%38
              
              $
              265,738,000
              
              
              10.23%
              
              
              100.00%
              
              
              70.28%
 
 Investments
        in real estate loans as of March 31, 2006 were as follows:
 
 **Loan
                  Type**
              
              **Number
                  Of Loans**
              
              **Balance
                  (2)**
              
              **Weighted
                  Average Interest Rate**
              
              **Portfolio
                  Percentage**
              
              **Weighted
                  Average Loan To Value (1)**Acquisition
                  and development
              
              
              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 completion of the development of the project, the market value
                of the
                property may be substantially less than the appraised value. As a
                result,
                there may be less security than anticipated at the time the loan
                was
                originally made. If there is less security and a default occurs,
                we may
                not recover the full amount of the loan. 
 (2)
            The
                following table reconciles the balance of the loan portfolio to the
                amount
                shown on the accompanying Consolidated Balance Sheet. The contra
                accounts
                represent the amount of real estate held for sale sold to third parties
                where the Company provided financing. GAAP requires the borrower
                to have a
                certain percentage equity ownership (ranging from 10% to 25%) to
                allow the
                Company to record the sale of a property. In addition, the borrower
                must
                maintain a minimum commitment in the property on a continuing basis.
                Therefore, until the borrower meets this requirement, the investment
                in
                the new loan is reduced by the amount originally invested in the
                real
                estate held for sale. 
 **September
                  30, 2006**
                **Balance**
              
              **March
                  31, 2006**
                **Balance**Balance
                  Per Loan Portfolio
              
              $
              265,738,000
              
              $
              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
              
              
              1,934,000
              
              
              432,000Unrealized
                  Gain on Seller Financed Loans
              
              
              (1,356,000
              )
              
              (1,356,000
              )Allowance
                  for Loan Losses
              
              
              (10,123,000
              )
              
              (10,734,000
              )Balance
                  per Balance Sheet
              
              $
              233,306,000
              
              $
              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 September
        30,
        2006 and March 31, 2006:
 
 **Loan
                  Type**
              
              **Number
                  of Loans**
              
              **September
                  30, 2006 Balance***
              
              **Portfolio**
                **Percentage**
              
              **Number
                  of Loans**
              
              **March
                  31, 2006**
                **Balance***
              
              **Portfolio**
                **Percentage**First
                  Deeds of Trust
              
              
              36
              
              $
              263,189,000
              
              
              99.04%
              
              
              31
              
              $
              247,028,000
              
              
              99.82%Second
                  Deeds of Trust**
              
              
              2
              
              
              2,549,000
              
              
              0.96%
              
              
              2
              
              
              445,000
              
              
              0.18%38
              
              $
              265,738,000
              
              
              100.00%
              
              
              33
              
              $
              247,473,000
              
              
              100.00%
 
 *
        Please
        see note (2) above
 **
        Generally, our second trust deeds are junior to first trust deed positions
        held
        by either us or our Manager.
 
 The
        following is a schedule of contractual maturities of investments in real
        estate
        loans as of September 30, 2006:
 
 October
                  2006 - December 2006
              
              $
              103,566,000January
                  2007 - March 2007
              
              
              26,505,000April
                  2007 - June 2007
              
              
              40,290,000July
                  2007 - September 2007
              
              
              56,823,000October
                  2007 - December 2007
              
              
              38,554,000Thereafter
              
              
              --Total
              
              $
              265,738,000
 
 The
        following is a schedule by geographic location of investments in real estate
        loans as of September 30, 2006 and March 31, 2006:
 
 **September
                  30, 2006 Balance***
              
              **Portfolio
                  Percentage**
              
              **March
                  31, 2006 Balance***
              
              **Portfolio
                  Percentage**Arizona
              
              $
              32,644,000
              
              
              12.28%
              
              $
              44,868,000
              
              
              18.13%California
              
              
              64,740,000
              
              
              24.36%
              
              
              53,397,000
              
              
              21.58%Hawaii
              
              
              17,291,000
              
              
              6.51%
              
              
              35,291,000
              
              
              14.26%Mississippi
              
              
              5,222,000
              
              
              1.97%
              
              
              --
              
              
              --%Nevada
              
              
              57,223,000
              
              
              21.53%
              
              
              43,058,000
              
              
              17.40%New
                  York
              
              
              19,554,000
              
              
              7.36%
              
              
              19,571,000
              
              
              7.91%North
                  Carolina
              
              
              --
              
              
              --%
              
              
              1,583,000
              
              
              0.64%Oklahoma
              
              
              7,682,000
              
              
              2.89%
              
              
              7,682,000
              
              
              3.10%Oregon
              
              
              16,560,000
              
              
              6.23%
              
              
              5,193,000
              
              
              2.10%Texas
              
              
              25,953,000
              
              
              9.77%
              
              
              24,219,000
              
              
              9.79%Washington
              
              
              18,869,000
              
              
              7.10%
              
              
              9,314,000
              
              
              3.76%Wisconsin
              
              
              --
              
              
              --%
              
              
              3,297,000
              
              
              1.33%Total
              
              $
              265,738,000
              
              
              100.00%
              
              $
              247,473,000
              
              
              100.00%
 
 *
        Please
        see note (2) above
 
 At
        September 30, 2006, the following four loans were non-performing (based on
        current information and events, it is probable that we will be unable to
        collect
        all amounts due according to the contractual terms of the loan agreement
        or when
        the payment of interest is 90 days past due); RightStar (Part I & Part II),
        Monterrey Associates and Rio Vista Nevada. These loans are currently carried
        on
        our books at a value of approximately $35.3 million, net of allowance for
        loan
        losses of approximately $9.6 million for the RightStar loans. These loans
        have
        been placed on non-accrual of interest status and are the subject of pending
        foreclosure proceedings.
 See
              review
              report of Independent Registered Public Accounting Firm.
 -
            15
            -
 *Table
            of Contents*
 
 ·
            RightStar
                (Part I & Part II) are loans secured by a lien on the business and
                virtually all of the property of RightStar, which includes 4 cemeteries
                and 8 mortuaries in Hawaii with an outstanding balance of $32 million
                of
                which our portion is approximately $17.3 million ($8.2 million for
                Part I
                and $9.1 million for Part II). The lenders commenced a judicial
                foreclosure on the loans, Part I and Part
                II. 
 ·
            Monterrey
                Associates, L.P., a loan secured by a 248 Unit apartment complex
                in
                Oklahoma City, OK, along with other real estate collateral, with
                an
                outstanding balance of approximately $4.4 million of which our portion
                is
                approximately $2.2 million. The loan is two months in arrears in
                payments
                of interest. Our Manager has commenced foreclosure proceedings and
                is
                filing litigation to enforce the personal guarantee on the loan.
                Our
                Manager has evaluated this loan and concluded that the value of the
                underlying collateral is sufficient to protect us from loss of principal.
                No specific allowance was deemed
                necessary. 
 ·
            Rio
                Vista Nevada, LLC, a loan secured by 480 residential building lots
                located
                within the Rio Vista Master Planned Community in Cathedral City,
                CA with
                an outstanding balance of approximately $30 million of which our
                portion
                is approximately $25.5 million. The loan is one month in arrears
                in
                payment of interest. Our Manager is assisting the borrower in selling
                the
                property to satisfy the principal balance of the loan and accrued
                interest. Our Manager has evaluated this loan and concluded that
                the value
                of the underlying collateral is sufficient to protect us from loss
                of
                principal. No specific allowance was deemed
                necessary. 
 The
        following schedule summarizes the non-performing loans:
 
 **Description
                  of Collateral**
              
              **Balance**
                **September
                  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
              
              
              30
              
              
              45%
                  of Part I4
                  cemeteries and 8 mortuaries in Hawaii Part II***
              
              
              9,108,000
              
              
              03/31/2004
              
              
              30
              
              
              65%
                  of Part II248-unit
                  apartment complex in Oklahoma City, OK
              
              
              2,155,000
              
              
              09/01/2006
              
              
              1
              
              
              49%480
                  residential building lots in Rio Vista Master Planned Community
                  in
                  Cathedral City, CA
              
              
              25,476,000
              
              
              10/25/2006
              
              
              1
              
              
              86%$
              44,922,000
 
 ***
        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
                principal payment, reducing our principal balance by approximately
                $1.0
                million. This transaction resulted in us recording unearned revenue
                of
                approximately $1.0 million, to be recognized through March 2007,
                the
                maturity of the loan. The terms of the loan are 9% due in 6 months,
                with
                an option to extend, which was granted in September 2006, for an
                additional 6 months 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.  See
              review
              report of Independent Registered Public Accounting Firm.
 -
            16
            -
 *Table
            of Contents*
 
