**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, 2007
 
 **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.)
 
 **6149
        SOUTH RAINBOW BOULVARD, LAS VEGAS, NEVADA 89118**
 (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 31, 2007, there were 38,638,033 shares of the Company’s Common Stock
        outstanding.
 
 
  
  **TABLE
        OF CONTENTS**
 
 **Page**Part
                  I
              FINANCIAL
                  INFORMATIONItem
                  1.
              Consolidated
                  Financial StatementsConsolidated
                  Balance Sheets as of September 30, 2007
                  (unaudited) and December 31, 2006
              1Consolidated
                  Statements of Income (unaudited) for the Three and
                  Nine Months Ended September 30, 2007 and 2006
              2Consolidated
                  Statements of Equity and Other Comprehensive
                  Income (unaudited) for the Nine Months Ended September 30,
                  2007
              3Consolidated
                  Statements of Cash Flows (unaudited) for the Nine
                  Months Ended September 30, 2007 and 2006
              4Notes
                  to Consolidated Financial Statements
                  (unaudited)
              6Report
                  of Independent Registered Public Accounting
                  Firm
              29Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              30Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              42Item
                  4.
              Controls
                  and Procedures
              43Item
                  4T
              Controls
                  and Procedures
              43Part
                  II
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              43Item
                  1A.
              Risk
                  Factors
              43Item
                  2.
              Unregistered
                  Sales of Equity – Securities and Use of
                  Proceeds
              54Item
                  3.
              Defaults
                  Upon Senior Securities
              55Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              55Item
                  5.
              Other
                  Information
              55Item
                  6.
              Exhibits
              56SIGNATURES
              57Exhibit
                  31.1Exhibit
                  31.2Exhibit
                  32
 
 
  *Table
            of Contents*
  **PART
        I - FINANCIAL INFORMATION**
 
 **ITEM
                  1.**
              **CONSOLIDATED
                  FINANCIAL STATEMENTS**
 
 **VESTIN
                  REALTY MORTGAGEII, INC.****CONSOLIDATED
                  BALANCE SHEETS****ASSETS****September
                  30, 2007**
              
              
              **December
                  31, 2006****(Unaudited)**AssetsCash
              
              $
              51,692,000
              
              
              $
              16,841,000Certificates
                  of deposit
              
              
              101,000
              
              
              
              250,000Investment
                  in marketable securities - related party
              
              
              2,898,000
              
              
              
              2,087,000Interest
                  and other receivables, net of allowance of $160,000 at September
                  30, 2007
                  and December 31, 2006
              
              
              3,307,000
              
              
              
              2,709,000Notes
                  receivable, net of allowance of $2,619,000 at September 30, 2007
                  and
                  $2,000,000 at December 31, 2006
              
              
              --
              
              
              
              282,000Real
                  estate held for sale
              
              
              28,866,000
              
              
              
              30,079,000Real
                  estate held for sale - seller financed
              
              
              7,424,000
              
              
              
              14,774,000Investment
                  in real estate loans, net of allowance for loan losses of $10,543,000
                  at
                  September 30, 2007 and $9,828,000 at December 31, 2006
              
              
              244,695,000
              
              
              
              221,849,000Due
                  from related parties
              
              
              --
              
              
              
              31,000Investment
                  in equity affiliate
              
              
              100,000
              
              
              
              --Assets
                  under secured borrowings
              
              
              --
              
              
              
              13,796,000Deferred
                  financing costs
              
              
              2,257,000
              
              
              
              --Other
                  assets
              
              
              166,000
              
              
              
              344,000Total
                  assets
              
              $
              341,506,000
              
              
              $
              303,042,000**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**LiabilitiesAccounts
                  payable and accrued liabilities
              
              $
              5,787,000
              
              
              $
              687,000Due
                  to related parties
              
              
              2,000
              
              
              
              --Secured
                  borrowings
              
              
              --
              
              
              
              13,796,000Junior
                  subordinated notes payable
              
              
              60,100,000
              
              
              
              --Note
                  payable
              
              
              --
              
              
              
              27,000Deposit
                  liability
              
              
              1,577,000
              
              
              
              5,514,000Unearned
                  revenue
              
              
              --
              
              
              
              454,000Dividend
                  payable
              
              
              1,728,000
              
              
              
              4,078,000Total
                  liabilities
              
              
              69,194,000
              
              
              
              24,556,000Commitments
                  and ContingenciesStockholders'
                  equityPreferred
                  stock, $0.0001 par value; 1,000,000 shares authorized; none
                  issued
              
              
              --
              
              
              
              --Treasury
                  stock, at cost (285,050 shares)
              
              
              (1,440,000
              )
              
              
              --Common
                  stock, $0.0001 par value; 100,000,000 shares authorized; 38,631,007
                  shares
                  issued and outstanding at September 30, 2007 and 38,839,710 shares
                  issued
                  and outstanding at December 31, 2006
              
              
              4,000
              
              
              
              4,000Additional
                  paid in capital
              
              
              278,260,000
              
              
              
              277,853,000Retained
                  earnings (accumulated deficit)
              
              
              (3,979,000
              )
              
              
              1,242,000Accumulated
                  other comprehensive loss
              
              
              (533,000
              )
              
              
              (613,000
              )Total
                  stockholders' equity
              
              
              272,312,000
              
              
              
              278,486,000Total
                  liabilities and stockholders' equity
              
              $
              341,506,000
              
              
              $
              303,042,000
 
  The
            accompanying notes are an integral part of these consolidated
            statements.
 See
            review report of Independent Registered Public Accounting Firm.
 -
            1
            -
 *Table
            of Contents*
  
 **VESTIN
                  REALTY MORTGAGEII, INC.****CONSOLIDATED
                  STATEMENTS OF INCOME****(UNAUDITED)****For
                  The Three**
                **Months
                  Ended**
              
              
              **For
                  The Three**
                **Months
                  Ended**
              
              
              **For
                  The Nine**
                **Months
                  Ended**
              
              
              **For
                  The Nine**
                **Months
                  Ended****09/30/2007**
              
              
              **09/30/2006**
              
              
              **09/30/2007**
              
              
              **09/30/2006****Revenues**Interest
                  income from investment in real estate loans
              
              $
              6,836,000
              
              
              $
              5,096,000
              
              
              $
              19,915,000
              
              
              $
              15,571,000Gain
                  on sale of marketable securities
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              21,000Dividend
                  income - related party
              
              
              73,000
              
              
              
              --
              
              
              
              200,000
              
              
              
              --Interest
                  income from banking institutions
              
              
              719,000
              
              
              
              456,000
              
              
              
              1,087,000
              
              
              
              1,219,000Gain
                  related to pay off of real estate loan, including recovery of allowance
                  for loan loss
              
              
              --
              
              
              
              --
              
              
              
              1,044,000
              
              
              
              --Other
                  income
              
              
              104,000
              
              
              
              93,000
              
              
              
              903,000
              
              
              
              251,000Total
                  revenues
              
              
              7,732,000
              
              
              
              5,645,000
              
              
              
              23,149,000
              
              
              
              17,062,000**Operating
                  expenses**Management
                  fees - related party
              
              
              274,000
              
              
              
              274,000
              
              
              
              822,000
              
              
              
              822,000Provision
                  for loan loss
              
              
              1,309,000
              
              
              
              --
              
              
              
              1,309,000
              
              
              
              5,500,000Interest
                  expense
              
              
              1,362,000
              
              
              
              2,000
              
              
              
              2,008,000
              
              
              
              1,109,000Professional
                  fees
              
              
              1,769,000
              
              
              
              286,000
              
              
              
              2,667,000
              
              
              
              735,000Professional
                  fees - related party
              
              
              34,000
              
              
              
              34,000
              
              
              
              110,000
              
              
              
              65,000Provision
                  of doubtful accounts related to receivable
              
              
              235,000
              
              
              
              --
              
              
              
              235,000
              
              
              
              --Other
              
              
              179,000
              
              
              
              210,000
              
              
              
              630,000
              
              
              
              730,000Total
                  operating expenses
              
              
              5,162,000
              
              
              
              806,000
              
              
              
              7,781,000
              
              
              
              8,961,000**Income
                  from Operations**
              
              
              2,570,000
              
              
              
              4,839,000
              
              
              
              15,368,000
              
              
              
              8,101,000**Income
                  from real estate held for sale**Revenue
                  related to real estate held for sale
              
              
              25,000
              
              
              
              938,000
              
              
              
              34,000
              
              
              
              3,852,000Net
                  gain on sale of real estate held for sale
              
              
              --
              
              
              
              1,472,000
              
              
              
              --
              
              
              
              1,784,000Gain
                  on sale of real estate held for sale - seller financed
              
              
              --
              
              
              
              --
              
              
              
              808,000
              
              
              
              --Expenses
                  related to real estate held for sale
              
              
              (969,000
              )
              
              
              (849,000
              )
              
              
              (2,781,000
              )
              
              
              (4,309,000
              )Write
                  downs on real estate held for sale
              
              
              (85,000
              )
              
              
              --
              
              
              
              (1,113,000
              )
              
              
              --Total
                  income (loss) from real estate held for sale
              
              
              (1,029,000
              )
              
              
              1,561,000
              
              
              
              (3,052,000
              )
              
              
              1,327,000Income
                  before provision for income taxes
              
              
              1,541,000
              
              
              
              6,400,000
              
              
              
              12,316,000
              
              
              
              9,428,000Provision
                  for income taxes
              
              
              --
              
              
              
              452,000
              
              
              
              --
              
              
              
              452,000**NET
                  INCOME**
              
              $
              1,541,000
              
              
              $
              5,948,000
              
              
              $
              12,316,000
              
              
              $
              8,976,000Basic
                  and diluted earnings per weighted average common share / membership
                  unit
              
              $
              0.04
              
              
              $
              0.15
              
              
              $
              0.32
              
              
              $
              0.23Dividends
                  declared per common share / cash distribution to members per membership
                  unit
              
              $
              0.15
              
              
              $
              0.22
              
              
              $
              0.45
              
              
              $
              0.38Weighted
                  average common shares / membership units
              
              
              38,724,407
              
              
              
              38,799,550
              
              
              
              38,807,670
              
              
              
              38,834,746
 
  The
            accompanying notes are an integral part of these consolidated
            statements.
 See
            review report of Independent Registered Public Accounting Firm.
 -
            2
            -
 *Table
            of Contents*
  
 **VESTIN
                  REALTY MORTGAGEII, INC.****CONSOLIDATED
                  STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE
                  INCOME****FOR
                  THE NINE MONTHS ENDED SEPTEMBER 30, 2007****(UNAUDITED)****Treasury
                  Stock**
              
              
              **Common
                  Stock****Number
                  of Shares**
              
              
              **Amount**
              
              
              **Number
                  of Shares**
              
              
              **Amount**
              
              
              **Additional
                  Paid-in-Capital**
              
              
              **Retained
                  Earnings (Accumulated deficit)**
              
              
              **Accumulated
                  Other Comprehensive Loss**
              
              
              **Total**Stockholders'
                  Equity at December 31, 2006
              
              
              --
              
              
              $
              --
              
              
              
              38,839,710
              
              
              $
              4,000
              
              
              $
              277,853,000
              
              
              $
              1,242,000
              
              
              $
              (613,000
              )
              
              $
              278,486,000Comprehensive
                  Income:Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              12,316,000
              
              
              
              
              
              
              
              12,316,000Unrealized
                  Gain on Marketable Securities - Related Party
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              80,000
              
              
              
              80,000Comprehensive
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              12,396,000Purchase
                  of Treasury Stock
              
              
              285,050
              
              
              
              (1,440,000
              )
              
              
              (285,050
              )
              
              
              --
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,440,000
              )Dividends
                  Declared to Stockholders
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (17,537,000
              )
              
              
              
              
              
              
              (17,537,000
              )Reinvestment
                  of Dividends
              
              
              
              
              
              
              
              
              
              
              76,347
              
              
              
              --
              
              
              
              407,000
              
              
              
              
              
              
              
              
              
              
              
              407,000Stockholders'
                  Equity at
                September
                  30, 2007 (Unaudited)
              
              
              285,050
              
              
              $
              (1,440,000
              )
              
              
              38,631,007
              
              
              $
              4,000
              
              
              $
              278,260,000
              
              
              $
              (3,979,000
              )
              
              $
              (533,000
              )
              
              $
              272,312,000
 
 
 
  The
            accompanying notes are an integral part of these consolidated
            statements.
 See
            review report of Independent Registered Public Accounting Firm.
 -
            3
            -
 *Table
            of Contents*
  
 **VESTIN
                  REALTY MORTGAGEII, INC.****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(UNAUDITED)****For
                  The Nine**
                **Months
                  Ended**
              
              
              **For
                  The Nine**
                **Months
                  Ended****September
                  30, 2007**
              
              
              **September
                  30, 2006****Cash
                  flows from operating activities:**Net
                  income
              
              $
              12,316,000
              
              
              $
              8,976,000Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Provision
                  for doubtful accounts related to receivable
              
              
              235,000
              
              
              
              --Gain
                  on sale of marketable securities
              
              
              --
              
              
              
              (21,000
              )Write
                  down of real estate held for sale
              
              
              1,113,000
              
              
              
              --Gain
                  on sale of real estate held for sale
              
              
              --
              
              
              
              (1,784,000
              )Gain
                  on sale of real estate held for sale - seller financed
              
              
              (808,000
              )
              
              
              --Recovery
                  of allowance for doubtful notes receivable included in other
                  income
              
              
              (594,000
              )
              
              
              (186,000
              )Provision
                  for loan loss
              
              
              1,309,000
              
              
              
              5,500,000Gain
                  related to pay off of real estate loan, including recovery of allowance
                  for loan loss
              
              
              (1,044,000
              )
              
              
              --Amortized
                  interest income
              
              
              (1,323,000
              )
              
              
              (801,000
              )Amortized
                  deferred financing costs, included in interest expense
              
              
              44,000
              
              
              
              --Provision
                  for income taxes
              
              
              --
              
              
              
              452,000Change
                  in operating assets and liabilities:Interest
                  and other receivables
              
              
              (598,000
              )
              
              
              338,000Due
                  to/from related parties
              
              
              33,000
              
              
              
              338,000Other
                  assets
              
              
              405,000
              
              
              
              741,000Accounts
                  payable and accrued liabilities
              
              
              5,100,000
              
              
              
              481,000Net
                  cash provided by operating activities
              
              
              16,188,000
              
              
              
              14,034,000**Cash
                  flows from investing activities:**Investments
                  in real estate loans
              
              
              (93,467,000
              )
              
              
              (149,017,000
              )Purchase
                  of investments in real estate loans from:VRM
                  I
              
              
              --
              
              
              
              (1,200,000
              )Fund
                  III
              
              
              (1,300,000
              )
              
              
              (4,900,000
              )Other
                  related parties
              
              
              (661,000
              )
              
              
              (2,556,000
              )Third
                  parties
              
              
              (12,798,000
              )
              
              
              (23,000,000
              )Proceeds
                  from loan payoffs
              
              
              82,759,000
              
              
              
              169,002,000Sale
                  of investments in real estate loans to:VRM
                  I
              
              
              --
              
              
              
              500,000Other
                  related parties
              
              
              --
              
              
              
              2,000,000Third
                  party
              
              
              3,319,000
              
              
              
              50,000Proceeds
                  related to investment in real estate held for sale
              
              
              100,000
              
              
              
              26,130,000Principal
                  payments on real estate held for sale-seller financed
              
              
              3,651,000
              
              
              
              --Legal
                  expenses paid and applied against loan allowance
              
              
              (94,000
              )
              
              
              (611,000
              )Proceeds
                  from note receivable
              
              
              641,000
              
              
              
              236,000Purchase
                  of marketable securities - related parties
              
              
              (731,000
              )
              
              
              --Proceeds
                  from sale of marketable securities
              
              
              --
              
              
              
              5,622,000Purchase
                  of investments in certificates of deposit
              
              
              (1,026,000
              )
              
              
              (17,061,000
              )Proceeds
                  from investments in certificates of deposit
              
              
              1,175,000
              
              
              
              13,736,000Unearned
                  revenue proceeds related to loan restructuring
              
              
              --
              
              
              
              608,000Deposit
                  liability
              
              
              570,000
              
              
              
              2,956,000Net
                  cash (used) provided by investing activities
              
              $
              (17,862,000
              )
              
              $
              22,495,000
 
 
  The
            accompanying notes are an integral part of these consolidated
            statements.
 See
            review report of Independent Registered Public Accounting Firm.
 -
            4
            -
 *Table
            of Contents*
  
 **VESTIN
                  REALTY MORTGAGE II, INC.****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(UNAUDITED)****For
                  The Nine**
                **Months
                  Ended**
              
              
              **For
                  The Nine**
                **Months
                  Ended****September
                  30, 2007**
              
              
              **September
                  30, 2006****Cash
                  flows from financing activities:**Principal
                  payment on note payable
              
              $
              (254,000
              )
              
              $
              (26,015,000
              )Proceeds
                  from issuance of junior subordinated notes payable
              
              
              60,000,000
              
              
              
              --Deferred
                  financing costs
              
              
              (2,301,000
              )
              
              
              --Dividends
                  to stockholders, net of reinvestments
              
              
              (19,013,000
              )
              
              
              (6,344,000
              )Dividends
                  to stockholders - related party
              
              
              (467,000
              )
              
              
              (99,000
              )Purchase
                  of treasury stock at cost
              
              
              (1,440,000
              )
              
              
              --Members'
                  distributions, net of reinvestments
              
              
              --
              
              
              
              (5,315,000
              )Members'
                  distributions - related party
              
              
              --
              
              
              
              (16,000
              )Members'
                  redemptions
              
              
              --
              
              
              
              (30,459,000
              )Net
                  cash provided (used) in financing activities
              
              
              36,525,000
              
              
              
              (68,248,000
              )**NET
                  CHANGE IN CASH**
              
              
              34,851,000
              
              
              
              (31,719,000
              )**Cash,
                  beginning of period**
              
              
              16,841,000
              
              
              
              39,633,000**Cash,
                  end of period**
              
              $
              51,692,000
              
              
              $
              7,914,000**Supplemental
                  disclosures of cash flows information:**Income
                  taxes paid
              
              $
              --
              
              
              $
              --Interest
                  paid
              
              $
              2,008,000
              
              
              $
              1,348,000Non-cash
                  investing and financing activities:Dividend
                  payable
              
              $
              1,728,000
              
              
              $
              1,792,000Reinvestment
                  of dividends
              
              $
              407,000
              
              
              $
              122,000Reinvestment
                  of member distributions
              
              $
              --
              
              
              $
              742,000Loan
                  payoffs of loans funded through secured borrowings
              
              $
              13,796,000
              
              
              $
              19,754,000Note
                  payable relating to prepaid E & O insurance
              
              $
              227,000
              
              
              $
              238,000Loan
                  rewritten with same or similar collateral
              
              $
              30,918,000
              
              
              $
              --Purchase
                  of equity investment related to junior subordinated notes
                  payable
              
              $
              100,000
              
              
              $
              --Receivable
                  related to loan rewritten with same or similar property, net of
                  allowance,
                  as collateral applied to unearned income
              
              $
              --
              
              
              $
              127,000Unearned
                  revenue from loans rewritten with same or similar property as
                  collateral
              
              $
              454,000
              
              
              $
              427,000Decrease
                  in deposit liability related to pay off of real estate held for
                  sale -
                  seller financed
              
              $
              4,507,000
              
              
              $
              --Adjustment
                  to note receivable and related allowance
              
              $
              978,000
              
              
              $
              --Unrealized
                  gain (loss) on marketable securities - related party
              
              $
              80,000
              
              
              $
              (163,000
              )
 
 
 
  The
            accompanying notes are an integral part of these consolidated
            statements.
 See
            review report of Independent Registered Public Accounting Firm.
 -
            5
            -
 *Table
            of Contents*
  
 **VESTIN
        REALTY MORTGAGEII, INC**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **SEPTEMBER
        30, 2007**
 
 **(UNAUDITED)**
 
 **NOTE
        A — ORGANIZATION**
 
 Vestin
        Fund II, LLC (“Fund II”) was organized in December 2000 as a Nevada limited
        liability company for the purpose of investing in real estate
        loans.  Vestin Realty Mortgage II, Inc. (“VRM II”) was organized in
        January 2006 as a Maryland corporation for the sole purpose of effecting
        a
        merger with Fund II.  On March 31, 2006, Fund II merged into VRM II
        and the members of Fund II received one share of VRM II’s common stock for each
        membership unit of Fund II.  References in this report to the
“Company”, “we”, “us” or “our” refer to Fund II with respect to the period prior
        to April 1, 2006 and to VRM II with respect to the period commencing on April
        1,
        2006.  Because we were a limited liability company (“LLC”) during the
        prior periods reflected in this report, we make reference to Fund II’s “members”
rather than “stockholders” in reporting our financial results
 
 We
        invest
        in loans secured by real estate through deeds of trust or mortgages (hereafter
        referred to collectively as “deeds of trust” and as defined in our Management
        Agreement as “Mortgage Assets”).  We commenced operations in June
        2001.
 