 ·
            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 through March 2007, the maturity of the
                loan. 
 Our
        Manager periodically reviews and makes a determination as to whether the
        allowance for loan losses is adequate to cover any potential losses. Additions
        to the allowance for loan losses are made by charges to the provision for
        loan
        losses. Recoveries of previously charged off amounts are credited to the
        allowance for loan losses or included as income when the asset is disposed.
        As
        of September 30, 2006, we have provided a specific reserve related to the
        two
        loans secured by 4 cemeteries and 8 mortuaries in Hawaii (“RightStar loans”), of
        which our portion of the specific reserve is $9,623,000. 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. 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 six
        months
        ended September 30, 2006:
 
 **Description**
              
              **Balance**
                **March
                  31, 2006**
              
              **Specific
                  Reserve Allocation**
              
              **RightStar**
                **Legal
                  Reserve**
              
              **Balance**
                **September
                  30, 2006**Specific
                  allowance (3)
              
              $
              10,734,000
              
              $
              --
              
              $
              (611,000
              )
              $
              10,123,000Total
              
              $
              10,734,000
              
              $
              --
              
              $
              (611,000
              )
              $
              10,123,000
 
 **(3)**
            **Specific
                Reserve Allowance** 
 *RightStar
        Loan Allowance* -RightStar, Inc. (“RightStar”) defaulted on our loans in the fall of 2004. The
        lenders commenced a judicial foreclosure on the loans, part I and part II,
        which
        is secured by a lien on the business and virtually all of the property of
        RightStar, which includes 4 cemeteries and 8 mortuaries in Hawaii. The aggregate
        principal balance of the loan is approximately $32 million. The loans, part
        I
        and part II, are owned as follows:
 
 **Senior
                  Principal Amount (Part II)**
              
              **Junior
                  Principal Amount (Part I)**
              
              **Total**VRM
                  I
              
              $
              4,892,000
              
              $
              4,415,000
              
              $
              9,307,000VRM
                  II
              
              
              9,108,000
              
              
              8,183,000
              
              
              17,291,000Sunset
                  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);  See
              review
              report of Independent Registered Public Accounting Firm.
 -
            17
            -
 *Table
            of Contents*
 
 ·
            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.
 
 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. We believe the State’s claims to be
        without merit and intend to vigorously pursue our remedies while defending
        against any allegations made by the State. The outcome of this litigation
        is
        unforeseeable at this time. We cannot estimate when the foreclosure will
        ultimately be completed or when the lenders may obtain title to the underlying
        properties.
 
 We
        have
        evaluated the estimated value of the underlying collateral, the potential
        trust
        fund deficit, and the expected cost and length of litigation. Based on this
        estimate we increased our total specific reserve allowance for loss by
        approximately $5.5 million during the 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 included
        approximately $1.0 million for estimated litigation fees and expenses which
        we
        anticipate incurring in enforcing our rights against the underlying collateral.
        We will continue to evaluate our position in the RightStar loan as the situation
        progresses. As of September 30, 2006 our specific reserve allowance on the
        RightStar loans totaled approximately $9.6 million ,
        which
        includes a legal reserve balance of approximately $389,000.
 
 *Impairment
        on Restructured Loan* —
As
        of
        September 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 eleven 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 September 30, 2006 was approximately $85.9
        million. Our Manager concluded that no allowance for loan loss was necessary
        with respect to these loans as of September 30, 2006.
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
            18
            -
 *Table
            of Contents*
 **Asset
        Quality and Loan Reserves**
 
 Losses
        may occur from investing in real estate loans. The amount of losses will
        vary as
        the loan portfolio is affected by changing economic conditions and the financial
        condition of borrowers.
 
 The
        conclusion that a real estate loan is uncollectible or that collectibility
        is
        doubtful is a matter of judgment. On a quarterly basis, the Manager evaluates
        our real estate loan portfolio for impairment. The fact that a loan is
        temporarily past due does not necessarily mean that the loan is impaired.
        Rather, all relevant circumstances are considered by our Manager to determine
        impairment and the need for specific reserves. Such evaluation, which includes
        a
        review of all loans on which full collectibility may not be reasonably assured,
        considers among other matters:
 
 ·
            Prevailing
                economic conditions; 
 ·
            Historical
                experience; 
 ·
            The
                nature and volume of the loan portfolio; 
 ·
            The
                borrowers’ financial condition and adverse situations that may affect the
                borrowers’ ability to pay; 
 ·
            Evaluation
                of industry trends; and 
 ·
            Estimated
                net realizable value of any underlying collateral in relation to
                the loan
                amount. 
 Based
        upon this evaluation, a determination is made as to whether the allowance
        for
        loan losses is adequate to cover any potential losses. Additions to the
        allowance for loan losses are made by charges to the provision for loan losses.
        As of September 30, 2006, our Manager had provided approximately $10.1 million
        as a specific allowance for loan losses. At September 30, 2006, the following
        loans were non-performing (based on current information and events, it is
        probable that we will be unable to collect all amounts due according to the
        contractual terms of the loan agreement or when the payment of interest is
        90
        days past due); RightStar (Part I & Part II), Monterrey Associates and Rio
        Vista Nevada. These loans are currently carried on our books at a value of
        approximately $35.3 million, net of allowance for loan losses of approximately
        $9.6 million for the RightStar loans. Our Manager evaluated the loans and
        concluded that the underlying collateral was sufficient to protect us against
        further losses of principal or interest. Our Manager will continue to evaluate
        these loans in order to determine if any other allowance for loan losses
        should
        be recorded.
 
 **NOTE
        E — REAL ESTATE HELD FOR SALE**
 
 At
        September 30, 2006, we held two properties with a total carrying value of
        approximately $14.3 million, which were acquired through foreclosure and
        recorded as investments in real estate held for sale. The summary below includes
        our percentage ownership in each property. These investments in real estate
        held
        for sale are accounted for at the lower of cost or fair value less costs to sell
        with fair value based on appraisals and knowledge of local market conditions.
        It
        is not our intent to invest in or own real estate as a long-term investment.
        We
        seek to sell properties acquired through foreclosure as quickly as circumstances
        permit. The following is a roll-forward of investments in real estate held
        for
        sale during the six months ended September 30, 2006:
  See
              review
              report of Independent Registered Public Accounting Firm.
 -
            19
            -
 *Table
            of Contents*
 
 **Description**
              **Date
                  Acquired**
              **Percentage
                  of Ownership**
              
              **Balance**
                **March
                  31, 2006**
              
              **Acquisitions
                  (Reductions)**
              
              **Seller
                  Financed Sales**
              
              **Proceeds
                  from Sales**
              
              **Gain
                  (Loss) on Sale of Real Estate**
              
              **Balance
                  at September 30, 2006**Land
                  containing (82) residential lots in Henderson, NV**(1)**
              2/28/2003
              34%
              $
              1,262,000
              $
              (13,000)
              $
              --
              $
              (1,270,000)
              $
              21,000
              $
              --278
                  unit apartment complex in Fort Worth, TX “Windrush”**(1)**
              8/2/2005
              100%
              
              8,059,000
              
              --
              
              --
              
              (7,886,000)
              
              (173,000)
              
              --One
                  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
              
              (50,000)
              
              --
              
              --
              
              --
              
              8,956,000504
                  unit apartment complex in Austin, TX “Lakeview”**(1)**
              6/7/2005
              100%
              
              14,468,000
              
              --
              
              --
              
              (16,093,000)
              
              1,625,000
              
              --$
              38,426,000
              $
              (58,000)
              $
              --
              $
              (25,799,000)
              $
              1,725,000
              $
              14,294,000
 
 **(1)**
              **Sales
                  of Real Estate Held for Sale for the Six Months Ended September
                  30,
                  2006:**
 
 During
        June 2006, we sold the parcel in Austin, Texas. Our net proceeds were
        approximately $550,000, resulting in a gain of approximately
        $252,000.
 
 During
        July 2006, we sold a 504 unit apartment complex in Austin, Texas, for
        approximately $16.1 million. This resulted in a net gain of approximately
        $1.6
        million.
 
 During
        July 2006, we and VRM I sold the land containing residential lots in Henderson,
        NV, for approximately $3.8 million, of which we received approximately $1.3
        million which resulted in a net gain of $21,000.
 
 During
        September 2006, we sold the “Windrush” property in Fort Worth, Texas, for a
        sales price of $8.0 million, resulting in net proceeds of approximately $7.9
        million. This resulted in a net loss of approximately $173,000.
 
 **NOTE
        F — REAL ESTATE HELD FOR SALE - SELLER FINANCED**
 
 At
        September 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 of ownership in each property. These investments in real estate
        held for sale are accounted for at the lower of cost or fair value less costs
        to
        sell with fair value based on appraisals and knowledge of local market
        conditions. The following is a roll-forward of seller financed real estate
        held
        for sale for the six months ended September 30, 2006:
 See
              review
              report of Independent Registered Public Accounting Firm.
 -
            20
            -
 *Table
            of Contents*
 
 **Description**
              **Date
                  Acquired**
              **Percentage
                  of Ownership**
              
              **Balance
                  at**
                **March
                  31, 2006**
              
              **Acquisitions**
              
              **Sales**
              
              **Balance
                  at**
                **September
                  30, 2006**74
                  unit (90) bed assisted living facility in San Bernardino, CA**(1)**
              4/06/2004
              100%
              $
              7,350,000
              $
              --
              $
              --
              $
              7,350,000126
                  unit (207) bed assisted living facility in Phoenix, AZ**(2)**
              9/08/2004
              90%
              
              8,113,000
              
              --
              
              --
              
              8,113,000Assisted
                  living facility in Las Vegas, Nevada**(3)**
              9/23/2004
              48%
              
              7,424,000
              
              --
              
              --
              
              7,424,000$
              22,887,000
              $
              --
              $
              --
              $
              22,887,000
 
 **(1)**
            During
                October 2005, we sold the 74 unit (90 bed) assisted living facility
                in San
                Bernardino, CA and financed 97% of the purchased price of $7.6 million
                maturing in November 2006. The transaction resulted in a $200,000
                deferred
                gain, which will be recognized once the equity requirement has been
                met.
                We have received approximately $672,000 in payments for the borrower.
                These payments are recorded as a deposit liability and will be recognized
                as income once the equity requirement has been
                met. 
 **(2)**
            During
                August 2005, we and VRM II sold the 126 unit (207 bed) assisted living
                facility in Phoenix, AZ and financed 100% of the purchased price
                of $10.5
                million maturing in January 2007. The transaction resulted in a $1.4
                million deferred gain, which will be recognized once the equity
                requirement has been met. We have received approximately $2.1 million
                in
                payments from the borrower. These payments are recorded as a deposit
                liability and will be recognized as income once the equity requirement
                has
                been met. 
 **(3)**
            During
                September 2004, we and VRM I sold an assisted living facility in
                Las
                Vegas, NV and financed 100% of the purchased price of $15.3 million
                maturing in September 2007. The transaction resulted in no gain or
                loss.
                We have received approximately $1.1 in payments from the borrower.
                These
                payments are recorded as a deposit liability and will be recognized
                as
                income once the equity requirement has been
                met 
 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.
 
 **Transactions
        with the Manager**
 
 Our
        Manager is entitled to receive from us an annual management fee of up to
        0.25%
        of our aggregate capital contributions received by us and Fund II from the
        sale
        of shares or membership units, paid monthly. The amount of management fees
        paid
        to our Manager for the six months ended September 30, 2006 and 2005 approximated
        $548,000 and $546,000, respectively.
 
 As
        of
        September 30, 2006, Vestin Mortgage owned 197,345 of our common shares. For
        the
        six months ended September 30, 2006 we paid approximately $33,000 in dividends
        to our manager based on the number of shares they held on the dividend record
        date. For the six months ended September 30, 2005 we recorded pro-rata
        distributions owed to our Manager of approximately $29,000.
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            of Contents*
 **Transactions
        with Other Related Parties**
 
 As
        of
        September 30, 2006, VRM I owned 286,658 of our common shares. For the six
        months
        ended September 30, 2006 we paid approximately $60,000 in dividends to VRM
        I
        based on the number of shares they held on the dividend record
        date.
 
 As
        of
        September 30, 2006, we owned 236,557 common shares of VRM I.
 
 During
        the six months ended September 30, 2005, we sold $600,000 in real estate
        loans
        to VRM I. No gain or loss resulted from these transactions.
 
 As
        of
        September 30, 2006, Fund III owned 121,685 of our common shares. For the
        six
        months ended September 30, 2006 we paid approximately $7,000 in dividends
        to
        Fund III based on the number of shares they held on the dividend record
        date.
 
 During
        the six months ended September 30, 2006 and 2005, we purchased $4.9 million
        and
        $5.5 million in real estate loans from Fund III. During the six months ended
        September 30, 2005 we sold $5 million in real estate loans to Fund III. No
        gain
        or loss resulted form these transactions.
 
 During
        the six months ended September 30, 2005, we purchased approximately $13.9
        million in real estate loans from inVestin Nevada, Inc., a company wholly
        owned
        by our Manager’s CEO. No gain or loss resulted from these
        transactions.
 
 During
        the six months ended September 30, 2005, we sold $7 million in real estate
        loans
        to inVestin Nevada, Inc. No gain or loss resulted from this these
        transactions.
 
 During
        the six months ended September 30, 2006 and 2005, we incurred $58,000 and
        $43,000, 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 six months ended September 30, 2006,
        we
        received approximately $23,000 in principal payments. The outstanding balance
        as
        of September 30, 2006 was $305,000, net of allowance.
 
 During
        March 2005, we and VRM I sold the
        126
        unit hotel in Mesquite, Nevada for $5,473,000 of which our share of the proceeds
        were approximately $3.8 million which resulted in a loss of approximately
        $829,000. In
        addition, during September 2005, we and VRM I entered into a settlement
        agreement with the guarantors of the loan in the amount of $2,000,000 in
        exchange for a release of their personal guarantees of which our share was
        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. This note is fully reserved.
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            of Contents*
 During
        June 2005, we took title to 133 units of a 150 unit condominium conversion
        know
        as “The Club at Stablechase” located in Houston, Texas. Our
        Manager has evaluated the carrying value of approximately $9.0 million and
        based
        on its estimated value and the underlying personal guarantee from the borrower,
        no valuation allowance was deemed necessary as of September 30, 2006.
        Additionally, the guarantor entered into an unsecured promissory note totaling
        $375,000 bearing an annual interest rate of 8.0%, payable in monthly payments
        of
        principal of approximately $6,000 plus interest and maturing during September
        2010. This
        note
        is fully reserved. In addition, the guarantors entered into a second unsecured
        note totaling $125,000. These notes were paid in full during October
        2006.
 
 During
        November 2004, we and VRM I sold the 140 Unit/224 beds senior facility in
        Mesa,
        Arizona of which our portion of the consideration received totaled $6,043,000.
        We and VRM I received a promissory note from the original guarantor in the
        amount of $478,000 of which our portion was $409,000. The promissory note
        is
        payable in interest only payments of 8% on the principal balance outstanding.
        Commencing June 25, 2005 through May 25, 2006, monthly payments shall increase
        to $15,000 and be applied to principal and accrued interest. Beginning June
        25,
        2006 through May 25, 2009 payments are to increase to $20,000 monthly. Due
        to
        the uncertainty of collectibility, we have provided a valuation allowance
        for
        the entire balance of the promissory note. Income will be recognized when
        payments are received. As of September 30, 2006, we received approximately
        $197,000 in payments. This note is fully reserved.
 
 During
        December 2005, we and VRM I sold the 460 acre residential subdivision in
        Lake
        Travis, TX for $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. The purchaser has defaulted
        on the note and our manager is pursuing litigation. Our portion of the
        outstanding balance as of September 30, 2006 was $329,000.
 
 **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 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
        September 30, 2006 we had no funds being used under any Inter-creditor
        Agreements where we have potential obligations.
 
 **NOTE
        J — NOTES PAYABLE**
 
 During
        the six months ended September 30, 2006, two notes payable totaling $17.2
        million were paid in full.
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            of Contents*
 In
        May
        2006, we financed a 12 month insurance policy for Directors and Officers
        liability, with an annual interest rate of 6.92%. The agreement required
        a down
        payment of $60,000 and nine monthly payments of approximately $27,000 beginning
        on May 27, 2006. At September 30, 2006 the outstanding balance of the note
        was
        approximately $107,000.
 
 **NOTE
        K — RECENT ACCOUNTING PRONOUNCEMENTS**
 
 On
        September 13, 2006, the SEC issued Staff Accounting Bulletin 108 (“SAB 108”),
“Considering the Effects of Prior Year Misstatements when Qualifying
        Misstatements in Current Year Financial Statements,” which provides interpretive
        guidance on the consideration of the effects of prior year misstatements
        in
        quantifying current year misstatements for the purpose of a materiality
        assessment. SAB 108 is effective for companies with fiscal years ending after
        November 15, 2006 and is required to be adopted by the Company in its fiscal
        year ending December 31, 2006. However, early application is encouraged in
        any
        report for an interim period of the first fiscal year ending after November
        15,
        2006, filed after the publication of this guidance. The Company is currently
        assessing the impact of the adoption of SAB 108.
 