 We
        operate as a real estate investment trust (“REIT”).  We are not a
        mutual fund or an investment company within the meaning of the Investment
        Company Act of 1940, nor are we subject to any regulation
        thereunder.  As a REIT, we are required to have a December 31 fiscal
        year end.
 
 Our
        manager is Vestin Mortgage, Inc. (the “manager” or “Vestin Mortgage”), a Nevada
        corporation, which is a wholly owned subsidiary of Vestin Group, Inc. (“Vestin
        Group”), a Delaware corporation.  Michael Shustek, the CEO and
        director of our manager and CEO, President and a director of us, wholly owns
        Vestin Group, Inc., which is engaged in asset management, real estate lending
        and other financial services though its subsidiaries.  Our manager,
        prior to June 30, 2006, also operated as a licensed Nevada mortgage broker
        and
        was engaged in the business of brokerage, placement and servicing of commercial
        loans secured by real property.  On July 1, 2006, the mortgage broker
        license was issued to an affiliated company, Vestin Originations, Inc. that
        has
        continued the business of brokerage, placement and servicing of commercial
        real
        estate loans.  Vestin Originations, Inc. is a wholly owned subsidiary
        of Vestin Group.  On September 1, 2007, the servicing of real estate
        loans was assumed by our manager.
 
 Pursuant
        to our management agreement, our manager implements our business strategies
        on a
        day-to-day basis, manages and provides services to us, and provides similar
        services to our subsidiaries.  Without limiting the foregoing, our
        manager performs other services as may be required from time to time for
        management and other activities relating to our assets, as our manager shall
        deem appropriate under the particular circumstances.  Consequently,
        our operating results are dependent upon our manager’s ability and performance
        in managing our operations and servicing our assets.
 
 Vestin
        Mortgage, Inc. is also the manager of Vestin Realty Mortgage I, Inc., as
        the
        successor by merger to Vestin Fund I, LLC (“Fund I”), referred to as (“VRM I”),
        Vestin Fund III, LLC (“Fund III”) and inVestin Nevada, Inc. (“inVestin”), a
        company wholly owned by our manager’s CEO.  These entities also invest
        in real estate loans.
 
 The
        consolidated financial statements include the accounts of us and our wholly
        owned taxable REIT subsidiary, TRS II, Inc.  All significant
        inter-company transactions and balances have been eliminated in
        consolidation.
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            6
            -
 *Table
            of Contents*
  On
        June
        22, 2007, we completed the issuance of $60.1 million in unsecured trust
        preferred securities through Vestin II Capital Trust I (“VCT I), a special
        purpose business trust.  Vestin II Capital Trust I, is a Delaware
        statutory trust.  Our interest in VCT I is accounted for using the
        equity method and the assets and liabilities are not consolidated into our
        financial statements due to our determination that VCT I is a variable interest
        entity in which we are not the primary beneficiary under Financial Accounting
        Standards Board Interpretation No. 46R (“FIN 46R”).
 
 **NOTE
        B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 **Management
        Estimates**
 
 The
        preparation of consolidated 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 consolidated financial statements and the reported amounts
        of
        revenues and expenses during the reporting period.  Actual results
        could differ from those estimates.
 
 **Cash
        and Cash Equivalents**
 
 Cash
        and
        cash equivalents include interest-bearing and non-interest-bearing bank
        deposits, money market accounts, short-term certificates of deposit with
        original maturities of three months or less, and short-term instruments with
        a
        liquidation provision of one month or less.
 
 **Revenue
        Recognition**
 
 Interest
        is recognized as revenue when earned according to the terms of the loans,
        using
        the effective interest method.  We do not accrue interest income on
        loans once they are determined to be impaired.  A loan is impaired
        when based on current information and events, it is probable that we will
        be
        unable to collect all amounts due according to the contractual terms of the
        loan
        agreement or when the payment of interest is 90 days past due.  Cash
        receipts will be allocated to interest income, except when such payments
        are
        specifically designated by the terms of the loan as principal reduction or
        when
        management does not believe our investment in the loan is fully
        recoverable.
 
 **Investments
        in Real Estate Loans**
 
 We
        may
        from time to time acquire or sell investments in real estate loans from or
        to
        our manager or other related parties pursuant to the terms of our Management
        Agreement provided the price does not exceed the par value of the
        loan.  The primary purpose is to either free up capital to provide
        liquidity for various reasons, such as loan diversification, or place excess
        capital in investments to maximize the use of our capital.  Selling or
        buying loans allows us to diversify our loan portfolio within these
        parameters.  Due to the short-term nature of the loans we make and the
        similarity of interest rates in loans we normally would invest in, the fair
        value of a loan typically approximates its carrying
        value.  Accordingly, discounts or premiums typically do not apply upon
        sales of loans and therefore, generally no gain or loss is recorded on these
        transactions, regardless of whether to a related or unrelated
        party.
 
 Investments
        in real estate loans are secured by deeds of trust or
        mortgages.  Generally, our real estate loans require interest only
        payments with a balloon payment of the principal at maturity.  We have
        both the intent and ability to hold real estate loans until maturity and
        therefore, real estate loans are classified and accounted for as held for
        investment and are carried at amortized cost.  Loans sold to or
        purchased from affiliates are accounted for at the principal balance and
        no gain
        or loss is recognized by us or any affiliate.  Loan-to-value ratios
        are based on appraisals obtained at the time of loan origination and may
        not
        reflect subsequent changes in value estimates.  Such appraisals are
        generally dated within 12 months of the date of loan origination and may
        be
        commissioned by the borrower.  The appraisals may be for the current
        estimate of the “as-if developed” value of the property, which approximates the
        post-construction value of the collateralized property assuming that such
        property is developed.  As-if developed values on raw land loans or
        acquisition and development loans often dramatically exceed the immediate
        sales
        value and may include anticipated zoning changes and timely successful
        development by the purchaser.
  See
            review report of Independent Registered Public Accounting Firm.
 -
            7
            -
 *Table
            of Contents*
  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 funded.  If there is less security and a default occurs, we
        may not recover the full amount of the loan.
 
 **Allowance
        for Loan Losses**
 
 We
        maintain an allowance for loan losses on our investments in real estate loans
        for estimated credit impairment.  Our 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 and 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
        commercial real estate lender willing to invest in loans to borrowers who
        may
        not meet the credit standards of other financial institutional lenders, the
        default rate on our loans could be higher than those generally experienced
        in
        the real estate lending industry.  We, our manager and Vestin
        Originations generally 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.
 
 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.
 
 **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, we seek to identify
        potential purchasers of such property.  It is not our 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”),**we
        seek 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.
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            8
            -
 *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 – *Accounting for Sales of Real
        Estate* ("FAS 66'') requires the buyer of the real estate to make minimum
        initial and continuing investments.  Minimum initial investments as
        defined by FAS 66 range from 10% to 25% based on the type of real estate
        sold.  In addition, FAS 66 limits commitments and contingent
        obligations incurred by a seller in order to record a sale.
 
 Because
        we occasionally foreclose on loans with raw land or developments in progress,
        available financing for such properties is often limited and we frequently
        provide financing up to 100% of the selling price on these
        properties.  In addition, we may make additional loans to the buyer to
        continue development of a property.  Although sale agreements are
        consummated at closing, they lack adequate initial investment by the buyer
        to
        qualify as a sales transaction as defined in FAS 66.  These sale
        agreements are not recorded as a sale until the requirements of FAS 66 are
        met.
 
 These
        sale agreements are recorded under the deposit method or cost recovery method
        as
        defined in FAS 66.  Under the deposit method, no profit is recognized
        and any cash received from the buyer is reported as a deposit liability on
        the
        balance sheet.  Under the cost recovery method, no profit is
        recognized until payments by the buyer exceed the carrying basis of the property
        sold.  Principal payments received will reduce the related receivable,
        and interest collections will be recorded as unrecognized gross profit on
        the
        balance sheet.  The carrying values of these properties are included
        in real estate held for sale on the accompanying consolidated balance
        sheets.
 
 In
        cases
        where the investment by the buyer is significant (generally 20% or more)
        and the
        buyer has an adequate continuing investment, the purchase money debt is not
        subject to future subordination, and a full transfer of risks and rewards
        has
        occurred, we will use the full accrual method.  Under the full accrual
        method, a sale is recorded and the balance remaining to be paid is recorded
        as a
        normal note.  Interest is recorded as income when
        received.
 
 **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.  Our operations related to real estate held for sale are
        separately identified in the accompanying consolidated statements of
        income.
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            9
            -
 *Table
            of Contents*
  **Secured
        Borrowings**
 
 Secured
        borrowings provide an additional source of capital for our lending
        activity.  Secured borrowings allow us to increase the diversification
        of our loan portfolio and to invest in loans that we might not otherwise
        invest
        in.  We do not receive any fees for entering into secured borrowing
        arrangements; however, we may receive revenue for any differential of the
        interest spread, if applicable.  Loans in which unaffiliated investors
        have participated through inter-creditor agreements (“Inter-creditor
        Agreements”) are accounted for as secured borrowings in accordance with
        Statement of Financial Accounting Standards (“FAS”) 140 – *Accounting for
        Transfers and Servicing of Financial Assets and Extinguishments of Liabilities*(“FAS 140”).  The Inter-creditor Agreements provide us additional
        funding sources for real estate loans whereby an unaffiliated investor (the
        “Investor”) may participate on a non-pari passu basis in certain real estate
        loans with us and/or VRM I and/or Fund III (collectively, the “Lead
        Lenders”).  In the event of borrower non- performance, the
        Inter-creditor Agreements generally provide that the Lead Lenders must repay
        the
        Investor’s loan amount either by (i) continuing to remit to the Investor the
        interest due on the participated loan amount; (ii) substituting an alternative
        loan acceptable to the Investor; or (iii) repurchasing the participation
        from
        the Investor for the outstanding balance plus accrued interest.
 
 Additionally,
        an Investor may participate in certain loans with the Lead Lenders through
        Participation Agreements.  In the event of borrower non-performance,
        the Participation Agreement may allow the Investor to be repaid up to the
        amount
        of the Investor’s investment prior to the Lead Lender being
        repaid.  Real estate loan financing under the Participation Agreements
        are also accounted for as a secured borrowing in accordance with FAS
        140.  We do not receive any revenues for entering into secured
        borrowing arrangements.
 
 **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, 2007.  All securities are classified
        as available-for-sale under the provisions of FAS 115 – *Accounting for
        Certain Investments in Debt and Equity Securities*.
 
 **Fair
        Value of Financial Instruments**
 
 FAS
        107 –
*Disclosures about Fair Value of Financial Instruments*(“FAS 107”)
        requires the determination of fair value of our financial assets.  The
        following methods and assumptions were used to estimate the fair value of
        financial instruments included in the following categories:
 
 (a)
              Certificate
                  of Deposits and Short-Term Investments:  The carrying amounts of
                  these instruments are at amortized cost, which approximates fair
                  value.
 
 (b)
              Investment
                  in Real Estate Loans:  The carrying value of these instruments,
                  net of the allowance for loan losses, approximates the fair value
                  due to
                  their short-term maturities.  Fair values for loans, which are
                  delinquent and/or in foreclosure are determined by underlying collateral
                  securing the loans.
 
 (c)
              Assets
                  under Secured Borrowing:  The carrying amount of these
                  instruments approximate fair value.  The fair value is estimated
                  based upon projected cash flows discounted at the estimated current
                  interest rates at which similar loans would be
                  made.
 
 At
        September 30, 2007 and December 31, 2006, the estimated fair values of the
        real
        estate loans, including seller financed loans, were approximately $248.7
        million
        and $227.9 million, respectively.  These estimates were based upon the
        present value of expected cash flows discounted at rates currently available
        for
        similar loans.  Fair value estimates are made at a specific point in
        time; based on relevant market information; are subjective in nature; and
        involve uncertainties and matters of significant
        judgment.  Accordingly, the estimates presented herein are not
        necessarily indicative of the amounts that would be collected upon maturity
        or
        disposition of the loans.
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            10
            -
 *Table
            of Contents*
  **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 share equivalents during the three and nine months ended
        September 30, 2007.  The following is a computation of the EPS data
        for the three and nine months ended September 30, 2007:
 
 **For
                  the Three**
                **Months
                  Ended**
                **September
                  30, 2007**
              
              
              **For
                  the Nine**
                **Months
                  Ended**
                **September
                  30, 2007**Net
                  income available to common stockholders
              
              $
              1,541,000
              
              
              $
              12,316,000Weighted
                  average number of common shares outstanding during the
                  period
              
              
              38,724,407
              
              
              
              38,807,670Basic
                  and diluted earnings per weighted average common share
              
              $
              0.04
              
              
              $
              0.32
 
 **Net
        Income Allocated to Members Per Weighted Average Membership
        Unit**
 
 Fund
        II
        was an LLC prior to the merger, which stated net income allocated to members
        per
        weighted average membership unit that is computed by dividing net income
        calculated in accordance with GAAP by the weighted average number of membership
        units outstanding for the period.  The following is a computation of
        the net income per weighted average membership unit for the three months
        ended
        March 31, 2006, basic earnings per share for the six months ended September
        30,
        2006 and total earnings per weighted average share/membership unit for the
        nine
        months ended September 30, 2006:
 
 **For
                  the Three**
                **Months
                  Ended**
                **March
                  31, 2006**
              
              
              **For
                  the Six**
                **Months
                  Ended**
                **September
                  30, 2006**
              
              
              **For
                  the Nine**
                **Months
                  Ended**
                **September
                  30, 2006**Net
                  income (loss) available to common stockholders / members
              
              $
              (1,710,000
              )
              
              $
              10,686,000
              
              
              $
              8,976,000Weighted
                  average number of common shares / units outstanding during the
                  period
              
              
              38,915,994
              
              
              
              38,799,550
              
              
              
              38,834,746Basic
                  and diluted earnings (loss) per weighted average common share /
                  membership
                  unit
              
              $
              (0.04
              )
              
              $
              0.28
              
              
              $
              0.23
 
 **Common
        Stock Dividends**
 
 Cash
        dividends declared during the nine months ended September 30, 2007, totaled
        approximately $0.45 per common share.
 
 On
        October 16, 2007, the Board of Directors declared a monthly cash dividend
        of
        $0.045 per share for the month of October 2007, that will be paid on November
        29, 2007, to the stockholders of record as of November 9, 2007.
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            11
            -
 *Table
            of Contents*
  **Treasury
        Stock**
 
 On
        March
        21, 2007, our Board of Directors authorized the repurchase of up to $10 million
        worth of our common stock.  Depending upon market conditions, shares
        may be repurchased from time to time at prevailing market prices through
        open
        market or privately negotiated transactions.  We are not obligated to
        purchase any shares.  Subject to applicable securities laws, including
        SEC Rule 10b-18, repurchases may be made at such times and in such amounts,
        as
        our management deems appropriate.  The share repurchase program may be
        discontinued or terminated at any time and we have not established a date
        for
        completion of the share repurchase program.  The repurchases will be
        funded from our available cash.  As of September 30, 2007, we had
        purchased 285,050 shares of treasury stock through the repurchase program
        noted
        above.  These shares are carried on our books at a cost totaling
        $1,440,000.
 
 **Segments**
 
 We
        operate as one business segment.
 
 **Principles
        of Consolidation**
 
 The
        accompanying consolidated financial statements include, on a consolidated
        basis,
        our accounts, the accounts of our wholly-owned subsidiaries and our interests
        in
        variable interest entities in which we are the primary beneficiary. All
        significant intercompany balances and transactions have been eliminated in
        consolidation. Our interest in VCT I (see Note K – Junior Subordinated Notes) is
        accounted for using the equity method and the assets and liabilities are
        not
        consolidated into our financial statements due to our determination that
        VCT I
        is a variable interest entity in which we are not the primary beneficiary
        under
        FIN 46R.
 
 **Income
        Taxes**
 
 We
          are
          organized and conduct our operations to qualify as a real estate investment
          trust (“REIT”) under Sections 856 to 860 of the Internal Revenue Code of 1986,
          as amended (the “Code”) and to comply with the provisions of the Internal
          Revenue Code with respect thereto.  A REIT is generally not subject to
          federal income tax on that portion of its REIT taxable income (“Taxable Income”)
          which is distributed to its stockholders, provided that at least 90% of
          Taxable
          Income is distributed and provided that certain other requirements are
          met.  Our taxable income may substantially exceed or be less than our
          net income as determined based on GAAP, because, differences in GAAP and
          taxable
          net income consist primarily of allowances for loan losses or doubtful
          account,
          write downs on real estate held for sale, amortization of deferred financing
          cost, capital gains and losses, and deferred income.
 
 Certain
          assets of ours are held in a taxable REIT subsidiary (“TRS”).  The
          income of a TRS is subject to federal and state income taxes.  The net
          income tax provision for the nine months ended September 30, 2007, was
          approximately zero.
 
 **Reclassifications**
 
 Certain
        reclassifications have been made to the prior periods’ consolidated 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 deeds of trust.
 
 We
        maintain cash deposit accounts and certificates of deposit, which at times
        may
        exceed federally insured limits.  We have not experienced any losses
        in such accounts and believe we are not exposed to any significant credit
        risk
        related to cash deposits.  As of September 30, 2007 and December 31,
        2006, we had approximately $51.0 million and $17.0 million, respectively,
        in
        excess of the federally insured limits.
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            12
            -
 *Table
            of Contents*
  As
        of
        September 30, 2007, 47%, 18% and 11% of our loans were in Nevada, Oregon
        and
        Arizona, respectively, compared to 26%, 18% and 11%, at December 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, 2007, the aggregate amount of loans to our three largest borrowers
        represented 24.28% of our total investment in real estate loans, including
        loans
        related to seller financed real estate held for sale.  These real
        estate loans consisted of commercial loans, located in Hawaii and Oregon
        with
        first lien positions, interest rates between 10.5% and 14.0%, with an aggregate
        outstanding balance of approximately $63.7 million and maturing through
        September 2008.  At December 31, 2006, the aggregate amount of loans
        to our three largest borrowers represented 26.29% of our total investment
        in
        real estate loans, including loans related to seller financed real estate
        held
        for sale.  These real estate loans consisted of commercial and
        construction loans, located in Oregon, New York and Washington with a first
        lien
        position, interest rates between 9% and 13%, with an aggregate outstanding
        balance of approximately $63.7 million.  The loans in Hawaii described
        above referred to the RightStar loans discussed in Note D – *Investments in
        Real Estate Loans*.  We have a significant concentration of credit
        risk with our largest borrowers, any additional defaults by such borrowers
        could
        have a material adverse effect on us.
 
 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, 2007, all of our loans provided for payments of interest only
        with
        a “balloon” payment of principal payable in full at the end of the term, with
        the exception of one of our loans that had both principal and interest payments
        along with a “balloon” payment at the end of the term.  As of
        September 30, 2007, this loan had a balance of approximately $6.9
        million.
 
 In
        addition, we may invest in real estate loans that require borrowers to maintain
        interest reserves funded from the principal amount of the loan for a period
        of
        time.  At September 30, 2007, we had approximately $66.9 million in
        investments in real estate loans that had interest reserves where the total
        outstanding principal due to our co-lenders and us was approximately $78.9
        million.  These loans had interest reserves of approximately $6.6
        million, of which our portion was approximately $5.7 million.  At
        December 31, 2006, we had approximately $71.5 million in investments in real
        estate loans that had interest reserves where the total outstanding principal
        due to our co-lenders and us was approximately $120.3 million.  These
        loans had interest reserves of approximately $5.6 million, of which our portion
        was approximately $4.3 million.
 
 As
        of
        September 30, 2007, we had five real estate loan products consisting of
        commercial, construction, acquisition and development, land and
        residential.  The effective interest rates on all product categories
        range from 9% to 14%.  Revenue by product will fluctuate based upon
        relative balances during the period.
 
 Investments
        in real estate loans, including loans related to seller financed real estate
        held for sale, as of September 30, 2007, were as follows:
 
 **Loan
                  Type**
              
              **Number
                  Of Loans**
              
              
              **Balance
                  (2)**
              
              
              **Weighted
                  Average Interest Rate**
              
              
              **Portfolio
                  Percentage**
              
              
              **Weighted
                  Average Loan-To-Value (1)**Acquisition
                  and development
              
              
              4
              
              
              $
              18,338,000
              
              
              
              12.85%
              
              
              
              6.99%
              
              
              
              45.77%Commercial
              
              
              14
              
              
              
              126,422,000
              
              
              
              12.02%
              
              
              
              48.22%
              
              
              
              80.20%Construction
              
              
              8
              
              
              
              33,819,000
              
              
              
              11.41%
              
              
              
              12.90%
              
              
              
              75.40%Land
              
              
              13
              
              
              
              78,865,000
              
              
              
              12.15%
              
              
              
              30.08%
              
              
              
              65.44%Residential
              
              
              1
              
              
              
              4,740,000
              
              
              
              12.00%
              
              
              
              1.81%
              
              
              
              80.00%40
              
              
              $
              262,184,000
              
              
              
              12.04%
              
              
              
              100.00%
              
              
              
              72.73%
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            13
            -
 *Table
            of Contents*
  Investments
        in real estate loans, including loans related to seller financed real estate
        held for sale, as of December 31, 2006 were as follows:
 
 **Loan
                  Type**
              
              **Number
                  Of Loans**
              
              
              **Balance
                  (2)**
              
              
              **Weighted
                  Average Interest Rate**
              
              
              **Portfolio
                  Percentage**
              
              
              **Weighted
                  Average Loan-To-Value (1)**Acquisition
                  and development
              
              
              4
              
              
              $
              8,569,000
              
              
              
              12.54%
              
              
              
              3.54%
              
              
              
              54.58%Commercial
              
              
              17
              
              
              
              138,556,000
              
              
              
              10.31%
              
              
              
              57.16%
              
              
              
              76.87%Construction
              
              
              6
              
              
              
              43,319,000
              
              
              
              11.48%
              
              
              
              17.87%
              
              
              
              67.24%Land
              
              
              10
              
              
              
              51,951,000
              
              
              
              11.92%
              
              
              
              21.43%
              
              
              
              56.38%37
              
              
              $
              242,395,000
              
              
              
              10.94%
              
              
              
              100.00%
              
              
              
              69.97%
 
 (1)
              Loan-to-value
                  ratios are based on the most recent appraisals and may not reflect
                  subsequent changes in value.  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 Sheets.  The
                  contra accounts represent the amount of real estate held for sale
                  sold to
                  third parties where we provided financing.  GAAP requires the
                  borrower to have a certain percentage of equity ownership (ranging
                  from
                  10% to 25%) to allow us 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, 2007 Balance**
              
              
              **December
                  31, 2006 Balance**Balance
                  per loan portfolio
              
              $
              262,184,000
              
              
              $
              242,395,000Less:Seller
                  financed loans included in real estate held for sale
              
              
              (7,424,000
              )
              
              
              (14,774,000
              )Proceeds
                  of principal on seller financed loans included in deposit
                  liability
              
              
              478,000
              
              
              
              4,056,000Allowance
                  for loan losses
              
              
              (10,543,000
              )
              
              
              (9,828,000
              )Balance
                  per consolidated balance sheet
              
              $
              244,695,000
              
              
              $
              221,849,000
 
 The
        following is a schedule of priority of real estate loans, including loans
        related to seller financed real estate held for sale, as of September 30,
        2007
        and December 31, 2006:
 
 **Loan
                  Type**
              
              **Number
                  of Loans**
              
              
              **September
                  30, 2007**
                **Balance***
              
              
              **Portfolio**
                **Percentage**
              
              
              **Number
                  of Loans**
              
              
              **December
                  31, 2006 Balance***
              
              
              **Portfolio**
                **Percentage**First
                  deeds of trust
              
              
              39
              
              
              $
              261,784,000
              
              
              
              99.85%
              
              
              
              35
              
              
              $
              239,748,000
              
              
              
              98.91%Second
                  deeds of trust
              
              
              1
              
              
              
              400,000
              
              
              
              0.15%
              
              
              
              2
              
              
              
              2,647,000
              
              
              
              1.09%40
              
              
              $
              262,184,000
              
              
              
              100.00%
              
              
              
              37
              
              
              $
              242,395,000
              
              
              
              100.00%
 
 *  Please
        see (2) above
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            14
            -
 *Table
            of Contents*
  The
        following is a schedule of contractual maturities of investments in real
        estate
        loans, including loans related to seller financed real estate held for sale,
        as
        of September 30, 2007:
 
 October
                  2007 - December 2007
              
              $
              118,012,000January
                  2008 - March 2008
              
              
              48,242,000April
                  2008 - June 2008
              
              
              13,000,000July
                  2008 - September 2008
              
              
              82,930,000Thereafter
              
              
              --Total
              
              $
              262,184,000
 
 The
        following is a schedule by geographic location of investments in real estate
        loans, including loans related to seller financed real estate held for sale,
        as
        of September 30, 2007 and December 31, 2006:
 
 **September
                  30, 2007 Balance***
              
              
              **Portfolio
                  Percentage**
              
              
              **December
                  31, 2006 Balance***
              
              
              **Portfolio
                  Percentage**Arizona
              
              $
              27,979,000
              
              
              
              10.67%
              
              
              $
              27,827,000
              
              
              
              11.48%California
              
              
              18,511,000
              
              
              
              7.06%
              
              
              
              24,167,000
              
              
              
              9.97%Hawaii
              
              
              17,291,000
              
              
              
              6.59%
              
              
              
              17,291,000
              
              
              
              7.13%Nevada
              
              
              124,472,000
              
              
              
              47.48%
              
              
              
              62,215,000
              
              
              
              25.67%New
                  York
              
              
              16,981,000
              
              
              
              6.48%
              
              
              
              19,554,000
              
              
              
              8.07%Oklahoma
              
              
              5,255,000
              
              
              
              2.00%
              
              
              
              5,237,000
              
              
              
              2.16%Oregon
              
              
              46,379,000
              
              
              
              17.69%
              
              
              
              44,423,000
              
              
              
              18.33%Texas
              
              
              4,340,000
              
              
              
              1.66%
              
              
              
              22,812,000
              
              
              
              9.41%Washington
              
              
              976,000
              
              
              
              0.37%
              
              
              
              18,869,000
              
              
              
              7.78%Total
              
              $
              262,184,000
              
              
              
              100.00%
              
              
              $
              242,395,000
              
              
              
              100.00%
 
 *  Please
        see (2) above
 
 At
        September 30, 2007, 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, Inc. (Part I & Part
        II), Monterrey Associates LP, Forest Development LLC, Pirates Lake, Ltd,
        Jeffrey's Court, LLC and V & M Homes at the Palms, Inc.  These
        loans are currently carried on our books at a value of approximately $20.6
        million, net of allowance for loan losses of approximately $9.2 million for
        the
        RightStar loans, which does not include the allowance for performing
        loans.  These loans have been placed on non-accrual of interest status
        and are the subject of pending foreclosure proceedings.
 
 ·
              RightStar,
                  Inc. (Part I & Part II), are loans secured by a lien on the business
                  and virtually all of the property of RightStar, which includes
                  4
                  cemeteries and 8 mortuaries in Hawaii with an outstanding balance
                  of
                  approximately $32.3 million of which our portion is approximately
                  $17.3
                  million ($8.2 million for Part I and $9.1 million for Part
                  II).  The lenders have commenced a judicial foreclosure on the
                  loans, Part I and Part II.
  See
            review report of Independent Registered Public Accounting Firm.
 -
            15
            -
 *Table
            of Contents*
 ·
                Monterrey
                    Associates, L.P. is a non-performing loan which was originally
                    secured by
                    various real estate collateral, including a 248 unit apartment
                    complex in
                    Oklahoma City, Oklahoma.  The outstanding balance on the loan is
                    approximately $4.4 million, of which our portion is approximately
                    $2.2
                    million.  Interest payments on the loan are 13 months in
                    arrears.  Our manager brought foreclosure and other legal
                    proceedings to protect our interest in the collateral.  The
                    borrowers have alleged that our lien on the Oklahoma City apartment
                    complex was extinguished as a result of legal actions commenced
                    on our
                    behalf with respect to other collateral securing the non-performing
                    loan.   We are vigorously contesting their position;
                    however, we cannot determine at this time the outcome of these
                    legal
                    proceedings.
 ·
              Forest
                  Development, LLC, is a loan secured by two 4,000 square foot single
                  family
                  residences, together with the four remaining lots in a subdivision,
                  located on Mt. Charleston, NV with an outstanding balance of approximately
                  $2.6 million of which our portion is approximately $1.7
                  million.  The loan is eleven months in arrears in payment of
                  interest.  We commenced foreclosure proceedings and filed
                  litigation to enforce the personal guarantee on the
                  loan.  Forest Development subsequently counterclaimed and also
                  filed a separate lawsuit against us, VRM I, Fund I, Fund II, Fund
                  III,
                  Vestin Mortgage, Inc. and Vestin Originations, Inc. (the “Defendants”)
                  alleging that the Defendants breached the construction loan agreement
                  and
                  thus jeopardized the completion of the project, alleging intentional
                  interference with contractual relations, bad faith, breach of contract,
                  conversion, undue and improper control and interference over borrower’s
                  business.  They are seeking injunctive relief, monetary damages,
                  and punitive damages.  The Defendants believe that the
                  allegations are without merit and that they have adequate
                  defenses.  The Defendants intend to undertake a vigorous
                  defense.  In April 2007, the borrower filed for protection under
                  Chapter 11 of the United State Bankruptcy Code.  In September
                  2007, Forest Development filed a lawsuit in the United States Bankruptcy
                  Court for the District of Nevada, against us, VRM I, Fund I, Fund
                  II, Fund
                  III, Vestin Mortgage, Inc. and Vestin Originations, Inc. (the
                  “Defendants”) alleging breach of contract, breach of the implied covenant
                  of good faith and fair dealing, and unjust enrichment, which claims
                  are
                  substantially the same as was filed in the State Court
                  action.  We believe the allegations are without merit, and we
                  have adequate defenses.  A settlement conference is currently
                  scheduled for November 9, 2007 between the Defendants and Forest
                  Development, LLC.  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.
 
 ·
              Pirates
                  Lake, Ltd., is a loan to provide bridge financing for approximately
                  46.75
                  acres of land in Galveston, TX, with an outstanding balance of
                  approximately $8.5 million of which our portion is approximately
                  $4.1
                  million.  The loan is secured by a first lien on the property
                  and guaranteed by the borrower.  Additionally, the loan is
                  secured by a second position lien on approximately 0.5 acres of
                  land
                  located in Houston, Texas.  The loan is five months in arrears
                  in payments of interest.  On August 7, 2007, we, VRM I and Fund
                  III entered into a settlement agreement with the borrower whereby
                  the
                  foreclosure was postponed.  Principal, accrued interest and
                  $75,000 for expenses incurred by us, VRM I and Fund III relating
                  to the
                  loan were due on October 1, 2007.  On October 2, 2007, the
                  borrower was in default of the settlement and loan agreements.
                  Subsequently the borrower filed for protection under Chapter 11
                  of the
                  United States Bankruptcy Court for the Southern District of
                  Texas.  Our manager has instructed Bankruptcy counsel to seek
                  relief from the automatic stay and to seek dismissal of Pirate’s Lake Ltd.
                  Chapter 11 proceedings so that foreclosure proceedings may
                  proceed.  A hearing is currently scheduled for November 7,
                  2007.  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..
  See
            review report of Independent Registered Public Accounting Firm.
 -
            16
            -
 *Table
            of Contents*
  
 ·
              Jeffrey's
                  Court, LLC, is a loan to provide financing for the development
                  of 4.92
                  acres of land into 119 condominium units in Las Vegas, NV, with
                  an
                  outstanding balance of approximately $5.1 million of which our
                  portion is
                  $3.1 million dollars.  The loan is two months in arrears in
                  payment of interest and is secured by a first lien on the property
                  and
                  guaranteed by the borrower.  Our manager has commenced
                  foreclosure proceedings.  We intend to bring legal action
                  against the guarantors of this 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.
 
 ·
              V
                  & M Homes at the Palms, Inc., is a loan, with a variable interest
                  rate, to provide acquisition financing for an 80 acre parcel of
                  land in
                  Florence, AZ, with an outstanding balance of approximately $3.9
                  million of
                  which our portion is approximately $1.5 million.  The loan is
                  one month in arrears in payment of interest and is secured by a
                  first lien
                  on the property and guaranteed by the borrower.  Our manager has
                  commenced foreclosure proceedings.  We intend to bring legal
                  action against the guarantors of this loan.  Our manager has
                  evaluated this loan and concluded that the value of the underlying
                  collateral is sufficient to protect us from loss of
                  principal.  No specific allowance was deemed
                  necessary.
 
 The
        following schedule summarizes the non-performing loans as of September 30,
        2007:
  **Description
                    of Collateral**
                
                **Balance
                    at**
                  **September
                    30, 2007**
                
                **Maturity
                    Date**
                
                **Number
                      of Months Non-Performing**
                
                **Percentage
                    of Total Loan Balance**4
                    cemeteries and 8 mortuaries in Hawaii Part I**
                
                $
                8,183,000
                
                3/31/2004
                
                
                42
                
                45%
                    of Part I4
                    cemeteries and 8 mortuaries in Hawaii Part II**
                
                
                9,108,000
                
                3/31/2004
                
                
                42
                
                65%
                    of Part II248-unit
                    apartment complex in Oklahoma City, OK
                
                
                2,155,000
                
                9/1/2006
                
                
                13
                
                49%2
                    single family residences and 4 lots in Mt. Charleston, NV
                
                
                1,681,000
                
                10/27/2006
                
                
                11
                
                64%46.75
                    acres of land located in Galveston, TX
                
                
                4,100,000
                
                6/30/2007
                
                
                5
                
                48%4.92
                    acres of land in Las Vegas, NV
                
                
                3,073,000
                
                7/17/2007
                
                
                2
                
                61%80
                    acre parcel of land in Florence, AZ
                
                
                1,510,000
                
                8/16/2007
                
                
                1
                
                39%$
                29,810,000
 **  Please
        refer to (3) *Specific Reserve Allowance*below.
 
 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, 2007, we have
        provided a specific reserve related to the two loans secured by 4 cemeteries
        and
        8 mortuaries in Hawaii (“RightStar loans”), of approximately $9.2
        million.  Our manager evaluated the loans and concluded that the
        remaining underlying collateral was sufficient to protect us against further
        losses of principal.  Our manager will continue to evaluate these
        loans in order to determine if any other allowance for loan losses should
        be
        recorded.
 
 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.
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            17
            -
 *Table
            of Contents*
  The
        following is a roll-forward of the allowance for loan losses for the nine
        months
        ended September 30, 2007:
 
 **Description**
              
              **Balance
                  at**
                **December
                  31, 2006**
              
              
              **Specific
                  Reserve Allocation**
              
              
              **RightStar
                  Legal Reserve**
              
              
              **Balance
                  at**
                **September
                  30, 2007**Specific
                  allowance (3)
              
              $
              9,828,000
              
              
              $
              809,000
              
              
              $
              (94,000
              )
              
              $
              10,543,000Total
              
              $
              9,828,000
              
              
              $
              809,000
              
              
              $
              (94,000
              )
              
              $
              10,543,000
 
 **(3)**
              **Specific
                  Reserve Allowance**
 
 *RightStar
        Loan Allowance*– RightStar, Inc. (“RightStar”) defaulted on our loans in the
        fall of 2004.  The lenders commenced a judicial foreclosure on the
        loans, part I and part II, which is secured by a lien on the business and
        virtually all of the property of RightStar, which includes 4 cemeteries and
        8
        mortuaries in Hawaii.  The aggregate principal balance of the loan is
        approximately $32.3 million.  The loans, part I and part II, are owned
        as follows:
 
 **Senior
                  Principal Amount (Part II)**
              
              
              **Junior
                  Principal Amount (Part I)**
              
              
              **Total**VRM
                  I
              
              $
              4,892,000
              
              
              $
              4,415,000
              
              
              $
              9,307,000VRM
                  II
              
              
              9,108,000
              
              
              
              8,183,000
              
              
              
              17,291,000Vestin
                  Mortgage
              
              
              --
              
              
              
              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 Amount (Part II)
                  (including default rate interest);
 
 ·
              Third
                  to pay past due interest on the Junior Principal Amount (Part I)
                  (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.  In March
        2007, Vestin Mortgage, Inc. purchased the junior principal amount owned by
        the
        unrelated third party for $500,000.  Vestin Mortgage, Inc. has agreed
        that any monies it receives as a result of payment of the notes or proceeds
        from
        a foreclosure sale are limited to its $500,000 investment in the notes plus
        expenses.
 
 RightStar
        is currently being operated by a court appointed receiver.
 
 Foreclosure
        proceedings are being delayed by the State of Hawaii, which has refused to
        issue
        licenses to potential buyers or the lenders to: (1) operate the facility,
        (2)
        operate a pre-need program and (3) operate a perpetual care
        program.  During the three months ended March 31, 2006, the State of
        Hawaii notified the lenders of a potential statutory trust fund deficiency,
        estimated to be between $20 million and $30 million and claimed that this
        balance has priority over all lenders.  The lenders dispute the amount
        and priority of this deficit.
  See
            review report of Independent Registered Public Accounting Firm.
 -
            18
            -
 *Table
            of Contents*
  In
        April
        2006, the lenders filed suit against the State of Hawaii listing 26 causes
        of
        action, including allegations that the State of Hawaii has illegally blocked
        the
        lender’s right to foreclose and take title to its collateral by inappropriately
        attaching conditions to the granting of licenses needed to operate the business,
        the pre-need trust funds and the perpetual care trust funds and that the
        State
        of Hawaii has attempted to force the lenders to accept liability for any
        statutory trust fund deficits while no such lender liability exists under
        the
        laws of the State of Hawaii.  The State of Hawaii responded by filing
        allegations against Vestin Mortgage, Inc. and us alleging that these Vestin
        entities improperly influenced the former RightStar trustees to transfer
        trust
        funds to us.
 
 On
        May 9,
        2007, we, VRM I, Vestin Mortgage, the State of Hawaii and Comerica Incorporated
        announced that an arrangement had been reached to auction the RightStar
        assets.  On June 12, 2007 the court approved the resolution agreement
        which provides that the proceeds of the foreclosure sale will be allocated
        to
        fund the trusts statutory minimum balances to VRM I, Vestin Mortgage and
        us.  We, VRM I, Vestin Mortgage, the State of Hawaii and Comerica have
        pledged to cooperate to recover additional amounts owed to the trusts and
        the
        creditors from others, while mutually releasing each other and RightStar
        from
        all claims.  We, VRM I, Vestin Mortgage and the State of Hawaii have
        received offers and are currently requesting, entertaining, and reviewing
        bids
        on the RightStar properties.  The outcome of this auction cannot be
        determined at this time.
 