 In
        September 2006, the Financial
        Accounting Standards Board ( FASB)
        issued FAS 157 - *Fair
        Value Measurements* (“FAS
        157”), which defines fair value, establishes a framework for measuring fair
        value in generally accepted accounting principles, and expands disclosures
        about
        fair value measurements. This Statement applies under other accounting
        pronouncements that require or permit fair value measurements, the FASB having
        previously concluded in those accounting pronouncements that fair value is
        the
        relevant measurement attribute. Accordingly, this Statement does not require
        any
        new fair value measurements. FAS 157 is effective for financial statements
        issued for fiscal years beginning after November 15, 2007, and interim periods
        within those fiscal years. This Statement is required to be adopted by the
        Company in the first quarter of its fiscal year 2008. The Company is currently
        assessing the impact of the adoption of this Statement.
 
 **NOTE
        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 in 1999, prior to the formation of Vestin Fund II, LLC.
        Desert
        Land sought in excess of $10 million in monetary damages. On April 10, 2003,
        the
        United States District Court for the District of Nevada (the “Court”) entered
        judgment jointly and severally in favor of Desert Land against Vestin Group,
        Vestin Mortgage and Del Mar Mortgage, Inc. Judgment was predicated upon the
        Court’s finding that Del Mar Mortgage, Inc. received an unlawful penalty fee
        from the plaintiffs.
 
 The
        defendants subsequently filed a motion for reconsideration. The Court denied
        the
        motion and, on August 13, 2003, held that Vestin Group, Vestin Mortgage,
        and Del
        Mar Mortgage, Inc. were jointly and severally liable for the judgment in
        the
        amount of $5,683,312 (which amount includes prejudgment interest and attorney’s
        fees). On August 27, 2003, the Court stayed execution of the judgment against
        Vestin Group and Vestin Mortgage based upon the posting of a bond in the
        amount
        of $5,830,000. Mr. Shustek personally posted a cash bond without any cost
        or
        obligation to Vestin Group and Vestin Mortgage. Additionally, Del Mar Mortgage,
        Inc. had indemnified Vestin Group and Vestin Mortgage for any losses and
        expenses in connection with the Action, and Mr. Shustek had guaranteed the
        indemnification with his cash bond. On September 12, 2003, all of the defendants
        held liable to Desert Land appealed the judgment to the United States Court
        of
        Appeals for the Ninth Circuit, which heard the case on October 18, 2005.
        On
        November 15, 2005, the Ninth Circuit vacated the judgment of the District
        Court
        and dismissed the state law claims against the defendants without prejudice
        on
        the basis that the District Court lacked subject matter jurisdiction in the
        case. On November 29, 2005, Desert Land petitioned the Ninth Circuit Court
        for
        rehearing with a suggestion that the matter be heard en banc. On December
        16,
        2005, the District Court issued an Order releasing the bond, and on January
        6,
        2006, the Ninth Circuit denied Desert Land’s petition and the matter remains
        dismissed.
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 On
        or
        about April 6, 2006, Desert Land filed a Writ of Certiorari seeking review
        of
        the 9th Circuit’s decision by the United States Supreme Court. The U.S. Supreme
        Court denied Desert Land’s Writ of Certiorari on June 12, 2006, effectively
        ending this action.
 
 On
        November 21, 2005, Desert Land filed a complaint in the state courts of Nevada,
        which complaint is substantially similar to the original complaint previously
        filed by Desert Land in the United States District Court, with the exception
        of
        claiming Nevada State Law violations and seeking Nevada State Law remedies
        rather than claiming Federal Law violations and seeking Federal Law remedies.
        On
        March 6, 2006, Desert Land amended the state court complaint to name VRM
        I.
        Desert Land alleges that one or more of the defendants have transferred assets
        to other entities without receiving reasonable value therefore; alleges
        plaintiffs are informed and believe that defendants have made such transfers
        with the actual intent to hinder, delay or defraud Desert Land; that such
        transfers made the transferor insolvent and that sometime between February
        27
        and April 1, 2003, Vestin Group transferred $1.6 million to VRM I for that
        purpose. The state court complaint further alleges that Desert Land is entitled
        to avoid such transfers and that pursuant to NRS 112.20, Desert Land is entitled
        to an injunction to enjoin defendants from further disposition of assets.
        Additionally, Del Mar Mortgage, Inc. has indemnified Vestin Group and Vestin
        Mortgage for any losses and expenses in connection with the Action, and Mr.
        Shustek has guaranteed the indemnification.
 
 The
        United States Securities and Exchange Commission, (the “Commission”) conducted
        an investigation of certain matters related to us, our Manager, Vestin Capital,
        VRM I and Fund III. We fully cooperated during the course of the investigation.
        On September 27, 2006, the investigation was resolved through the entry of
        an
        Administrative Order by the Commission (the “Order”). Our Manager, Vestin
        Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin
        Capital (collectively, the “Respondents”), consented to the entry of the Order
        without admitting or denying the findings therein. In the Order, the Commission
        finds that the Respondents violated Sections 17(a)(2) and 17(a)(3) of the
        Securities Act of 1933 through the use of certain slide presentations in
        connection with the sale of units in Fund III and in our predecessor, Vestin
        Fund II, LLC. The Respondents consented to the entry of a cease and desist
        order, the payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s
        suspension from association with any broker or dealer for a period of six
        months. In addition, the Respondents agreed to implement certain undertakings
        with respect to future sales of securities. We are not a party to the Order
        and
        we do not expect that the sanctions imposed upon the Respondents will have
        any
        material affect upon our operations.
 
 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 and the matters described in Note M below, the Manager believes
        that it is not a party to any pending legal or arbitration proceedings that
        would have a material adverse effect on the Manager’s financial condition or
        results of operations or cash flows, although it is possible that the outcome
        of
        any such proceedings could have a material impact on the Manager’s net income in
        any particular period.
 
 **NOTE
        M — LEGAL MATTERS INVOLVING THE COMPANY**
 
 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 any allegations made by the State. The
        outcome of this litigation is unforeseeable at this time.
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 *Table
            of Contents*
 We,
        Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
        civil action filed by 88 separate plaintiffs (“Plaintiffs”) in Superior Court
        for Clark County, Nevada. The Plaintiffs allege, among other things, that
        Defendants: breached certain alleged contractual obligations owed to Plaintiffs;
        breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented
        or
        omitted material facts regarding the conversion of Fund II into VRM II. The
        Action seeks monetary damages and a rescission of the REIT conversion. The
        Defendants believe that the allegations are without merit and that they have
        adequate defenses. The Defendants intend to undertake a vigorous defense.
        The
        terms of our management agreement and Fund II’s operating agreement contain
        indemnity provisions whereby, Vestin Mortgage and Michael V. Shustek may
        be
        eligible for indemnification by the Company with respect to the above
        actions.
 
 We
        and
        Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
        action filed in San Diego Superior Court by certain plaintiffs who allege,
        among
        other things, that they were wrongfully denied appraisal rights in connection
        with the merger of Fund II into Vestin Realty Mortgage II, Inc. The action
        is
        being brought as a purported class action on behalf of all members of Vestin
        Fund II who did not vote in favor of the merger. The Defendants believe that
        the
        allegations are without merit and that they have adequate defenses. The
        Defendants intend to undertake a vigorous defense. The terms of our management
        agreement and Fund II’s Operating Agreement contain indemnity provisions
        whereby, Vestin Mortgage and Michael V. Shustek may be eligible for
        indemnification by the Company with respect to the above actions.
 
 In
        addition to the matters described above, we are involved in a number of other
        legal proceedings concerning matters arising in connection with the conduct
        of
        our business activities. We believe we have meritorious defenses to each
        of
        these actions and intend to defend them vigorously. Other than the matters
        described above, we believe that we are not a party to any pending legal
        or
        arbitration proceedings that would have a material adverse effect on our
        financial condition or results of operations or cash flows, although it is
        possible that the outcome of any such proceedings could have a material impact
        on our net income in any particular period.
 