 We
        have
        evaluated the estimated value of the underlying collateral, the potential
        trust
        fund deficit, and the expected cost and length of litigation.  Based
        on this estimate we increased our total specific reserve allowance for loss
        by
        approximately $5.0 million during the twelve months ended December 31, 2006
        and
        specifically allocated our general allowance of approximately $1.9 million
        to
        the RightStar loans.  The increase in the reserve allowance included
        approximately $1.0 million for estimated litigation fees and expenses, which
        we
        have incurred 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, 2007,
        our specific reserve allowance on the RightStar loans totaled approximately
        $9.2
        million.
 
 *Peoria
        180, LLC Loan Allowance*– During the nine months ended September 30, 2007,
        our manager provided a specific reserve allowance, related to a land loan
        on
        property located in Glendale, AZ, of approximately $1.6 million, of which
        our
        portion was approximately $1.3 million.  This specific reserve
        allowance was based on an updated appraisal of the underlying collateral
        for
        this loan, obtained by our manager during October 2007.  As of
        September 30, 2007, the loan was performing as required.  Our manager
        will continue to evaluate our position in the loan.
 
 *Impairment
        on Restructured Loan*– As of December 31, 2006, included in the specific
        reserve allowance was an impairment of $500,000 on a restructured
        loan.  In May 2007, this loan was paid in full, reducing our specific
        reserve allowance by $500,000.
 
 In
        addition, as of September 30, 2007, our manager granted extensions on 14
        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.  Included in the 14 extended loans was the Mid-State Raceway
        loan, which was extended from March 31, 2007 to March 31, 2008.  As
        part of the extension agreement, the borrower made a principal payment of
        approximately $3.0 million, of which our portion was approximately $2.6 million,
        and the loan interest rate increased from 9% to 12%.  The aggregate
        amount due to us from borrowers whose loans had been extended as of September
        30, 2007, was approximately $118.0 million.  Our manager concluded
        that no allowance for loan loss was necessary with respect to these loans
        as of
        September 30, 2007.
 
 **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.
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            19
            -
 *Table
            of Contents*
  The
        conclusion that a real estate loan is uncollectible or that collectibility
        is
        doubtful is a matter of judgment.  On a quarterly basis, our 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, 2007 and December 31, 2006, approximately
        $12.5 million and $11.5 million, respectively, in non-performing loans had
        no
        specific allowance for loan losses.  As of September 30, 2007 and
        December 31, 2006, approximately $17.3 million in non-performing loans had
        a
        specific allowance for loan losses of approximately $9.2 million and $9.3
        million, respectively, which does not include the allowance for performing
        loans.  At September 30, 2007, the following loans were non-performing
        (based on current information and events, it is probable that we will be
        unable
        to collect all amounts due according to the contractual terms of the loan
        agreement or when the payment of interest is 90 days past due); RightStar
        (Part
        I & Part II), Monterrey Associates LP, Forest Development LLC, Pirates Lake,
        Ltd, Jeffrey's Court, LLC and V & M Homes at the Palms,
        Inc.  These loans have been placed on non-accrual of interest status
        and are the subject of pending foreclosure proceedings.  Our manager
        evaluated the loans and concluded that the underlying collateral was sufficient
        to protect us against further losses of principal or interest.  Our
        manager will continue to evaluate these loans in order to determine if any
        other
        allowance for loan losses should be recorded.
 
 **NOTE
        E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY**
 
 As
        of
        September 30, 2007, we owned 533,675 shares of VRM I’s common stock,
        representing approximately 7.77% of their total outstanding common
        stock.
 
 **NOTE
        F — REAL ESTATE HELD FOR SALE**
 
 At
        September 30, 2007, we held two properties with a total carrying value of
        approximately $28.9 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 nine months ended September 30, 2007:
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            20
            -
 *Table
            of Contents*
  
 **Description**
              **Date
                  Acquired**
              
              **Percentage
                  of Ownership**
              
              
              **Balance
                  at December 31, 2006**
              
              
              **Acquisitions
                  (Reductions)**
              
              
              **Seller
                  Financed Sales**
              
              
              **Balance
                  at September 30, 2007**Partially
                  completed golf course on 570 acres of land near Austin, TX
                  **(1)**
              8/3/2004
              
              
              100%
              
              
              $
              4,688,000
              
              
              $
              (100,000
              )
              
              $
              --
              
              
              $
              4,588,000480
                  residential building lots & 2 single family dwellings in Rio Vista
                  Village Subdivision in Cathedral City, CA
                  **(2)**
              12/21/2006
              
              
              86%
              
              
              
              25,391,000
              
              
              
              (1,113,000
              )
              
              
              --
              
              
              
              24,278,000$
              30,079,000
              
              
              $
              (1,213,000
              )
              
              $
              --
              
              
              $
              28,866,000
 
 (1)
              During
                  the nine months ended September 30, 2007, we entered into a sales
                  contract
                  for the sale of the partially completed golf course near Austin,
                  Texas at
                  a price that would not result in a material gain or loss.  The
                  sale contract required that the buyer complete the purchase on
                  or before
                  June 29, 2007.  The buyer extended the closing date to the end
                  of October 2007.  In June 2007, we received a $100,000
                  non-refundable extension fee from the buyer.  The buyer has
                  elected to use their final extension, by paying a non-refundable
                  extension
                  fee of $50,000 in October 2007.  The closing was extended until
                  November 13, 2007; however, there can be no assurance that the
                  sale will
                  be completed.
 
 (2)
              During
                  November 2006, we, VRM I and Fund III acquired through foreclosure
                  proceedings 480 residential building lots and two single family
                  dwellings
                  in Rio Vista Village Subdivision in Cathedral City, CA.  During
                  the three months ended September 30, 2007, our manager continued
                  to
                  evaluate the carrying value of the acquired property and related
                  liabilities. As of September 30, 2007, our manager estimated the
                  net
                  realizable value of the asset totaled $28,355,000, of which our
                  portion
                  totaled $24,278,000, and estimated liabilities associated with
                  this asset
                  totaled $2,700,000, of which our portion totaled $2,312,000. Based
                  on
                  these estimates, our write downs on real estate held for sale for
                  this
                  property totaled $85,000 and $1,113,000 for the three and nine
                  months
                  ended September 30, 2007, respectively. We also recognized expenses
                  related to real estate held for sale for this property which totaled
                  $771,000 and $2,312,000 for the three and nine months ended September
                  30,
                  2007, respectively.
 
 **NOTE
        G — REAL ESTATE HELD FOR SALE – SELLER FINANCED**
 
 At
        September 30, 2007, we held an interest in one****property
        with a total carrying value of approximately $7.4 million, which had been
        sold
        in a transaction where we provided the financing to the
        purchaser.  GAAP requires us to include these properties in real
        estate held for sale until the borrower has met and maintained certain
        requirements.  We may share ownership of such properties with VRM I,
        Fund III, our manager, or other related and/or unrelated parties.  The
        summary below includes our percentage of ownership in each property held
        during
        the nine months ended September 30, 2007.  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 nine months ended September 30,
        2007:
  See
            review report of Independent Registered Public Accounting Firm.
 -
            21
            -
 *Table
            of Contents*
  
 **Description**
              **Date
                  Acquired**
              
              **Percentage
                  of Ownership**
              
              
              **Balance
                  at**
                **December
                  31, 2006**
              
              
              **Acquisitions**
              
              
              **Sales**
              
              
              **Gain
                  (Loss) on Sale**
              
              
              **Balance
                  at**
                **September
                  30, 2007**74
                  unit (90 bed) assisted living facility in San Bernardino, CA
                  **(1)**
              4/6/2004
              
              
              100%
              
              
              $
              7,350,000
              
              
              $
              --
              
              
              $
              (8,158,000
              )
              
              $
              808,000
              
              
              $
              --Assisted
                  living facility in Las Vegas, Nevada **(2)**
              9/23/2004
              
              
              48%
              
              
              
              7,424,000
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              7,424,000$
              14,774,000
              
              
              $
              --
              
              
              $
              (8,158,000
              )
              
              $
              808,000
              
              
              $
              7,424,000
 
 **(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 approximately
                  $7.6 million maturing in November 2006.  During March 2007, the
                  borrower paid the loan in full, which resulted in a gain of approximately
                  $0.8 million.
 
 **(2)**
              During
                  September 2004, we and VRM I sold an assisted living facility in
                  Las
                  Vegas, NV and financed 100% of the purchase price of approximately
                  $15.3
                  million maturing in September 2007.  The transaction resulted in
                  no gain or loss.  As of September 30, 2007, we had received
                  approximately $1.6 million in payments from the borrower.  These
                  principal and interest payments are recorded as a deposit
                  liability.  Interest payments will be recognized as income once
                  the equity requirement has been met or the loan is paid in
                  full.
 
 Until
        borrowers have met the minimum equity ownership requirement to allow us to
        record a sale, we will record payments received under the deposit method
        or the
        cost recovery method, which ever is applicable in accordance with FAS
        66.
 
 **NOTE
        H — RELATED PARTY TRANSACTIONS**
 
 From
        time
        to time, we may acquire or sell investments in real estate loans from/to
        our
        manager or other related parties pursuant to the terms of our Management
        Agreement provided the price does not exceed the par value of the
        loan.  No gain or loss is recorded on these transactions, as it is not
        our intent to make a profit on the purchase or sale of such
        investments.  The purpose is generally to diversify our portfolio by
        syndicating loans, thereby providing us with additional capital to make
        additional loans.
 
 **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 three and nine months ended September 30,
        2007
        and 2006, were $274,000 and $822,000 for each period, respectively.
 
 As
        of
        September 30, 2007, our manager owned 241,020 of our common
        shares.  For the three and nine months ended September 30, 2007, we
        declared $50,000 and $124,000, respectively, in dividends payable to our
        manager
        based on the number of shares our manager held on the dividend record
        dates.  During the three months ended March 31, 2006, we recorded
        pro-rata distributions owned to our manager of $16,000 and for the six months
        ended September 30, 2006, we declared $43,000 in dividends payable to our
        manager based on the number of shares our manager held on the dividend record
        dates
 
 **Transactions
        with Other Related Parties**
 
 As
        of
        September 30, 2007, we owned 533,675 common shares of VRM I, representing
        approximately 7.77% of their total outstanding common stock.  For the
        three and nine months ended September 30, 2007, we recognized $73,000 and
        $200,000, respectively, in dividend income from VRM I based on the number
        of
        shares we held on the dividend record dates.
  See
            review report of Independent Registered Public Accounting Firm.
 -
            22
            -
 *Table
            of Contents*
  As
        of
        September 30, 2007, VRM I owned 585,349 of our common shares, representing
        approximately 1.52% of our total outstanding common stock.  For the
        three and nine months ended September 30, 2007, we declared $85,000 and
        $221,000, respectively, in dividends payable to VRM I based on the number
        of
        shares VRM I held on the dividend record dates.  For the three and
        nine months ended September 30, 2006, we declared $77,000 in dividends payable
        to VRM I based on the number of shares VRM I held on the dividend record
        dates.
 
 During
        the nine months ended September 30, 2006 we bought $1.2 million in real estate
        loans from VRM I and sold $0.5 million in real estate loans to VRM
        I.  No gain or loss resulted from these transactions.  No
        similar transactions occurred during the nine months ended September 30,
        2007.
 
 As
        of
        September 30, 2007, Fund III owned 296,707 of our common shares, representing
        approximately 0.77% of our total outstanding common stock.  For the
        three and nine months ended September 30, 2007, we declared $56,000 and
        $119,000, respectively, in dividends payable to Fund III based on the number
        of
        shares Fund III held on the dividend record dates.  For the three and
        nine months ended September 30, 2006, we declared $15,000 in dividends payable
        to Fund III based on the number of shares Fund III held on the dividend record
        dates.
 
 During
        the nine months ended September 30, 2007, we purchased $1.3 million in real
        estate loans from Fund III.  No gain or loss resulted from this
        transaction.  No similar transactions occurred during the nine months
        ended September 30, 2006.
 
 During
        the nine months ended September 30, 2007, we purchased $0.7 million in real
        estate loans from inVestin.  No gain or loss resulted from this
        transaction.  No similar transactions occurred during the nine months
        ended September 30, 2006.
 
 During
        January 2006, Michael V. Shustek, our CEO, purchased a $2.0 million deed
        of
        trust investment from us, of which, the total balance of $2.0 million was
        repurchased by us.  No gain or loss resulted from these
        transactions.  No similar transactions occurred during the nine months
        ended September 30, 2007.
 
 During
        the nine months ended September 30, 2006, we purchased $556,000 in performing
        real estate loans from LTD, a company wholly owned by our CEO Michael V.
        Shustek.  No gain or loss resulted from these
        transactions.  No similar transactions occurred during the nine months
        ended September 30, 2007.
 
 As
        of
        September 30, 2007, we owed related parties, under common management,
        $2,000.  As of December 31, 2006, we had receivables from related
        parties, under common management, $31,000.
 
 During
        the three and nine months ended September 30, 2007, we incurred $34,000 and
        $110,000, 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.  During the three and nine months ended
        September 30, 2006, we incurred $34,000 and $65,000, respectively, for legal
        fees to the law firm of Levine, Garfinkel & Katz.
 
 **NOTE
        I — NOTES RECEIVABLE**
 
 During
        October 2004, we and VRM I sold the Castaways Hotel/Casino in Las Vegas,
        Nevada
        of which our portion of the net cash proceeds was approximately $5.8
        million.  We originally sold this property under a 100% seller
        financing arrangement.  The borrowers then sold the property to an
        unrelated third party that resulted in a payoff of the note and also allowed
        us
        to record the sale and remove the asset from seller financed real estate
        held
        for sale.  In addition, during September 2004, we received a
        promissory note from the guarantors of the loan in the amount of $440,000
        in
        exchange for a release of their personal guarantees.  Since payments
        on the note did not begin for 18 months from the date of the note, we discounted
        the face value of the note to $328,000, which is based on a discount rate
        of 8%
        as of that date.  As of September 30, 2007, we have received $93,000
        in principal payments.  During the nine months ended September 30,
        2007, the balance of $347,000 was fully reserved.
 
 During
        March 2005, we and VRM I sold the 126 unit hotel in Mesquite, Nevada for
        $5,473,000 of which our share of the proceeds were approximately $3.8 million,
        which resulted in a loss of $829,000.  In addition, during June 2005,
        we and VRM I entered into a settlement agreement with the guarantors of the
        loan
        in the amount of $2,000,000 in exchange for a release of their personal
        guarantees of which our share was $1,350,000.
  See
            review report of Independent Registered Public Accounting Firm.
 -
            23
            -
 *Table
            of Contents*
  The
        balance is secured by a second deed of trust 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.  As of September 30, 2007, we have received $616,000
        in principal payments.  Payments will be recognized as income when
        received.  The balance of $745,000 is fully reserved as of September
        30, 2007.
 
 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.  From June 25, 2005 through
        May 25, 2006, monthly payments increased to $15,000 and were applied to
        principal and accrued interest.  Beginning June 25, 2006 through May
        25, 2009, payments are to increase to $20,000 monthly.  Due to the
        uncertainty of collectibility, we have provided a valuation allowance for
        the
        entire remaining balance of the promissory note.  Income will be
        recognized when payments are received.  On August 7, 2007, we and VRM
        I filed a complaint against the guarantor in the U.S. District Court of the
        District of Nevada, seeking to recover the amounts due pursuant to the
        promissory note.  The guarantor did not answer or otherwise respond to
        the lawsuit.  We and VRM I will seek a default judgment for all the
        amounts due.  If granted, we and VRM I will seek to enforce the
        Complaint against the guarantor; however, there can be no assurance that
        we and
        VRM I will recover the amounts.  As of September 30, 2007, we received
        $234,000 in principal payments.  The balance of $184,000 is fully
        reserved as of September 30, 2007.
 
 During
        December 2005, we and VRM I sold the 460 acre residential subdivision in
        Lake
        Travis, TX for approximately $5.5 million, of which our portion was
        approximately $3.5 million.  The purchase price included cash proceeds
        of $5 million and a $500,000 note receivable, with an imputed interest rate
        of
        8% in July 2006.  A net gain of $71,000 resulted in this transaction,
        of which our portion was $47,000.  The purchaser defaulted on the note
        and our manager pursued litigation.  During the nine months ended
        September 30, 2007, we and VRM I entered into a settlement agreement, which
        reduced the note to $175,000, of which our portion is $115,000.  As of
        September 30, 2007, we received $33,000 in principal payments.  The
        balance of $82,000 is fully reserved as of September 30, 2007.
 
 During
        2006, we and VRM I entered into a settlement agreement in the amount of $1.5
        million with the guarantors of a loan, which we foreclosed on.  Our
        portion was approximately $1.3 million.  The promissory note is
        payable in seven annual installments of $100,000 with an accruing interest
        rate
        of 7%, with the remaining note balance due in April 2013.  The balance
        of approximately $1.3 million is fully reserved as of September 30,
        2007.
 
 **NOTE
        J— SECURED BORROWINGS**
 
 Secured
        borrowings provide an additional source of capital for our lending
        activity.  Secured borrowings allow us to increase the diversification
        of our loan portfolio and to invest in loans that we might not otherwise
        invest
        in.  We do not receive any fees for entering into secured borrowing
        arrangements; however, we may receive revenue for any differential of the
        interest spread, if applicable.  Loans in which unaffiliated investors
        have participated through inter-creditor agreements (“Inter-creditor
        Agreements”) are accounted for as secured borrowings in accordance with
        Statement of Financial Accounting Standards (“FAS”) 140 – *Accounting for
        Transfers and Servicing of Financial Assets and Extinguishments of Liabilities*(“FAS 140”).  The Inter-creditor Agreements provide us additional
        funding sources for real estate loans whereby an unaffiliated investor (the
        “Investor”) may participate on a non-pari passu basis in certain real estate
        loans with us and/or VRM I and/or Fund III (collectively, the “Lead
        Lenders”).  In the event of borrower non-performance, the
        Inter-creditor Agreements generally provide that the Lead Lenders must repay
        the
        Investor’s loan amount either by (i) continuing to remit to the Investor the
        interest due on the participated loan amount; (ii) substituting an alternative
        loan acceptable to the Investor; or (iii) repurchasing the participation
        from
        the Investor for the outstanding balance plus accrued interest.
 
 Additionally,
        an Investor may participate in certain loans with the Lead Lenders through
        Participation Agreements.  In the event of borrower non-performance,
        the Participation Agreement may allow the Investor to be repaid up to the
        amount
        of the Investor’s investment prior to the Lead Lender being
        repaid.  Real estate loan financing under the Participation Agreements
        are also accounted for as a secured borrowing in accordance with FAS
        140.  We do not receive any revenues for entering into secured
        borrowings arrangements.
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            24
            -
 *Table
            of Contents*
  During
        October 2006, we, our manager, Vestin Originations, Inc., VRM I and Fund
        III
        entered into an intercreditor agreement with an unrelated third party related
        to
        the funding of a construction real estate loan.  (See exhibit 10.8
        Intercreditor Agreement  under the Exhibit Index included in Part II –
Other Information, Item 6 Exhibits of this Report Form 10-Q).  The
        secured borrowing was recognized pro rata between us, VRM I and Fund III
        for the
        amount each entity has funded for the loan.  During May 2007, the
        secured borrowings were paid in full.  As of September 30, 2007, we
        did not have any funds used under Inter-creditor Agreements as compared to
        approximately $13.8 million used under Inter-creditor Agreements as of December
        31, 2006.
 
 **NOTE
        K — JUNIOR SUBORDINATED NOTES**
 
 On
        June
        22, 2007, we completed the issuance of $60.1 million in unsecured trust
        preferred securities through the special purpose business trust, VCT I to
        Merrill Lynch International, Bear Stearns & Co. Inc. and Taberna Funding
        LLC.  These securities have a fixed interest rate equal to 8.75%
        through July 2012, and thereafter are subject to a variable rate equal to
        LIBOR
        plus 3.5% per annum, resetting quarterly.  The securities mature on
        July 30, 2020 and may be called at par by us any time after July 30,
        2012.  We incurred approximately $2.3 million in financing costs
        relating to the notes.  These costs are being amortized to interest
        expense over the term of the notes.  We are obligated to pay the trust
        preferred securities with respect to distributions and amounts payable upon
        liquidation, redemption or repayment.
 
 VCT
        I
        issued $100,000 of common securities, representing 100% of the voting common
        stock of VCT I to us.  VCT I used the proceeds from the sale of the
        trust preferred securities and the common securities to purchase our junior
        subordinated notes.  The terms of the junior subordinated notes
        matches the terms of the trust preferred securities.  The notes are
        subordinated and junior in right of payment to all present and future senior
        indebtedness and certain other of our financial obligations.
 
 The
        junior subordinated notes require quarterly interest distributions beginning
        July 31, 2007.  For the three and nine months ended September 30,
        2007, interest expense on the junior subordinated notes totaled $1,315,000
        and
        $1,432,000, respectively.
 
 Our
        interest in VCT I is accounted for using the equity method and the assets
        and
        liabilities of VCT I are not consolidated into our financial statements,
        in
        accordance with FIN 46R.  Interest on the junior subordinated notes is
        included in interest expense on our consolidated income statement while the
        junior subordinated notes are presented as a separate item on our consolidated
        balance sheet.  We were in compliance with all debt covenants related
        to the junior subordinated notes as of September 30, 2007.
 
 **NOTE
        L — NOTES PAYABLE**
 
 In
        May
        2007, we financed a 12-month insurance policy for Directors and Officers
        liability, with an annual interest rate of 7.25%.  The agreement
        required a down payment of $40,000 and nine monthly payments of $26,000
        beginning on May 27, 2007.  During August 2007, the note was paid in
        full.
 
 **NOTE
        M — RECENT ACCOUNTING PRONOUNCEMENTS**
 
 In
        February 2007, the Financial Accounting Standards Board (FASB) issued FAS
        159,
*The Fair Value Option for Financial Assets and Financial
        Liabilities*.  FAS 159 permits entities to choose to measure
        financial assets and liabilities (except for those that are specifically
        scoped
        out of the Statement) at fair value.  The election to measure a
        financial asset or liability at fair value can be made on an
        instrument-by-instrument basis and is irrevocable.  The difference
        between carrying value and fair value at the election date is recorded as
        a
        transition adjustment to opening retained earnings.  Subsequent
        changes in fair value are recognized in earnings.  The effective date
        for FAS 159 is as of the beginning of an entity's first fiscal year that
        begins
        after November 15, 2007.  We are evaluating FAS 159 and have not yet
        determined the impact the adoption will have on our consolidated financial
        statements, but it is not expected to be significant.
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            25
            -
 *Table
            of Contents*
  **NOTE
        N — LEGAL MATTERS INVOLVING THE MANAGER**
 
 The
        United States Securities and Exchange Commission (the “Commission”), conducted
        an investigation of certain matters related to us, our manager, Vestin Capital,
        VRM I and Fund III.  We fully cooperated during the course of the
        investigation.  On September 27, 2006, the investigation was resolved
        through the entry of an Administrative Order by the Commission (the
“Order”).  Our manager, Vestin Mortgage and its Chief Executive
        Officer, Michael Shustek, as well as Vestin Capital (collectively, the
“Respondents”), consented to the entry of the Order without admitting or denying
        the findings therein.  In the Order, the Commission finds that the
        Respondents violated Sections 17(a)(2) and 17(a)(3) of the Securities Act
        of
        1933 through the use of certain slide presentations in connection with the
        sale
        of units in Fund III and in our predecessor, Vestin Fund II, LLC.
 
 The
        Respondents consented to the entry of a cease and desist order, the payment
        by
        Mr. Shustek of a fine of $100,000 and Mr. Shustek’s suspension from association
        with any broker or dealer for a period of six months, which expired in March
        2007.  In addition, the Respondents agreed to implement certain
        undertakings with respect to future sales of securities.  We are not a
        party to the Order and we do not expect that the sanctions imposed upon the
        Respondents will have any material affect upon our operations.
 
 On
        November 21, 2005, Desert Land filed a complaint in the state District court
        of
        Nevada against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. which
        complaint is substantially similar to a complaint previously filed by Desert
        Land in the United States District Court, which complaint was dismissed by
        the
        Ninth Circuit United Court of Appeals, which dismissal was upheld when the
        United States Supreme Court denied Desert Land’s Writ of
        Certiorari.  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 Fund II.  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 void such transfers and that pursuant to NRS 112.20,
        Desert Land is entitled to an injunction to enjoin defendants from further
        disposition of assets.  Additionally, Del Mar Mortgage, Inc. has
        indemnified Vestin Group and Vestin Mortgage for any losses and expenses
        in
        connection with the action, and Mr. Shustek has guaranteed the
        indemnification.  The Defendants believe that the allegations are
        without merit and that they have adequate defenses.  The Defendants
        intend to undertake a vigorous defense.
 
 VRM
        I and
        Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
        action filed in San Diego Superior Court by certain plaintiffs who allege,
        among
        other things, that they were wrongfully denied appraisal rights in connection
        with the merger of Fund I into Vestin Realty Mortgage I, Inc.  The
        action is being brought as a purported class action on behalf of all members
        of
        Vestin Fund I who did not vote in favor of the merger.  The Defendants
        believe that the allegations are without merit and that they have adequate
        defenses.  The Defendants intend to undertake a vigorous
        defense.  The terms of our management agreement and Fund I’s Operating
        Agreement contain indemnity provisions whereby, Vestin Mortgage and Michael
        V.
        Shustek may be eligible for indemnification by VRM I with respect to the
        above
        actions.
 
 VRM
        I,
        Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
        civil action filed by 25 separate plaintiffs (“Plaintiffs”) in District 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
        I into
        VRM I.  The action seeks monetary damages, punitive damages and a
        rescission of the REIT conversion.  The Defendants believe that the
        allegations are without merit and that they have adequate
        defenses.  The Defendants intend to undertake a vigorous
        defense.  The terms of VRM I’s management agreement and Fund I’s
        operating agreement contain indemnity provisions whereby, Vestin Mortgage
        and
        Michael V. Shustek may be eligible for indemnification by VRM I with respect
        to
        the above actions.
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            26
            -
 *Table
            of Contents*
  In
        addition to the matters described above, our manager is involved in a number
        of
        other legal proceedings concerning matters arising in connection with the
        conduct of its business activities.  Our manager believes it has
        meritorious defenses to each of these actions and intends to defend them
        vigorously.  Other than the matters described above, our manager
        believes that it is not a party to any pending legal or arbitration proceedings
        that would have a material adverse effect on our manager’s financial condition
        or results of operations or cash flows, although it is possible that the
        outcome
        of any such proceedings could have a material impact on our manager’s net income
        in any particular period.
 
 **NOTE
        O — LEGAL MATTERS INVOLVING THE COMPANY**
 
 In
        April
        2006, the lenders filed suit against the State of Hawaii listing 26 causes
        of
        action, including allegations that the State of Hawaii has illegally blocked
        the
        lender’s right to foreclose and take title to its collateral by inappropriately
        attaching conditions to the granting of licenses needed to operate the business,
        the pre-need trust funds and the perpetual care trust funds and that the
        State
        of Hawaii has attempted to force the lenders to accept liability for any
        statutory trust fund deficits while no such lender liability exists under
        the
        laws of the State of Hawaii.  The State of Hawaii responded by filing
        allegations against Vestin Mortgage, Inc. and us alleging that these Vestin
        entities improperly influenced the former RightStar trustees to transfer
        trust
        funds to us.
 
 On
        May 9,
        2007, we, VRM I, Vestin Mortgage, the State of Hawaii and Comerica Incorporated
        announced that an arrangement had been reached to auction the RightStar
        assets.  On June 12, 2007 the court approved the resolution agreement
        which provides that the proceeds of the foreclosure sale will be allocated
        to
        fund the trusts statutory minimum balances to VRM I, Vestin Mortgage and
        us.  We, VRM I, Vestin Mortgage, the State of Hawaii and Comerica have
        pledged to cooperate to recover additional amounts owed to the trusts and
        the
        creditors from others, while mutually releasing each other and RightStar
        from
        all claims.  We, VRM I, Vestin Mortgage and the State of Hawaii have
        received offers and are currently requesting, entertaining, and reviewing
        bids
        on the RightStar properties.  The outcome of this auction cannot be
        determined at this time.
 
 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 us with respect to the above
        actions.
 
 We,
        Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
        civil action filed by 88 separate plaintiffs (“Plaintiffs”) in District 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, punitive damages and
        a rescission of the REIT conversion.  The Defendants believe that the
        allegations are without merit and that they have adequate
        defenses.  The Defendants intend to undertake a vigorous
        defense.  The terms of VRM II’s management agreement and Fund II’s
        operating agreement contain indemnity provisions whereby, Vestin Mortgage
        and
        Michael V. Shustek may be eligible for indemnification by us 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.
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            27
            -
 *Table
            of Contents*
  **NOTE
        P — 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
        Q — SUBSEQUENT EVENT**
 
 On
        October 16, 2007, the Board of Directors declared a monthly cash dividend
        of
        $0.045 per share for the month of October 2007, that will be paid on November
        29, 2007, to the stockholders of record as of November 9, 2007.
 
 
  See
            review report of Independent Registered Public Accounting Firm.
 -
            28
            -
 *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, 2007, the related consolidated
        statements of income for the three-month and nine-month periods ended September
        30, 2007 and 2006, the related consolidated statement of equity and other
        comprehensive income for the nine-month period ended September 30, 2007 and
        the
        related consolidated statements of cash flows for the nine-month periods
        ended
        September 30, 2007 and 2006. 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
        consolidated 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 December 31,  2006 and the
        related consolidated statements of operations, stockholders’ equity and other
        comprehensive income and cash flows for the twelve months ended December
        31,
        2006, management’s assessment of the effectiveness of the internal control over
        financial reporting as of December 31, 2006 and the effectiveness of the
        internal control over financial reporting as of December 31, 2006, and in
        our
        report dated March 12, 2007, we expressed an unqualified opinion on those
        consolidated financial statements; an unqualified opinion on management’s
        assessment of, and an unqualified  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 December 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
 November
        6, 2007
 
  -
            29
            -
 *Table
            of Contents*
  **ITEM
                  2.**
              **MANAGEMENT’S
                  DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION
                  AND
                  RESULTS OF OPERATIONS**
 
 The
        following is a financial review and analysis of our financial condition and
        results of operations for the three and nine months ended September 30, 2007
        and
        2006.  This discussion should be read in conjunction with our
        consolidated financial statements and accompanying notes and other detailed
        information regarding us appearing elsewhere in this report on Form 10-Q
        and our
        report on Form 10-K, Part II, Item 7 *Management’s Discussion and Analysis of
        Financial Conditions and Results of Operations* for the year ended December
        31, 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 consolidated
        financial statements, related notes, and other detailed information included
        elsewhere in this report on Form 10-Q.  We are including this
        cautionary statement to make applicable and take advantage of the safe harbor
        provisions of the Private Securities Litigation Reform Act of
        1995.  Statements that are not historical fact are forward-looking
        statements.  Certain of these forward-looking statements can be
        identified by the use of words such as “believes,” “anticipates,” “expects,”
“intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,”
or other similar expressions.  Such forward-looking statements involve
        known and unknown risks, uncertainties and other important factors, which
        could
        cause actual results, performance or achievements to differ materially from
        future results, performance or achievements.  These forward-looking
        statements are based on our current beliefs, intentions and
        expectations.  These statements are not guarantees or indicative of
        future performance.  Important assumptions and other important factors
        that could cause actual results to differ materially from those forward-looking
        statements include, but are not limited to, those factors, risks and
        uncertainties described in Part II Item 1A *Risk Factors* of this
        Quarterly Report on Form 10-Q and in our other securities filings with the
        Securities and Exchange Commission (“SEC”).  Our future financial
        condition and results of operations, as well as any forward-looking statements,
        are subject to change and involve inherent risks and
        uncertainties.  The forward-looking statements contained in this
        report are made only as of the date hereof.  We undertake no
        obligation to update or revise information contained herein to reflect events
        or
        circumstances after the date hereof or to reflect the occurrence of
        unanticipated events.
 
 **RESULTS
        OF OPERATIONS**
 
 **OVERVIEW**
 
 Our
        primary business objective is to generate income by investing in real estate
        loans.  We believe there is a significant market opportunity to make
        real estate loans to owners and developers of real property whose financing
        needs are not met by other financial institutional real estate
        lenders.  The loan underwriting standards utilized by our manager and
        Vestin Originations are less strict than other financial institutional real
        estate lenders.  In addition, one of our competitive advantages is our
        ability to approve loan applications more quickly than other financial
        institutional lenders.  As a result, in certain cases, we may make
        real estate loans that are riskier than real estate loans made by other
        financial institutional lenders such as 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 other financial institutional 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, except for the funds
        we received pursuant to the VCT I closing, to materially increase the funds
        we
        will have available to invest from any other sources.  See discussion
        under – “Capital and Liquidity.”
 
  -
            30
            -
 *Table
            of Contents*
  On
        June
        22, 2007, we completed the issuance of $60.1 million in unsecured trust
        preferred securities through the special purpose business trust, VCT I to
        Merrill Lynch International, Bear Stearns & Co. Inc. and Taberna Funding
        LLC.  The proceeds derived from the sale of these securities will
        increase the capital we have available to invest.  These securities
        have a fixed interest rate equal to 8.75% through July 2012, and thereafter
        are
        subject to a variable rate equal to LIBOR plus 3.5% per annum, resetting
        quarterly.  The securities mature on July 30, 2020 and may be called
        at par by the Company any time after July 30, 2012.  These costs are
        being amortized to interest expense over the term of the notes.  We
        are obligated to pay the trust preferred securities with respect to
        distributions and amounts payable upon liquidation, redemption or
        repayment.
 
 Our
        operating results during the past several years have been adversely affected
        by
        allowances for non-performing loans.  At September 30, 2007, 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, Inc. (Part I & Part II), Monterrey Associates LP,
        Forest Development LLC, Pirates Lake, Ltd, Jeffrey's Court, LLC and V & M
        Homes at the Palms, Inc.  These loans are currently carried on our
        books at a value of approximately $20.6 million, net of allowance for loan
        losses of approximately $9.2 million for the RightStar loans, which does
        not
        include the allowance for performing loans.  These loans have been
        placed on non-accrual of interest status and are the subject of pending
        foreclosure proceedings.  On August 7, 2007, we, VRM I and Fund III
        entered into a settlement agreement with the borrower of Pirates Lake, Ltd.
        whereby the foreclosure was postponed.  Principal, accrued interest
        and $75,000 for expenses incurred by us, VRM I and Fund III relating to the
        loan
        were due on October 1, 2007.  On October 2, 2007, the borrower was in
        default of the settlement and loan agreements and they filed for protection
        under Chapter 11 of the United States Bankruptcy Court for the Southern District
        of Texas.  For additional information, see “Specific Loan Allowance”
in Note D – *Investments In Real Estate Loans* of the Notes to the
        Consolidated Financial Statements included in Item 1 *Consolidated Financial
        Statements* of this report Form 10-Q.
 
 Non-performing
        assets, net of allowance for loan losses, totaled approximately $49.5 million
        or
        14.5% of our total assets as of September 30, 2007, as compared to approximately
        $49.6 million or 16.4% of our total assets as of December 31,
        2006.  At December 31, 2006, non-performing assets consisted of
        approximately $28.9 million of real estate held for sale not sold through
        seller
        financing and approximately $20.6 million of non-performing loans, net of
        allowance for loan losses.  During the nine months ended September 30,
        2007, we received a $100,000 non refundable extension fee from the potential
        buyer of the partially completed golf course near Austin Texas.  In
        October 2007, the buyer elected to use their final extension, by paying a
        non-refundable extension fee of $50,000.  The closing was extended
        until November 13, 2007; however, there can be no assurance that the sale
        will
        be completed.  In addition, during the nine months ended September 30,
        2007, our manager evaluated the carrying value of the acquired properties
        located in Cathedral City, CA and based on its estimate, our manager has
        written
        down the value of the property by $1.3 million, of which our portion was
        approximately $1.1 million.  Our manager also recognized expenses
        related to real estate held for sale for this property which totaled $2.7
        million, of which our portion was approximately $2.3 million.
 
 The
        level
        of non-performing assets may reflect the continuing weakness in certain sectors
        of the economy and the risk inherent in our business strategy that entails
        more
        lenient underwriting standards and expedited loan approval
        procedures.  If the economy weakens and our borrowers who develop and
        sell commercial real estate projects are unable to complete their projects
        or
        obtain takeout financing or are otherwise adversely impacted, we may experience
        an increase in loan defaults, which may reduce the amount of funds we have
        to
        pay dividends to our stockholders.  Such conditions may also require
        us to restructure loans.  The weighted average term of our outstanding
        loans, including extensions and loans related to seller financed real estate
        held for sale, as of September 30, 2007 and December 31, 2006 were 18 months
        and
        19 months, respectively.
 
 Uncertain
        economic conditions during the next year could have a material impact on
        the
        collectability of our loans.  The downturn in the real estate markets
        where we conduct business might increase defaults on our loans and might
        require
        us to record additional reserves.  The problems experienced by some
        lenders in the sub-prime market may have a material adverse affect on the
        commercial mortgage markets in which we operate.  We are aware that
        weakness in the credit markets could at some point have an adverse impact
        upon
        our markets.  Nonetheless, we are aware that weakness in residential
        lending could at some point have an adverse impact upon our
        markets.  Recognizing the risk, we seek to maintain an adequate
        loan-to-value ratio, including loans related to seller financed real estate
        held
        for sale, which, as of September 30, 2007, was 72.73% on a weighted average
        basis, generally using appraisals prepared on an “as-if developed basis” in
        connection with the loan origination.
 
  -
            31
            -
 *Table
            of Contents*
  The
        increase in the weighted average loan-to-value ratio from 69.97%, as of December
        31, 2006, to 72.73%, as of September 30, 2007, is primarily due to eight
        loans
        that were funded during the nine months ended September 30, 2007, totaling
        approximately $28.8 million, with loan-to-value ratios ranging from 72.32%
        to
        80.00%.  The majority of these loans were to repeat borrowers with a
        history of good standing with us.  In addition, the original terms of
        these loans were 12 months.  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.
 
 During
        the nine months ended September 30, 2007, our manager provided a specific
        reserve allowance, related to a land loan on property located in Glendale,
        AZ,
        of approximately $1.6 million, of which our portion was approximately $1.3
        million.  This specific reserve allowance was based on an updated
        appraisal of the underlying collateral for this loan, obtained by our manager
        during October 2007.  As of September 30, 2007, the loan was
        performing as required.  Our manager will continue to evaluate our
        position in the loan.
 
 From
        time
        to time, we may acquire or sell investments in real estate loans from/to
        our
        manager or other related parties pursuant to the terms of our Management
        Agreement provided the price does not exceed the par value of the
        loan.  No gain or loss is recorded on these transactions, as it is not
        our intent to make a profit on the purchase or sale of such
        investments.  The purpose is generally to diversify our portfolio by
        syndicating loans, thereby providing us with additional capital to make
        additional loans.  For further information regarding related party
        transactions, refer to Note H – Related Party Transactions in the notes to our
        consolidated financials statements in Item 1 *Consolidated Financial
        Statements* in Part I of this report Form 10-Q.
 
 As
        of
        September 30, 2007, our loans were in the following states: Arizona, California,
        Hawaii, Nevada, New York, Oklahoma, Oregon, Texas and Washington.
 