 **NOTE
        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
        October 2006, we, Vestin Origination, Inc., VRM I and Fund III entered into
        an
        intercreditor agreement with a third party totaling $20 million related to
        the
        funding of a $31.3 million construction real estate loan, of which approximately
        $22.9 million has been funded through October 26, 2006. The secured borrowing
        will be recognized pro rata between us, VRM I and Fund III for the amount
        each
        entity has funded for the loan. As of October 26, our portion is approximately
        $17.6 million. In the event VRM I and Fund III were unable to pay there pro
        rata
        share of the secured borrowing, we would be liable for the full outstanding
        balance.
 
 During
        October 2006, the unsecured promissory notes from the borrower on “The Club at
        Stablechase” property were paid in full.
 
 The
        Board
        of Directors declared a monthly cash dividend of $0.065 per share for the
        month
        of September 2006 on October 24, 2006 to be paid on November 29, 2006, to
        the
        stockholders of record as of November 13, 2006.
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 *Table
            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. and its subsidiary as of September 30, 2006, and the related
        consolidated statements of income for the three-month and six-month periods
        ended September 30, 2006 and 2005, and stockholders’ equity and comprehensive
        income for the six-month period ended September 30, 2006, and cash flows
        for the
        six-month periods ended September 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, management’s assessment
        of the effectiveness of the internal control over financial reporting as
        of
        December 31, 2005 and the effectiveness of the internal control over financial
        reporting as of December 31, 2005, and in our report dated June 6, 2006,
        we
        expressed an unqualified opinion on those consolidated financial statements;
        an
        unqualified opinion on management’s assessment of, and an adverse opinion on the
        effective operation of internal control over financial reporting. The
        consolidated financial statements and management’s assessment of the
        effectiveness of internal control over financial reporting referred to above
        are
        not presented herein. 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
 October
        24, 2006
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            27
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 *Table
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 **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS
        OF OPERATIONS**
 
 The
        following is a financial review and analysis of our financial condition and
        results of operations for the three and six months ended September 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.”
  -
            28
            -
 *Table
            of Contents*
 Our
        operating results during the past several years have been adversely affected
        by
        allowances for non-performing loans. At September 30, 2006, the following
        four
        loans were non-performing (based on current information and events, it is
        probable that we will be unable to collect all amounts due according to the
        contractual terms of the loan agreement or when the payment of interest is
        90
        days past due); RightStar (Part I & Part II), Monterrey Associates and Rio
        Vista Nevada. These loans are currently carried on our books at a value of
        approximately $35.3 million, net of allowance for loan losses of approximately
        $9.6 million for the RightStar loans. These loans have been placed on
        non-accrual of interest status and are the subject of pending foreclosure
        proceedings. In addition to the RightStar allowance we have also provided
        $500,000 for an impairment on a restructured loan. For additional information
        see “Specific Loan Allowance” in Note D - *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 $49.6 million or 17.2% of
        our
        total assets as of September 30, 2006 as compared to $65.1 million or 21.0%
        of
        our total assets as of March 31, 2006. At September 30, 2006, non-performing
        assets consist of approximately $14.3 million of real estate held for sale
        not
        sold through seller financing and approximately $35.3 million of non-performing
        loans, net of allowance for loan losses. During the six months ended we
        completed the following transactions related to our real estate held for
        sale:
 
 ·
            During
                June 2006, we sold the parcel in Austin, Texas. Our net proceeds
                were
                approximately $550,000, resulting in a net gain of approximately
                $252,000. 
 ·
            During
                July 2006, we sold a 504 unit apartment complex in Austin, Texas,
                for
                approximately $16.1 million. This resulted in a net gain of approximately
                $1.6 million. 
 ·
            During
                July 2006, we and VRM I sold the land containing residential lots
                in
                Henderson, NV, for approximately $3.8 million, of which we received
                approximately $1.3 million that resulted in a net gain of
                $21,000. 
 ·
            During
                September 2006, we sold the “Windrush” property in Fort Worth, Texas, for
                a sales price of $8.0 million, resulting in net proceeds of approximately
                $7.9 million. This resulted in a net loss of approximately
                $173,000. 
 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 to pay dividends to our
        stockholders. Such conditions may also require us to restructure loans. The
        weighted average term of our outstanding loans as of September 30, 2006 was
        15
        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. A
        downturn in the real estate markets where we conduct business might increase
        defaults on our loans and might require us to record additional reserves
        with
        respect to non-performing loans.Recognizing the risk, we seek to
        maintain an adequate loan-to-value ratio which, as of September 30, 2006,
        was
        70.28% on a weighted average basis, generally using appraisals prepared on
        an
“as-if developed basis” in connection with the loan origination. The increase in
        the weighted average loan to value ratio from 64.62%, as of March 31, 2006,
        to
        70.28%, as of September 30, 2006, is primarily due to six loans being funded
        during the six month period, totaling approximately $42.9 million, with a
        loan
        to value ratios ranging from 72.86% to 78.86%. The
        majority of these loans were to repeat borrowers with a history of good standing
        with us. In addition the terms of these loans are 12 months or less.In
        this manner, we hope to retain sufficient cushion in the underlying equity
        position to protect the value of our loans in the event of a default.
        Nevertheless, no assurances can be given that a marked increase in loan defaults
        accompanied by a rapid decline in real estate values will not have a material
        adverse effect upon our financial condition and operating results.
 
 We
        generally invest in real estate loans throughout the areas in which Vestin
        Mortgage and its correspondents have experience. As of September 30, 2006
        our
        loans were in the following states; Arizona, California, Hawaii, Mississippi,
        Nevada, New York, Oklahoma, Oregon, Texas and Washington.
  -
            29
            -
 *Table
            of Contents*
 **Summarization
        of Financial Results**
 
 **For
                  the Three Months**
                **Ended
                  September 30,**
              
              **For
                  the Six Months**
                **Ended
                  September 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Total
                  revenues
              
              $
              5,646,000
              
              $
              6,971,000
              
              $
              10,952,000
              
              $
              12,728,000Total
                  operating expenses
              
              
              807,000
              
              
              522,000
              
              
              1,729,000
              
              
              4,799,000Total
                  income (loss) from real estate held for sale
              
              
              1,561,000
              
              
              (639,000
              )
              
              1,915,000
              
              
              (2,235,000
              )Income
                  tax provision
              
              
              452,000
              
              
              --
              
              
              452,000
              
              
              --**NET
                  INCOME**
              
              $
              5,948,000
              
              $
              5,810,000
              
              $
              10,686,000
              
              $
              5,694,000Basic
                  and diluted earnings per share
              
              $
              0.20
              
              
              
              
              $
              0.36Net
                  income allocated to members per weighted average membership
                  units
              
              
              
              
              $
              0.18
              
              
              
              
              $
              0.17Weighted
                  average common shares / membership units
              
              
              29,845,807
              
              
              32,851,440
              
              
              29,842,145
              
              
              32,815,435Annualized
                  rate of return to members**(a)**
              
              
              
              
              
              7.02
              %
              
              
              
              
              3.46
              %Dividends
                  / cash distributions
              
              $
              8,357,000
              
              $
              4,230,000
              
              $
              8,357,000
              
              $
              8,825,000Dividends
                  / cash distributions per weighted average common share / membership
                  units
              
              $
              0.28
              
              $
              0.13
              
              $
              0.28
              
              $
              0.27Weighted
                  average term of outstanding loans
              
              
              15
                  months
              
              
              16
                  months
              
              
              15
                  months
              
              
              16
                  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 September
                30,
                2005 divided by the number of days during the period (92 and 183
                days for
                the three and six months ended September 30, 2005, respectively)
                and
                multiplied by three hundred sixty five (365) days, then divided by
                ten
                (the cost per unit). 
 *Comparison
        of Operating Results for the three months ended September 30, 2006 to the
        three
        months ended September 30, 2005.*
 
 *Total
        Revenues* :
        For the
        three months ended September 30, 2006 total revenues decreased by approximately
        $1.3 million or 19% compared to the same period in 2005 due in significant
        part
        to the following factors:
 
 ·
            Our
                  interest income decreased by approximately $1.4 million. In the
                  2005
                  period, we recognized deferred interest income of approximately
                  $1.2
                  million relating to two sell financed real estate loans which paid
                  off
                  during the three months ended September 30, 2005. Additionally,
                  the
                  decrease in interest income is attributable to the decrease of
                  approximately $9.5 million in the monthly average balance in investments
                  in real estate loans during the three month period ended September
                  30,
                  2006 compared to the same period in 2005. 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.
                  For
                  additional information see 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.  -
            30
            -
 *Table
            of Contents*
 This
        decline was partially offset by the following items:
 
 ·
            Included
                in other income is bank interest income earned on cash and cash
                equivalents accounts held at banking institutions. Bank interest
                income
                increased by approximately $307,000 during the three month period
                ended
                September 30, 2006 compared to the same period in 2005. This increase
                is
                attributed to a higher average monthly balance in cash and cash
                equivalents during this period. The increase in cash and cash equivalents
                is partially offset by the use of cash and cash equivalents during
                the
                month of September 2006 due to the funding of approximately $22.8
                million
                in new investments in real estate loans. 
 *Total
        Expenses* :
        For the
        three months ended September 30, 2006, total expenses were approximately
        $807,000 compared to approximately $522,000 for the three months ended September
        30, 2005, an increase of approximately $285,000 or 54%. Expenses were primarily
        affected by the following factors:
 
 ·
            Interest
                expense decreased by approximately $148,000 primarily due to the
                decrease
                in secured borrowing of approximately $4.7 million at September 30,
                2005
                compared to September 30, 2006. 
 ·
            Professional
                fees increased approximately $228,000 for the three months ended
                September
                30, 2006, as compared to the same period in 2005, primarily due to
                expenses incurred on legal matters related to a civil action against
                us
                filed by 88 plaintiffs and other legal expenses related to real estate
                loans during the three months ended September 30, 2006. For additional
                information see Note M -*Legal
                Matters Involving the Company*of
                the Notes to Financial Statements included in Part I of this Report
                on
                Form 10-Q. 
 ·
            Included
                in other expenses are expenses totaling $139,000 for liability insurance
                expense for the Company’s directors and officers and expenses relating to
                investor services for the three months ended September 30, 2006.
                There
                were no similar expenses incurred during the same period in
                2005. 
 *Total
        Income(Loss) from Real Estate Held for Sale* :
        For the
        three months ended September 30, 2006, total income from real estate held
        for
        sale increased by approximately $2.2 million or 336.8% compared to the same
        period in 2005 due in significant part to the following factors:
 
 ·
            During
                the three months ended September 30, 2006, we recorded approximately
                $900,000 in expenses related to three apartment complexes which are
                classified as real estate held for sale. During the same period in
                2005,
                we recognized approximately $1.6 million, a decrease of approximately
                $700,000. The decrease is partially attributable to the sale of the
                504
                unit apartment complex in Austin, TX “Lakeview” during July 2006 which
                resulted in a gain of approximately $1.6 million. We will continue
                to
                incur related expenses until the remaining properties are sold. 
 ·
            In
                addition to the sale of Lakeview, we sold the 278 unit apartment
                complex
                in Fort Worth, TX “Windrush” during September 2006 which resulted in a
                loss of approximately $173,000. 
 *Comparison
        of Operating Results for the six months ended September 30, 2006 to the six
        months ended September 30, 2005.*
 
 *Total
        Revenues* :
        For the
        six months ended September 30, 2006 total revenues decreased by approximately
        $1.8 million or 14% compared to the same period in 2005 due in significant
        part
        to the following factors:
 
 ·
            Our
                interest income decreased by approximately $2.4 million primarily
                as the
                result of the recognition of deferred interest income referred to
                above
                and the decrease of approximately $38.3 million in the monthly average
                balance in investments in real estate loans during the six month
                period
                ended September 30, 2006 compared to the same period in 2005. 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. For additional information see 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.  -
            31
            -
 *Table
            of Contents*
 
 ·
            This
                decline was partially offset by the increase in bank interest income
                earned on cash and cash equivalents accounts held at banking institutions.
                Bank interest income increased by approximately $854,000 during the
                six
                month period ended September 30, 2006 compared to the same period
                in 2005.
                The
                increase is attributed to a higher average monthly balance in cash
                and
                cash equivalents during the period ended attributable to the proceeds
                received from loan payoffs of approximately $127.8 million and proceeds
                of
                approximately $25.8 million received from the sale of real property
                acquired through foreclosure. 
 *Total
        Expenses* :
        For the
        six months ended September 30, 2006, total expenses were approximately $1.7
        million compared to approximately $4.8 million for the six months ended
        September 30, 2005, a decrease of approximately $3.1 million or 64%. Expenses
        were primarily affected by the following factors:
 
 ·
            During
                the six months ended September 30, 2005, expenses were significantly
                impacted by the recognition of provisions for loan loss of approximately
                $2.2 million related to the loans secured by 4 cemeteries and 8 mortuaries
                in Hawaii and $500,000 for 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 six months ended September 30, 2006. 
 ·
            Interest
                expense decreased by approximately $382,000 primarily due to the
                decrease
                of secured borrowing of approximately $4.7 million from September
                30, 2005
                compared to September 30, 2006. 
 ·
            Professional
                fees decreased approximately $348,000 for the six months ended September
                30, 2006, as compared to the same period in 2005, primarily due to
                expenses incurred on a restructured loan during the six months ended
                September 30, 2005. This decrease is partially offset by the increase
                in
                legal expenses incurred during the three months ended September 30,
                2006
                referred to above. 
 ·
            Included
                in other expenses are expenses totaling $214,000 for liability insurance
                expense for the Company’s directors and officers and expenses relating to
                investor services for the six months ended September 30, 2006. There
                were
                no similar expenses incurred during the same period in
                2005. 
 *Total
        Income(Loss) from Real Estate Held for Sale* :
        For the
        six months ended September 30, 2006, total income from real estate held for
        sale
        increased by approximately $4.2 million or 186% compared to the same period
        in
        2005 due in significant part to the following factors:
 
 ·
            During
                the six months ended September 30, 2006, we recorded approximately
                $2.4
                million in rental revenue related to three apartment complexes which
                were
                classified as real estate held for sale. During the same period in
                2005,
                we recognized approximately $1.2 million in rental revenue due to
                the fact
                that the properties were primarily acquired during the three months
                ended
                September 30, 2005. 
 ·
            In
                addition to the gain and losses on the sale of real estate held for
                sale
                referred to above, we recorded a gain of approximately $252,000 on
                the
                sale of a real estate parcel in Austin, Texas during the six months
                ended
                September 30, 2006. There was no gain or loss on sale of real estate
                held
                for sale during the same period in 2005. 
 ·
            During
                the six months ended September 30, 2005 we recorded a charge of
                approximately $1.2 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 six months ended September
                30, 2006.  -
            32
            -
 *Table
            of Contents*
 *Net
        Income.* Overall,
        net income for the three and six months ended September 30, 2006 totaled
        approximately $5.9 million and $10.7 million, respectively, as compared to
        $5.8
        million and $5.7 million for the three and six months ended September 30,
        2005.
 
 *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. During
        the
        six months ended September 30, 2006 we paid dividends to our shareholders
        of
        approximately $6.6 million. On September 25, 2006 the Board of Directors
        declared a cash dividend of $0.06 per share for the month ended August 31,
        2006
        payable on October 27, 2006 to shareholders of record as of October 12, 2006,
        totaling approximately $1.8 million in dividends. In addition, the Board
        of
        Directors declared a monthly cash dividend of $0.065 per share for the month
        of
        September 2006 on October 24, 2006 to be paid on November 29, 2006, to the
        stockholders of record as of November 13, 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 six months ended September 30, 2006, cash flows provided by operating
        activities approximated $8.8 million. Investing activities consisted of cash
        provided by loan payoffs of approximately $127.8 million. Cash used for new
        investments and purchases of real estate loans totaled approximately $146.4
        million, and proceeds from the sale of real estate held for sale totaled
        approximately $25.9 million. In addition, investing activities consisted
        of the
        purchase of $17.1 million in certificates of deposit and proceeds from
        maturities of certificates of deposit totaling $13.4 million. Financing
        activities consisted of payments on notes payable in the amount of approximately
        $17.3 million and dividends to stockholders, net of reinvestment, of $6.4
        million.
 
 At
        September 30, 2006, we had approximately $7.9 million in cash, $4.3 million
        in
        certificates of deposit, $1.5 million in marketable securities - related
        party
        and approximately $287.8 million in total assets. We intend to meet short-term
        working capital needs through a combination of proceeds from loan payoffs,
        loan
        sales and/or borrowings. We believe we have sufficient working capital to
        meet
        our operating needs in the near term.
 
 Since
        we
        distribute most or all of our distributable cash generated by operations,
        our
        sources of liquidity include: repayments of outstanding loans, dividend
        reinvestments by our stockholders 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.
  -
            33
            -
 *Table
            of Contents*
 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 $35.3 million
        and $14.3 million, respectively, as of September 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.
 
 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
        September 30, 2006, we had no Inter-creditor Agreements as compared to March
        31,
        2006, were we had $11.6 million in funds being used under Inter-creditor
        Agreements where we have potential obligations as defined above.
 