 **Comparison
        of Operating Results for the three and nine months ended September 30, 2007
        to
        the three and nine months ended September 30, 2006.**
 
 **For
                  the Three Months**
                **Ended
                  September 30,**
              
              
              **For
                  the Nine Months**
                **Ended
                  September 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Revenues
              
              $
              7,732,000
              
              
              $
              5,645,000
              
              
              $
              23,149,000
              
              
              $
              17,062,000Operating
                  expenses
              
              
              5,162,000
              
              
              
              806,000
              
              
              
              7,781,000
              
              
              
              8,961,000Income
                  (loss) from real estate held for sale
              
              
              (1,029,000
              )
              
              
              1,561,000
              
              
              
              (3,052,000
              )
              
              
              1,327,000Income
                  before provision for income taxes
              
              
              1,541,000
              
              
              
              6,400,000
              
              
              
              12,316,000
              
              
              
              9,428,000Provision
                  for income taxes
              
              
              --
              
              
              
              452,000
              
              
              
              --
              
              
              
              452,000Net
                  income
              
              $
              1,541,000
              
              
              $
              5,948,000
              
              
              $
              12,316,000
              
              
              $
              8,976,000Basic
                  and diluted earnings per weighted average common share
              
              $
              0.04
              
              
              $
              0.15
              
              
              $
              0.32
              
              
              $
              0.27Net
                  income allocated to members per weighted average membership
                  units
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (0.04
              )Dividends
                  declared per common share / cash distributions per membership
                  unit
              
              $
              0.15
              
              
              $
              0.22
              
              
              $
              0.45
              
              
              $
              0.38Weighted
                  average common shares / membership units
              
              
              38,724,407
              
              
              
              38,799,550
              
              
              
              38,807,670
              
              
              
              38,834,746Weighted
                  average term of outstanding loans, including extensions
              
              18
                  months
              
              
              22
                  months
              
              
              18
                  months
              
              
              22
                  months
 
  -
            32
            -
 *Table
            of Contents*
  *Comparison
        of Operating Results for the three months ended September 30, 2007 to the
        three
        months ended September 30, 2006*.
 
 *Total
        Revenues*:  For the three months ended September 30, 2007, total
        revenues were approximately $7.7 million compared to approximately $5.6 million
        during the three months ended September 30, 2006, an increase of approximately
        $2.1 million or 37.0%.  Revenues were primarily affected by the
        following factors:
 
 ·
              Interest
                  income from investments in real estate loans totaled approximately
                  $6.8
                  million during the three months ended September 30, 2007, compared
                  to
                  approximately $5.1 million during the same period in 2006.  This
                  increase was primarily due to the increase in investment in real
                  estate
                  loans, net of allowance for loan losses, of approximately $12.7
                  million or
                  5.44%.  Our revenue is dependent upon the balance of our
                  investment in real estate loans and the interest earned on these
                  loans.  As of September 30, 2007, our investment in real estate
                  loans, including loans related to seller financed real estate held
                  for
                  sale, was approximately $262.2 million with a weighted average
                  interest
                  rate of 12.04%.  As of September 30, 2006, our investment in
                  real estate loans, including loans related to seller financed real
                  estate
                  held for sale, was approximately $265.7 million with a weighted
                  average
                  interest rate of 10.23%.  The increase in the weighted average
                  interest rate is attributable to five loans held at September 30,
                  2006
                  with interest rates ranging from 6% to 8.5%, which were paid in
                  full
                  during the twelve months ending September 30, 2007.  At
                  September 30, 2007, we had 20 loans that originated during the
                  twelve
                  months ended September 30, 2007 with interest rates ranging from
                  10.5% to
                  14.0%.
 
 ·
              During
                  the three months ended September 30, 2007 interest income from
                  banking
                  institutions increased approximatly $0.3 million compared to the
                  same
                  period in 2006 due to an increase in the cash balance at September
                  30,
                  2007 compared to September 30,
                  2006.
 
 *Total
        Operating Expenses*:  For the three months ended September 30,
        2007, total operating expenses were approximately $5.2 million compared to
        approximately $0.8 million during the three months ended September 30, 2006,
        an
        increase of approximately $4.4 million or 550.5% due in significant part
        to the
        following factors:
 
 ·
              During
                  the three months ended September 30, 2007, we recognized a provision
                  for
                  loan losses of approximately $1.3 million related to a land loan
                  on
                  property located in Glendale, Arizona.  See “Specific Loan
                  Allowance “ in Note D *Investment Real Estate Loans* of the Notes
                  to the Consolidated Financial Statements included in Part I, Item
                  1*Consolidated Financial Statements*of this Interim Report Form
                  10-Q.  There were no comparable loan loss provisions during the
                  three months ended September 30,
                  2006.
 
 ·
              During
                  the three months ended September 30, 2007, professional fees increased
                  approximately $1.5 million primarily due to the accrual of approximately
                  $1.2 million in legal fees relating to the legal actions that have
                  been
                  filed against us in connection with the REIT conversion.  See
                  Note O – *Legal Matters Involving The Company* of the Notes to the
                  Consolidated Financial Statements included in Part I, Item 1*Consolidated Financial Statements*of this Interim Report Form
                  10-Q.  There were no comparable accruals during the three months
                  ended September 30, 2006.
 
 ·
              We
                  recognized approximately $1.4 million of interest expense during
                  the three
                  months ended September 2007, related to the junior subordinated
                  notes
                  issued in connection with the trust preferred financing.  There
                  were no similar expenses during the three months ended September
                  30,
                  2006.
 
 *Total
        Income(Loss) from Real Estate Held for Sale*:  For the three
        months ended September 30, 2007, total loss from real estate held for sale
        was
        approximately $1.0 million compared to income of approximately $1.6 million
        during the same period in 2006, a decrease of 165.9%, primarily due to the
        following factors:
 
 ·
              During
                  the three months ended September 30, 2007, our manager evaluated
                  the
                  carrying value of the acquired property located in Cathedral City,
                  CA and
                  related liabilities. As of September 30, 2007, our manager estimated
                  the
                  net realizable value of the asset totaled $28,355,000, of which
                  our
                  portion totaled $24,278,000, and estimated liabilities associated
                  with
                  this asset totaled $2,700,000, of which our portion totaled $2,312,000.
                  Based on these estimates, our write downs on real estate held for
                  sale for
                  this property totaled $85,000 for the three months ended September
                  30,
                  2007. We also recognized expenses related to real estate held for
                  sale for
                  this property which totaled $771,000 for the three months ended
                  September
                  30, 2007.
  -
            33
            -
 *Table
            of Contents*
  
 ·
              We
                  recorded a gain on sale of real estate held for sale of approximately
                  $0.3
                  million during the three months ended September 30, 2006, on the
                  sale of a
                  real estate parcel in Austin, Texas.  There was no gain on sale
                  of real estate held for sale during the same period in
                  2007.
 
 ·
              During
                  the three months ended September 30, 2006, we recorded approximately
                  $0.9
                  million in rental revenue related to three apartment complexes
                  that were
                  classified as real estate held for sale.  We had no comparable
                  income during 2007.  During July 2006, we sold the 504 unit
                  apartment complex in Austin, TX “Lakeview” which resulted in a gain of
                  approximately $1.6 million.  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 $0.2 million.
 
 ·
              During
                  the three months ended September 30, 2006, we incurred expenses
                  related to
                  real estate held for sale not sold through seller financed of
                  approximately $0.9 million, primarily related to the three apartment
                  complexes referred to above.
 
 *Comparison
        of Operating Results for the nine months ended September 30, 2007 to the
        nine
        months ended September 30, 2006*
 
 *Total
        Revenues*:  For the nine months ended September 30, 2007, total
        revenues increased by approximately $6.1 million or 35.68% compared to the
        same
        period in 2006, due in significant part to the following factors:
 
 ·
              Interest
                  income from investments in real estate loans totaled approximately
                  $19.9
                  million during the nine months ended September 30, 2007, compared
                  to
                  approximately $15.6 million during the same period in
                  2006.  This increase was primarily due to the increase in
                  investment in real estate loans and the increase in the weighted
                  average
                  interest rate referred to above.  For additional information see
                  Note D- *Investment Real Estate Loans* of the Notes to the
                  Consolidated Financial Statements included in Part I, Item 1*Consolidated Financial Statements*of this Interim Report Form
                  10-Q.
 
 ·
              During
                  the nine months ended September 30, 2007, we recognized a gain
                  of
                  approximately $1.0 million related to an impaired real estate loan
                  that
                  was paid in full.
 
 ·
              During
                  the nine months ended September 30, 2007, we earned approximately
                  $0.6
                  million in other income from principal payments on notes receivable
                  that
                  were fully reserved.
 
 *Total
        Operating Expenses*:  For the nine months ended September 30,
        2007, total operating expenses were approximately $7.8 million compared to
        approximately $9.0 million during the nine months ended September 30, 2006,
        a
        decrease of approximately $1.2 million or 13.2%.  Expenses were
        primarily affected by the following factors:
 
 ·
              During
                  the nine months ended, we recognized a provision for loan losses
                  of
                  approximately $1.3 million related to a land loan on property located
                  in
                  Glendale, Arizona.  During the nine months ended September 30,
                  2006, we recognized a provision for loan loss of $5.5 million related
                  to
                  the loans secured by 4 cemeteries and 8 mortuaries in
                  Hawaii.  See “Specific Loan Allowance “ in Note D *Investment
                  Real Estate Loans* of the Notes to the Consolidated Financial
                  Statements included in Part I, Item 1*Consolidated Financial
                  Statements*of this Interim Report Form
                  10-Q.
 
 ·
              We
                  recognized approximately $1.4 million of interest during the nine
                  months
                  ended September 30, 2007 related to the junior subordinated notes
                  issued
                  in connection with the trust preferred financing.  During the
                  nine months ended September 30, 2006, we recognized approximately
                  $1.0
                  million of interest related to secured borrowings held during the
                  period
                  compared to approximately $0.5 million for the nine months ended
                  September
                  30, 2007.  We had no secured borrowings as of September 30,
                  2007.
 
 ·
              Professional
                  fees increased approximately $2.0 million during the nine months
                  ended
                  September 30, 2007, compared to the same period in 2006, primarily
                  due to
                  the accrual of approximately $1.2 million in legal fees relating
                  to the
                  legal actions that have been filed against us in connection with
                  the REIT
                  conversion.  See Note O – *Legal Matters Involving The
                  Company* of the Notes to the Consolidated Financial Statements
                  included in Part I, Item 1*Consolidated Financial Statements*of
                  this Interim Report Form 10-Q
  -
            34
            -
 *Table
            of Contents*
  *Total
        Income (Loss) from Real Estate Held for Sale*:  For the nine
        months ended September 30, 2007, total losses from real estate held for sale
        was
        approximately $3.1 million compared to income of approximately $1.3 million
        during the same period in 2006.  This decline was primarily due to the
        following factors:
 
 ·
              We
                  recorded a gain on sale of real estate held for sale related to
                  seller
                  financed loans of approximately $0.8 million during the three months
                  ended
                  March 31, 2007, as a result of a seller financed loan on the 74
                  unit (90
                  bed) assisted living facility in San Bernardino, CA being paid
                  in
                  full.  As of September 30, 2007, we had approximately $7.4
                  million, in real estate held for sale – seller financed.  Upon
                  the sale of real estate held for sale where we provide the financing,
                  GAAP
                  requires the new borrower to have a certain percentage equity ownership
                  (ranging from 10% to 25%) to allow us to record the sale of
                  property.  In addition, the borrower must maintain a minimum
                  commitment in the property on a continuing basis.  Therefore,
                  until the borrower meets these requirements, the proceeds received
                  from
                  the borrower are recorded as a deposit liability or applied to
                  the balance
                  of the real estate held for sale - seller financed, depending on
                  the
                  guidelines established by GAAP.  Our revenues will continue to
                  be impacted until we are able to convert these assets into investment
                  in
                  real estate loans or the loans are paid in full and we reinvest
                  the
                  proceeds into new loans.
 
 ·
              During
                  the nine months ended September 30, 2007, our manager evaluated
                  the
                  carrying value and estimated liabilities associated with the acquired
                  property located in Cathedral City, CA and based on these estimates,
                  our
                  write downs on real estate held for sale for this property totaled
                  approximately $1.1 million for the nine months ended September
                  30, 2007.
                  We also recognized expenses related to real estate held for sale
                  for this
                  property, which totaled approximately $2.3 million for the nine
                  months
                  ended September 30, 2007.
 
 ·
              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 $0.3 million
                  during
                  the nine months ended September 30, 2006, on the sale of a real
                  estate
                  parcel in Austin, Texas.  There was no gain on sale of real
                  estate held for sale during the same period in
                  2007.
 
 ·
              During
                  the nine months ended September 30, 2006, we recorded approximately
                  $3.9
                  million in rental revenue related to three apartment complexes
                  that were
                  classified as real estate held for
                  sale.
 
 ·
              During
                  the nine months ended September 30, 2006, we incurred expenses
                  related to
                  real estate held for sale not sold through seller financed of
                  approximately $4.3 million, primarily related to the three apartment
                  complexes referred to above.
 
 *Dividends*:  To
        maintain our status as a REIT, we are required to make distributions, other
        than
        capital gain dividends, to our stockholders each year in an amount at least
        equal to (1) the sum of (a) 90% of our taxable income, computed without regards
        to the dividends paid deduction and our net capital gain, and (b) 90% of
        the net
        income, after tax, from foreclosure property, minus (2) the sum of certain
        specified items of non-cash income over 5% of our REIT taxable
        income.  Our taxable income may substantially exceed or be less than
        our net income as determined based on GAAP, because, differences in GAAP
        and
        taxable net income consist primarily of allowances for loan losses or doubtful
        account, write downs on real estate held for sale, amortization of deferred
        financing cost, capital gains and losses, and deferred income.  From
        January 1, 2007 through September 30, 2007, we declared dividends to our
        shareholders of approximately $17.5 million.
 
 *Distributions
        to Members:*During the three months ended March 31, 2006, we distributed
        approximately $6.1 million to Fund II’s members.
 
 **CAPITAL
        AND LIQUIDITY**
 
 Liquidity
        is a measure of a company’s ability to meet potential cash requirements,
        including ongoing commitments to fund lending activities and general operating
        purposes.  Subject to a 3% reserve, we generally use all of our
        available funds to invest in real estate loans.  Distributable cash
        flow generated from such loans is paid out to our stockholders, in the form
        of a
        dividend.  We do not anticipate the need for hiring any employees,
        acquiring fixed assets such as office equipment or furniture, or incurring
        material office expenses during the next twelve months because our manager
        will
        manage our affairs.  We may pay our manager an annual management fee
        of up to 0.25% of our aggregate capital received by us and Fund II from the
        sale
        of shares or membership units.
  -
            35
            -
 *Table
            of Contents*
  During
        the nine months ended September 30, 2007, cash flows provided by operating
        activities approximated $16.2 million.  Investing activities consisted
        of cash provided by loan payoffs of approximately $86.1 million.  Cash
        used for new investments and purchases of real estate loans totaled
        approximately $108.2 million and proceeds from full payment of loans related
        to
        real estate held for sale – seller financed totaled approximately $3.7
        million.  In addition, investing activities consisted of the purchase
        of approximately $1.0 million in certificates of deposit and redemptions
        of
        approximately $1.2 million in certificates of deposit.  Financing
        activities consisted of dividends to stockholders, net of reinvestment, of
        approximately $19.5 million, proceeds from issuance of junior preferred
        securities of approximately $60.1 million and deferred financing costs of
        approximately $2.3 million.  In addition, financing activities
        consisted of the purchase of treasury stock totaling approximately $1.4
        million.
 
 On
        June
        22, 2007 we completed the issuance of $60.1 million in unsecured trust preferred
        securities through the special purpose business trust, VCT I to Merrill Lynch
        International, Bear Stearns & Co. Inc. and Taberna Funding
        LLC.  These securities have a fixed interest rate equal to 8.75%
        through July 2012, and thereafter are subject to a variable rate equal to
        LIBOR
        plus 3.5% per annum, resetting quarterly. VCT I used the proceeds from the
        sale
        of the trust preferred securities and the common securities to purchase our
        junior subordinated notes.  The terms of the junior subordinated notes
        match the terms of the trust preferred securities.  The notes are
        subordinated and junior in right of payment to all present and future senior
        indebtedness and certain other of our financial obligations.
 
 The
        indenture governing the notes includes a number of covenants including the
        following financial covenants:  (i) we must maintain a Tangible Net
        Worth of not less than $225,000,000, (ii) our trailing twelve months EBITDA
        must
        not be less than 2.5 times our Interest Expense and (iii) our ratio of Total
        Debt to Tangible Net Worth must not exceed 0.5 to 1.00.  All defined
        terms are set forth in the indenture.  As of September 30, 2007, we
        were in compliance with all financial covenants included in the
        indenture.
 
 At
        September 30, 2007, we had approximately $51.7 million in cash, $101,000
        in
        certificates of deposit, $2.9 million in marketable securities – related party
        and approximately $343.1 million in total assets.  We intend to meet
        short-term working capital needs through a combination of proceeds from loan
        payoffs, loan sales and/or borrowings.  We believe we have sufficient
        working capital to meet our operating needs in the near term.
 
 Since
        we
        distribute most or all of our distributable cash generated by operations,
        our
        sources of liquidity include  repayments of outstanding loans,
        dividend reinvestments by our stockholders, arrangements with third parties
        to
        participate in our loans and proceeds from issuance of note payable and secured
        borrowings.
 
 We
        have
        no current plans to sell any new shares except through our dividend reinvestment
        program.  As of October 30, 2007, approximately 8.6% of our
        shareholders owning less than 1% our outstanding shares have elected to reinvest
        their dividends.  The level of dividend reinvestment in the future
        will depend upon our performance, as well as the number of our stockholders
        who
        prefer to reinvest rather than receive current dividends.
 
 On
        March
        21, 2007, our Board of Directors authorized the repurchase of up to $10 million
        worth of our common stock.  Depending upon market conditions, shares
        may be repurchased from time to time at prevailing market prices through
        open
        market or privately negotiated transactions.  We are not obligated to
        purchase any shares.  Subject to applicable securities laws, including
        SEC Rule 10b-18, repurchases may be made at such times and in such amounts,
        as
        our management deems appropriate.  The share repurchase program may be
        discontinued or terminated at any time and we have not established a date
        for
        completion of the share repurchase program.  The repurchases will be
        funded from our available cash.  As of September 30, 2007, we
        purchased 285,050 shares of treasury stock through the repurchase program
        noted
        above.  These shares are carried on our books at cost totaling
        $1,440,000.
 
 We
        rely
        primarily upon repayment of outstanding loans to provide capital for investment
        in new loans.  Any significant level of defaults on outstanding loans
        could reduce the funds we have available for investment in new
        loans.  Resulting foreclosure proceedings may not generate full
        repayment of our loans and may result in significant delays in the return
        of
        invested funds.  This would diminish our capital resources and would
        impair our ability to invest in new loans.  Non-performing assets
        included loans in non-accrual status, net of allowance for loan losses, and
        real
        estate held for sale not sold through seller financing totaling approximately
        $20.6 million and $28.9 million, respectively, as of September 30, 2007,
        compared to approximately $19.5 million and $30.1 million, respectively,
        as of
        December 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.
  -
            36
            -
 *Table
            of Contents*
  Our
        manager believes that these non-performing assets are a result of factors
        unique
        to specific borrowers and properties.  Because of the estimated value
        of the underlying properties, we do not currently believe that any losses
        beyond
        those already recognized will be incurred from these assets upon final
        disposition.  However, it is possible that we will not be able to
        realize the full estimated carrying values upon disposition.
 
 To
        maintain our status as a REIT, we will be required to make distributions,
        other
        than capital gain dividends, to our stockholders each year in an amount at
        least
        equal to (1) the sum of (a) 90% of our taxable income, computed without regards
        to the dividends paid deduction and our net capital gain, and (b) 90% of
        the net
        income, after tax, from foreclosure property, minus (2) the sum of certain
        specified items of noncash income over 5% of our REIT taxable
        income.
 