 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
        38 real estate loans as of September 30, 2006, with a balance of $265.7 million
        as compared to investments in 33 real estate loans as of March 31, 2006,
        with a
        balance of $247.5 million.
 
 At
        September 30, 2006, the following loans were non-performing (based on current
        information and events, it is probable that we will be unable to collect
        all
        amounts due according to the contractual terms of the loan agreement or when
        the
        payment of interest is 90 days past due); RightStar (Part I & Part II),
        Monterrey Associates and Rio Vista Nevada. These loans are currently carried
        on
        our books at a value of approximately $35.3 million, net of allowance for
        loan
        losses of approximately $9.6 million for the RightStar loans. These loans
        have
        been placed on non-accrual of interest status and are the subject of pending
        foreclosure proceedings.
  -
            34
            -
 *Table
            of Contents*
 On
        May 1,
        2006 the bankruptcy plan of Mid-State Raceway, Inc. for Vernon Downs became
        effective. As a result of the bankruptcy plan, we and VRM I received the
        following:
 
 ·
            A
                new first deed of trust was received from the buyer, Vernon Downs
                Acquisition, LLC, approximating $22.8 million, of which our portion
                is
                approximately $19.6 million. The new terms included a $1.2 million
                principal payment, reducing our principal balance by approximately
                $1.0
                million. This transaction resulted in us recording unearned revenue
                of
                approximately $1.0 million, to be recognized through March 2007.
                The terms
                of the loan are 9% due in 6 months, with an option to extend, which
                was
                granted in September 2006, for an additional 6 months 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. 
 ·
            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 through March 2007. 
 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 September 30, 2006, we have provided a specific reserve related to the
        4
        cemeteries and 8 mortuaries in Hawaii, of which our portion of the specific
        reserve is approximately $9,623,000. In addition, our manager recognized
        a
        specific reserve for the impairment of a restructured loan in the amount
        of
        $500,000. Our Manager evaluated the loans and concluded that the remaining
        underlying collateral was sufficient to protect us against further losses
        of
        principal or interest. Our Manager will continue to evaluate these loans
        in
        order to determine if any other allowance for loan losses should be recorded.
        For additional information on our investments in real estate loans, refer
        to
        Note D - *Investments
        In Real Estate Loans* of the
        Notes to the Financial Statements included in Part 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;  -
            35
            -
 *Table
            of Contents*
  ·
            Evaluation
                of industry trends; and 
 ·
            Estimated
                net realizable value of any underlying collateral in relation to
                the real
                estate loan amount. 
 Based
        upon this evaluation, a determination is made as to whether the allowance
        for
        loan losses is adequate to cover any potential losses. Additions to the
        allowance for loan losses are made by charges to the provision for loan losses.
        Recoveries of previously charged off amounts are credited to the allowance
        for
        loan losses. For additional information regarding the roll-forward of the
        allowance for loan losses for the six months ended September 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.
 
 **Investments
        in Real Estate Held for Sale**
 
 At
        September 30, 2006, we held two properties with a total carrying value of
        approximately $14.3 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. During the six months ended we completed the following
        transactions related to our real estate held for sale:
 
 ·
            During
                June 2006, we sold the parcel in Austin, Texas. Our net proceeds
                were
                approximately $550,000, resulting in a net gain of approximately
                $252,000. 
 ·
            During
                July 2006, we sold a 504 unit apartment complex in Austin, Texas, for
                approximately $16.1 million. This resulted in a net gain of approximately
                $1.6 million. 
 ·
            During
                July 2006, we and VRM I sold the land containing residential lots
                in
                Henderson, NV, for approximately $3.8 million, of which we received
                approximately $1.3 million that resulted in a net gain of
                $21,000. 
 ·
            During
                September 2006, we sold the “Windrush” property in Fort Worth, Texas, for
                a sales price of $8.0 million, resulting in net proceeds of approximately
                $7.9 million. This resulted in a net loss of approximately
                $173,000. 
 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
        September 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 F - *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.
  -
            36
            -
 *Table
            of Contents*
 **CONTRACTUAL
        OBLIGATIONS**
 
 The
        following summarizes our contractual obligation at September 30,
        2006:
 
 **Contractual
                  Obligation**
              
              **Total**
              
              **Less
                  Than 1 Year**
              
              **1-3
                  Years**
              
              **3-5
                  Years**
              
              **More
                  Than**
                **5
                  Years**Note
                  Payable
              
              $
              107,000
              
              $
              107,000
              
              $
              --
              
              $
              --
              
              $
              --Total
              
              $
              107,000
              
              $
              107,000
              
              $
              --
              
              $
              --
              
              $
              --
 
 **CRITICAL
        ACCOUNTING ESTIMATES**
 
 **Revenue
        Recognition**
 
 Interest
        income on loans is accrued by the effective interest method. We do not recognize
        interest income from loans once they are determined to be impaired. A loan
        is
        impaired when, based on current information and events, it is probable that
        we
        will be unable to collect all amounts due according to the contractual terms
        of
        the loan agreement or when the payment of interest is 90 days past
        due.
 
 The
        following table presents a sensitivity analysis to show the impact on our
        financial condition at September 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 1.0% or 100 basis
                  points
              
              $
              2,424,000Weighted
                  average interest rate assumption increased by 5.0% or 500 basis
                  points
              
              $
              12,122,000Weighted
                  average interest rate assumption decreased by 1.0% or 100 basis
                  points
              
              $
              (2,424,000
              )Weighted
                  average interest rate assumption decreased by 5.0% or 500 basis
                  points
              
              $
              (12,122,000
              )
 
 The
        purpose of this analysis is to provide an indication of the impact that the
        weighted average interest rate fluctuations would have on our financial results.
        It is not intended to imply our expectation of future revenues or to estimate
        earnings. We believe that the assumptions used above are appropriate to
        illustrate the possible material impact on the financial
        statements.
 
 **Allowance
        for Loan Losses**
 
 We
        maintain an allowance for loan losses on our investments in real estate loans
        for estimated credit impairment in our investment in real estate loans
        portfolio. The Manager’s estimate of losses is based on a number of factors
        including the types and dollar amounts of loans in the portfolio, adverse
        situations that may affect the borrower’s ability to repay, prevailing economic
        conditions and the underlying collateral securing the loan. Additions to
        the
        allowance are provided through a charge to earnings and are based on an
        assessment of certain factors, which may indicate estimated losses on the
        loans.
        Actual losses on loans are recorded as a charge-off or a reduction to the
        allowance for loan losses. Subsequent recoveries of amounts previously charged
        off are added back to the allowance or included as income.
  -
            37
            -
 *Table
            of Contents*
 The
        following table presents a sensitivity analysis to show the impact on our
        financial condition at September 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
              
              $
              2,657,000Allowance
                  for loan losses assumption increased by 5.0% of loan
                  portfolio
              
              $
              13,287,000Allowance
                  for loan losses assumption decreased by 1.0% of loan
                  portfolio
              
              $
              (2,657,000
              )Allowance
                  for loan losses assumption decreased by 3.8% of loan
                  portfolio
              
              $
              (10,123,000
              )
 
 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 all material facts pertaining to a borrower and the
        security.
 
 We
        may
        discover additional facts and circumstances as we continue our efforts in
        the
        collection and foreclosure processes. This additional information often causes
        management to reassess its estimates. In recent years, we have revised estimates
        of our allowance for loan losses. Circumstances that have caused significant
        changes in our estimated allowance include, but not limited to:
 
 ·
            Declines
                in real estate market conditions that can cause a decrease in expected
                market value; 
 ·
            Discovery
                of undisclosed liens for community improvement bonds, easements and
                delinquent property taxes; 
 ·
            Lack
                of progress on real estate developments after we advance funds. We
                customarily utilize disbursement agents to monitor the progress of
                real
                estate developments and approve loan advances. After further inspection
                of
                the related property, progress on construction occasionally does
                not
                substantiate an increase in value to support the related loan
                advances; 
 ·
            Unanticipated
                legal or business issues that may arise subsequent to loan origination
                or
                upon the sale of foreclosed upon property;
                and 
 ·
            Appraisals,
                which are only opinions of value at the time of the appraisal, may
                not
                accurately reflect the value of the
                property. 
 **Real
        Estate Held for Sale**
 
 Real
        estate held for sale includes real estate acquired through foreclosure and
        will
        be carried at the lower of the recorded amount, inclusive of any senior
        indebtedness, or the property's estimated fair value, less estimated costs
        to
        sell, with fair value based on appraisals and knowledge of local market
        conditions. While pursuing foreclosure actions, the Company seeks to identify
        potential purchasers of such property. It is not the Company's intent to
        invest
        in or own real estate as a long-term investment. In accordance with FAS 144
        - *Accounting
        for the Impairment or Disposal of Long Lived Assets,* the
        Company seeks to sell properties acquired through foreclosure as quickly
        as
        circumstances permit. The carrying values of real estate held for sale are
        assessed on a regular basis from updated appraisals, comparable sales values
        or
        purchase offers.
  -
            38
            -
 *Table
            of Contents*
 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.
 
 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, which from time to
        time
        include those that are financed under Inter-creditor Agreements. At September
        30, 2006, our aggregate investment in real estate loans was approximately
        $233.3
        million, net of allowance, with a weighted average effective interest rate
        of
        10.23%. We had no loans financed under Inter-creditor Agreements at September
        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 September 30, 2006 was 15 months. All but one
        of
        the outstanding real estate loans at September 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 eight have an exit fee.
  -
            39
            -
 *Table
            of Contents*
 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 September 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 September 30, 2006.
 
 **Interest
                  Earning Assets**
                **Aggregated
                  by Maturity at September 30, 2006****Interest
                  Earning Assets**
              
              **2006**
              
              **2007**
              
              **2008**
              
              **2009**
              
              **Thereafter**
              
              **Total**Investments
                  In Real Estate Loans
              
              $
              103,566,000
              
              $
              162,172,000
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              265,738,000Weighted
                  Average Interest Rates
              
              
              10.21%
              
              
              10.24%
              
              
              --%
              
              
              --%
              
              
              --%
              
              
              10.23%
 
 At
        September 30, 2006, we also had approximately $13.7 million invested in cash,
        cash equivalents, certificates of deposit, and marketable securities - related
        party. 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 September 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 discussed below.
  -
            40
            -
 *Table
            of Contents*
 **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 September 30, 2006, management had identified the following
        material weaknesses in their assessment of the effectiveness of our internal
        control over financial reporting:
 
 ·
            *Controls
                over computer database of investments in real estate loans:*We
                did not establish effective controls over investments in real estate
                loans, specifically relating to the access 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. During the period
                ended
                September 30, 2006, management established and implemented controls,
                policies and procedures 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. 
 ·
            *Controls
                over information recorded in the computer database of investments
                in real
                estate loans:*We
                identified errors in recording information in the computer database
                of
                investments in real estate loans related to the origination of new
                loans
                and loan servicing 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. During the period
                ended
                September 30, 2006, management established and implemented additional
                controls, policies and procedures within our loan origination department
                which require critical information recorded in the computer database
                to be
                reviewed and documented by an additional person following the information
                being recorded in the database. 
 ·
            *Controls
                over recording interest income from investments in real estate:*We
                identified errors in recording transactions specifically related
                to
                interest income from investments in real estate loans. During the
                review
                and evaluation of the design and operation of our controls related
                to
                recording interest income from investments in real estate loans,
                we
                recognized that controls and procedures were generally manual rather
                than
                automated and required additional manual controls including documented
                sign-offs by preparers and reviewers of various reports. During the
                period
                ended September 30, 2006, management established and implemented
                additional controls, policies and procedures within our loan servicing
                department which require documented sign-offs by the preparers and
                reviewers of these reports.  -
            41
            -
 *Table
            of Contents*
 **Remediation
        Plan**
 
 To
        remediate our material weakness over the computer database of investments
        in
        real estate loans, management established and implemented controls, policies
        and
        procedures 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 continue to test the design and operation
        of these controls and procedures to verify their effectiveness.
 
 To
        remediate our material weakness over information recorded in the computer
        database of investments in real estate loans, management established and
        implemented additional controls, policies and procedures within our loan
        origination and servicing departments which require critical information
        recorded in the computer database to be reviewed and documented by an additional
        person following the information being recorded in the database. Management
        will
        continue to test the design and operation of these controls and procedures
        to
        verify their effectiveness.
 
 To
        remediate our material weakness over recording interest income from investments
        in real estate loans, management established and implemented additional
        controls, policies and procedures within our loan servicing department which
        require documented sign-offs by the preparers and reviewers of monthly reports
        that reconcile subsidiary records to the general ledger. Management will
        continue to test the design and operation of these controls and procedures
        to
        verify their effectiveness.
 
 **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, loan origination and loan servicing departments. These controls
        have
        been implemented and will continue to be tested during our quarter ending
        December 31, 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 September
        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.
  -
            42
            -
 *Table
            of Contents*
 **ITEM
        1A.**  **RISK
        FACTORS**
  Except
          as
          set forth below, 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.
 
 **SEC
          Investigations Resolved.**
 
 The
          SEC
          investigation disclosed in our previous filings have been resolved without
          any
          adverse action against us. For further information, please see Note L to
          our Financial Statements.
 
 **Legal
          actions seeking damages and appraisal rights could harm our operating results
          and financial condition.**
 
 We
          have
          recently been named in several legal actions seeking damages and appraisal
          rights in connection with the REIT conversion. See Note M to our Financial
          Statements. While we believe these actions are without merit, the defense
          of
          such actions could material increase our legal costs and may require the
          substantial attention of our management. This in turn might adversely impact
          our
          operation results. Moreover, any adverse outcome in such actions could
          result in
          our having to pay substantial damages with would reduce our cash resources
          and
          harm our financial condition.
 **ITEM
        2.**  **UNREGISTERED
        SALES OF EQUITY AND USE OF PROCEEDS**
 
 None.
 
 **ITEM
        3.**  **DEFAULTS
        UPON SENIOR SECURITIES**
 
 None.
 
 **ITEM
        4.**  **SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 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 America10.8
              
              Intercreditor
                  Agreement, dated October 13, 2006, by
                  and between Vestin Originations, Inc., Vestin Mortgage, Inc. Vestin
                  Realty
                  Mortgage I, Inc., Vestin Realty Mortgage II, Inc., Vestin Fund
                  III, LLC,
                  Owens Financial Group, Inc. and Owens Mortgage Investment
                  Fund21.1(4)
              
              List
                  of subsidiaries of the Registrant31.1
              
              Section
                  302 Certification of Michael V.
                  Shustek31.2
              
              Section
                  302 Certification of John
                  Alderfer32
              
              Certification
                  Pursuant to U.S.C. 18 Section
                  135099.2R(5)
              
              Vestin
                  Realty Mortgage II, Inc. Code of Business Conduct and
                  Ethics
 
 (1)
              
              Incorporated
                  herein by reference to our Form S-4 Registration Statement filed
                  on May
                  20, 2005 (File No. 333-125121).(2)
              
              Incorporated
                  herein by reference to Post-Effective Amendment No. 5 to our Form
                  S-4
                  Registration Statement filed on December 20, 2005 (File No.
                  333-125121).(3)
              
              Incorporated
                  herein by reference to Post-Effective Amendment No. 6 to our Form
                  S-4
                  Registration Statement filed on January 4, 2006 (File No.
                  333-125121).(4)
              
              Incorporated
                  herein by reference to Post-Effective Amendment No. 7 to our Form
                  S-4
                  Registration Statement filed on January 13, 2006 (File No.
                  333-125121).(5)
              
              Incorporated
                  herein by reference to the Transition Report on Form 10-K for the
                  nine
                  month transition period ended March 31, 2006 filed on September
                  7, 2006
                  (File No.000-51892)
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            44
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 *Table
            of Contents*
 
 **SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the registrant has duly caused this report to be signed on its behalf
        by
        the undersigned thereunto duly authorized.
 
 **Vestin
                  Realty Mortgage II, Inc.**By:
              */s/
                  Michael V. Shustek*Michael
                  V. ShustekPresident
                  and Chief Executive OfficerDate:
              October
                  26, 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
              
              October
                  26, 2006Michael
                  V. Shustek
              
              (Principal
                  Executive Officer)*/s/
                  John W. Alderfer*
              
              Chief
                  Financial Officer and Director
              
              October
                  26, 2006John
                  W. Alderfer
              
              (Principal
                  Financial and Accounting Officer)*/s/
                  Robert J. Aalberts*
              
              Director
              
              October
                  26, 2006Robert
                  J. Aalberts*/s/
                  Fredrick J.**Zaffarese**Leavitt*
              
              Director
              
              October
                  26, 2006Fredrick
                  J.ZaffareseLeavitt*/s/
                  Roland M. Sansone*
              
              Director
              
              October
                  26, 2006Roland
                  M. Sansone
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