 Loans
        in
        which unaffiliated investors have participated through inter-creditor agreements
        (“Inter-creditor Agreements”) are accounted for as secured borrowings in
        accordance with Statement of Financial Accounting Standards (“FAS”) 140 –
*Accounting for Transfers and Servicing of Financial Assets and
        Extinguishments of Liabilities*(“FAS 140”).  The Inter-creditor
        Agreements provide us additional funding sources for real estate loans whereby
        an unaffiliated investor (the “Investor”) may participate on a non-pari passu
        basis in certain real estate loans with us and/or VRM I and/or Fund III
        (collectively, the “Lead Lenders”).  In the event of borrower non-
        performance, the Inter-creditor Agreements generally provide that the Lead
        Lenders must repay the Investor’s loan amount either by (i) continuing to remit
        to the Investor the interest due on the participated loan amount; (ii)
        substituting an alternative loan acceptable to the Investor; or (iii)
        repurchasing the participation from the Investor for the outstanding balance
        plus accrued interest.
 
 During
        October 2006, we, our manager, Vestin Originations, Inc., VRM I and Fund
        III
        entered into an intercreditor agreement with an unrelated third party related
        to
        the funding of a construction real estate loan.  (See exhibit 10.8
        Intercreditor Agreement  under the Exhibit Index included in Part II –
Other Information, Item 6 Exhibits of this Report Form 10-Q).  The
        secured borrowing was recognized pro rata between us, VRM I and Fund III
        for the
        amount each entity has funded for the loan.  During May 2007, the
        secured borrowings were paid in full.  As of September 30, 2007, we
        did not have any funds used under Inter-creditor Agreements as compared to
        approximately $13.8 million used under Inter-creditor Agreements as of December
        31, 2006.
 
 We
        maintain working capital reserves of approximately 3% in cash and cash
        equivalents, certificates of deposits and short-term investments or liquid
        marketable securities.  This reserve is available to pay expenses in
        excess of revenues, satisfy obligations of underlying properties, expend
        money
        to satisfy our unforeseen obligations and for other permitted uses of working
        capital.
 
 **Investments
        in Real Estate Loans Secured by Real Estate Portfolio**
 
 We
        offer
        five real estate loan products consisting of commercial, construction,
        acquisition and development, land, and residential loans.  The
        effective interest rates on all product categories range from 9% to
        14%.  Revenue by product will fluctuate based upon relative balances
        during the period.  We had investments in 40 real estate loans,
        including loans related to seller financed real estate held for sale, as
        of
        September 30, 2007, with a balance of approximately $262.2 million as compared
        to investments in 37 real estate loans, including loans related to seller
        financed real estate held for sale, as of December 31, 2006, with a balance
        of
        approximately $242.4 million.
 
 At
        September 30, 2007, 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, Inc. (Part I & Part
        II), Monterrey Associates LP, Forest Development LLC, Pirates Lake, Ltd,
        Jeffrey's Court, LLC and V & M Homes at the Palms, Inc.  These
        loans are currently carried on our books at a value of approximately $20.6
        million, net of allowance for loan losses of approximately $9.2 million for
        the
        RightStar loans, which does not include the allowance for performing
        loans.  These loans have been placed on non-accrual of interest status
        and are the subject of pending foreclosure proceedings.  On August 7,
        2007, we, VRM I and Fund III entered into a settlement agreement with the
        borrower of Pirates Lake, Ltd. whereby the foreclosure was
        postponed.  Principal, accrued interest and $75,000 for expenses
        incurred by us, VRM I and Fund III relating to the loan were due on October
        1,
        2007.  On October 2, 2007, the borrower was in default of the
        settlement and loan agreements and they filed for protection under Chapter
        11 of
        the United States Bankruptcy Court for the Southern District of
        Texas.  Our manager has instructed Bankruptcy counsel to seek relief
        from the automatic stay and to seek dismissal of the Pirate’s Lake Ltd. Chapter
        11 proceedings so that foreclosure proceedings may proceed.
  -
            37
            -
 *Table
            of Contents*
  A
        hearing
        is currently scheduled for November 7, 2007.  Our manager has
        evaluated this loan and concluded that the value of the underlying collateral
        is
        sufficient to protect us for loss of principal.  No specific allowance
        was deemed necessary.
 
 During
        March 2007, our manager extended the Mid-State Raceway loan from March 31,
        2007
        to March 31, 2008.  As part of the extension agreement, the borrower
        made a principal payment of approximately $3.0 million, of which our portion
        was
        approximately $2.6 million, and the loan interest rate increased from 9%
        to
        12%.
 
 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, 2007, 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 $9.2
        million.  In addition, during the nine months ended September 30,
        2007, our manager provided a specific reserve allowance, related to a land
        loan
        on property located in Glendale, AZ, of approximately $1.6 million, of which
        our
        portion was approximately $1.3 million.  Our manager evaluated these
        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 Consolidated
        Financial Statements included in Part I, Item *1 Consolidated Financial
        Statements*of this Interim Report Form 10-Q.
 
 **Asset
        Quality and Loan Reserves**
 
 Losses
        may occur from investing in real estate loans.  The amounts of losses
        will vary as the loan portfolio is affected by changing economic conditions
        and
        the financial condition of borrowers.
 
 The
        conclusion that a real estate loan is uncollectible or that collectibility
        is
        doubtful is a matter of judgment.  On a periodic basis, our manager
        evaluates our real estate loan portfolio for impairment.  The fact
        that a loan is temporarily past due does not necessarily mean that the loan
        is
        impaired.  Rather, all relevant circumstances are considered by our
        manager to determine impairment and the need for specific
        reserves.  Such evaluation, which includes a review of all loans on
        which full collectibility may not be reasonably assured, considers among
        other
        matters:
 
 ·
              Prevailing
                  economic conditions;
 
 ·
              Historical
                  experience;
 
 ·
              The
                  nature and volume of the loan
                  portfolio;
 
 ·
              The
                  borrowers’ financial condition and adverse situations that may affect the
                  borrowers’ ability to pay;
 
 ·
              Evaluation
                  of industry trends; and
 
 ·
              Estimated
                  net realizable value of any underlying collateral in relation to
                  the real
                  estate loan amount.
 
 Based
        upon this evaluation, a determination is made as to whether the allowance
        for
        loan losses is adequate to cover any potential losses.  Additions to
        the allowance for loan losses are made by charges to the provision for loan
        losses.  Recoveries of previously charged off amounts are credited to
        the allowance for loan losses.  For additional information regarding
        the roll-forward of the allowance for loan losses for the nine months ended
        September 30, 2007, refer to Note D – *Investments In Real Estate Loans*
        of the Notes to the Consolidated Financial Statements included in Part I,
        Item
*1 Consolidated Financial Statements*of this Interim Report Form
        10-Q.
 
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            38
            -
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            of Contents*
  **Investments
        in Real Estate Held for Sale**
 
 At
        September 30, 2007, we held two properties with a total carrying value of
        approximately $28.9 million, which were acquired through foreclosure and
        recorded as investments in real estate held for sale.  Our investments
        in real estate held for sale are accounted for at the lower of cost or fair
        value less costs to sell with fair value based on appraisals and knowledge
        of
        local market conditions.  It is not our intent to invest in or own
        real estate as a long-term investment.  We seek to sell properties
        acquired through foreclosure as quickly as circumstances
        permit.  During the nine months ended September 30, 2007, we received
        a $100,000 non refundable extension fee from the potential buyer of the
        partially completed golf course near Austin Texas.  In October 2007,
        the buyer elected to use their final extension, by paying a non-refundable
        extension fee of $50,000.  The closing was extended until November 13,
        2007; however, there can be no assurance that the sale will be
        completed.  In addition, during the nine months ended September 30,
        2007, our manager evaluated the carrying value of the acquired properties
        located in Cathedral City, CA and based on its estimate, our manager has
        written
        down the value of the property by $1.3 million, of which our portion was
        approximately $1.1 million.  Our manager also recognized expenses
        related to real estate held for sale for this property, which totaled $2.7
        million, of which our portion was approximately $2.3 million.
 
 For
        additional information on our investments in real estate held for sale, refer
        to
        Note F –*Real Estate Held for Sale*of the Notes to the Consolidated
        Financial Statements included in Part I, Item 1*Consolidated Financial
        Statements*of this Interim Report Form 10-Q.
 
 **Investments
        in Real Estate Held for Sale — Seller Financed**
 
 At
        September 30, 2007, we held an interest in one****property
        with a total carrying value of approximately $7.4 million, which was sold
        in a
        transaction where we provided the financing to the purchaser.  GAAP
        requires us to include these properties in real estate held for sale until
        the
        borrower has met and maintained certain requirements.  We may share
        ownership of such properties with VRM I, Fund III, our manager, or other
        related
        and/or unrelated parties.  These investments in real estate held for
        sale are accounted for at the lower of cost or fair value less costs to sell
        with fair value based on appraisals and knowledge of local market
        conditions.  For additional information on our investments in real
        estate loans, refer to Note G –*Real Estate Held for Sale-Seller
        Financed* of the Notes to the Consolidated Financial Statements included in
        Part I, Item 1*Consolidated Financial Statements*of this Interim Report
        Form 10-Q.
 
 **OFF-BALANCE
        SHEET ARRANGEMENTS**
 
 We
        do not
        have any interests in off-balance sheet special purpose entities, other then
        the
        interest in VCT I as discussed in Note K – *Junior Subordinated Notes* of
        the Notes to the Consolidated Financial Statements included in Part I, Item
        1*Consolidated Financial Statements*of this Interim Report Form 10-Q,
        nor do we have any interests in non-exchange traded commodity
        contracts.
 
 **CONTRACTUAL
        OBLIGATIONS**
 
 The
        following summarizes our contractual obligations at September 30,
        2007:
 
 **Contractual
                  Obligation**
              
              **Total**
              
              
              **Less
                  Than 1 Year**
              
              
              **1-3
                  Years**
              
              
              **3-5
                  Years**
              
              
              **More
                  Than**
                **5
                  Years**Junior
                  subordinated notes payable **(1)**
              
              $
              60,100,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              60,100,000Total
              
              $
              60,100,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              60,100,000
 
 **(1)**
              See
                  Note K – *Junior Subordinated Notes* of the Notes to the
                  Consolidated Financial Statements included in Part I, Item 1*Consolidated Financial Statements*of this Interim Report Form
                  10-Q.
 
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            39
            -
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            of Contents*
  **CRITICAL
        ACCOUNTING ESTIMATES**
 
 **Revenue
        Recognition**
 
 Interest
        income on loans is accrued by the effective interest method.  We do
        not accrue interest income from loans once they are determined to be
        impaired.  A loan is impaired when, based on current information and
        events, it is probable that we will be unable to collect all amounts due
        according to the contractual terms of the loan agreement or when the payment
        of
        interest is 90 days past due.
 
 The
        following table presents a sensitivity analysis to show the impact on our
        financial condition at September 30, 2007, 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
              
              $
              2,462,000Weighted
                  average interest rate assumption increased by 5.0% or 500 basis
                  points
              
              $
              12,312,000Weighted
                  average interest rate assumption decreased by 1.0% or 100 basis
                  points
              
              $
              (2,462,000
              )Weighted
                  average interest rate assumption decreased by 5.0% or 500 basis
                  points
              
              $
              (12,312,000
              )
 
 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
        consolidated 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.  Our manager’s estimate of losses is based on a number of
        factors including the types and dollar amounts of loans in the portfolio,
        adverse situations that may affect the borrower’s ability to repay, prevailing
        economic conditions and the underlying collateral securing the
        loan.  Additions to the allowance are provided through a charge to
        earnings and are based on an assessment of certain factors, which may indicate
        estimated losses on the loans.  Actual losses on loans are recorded as
        a charge-off or a reduction to the allowance for loan
        losses.  Subsequent recoveries of amounts previously charged off are
        added back to the allowance or included as income.
 
 The
        following table presents a sensitivity analysis to show the impact on our
        financial condition at September 30, 2007, 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
              
              $
              2,622,000Allowance
                  for loan losses assumption increased by 5.0% of loan
                  portfolio
              
              $
              13,109,000Allowance
                  for loan losses assumption decreased by 1.0% of loan
                  portfolio
              
              $
              (2,622,000
              )Allowance
                  for loan losses assumption decreased by 3.7% of loan
                  portfolio
              
              $
              (9,734,000
              )
 
 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
        commercial real estate lender willing to invest in loans to borrowers who
        may
        not meet the credit standards of other financial institutional lenders, the
        default rate on our loans could be higher than those generally experienced
        in
        the mortgage lending industry.  We, our manager and Vestin
        Originations generally approves loans more quickly than other real estate
        lenders and, due to our expedited underwriting process, there is a risk that
        the
        credit inquiry we perform will not reveal all material facts pertaining to
        a
        borrower and the security.
 
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            40
            -
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            of Contents*
  We
        may
        discover additional facts and circumstances as we continue our efforts in
        the
        collection and foreclosure processes.  This additional information
        often causes management to reassess its estimates.  In recent years,
        we have revised estimates of our allowance for loan
        losses.  Circumstances that may cause significant changes in our
        estimated allowance include, but not limited to:
 
 ·
              Declines
                  in real estate market conditions that can cause a decrease in expected
                  market value;
 
 ·
              Discovery
                  of undisclosed liens for community improvement bonds, easements
                  and
                  delinquent property taxes;
 
 ·
              Lack
                  of progress on real estate developments after we advance
                  funds.  We customarily utilize disbursement agents to monitor
                  the progress of real estate developments and approve loan
                  advances.  After further inspection of the related property,
                  progress on construction occasionally does not substantiate an
                  increase in
                  value to support the related loan
                  advances;
 
 ·
              Unanticipated
                  legal or business issues that may arise subsequent to loan origination
                  or
                  upon the sale of foreclosed upon property;
                  and
 
 ·
              Appraisals,
                  which are only opinions of value at the time of the appraisal,
                  may not
                  accurately reflect the value of the
                  property.
 
 **Real
        Estate Held For Sale**
 
 Real
        estate held for sale includes real estate acquired through foreclosure and
        will
        be carried at the lower of the recorded amount, inclusive of any senior
        indebtedness, or the property's estimated fair value, less estimated costs
        to
        sell, with fair value based on appraisals and knowledge of local market
        conditions.  While pursuing foreclosure actions, we seek to identify
        potential purchasers of such property.  It is not our 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,*we seek 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.
 
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  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 QUALITATIVEDISCLOSURES ABOUT MARKET
                  RISK**
 
 We
        are
        exposed to market risk, primarily from changes in interest rates.  We
        do not deal in any foreign currencies and do not own any options, futures
        or
        other derivative instruments.
 
 Most
        of
        our assets consisted of investments in real estate loans, which from time
        to
        time include those that are financed under Inter-creditor
        Agreements.  At September 30, 2007, our aggregate investment in real
        estate loans was approximately $244.7 million, net of allowance, with a weighted
        average effective interest rate of 12.04%.  Most of the real estate
        loans had an initial term of 12 months.  The weighted average term of
        outstanding loans, including extensions and loans related to seller financed
        real estate held for sale, at September 30, 2007, was 18 months.  All
        but two of the outstanding real estate loans at September 30, 2007, were
        fixed
        rate loans.  One of the two variable interest rate loans was
        non-performing as of September 30, 2007, see Note D – Investments in Real Estate
        Loans in Part I, Item 1 *Consolidated Financial Statements* of this Form
        10-Q.  All of the real estate loans are held for investment purposes;
        none are held for sale.  We intend to hold such real estate loans to
        maturity.  None of the real estate loans had prepayment penalties and
        20 had an exit fee.
 
 Market
        fluctuations in interest rates generally do not affect the carrying value
        of our
        investment in real estate loans.  However, significant and sustained
        changes in interest rates could affect our operating results.  If
        interest rates decline significantly, some of the borrowers could prepay
        their
        loans with the proceeds of a refinancing at lower interest
        rates.  This would reduce our earnings and funds available for
        dividend distribution to stockholders.  On the other hand, a
        significant increase in interest rates could result in a slowdown in real
        estate
        development activity that would reduce the demand for commercial real estate
        loans.  As a result, we might encounter greater difficulty in
        identifying appropriate borrowers.  We are not in a position to
        quantify the potential impact on our operating results from a material change
        in
        interest rates.
 
 The
        following table contains information about the investment in real estate
        loans,
        including loans related to seller financed real estate held for sale, in
        our
        portfolio as of September 30, 2007.  The presentation aggregates the
        investment in real estate loans by their maturity dates for maturities occurring
        in each of the years 2007 through 2010 and thereafter and separately aggregates
        the information for all maturities arising after 2010.  The carrying
        values of these assets approximate their fair value as of September 30,
        2007.
 
 **Interest
                  Earning Assets**
                **Aggregated
                  by Maturity at September 30, 2007****Interest
                  Earning Assets**
              
              **2007**
              
              
              **2008**
              
              
              **2009**
              
              
              **2010**
              
              
              **Thereafter**
              
              
              **Total**Investments
                  in real estate loans
              
              $
              118,012,000
              
              
              $
              144,172,000
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              262,184,000Weighted
                  average interest rates
              
              
              11.81%
              
              
              
              12.22%
              
              
              
              --%
              
              
              
              --%
              
              
              
              --%
              
              
              
              12.04%
 
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            of Contents*
  At
        September 30, 2007, we also had approximately $54.7 million invested in cash,
        cash equivalents, certificates of deposit, and marketable securities – related
        party (VRM I).  Approximately 3% of our assets will be held in such
        accounts as a cash reserve; additional deposits in such accounts will be
        made as
        funds are received from investors and repayment of loans pending the deployment
        of such funds in new real estate loans.  We believe that these
        financial assets do not give rise to significant interest rate risk due to
        their
        short-term nature.
 
 **ITEM
                  4.**
              **CONTROLS
                  AND PROCEDURES**
 
 **Evaluation
        of Disclosure Controls and Procedures**
 
 We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed in our reports under the Exchange Act
        is
        recorded, processed, summarized and reported within the time periods specified
        in the SEC's rules and forms, and that such information is accumulated and
        communicated to our management, including our Chief Executive Officer (“CEO”)
        and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions
        regarding required financial disclosure. In connection with the preparation
        of
        this Report on Form 10-Q, our management carried out an evaluation, under
        the
        supervision and with the participation of our management, including the CEO
        and
        CFO, as of September 30, 2007, of the effectiveness of the design and operation
        of our disclosure controls and procedures, as such term is defined under
        Rule
        13a-15(e) under the Exchange Act.  Based upon this evaluation, our CEO
        and CFO believe that these controls and procedures are adequate to ensure
        we are
        able to collect, process and disclose within the required time periods the
        information we are required to disclose in the reports we file with the
        SEC.
 
 The
        certifications of the our Chief Executive Officer and Chief Financial Officer
        required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits
        31.1 and 31.2 to this report.
 
 **Changes
        in Internal Control Over Financial Reporting**
 
 Our
        management has not identified any changes in our internal controls over
        financial reporting during the Quarter ended September 30, 2007.
 
 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.
 
 **ITEM
                  4T.**
              **CONTROLS
                  AND PROCEDURES**
 
 Not
        applicable
 
 **PART
        II – OTHER INFORMATION**
 
 **ITEM
                  1.**
              **LEGAL
                  PROCEEDINGS**
 
 Please
        refer to Note N *Legal Matters Involving the Manager* and Note O
*Legal Matters Involving the Company* in Part I, Item 1 *Consolidated
        Financial Statements* of this Form 10-Q for information regarding our legal
        proceedings, which are incorporated herein by reference.
 
 **ITEM
                  1A.**
              **RISK
                  FACTORS**
 
 In
        considering our future performance and any forward-looking statements made
        in
        this report, the material risks described below should be considered
        carefully.  These factors should be considered in conjunction with the
        other information included elsewhere in this report.
 
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  **RISKS
        RELATED TO OUR BUSINESS**
 
 **Defaults
        on our real estate loans will decrease our revenues and
        distributions.**
 
 We
        are in
        the business of investing in real estate loans and, as such, we are subject
        to
        risk of defaults by borrowers.  Our performance will be directly
        impacted by any defaults on the loans in our portfolio.  As a
        commercial real estate lender willing to invest in loans to borrowers who
        may
        not meet the credit standards of other financial institutional lenders, the
        rate
        of default on our loans could be higher than those generally experienced
        in the
        real estate lending industry.  Any sustained period of increased
        defaults could adversely affect our business, financial condition, liquidity
        and
        the results of our operations.  We seek to mitigate the risk by
        estimating the value of the underlying collateral and insisting on adequate
        loan-to-value ratios.  However, we cannot be assured that these
        efforts will fully protect us against losses on defaulted loans.  Any
        subsequent decline in real estate values on defaulted loans could result
        in less
        security than anticipated at the time the loan was originally made, which
        may
        result in our not recovering the full amount of the loan.  Any failure
        of a borrower to repay loans or interest on loans will reduce our revenues
        and
        distributions and the value of common stock.  Our weighted average
        loan-to-value ratio, including loans related to seller financed real estate
        held
        for sale, as of September 30, 2007, was 72.73% as compared to 69.97% as of
        December 31, 2006.  Our appraisals are generally dated within 12
        months of the date of loan origination and may not reflect a decrease in
        the
        value of the real estate due to events subsequent to the date of the
        appraisals.
 
 As
        of
        September 30, 2007, we had in our portfolio approximately $20.6 million in
        delinquent loans, net of allowance for loan losses, and approximately $28.9
        million of real estate held for sale not sold through seller financing for
        a
        total of approximately $49.5 million in non-performing assets, which represented
        approximately 18.2% of our stockholders’ equity.  As of September 30,
        2007, we also had approximately $7.4 million of seller financed real estate
        held
        for sale and had received approximately $1.6 million in payments from borrowers
        on the loans associated with these properties.  We do not believe that
        a rising interest rate environment will increase or accelerate our delinquency
        rate because all of our loans are short term.
 
 **Our
        underwriting standards and procedures are more lenient than other financial
        institutional lenders, which may result in a higher level of non-performing
        assets and less amounts available for distribution.**
 
 Our
        underwriting standards and procedures are more lenient than other financial
        institutional lenders in that we will invest in loans to borrowers who may
        not
        be required to meet the credit standards of other financial institutional
        real
        estate lenders, which may lead to an increase in non-performing assets in
        our
        loan portfolio and create additional risks of return.  We approve real
        estate loans more quickly than other lenders.  We rely heavily on
        third-party reports and information such as appraisals and environmental
        reports.  Because of our accelerated due diligence process, we may
        accept documentation that was not specifically prepared for us or commissioned
        by us.  This creates a greater risk of the information contained
        therein being out of date or incorrect.  Generally, we will not spend
        more than 20 days assessing the character and credit history of our
        borrowers.  Due to the nature of loan approvals, there is a risk that
        the credit inquiry we perform will not reveal all material facts pertaining
        to
        the borrower and the security.  There may be a greater risk of default
        by our borrowers, which may impair our ability to make timely distributions
        and
        which may reduce the amount we have available to distribute.
 
 **We
        depend upon our real estate security to secure our real estate loans, and
        we may
        suffer a loss if the value of the underlying property
        declines.**
 
 We
        depend
        upon our real estate security to protect us on the loans that we
        make.  We depend upon the skill of independent appraisers to value the
        security underlying our loans.  However, notwithstanding the
        experience of the appraisers, they may make mistakes, or the value of the
        real
        estate may decrease due to subsequent events.  Our appraisals are
        generally dated within 12 months of the date of loan origination and may
        have
        been commissioned by the borrower.  Therefore, the appraisals may not
        reflect a decrease in the value of the real estate due to events subsequent
        to
        the date of the appraisals.  In addition, most of the appraisals are
        prepared on an as-if developed basis, which approximates the post-construction
        value of the collateralized property assuming such property is
        developed.  As-if developed values on raw land loans or acquisition
        and development loans often dramatically exceed the immediate sales value
        and
        may include anticipated zoning changes and successful development by the
        purchaser upon which development is dependent on availability of
        financing.  As most of the appraisals will be prepared on an as-if
        developed basis, if the loan goes into default prior to completion of the
        project, the market value of the property may be substantially less than
        the
        appraised value.
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  As
        a
        result, there may be less security than anticipated at the time the loan
        was
        originally made.  If there is less security and a default occurs, we
        may not recover the full amount of our loan, thus reducing the amount of
        funds
        available to distribute.
 
 **We
        typically make “balloon payment” loans, which are riskier than loans with
        payments of principal over an extended period of time.**
 
 The
        loans
        we invest in or purchase generally require the borrower to make a “balloon
        payment” on the principal amount upon maturity of the loan.  A balloon
        payment is a large principal balance that is payable after a period of time
        during which the borrower has repaid none or only a small portion of the
        principal balance.  As of September 30, 2007, all of our loans
        provided for payments of interest only with a “balloon” payment of principal
        payable in full at the end of the term, with the exception of one of our
        loans
        that has both principal and interest payments along with a “balloon” payment at
        the end of the term.  Loans with balloon payments are riskier than
        loans with even payments of principal over an extended time period such as
        15 or
        30 years because the borrower’s repayment depends on its ability to sell the
        property profitably, obtain suitable refinancing or otherwise raise a
        substantial amount of cash when the loan comes due.  There are no
        specific criteria used in evaluating the credit quality of borrowers for
        loans
        requiring balloon payments.  Furthermore, a substantial period of time
        may elapse between the review of the financial statements of the borrower
        and
        the date when the balloon payment is due.  As a result, there is no
        assurance that a borrower will have sufficient resources to make a balloon
        payment when due.
 
 **Our
        loans are not guaranteed by any governmental agency.**
 
 Our
        loans
        are not insured or guaranteed by a federally owned or guaranteed mortgage
        agency.  Consequently, our recourse, if there is a default, may be to
        foreclose upon the real property securing a loan and/or pursuing the borrower’s
        guarantee of the principal.  The value of the foreclosed property may
        have decreased and may not be equal to the amount outstanding under the
        corresponding loan, resulting in a decrease of the amount available to
        distribute.
 
 **Our
        real estate loans may not be marketable, and we expect no secondary market
        to
        develop.**
 
 We
        do not
        expect our real estate loans to be marketable, and we do not expect a secondary
        market to develop for them.  As a result, we will generally bear all
        the risk of our investment until the loans mature.  This will limit
        our ability to hedge our risk in changing real estate markets and may result
        in
        reduced returns to our investors.
 
 **The
        terms of our indebtedness increase our operating risk and may reduce the
        amount
        we have available to distribute to stockholders.**
 
 In
        June
        2007, we completed the issuance of $60.1 million of trust preferred securities
        through a special purpose business trust in order to expand our capacity
        to
        invest in real estate loans.  We may borrow up to 70% of the fair
        market value of our outstanding real estate loans at any time and consequently,
        subject to the terms of the trust preferred securities, we may borrow additional
        funds in order to further expand our loan portfolio.  These borrowings
        will require us to carefully manage our cost of funds.  The junior
        subordinated notes sold in June 2007 in connection with the trust preferred
        financing bear interest at a fixed rate of 8.75% through July 2012; thereafter
        the interest rate is LIBOR plus 3.5%, resetting quarterly.  In order
        to benefit from this arrangement, we need to loan the proceeds at rates in
        excess of the rates payable on the junior subordinated notes.  No
        assurance can be given that we will be successful in this effort, particularly
        if non-performing loans reduce our effective rate of return on our outstanding
        loans.
 
 In
        addition, the indenture governing the junior subordinated notes sets forth
        a
        number of covenants, which may constrain our flexibility in operating our
        business.  Should we breach a material covenant or if we are unable to
        meet our payment obligations on the junior subordinated notes, the purchasers
        of
        the trust preferred securities will likely declare us in default, resulting
        in
        acceleration of the principal sums due on the notes and restrictions on the
        payment of dividends to our shareholders.
 
 The
        terms
        of any additional indebtedness we incur may vary.  However, some
        lenders may require as a condition of making a loan to us that the lender
        will
        receive a priority on loan repayments received by us.  As a result, if
        we do not collect 100% on our investments, the first dollars may go to our
        lenders and we may incur a loss that will result in a decrease of the amount
        available for distribution.
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  In
        addition, we may enter into securitization arrangements in order to raise
        additional funds.  Such arrangements could increase our leverage and
        adversely affect our cash flow and our ability to make
        distributions.  During October 2006, we, our manager, Vestin
        Originations, Inc., VRM I and Fund III entered into an intercreditor agreement
        with an unrelated third party related to the funding of a construction real
        estate loan.  The secured borrowing was recognized pro rata between
        us, VRM I and Fund III for the amount each entity has funded for the
        loan.  During May 2007, the secured borrowings were paid in
        full.
 
 We
        may
        need cash to meet our minimum REIT distribution requirements and limit U.S.
        federal income taxation.  Because we are required to distribute
        annually to our stockholders at least 90% of our REIT taxable income (determined
        without regard to the dividends paid deduction and by excluding net capital
        gains) to qualify as a REIT and because we intend to distribute substantially
        all of our REIT taxable income and net capital gain, our ability to expand
        our
        loan portfolio will depend in large part on external sources of
        capital.  In addition, if our minimum distribution requirements to
        maintain our REIT status and minimize U.S. federal income taxation become
        large
        relative to our cash flow as a result of our taxable income exceeding our
        cash
        flow from operations, then we may be required to borrow funds or raise capital
        by selling assets to meet those distribution requirements.  Any equity
        financing may result in substantial dilution to our stockholders, and any
        debt
        financing may include restrictive covenants.  We may not be able to
        raise capital on reasonable terms, if at all.
 
 **We
        may have difficulty protecting our rights as a secured
        lender.**
 
 We
        believe that our loan documents will enable us to enforce our commercial
        arrangements with borrowers.  However, the rights of borrowers and
        other secured lenders may limit our practical realization of those
        benefits.  For example:
 
 ·
              Judicial
                  foreclosure is subject to the delays of protracted
                  litigation.  Although we expect non-judicial foreclosure to be
                  quicker, our collateral may deteriorate and decrease in value during
                  any
                  delay in foreclosing on it;
 
 ·
              The
                  borrower’s right of redemption during foreclosure proceedings can deter
                  the sale of our collateral and can for practical purposes require
                  us to
                  manage the property;
 
 ·
              Unforeseen
                  environmental hazards may subject us to unexpected liability and
                  procedural delays in exercising our
                  rights;
 
 ·
              The
                  rights of senior or junior secured parties in the same property
                  can create
                  procedural hurdles for us when we foreclose on
                  collateral;
 
 ·
              Required
                  licensing and regulatory approvals may complicate our ability to
                  foreclose
                  or to sell a foreclosed property where our collateral includes
                  an
                  operating business.  We have recently experienced difficulties
                  in foreclosing on the RightStar loans discussed in Note O – *Legal
                  Matters Involving The Company* in the notes to the consolidated
                  financial statement under Part I, Item I. *Consolidated Financial
                  Statements* to this Interim Report Form 10-Q, because of the need to
                  obtain a license from the State of Hawaii to operate funeral homes
                  and
                  cemeteries;
 
 ·
              We
                  may not be able to pursue deficiency judgments after we foreclose
                  on
                  collateral; and
 
 ·
              State
                  and federal bankruptcy laws can prevent us from pursuing any actions,
                  regardless of the progress in any of these suits or
                  proceedings.
 
 **By
        becoming the owner of property, we may incur additional obligations, which
        may
        reduce the amount of funds available for distribution.**
 
 We
        intend
        to own real property only if we foreclose on a defaulted loan and purchase
        the
        property at the foreclosure sale.  Acquiring a property at a
        foreclosure sale may involve significant costs.  If we foreclose on
        the security property, we expect to obtain the services of a real estate
        broker
        and pay the broker’s commission in connection with the sale of the
        property.  We may incur substantial legal fees and court costs in
        acquiring a property through contested foreclosure and/or bankruptcy
        proceedings.
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  In
        addition, significant expenditures, including property taxes, maintenance
        costs,
        mortgage payments, insurance costs and related charges, must be made on any
        property we own regardless of whether the property is producing any
        income.
 
 Under
        applicable environmental laws, any owner of real property may be fully liable
        for the costs involved in cleaning up any contamination by materials hazardous
        to the environment.  Even though we might be entitled to
        indemnification from the person that caused the contamination, there is no
        assurance that the responsible person would be able to indemnify us to the
        full
        extent of our liability.  Furthermore, we would still have court and
        administrative expenses for which we may not be entitled to
        indemnification.
 
 **A
        prolonged economic slowdown, lengthy or severe recession or significant increase
        in interest rates could harm our business.**
 
 The
        risks
        associated with our business are more acute during periods of economic slowdown
        or recession because these periods can be accompanied by decreased demand
        for
        consumer credit and declining real estate values.  As a commercial
        real estate lender willing to invest in riskier loans, rates of delinquencies,
        foreclosures and losses on our loans could be higher than those generally
        experienced in the commercial mortgage lending industry during periods of
        economic slowdown or recession.  Problems in the sub-prime residential
        mortgage market could adversely affect the general economy or the availability
        of funds for commercial real estate developers.  This in turn could
        lead to an increase in defaults on our loans.  Furthermore, if
        interest rates were to increase significantly, the costs of borrowing may
        become
        too expensive, which may negatively impact the refinance market by reducing
        demand for real estate lending.  For the nine months ended September
        30, 2007, loan originations accounted for all loans funded, except for eight
        loans that were refinanced during that period.  All eight of these
        loans had interest rates equal to or higher than their original
        loan.  Any sustained period of increased delinquencies, foreclosures
        or losses or a significant increase in interest rates could adversely affect
        our
        ability to originate, purchase and securitize loans, which could significantly
        harm our business, financial condition, liquidity and results of
        operations.
 
 As
        of
        September 30, 2007, none of our loans had a prepayment penalty and 20 loans
        had
        an exit fee.  Based on our manager’s historical experience, we expect
        that our loans will include exit fees.  Should interest rates
        decrease, our borrowers may prepay their outstanding loans with us in order
        to
        receive a more favorable rate.  This may reduce the amount of funds we
        have available to distribute.
 
 **Our
        results are subject to fluctuations in interest rates and other economic
        conditions.**
 
 Our
        results of operations will vary with changes in interest rates and with the
        performance of the relevant real estate markets.  If the economy is
        healthy, we expect that more people will be borrowing money to acquire, develop
        or renovate real property.  However, if the economy grows too fast,
        interest rates may increase too much and the cost of borrowing may become
        too
        expensive.  Alternatively, if the economy enters a recession, real
        estate development may slow.  A slowdown in real estate lending may
        mean we will have fewer loans to acquire, thus reducing our revenues and
        the
        distributions.
 
 One
        of
        the results of interest rate fluctuations is that borrowers may seek to extend
        their low-interest-rate loans after market interest rates have
        increased.  This creates two risks for us:
 
 ·
              If
                  interest rates rise, borrowers under loans with monthly or quarterly
                  principal payments may be compelled to extend their loans to decrease
                  the
                  principal paid with each payment because the interest component
                  has
                  increased.  If this happens, we are likely to be at a greater
                  risk of the borrower defaulting on the extended loan, and the increase
                  in
                  the interest rate on our loan may not be adequate compensation
                  for the
                  increased risk.  Additionally, any fees paid to extend the loan
                  are paid to Vestin Originations or our manager, not to us.  Our
                  revenues and distributions will decline if we are unable to reinvest
                  at
                  higher rates or if an increasing number of borrowers default on
                  their
                  loans; and
 
 ·
              If,
                  at a time of relatively low interest rates, a borrower should prepay
                  obligations that have a higher interest rate from an earlier period,
                  we
                  will likely not be able to reinvest the funds in real estate loans
                  earning
                  that higher rate of interest.  In the absence of a prepayment
                  fee, we will receive neither the anticipated revenue stream at
                  the higher
                  rate nor any compensation for its loss.  This is a risk if the
                  loans we invest in do not have prepayment penalties or exit
                  fees.
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  Our
        results will also reflect other economic conditions, such as a particular
        industry migrating to or from one of the states into which we make
        loans.
 
 **Legal
        actions seeking damages and appraisal rights could harm our operating results
        and financial condition.**
 
 We
        have
        recently been named in several legal actions seeking damages and appraisal
        rights in connection with the REIT conversion.  See Note N – *Legal
        Matters Involving The Manager* and Note O – *Legal Matters Involving The
        Company* in the notes to the consolidated financial statement under Part I,
        Item I. *Consolidated Financial Statements* to this Interim Report Form
        10-Q.  While we believe these actions are without merit, the defense
        of such actions could materially increase our legal costs and may require
        the
        substantial attention of our management.  This in turn might adversely
        impact our operating results.  During the nine months ended September
        30, 2007, we accrued legal expenses of approximately $1.2 million related
        to
        such actions.  Moreover, any adverse outcome in such actions could
        result in our having to pay substantial damages, which would reduce our cash
        resources and harm our financial condition.
 
 **We
        face competition for real estate loans that may reduce available yields and
        fees
        available.**
 
 We
        consider our direct competitors to be the providers of real estate loans
        who
        offer short-term, equity-based loans on an expedited basis for higher fees
        and
        rates than those charged by other financial institutional lenders such as
        commercial banks, insurance companies, mortgage brokers and pension
        funds.  Many of the companies against which we compete have
        substantially greater financial, technical and other resources than either
        our
        company or our manager.  Competition in our market niche depends upon
        a number of factors, including price and interest rates of the loan, speed
        of
        loan processing, cost of capital, reliability, quality of service and support
        services.  If our competition decreases interest rates on their loans
        or makes funds more easily accessible, yields on our loans could decrease
        and
        the costs associated with making loans could increase, both of which would
        reduce our revenues and the distributions.
 
 **MANAGEMENT
        AND CONFLICTS OF INTEREST RISKS**
 
 **We
        rely on our manager to manage our day-to-day operations and select our loans
        for
        investment.**
 
 Our
        ability to achieve our investment objectives and to make distributions depends
        upon our manager’s and its affiliate’s performance in obtaining, processing,
        making and brokering loans for us to invest in and determining the financing
        arrangements for borrowers.  Stockholders have no opportunity to
        evaluate the financial information or creditworthiness of borrowers, the
        terms
        of mortgages, the real property that is our collateral or other economic
        or
        financial data concerning our loans.  We pay our manager an annual
        management fee of up to 0.25% of our aggregate capital received by us and
        Fund
        II from the sale of shares or membership units.  This fee is payable
        regardless of the performance of our loan portfolio.  Our manager has
        no fiduciary obligations to our stockholders, is not required to devote its
        employees’ full time to our business and may devote time to business interests
        competitive to our business.
 
 **Our
        manager’s lack of experience with certain real estate markets could impact its
        ability to make prudent investments on our behalf.**
 
 As
        of
        September 30, 2007, our loans were in the following states:  Arizona,
        California, Hawaii, Nevada, New York, Oklahoma, Oregon, Texas and
        Washington.  Depending on the market and on our company’s performance,
        we plan to expand our investments throughout the United
        States.  However, our manager has limited experience outside of the
        Western and Southern United States.  Real estate markets vary greatly
        from location to location and the rights of secured real estate lenders vary
        considerably from state to state.  Our manager’s limited experience in
        most U.S. real estate markets may impact its ability to make prudent investment
        decisions on our behalf.  Accordingly, where our manager deems it
        necessary, it plans to utilize independent real estate advisors and local
        legal
        counsel located in markets where it lacks experience for consultation prior
        to
        making investment decisions.  Stockholders will not have an
        opportunity to evaluate the qualifications of such advisors and no assurance
        can
        be given that they will render prudent advice to our manager.
 
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  **Our
        success depends on key personnel of our manager, the loss of whom could
        adversely affect our operating results, and on our manager’s ability to attract
        and retain qualified personnel.**
 
 Our
        success depends in part upon the continued contributions of certain key
        personnel of our manager, including; Michael V. Shustek (Chief Executive
        Officer
        and President), Rocio Revollo (Chief Financial Officer), James M. Townsend
        (Chief Operating Officer) and Daniel B. Stubbs (Senior Vice President,
        Underwriting) some of whom would be difficult to replace because of their
        extensive experience in the field, extensive market contacts and familiarity
        with our company.  If any of these key employees were to cease
        employment, our operating results could suffer.  None of the key
        personnel of our manager are subject to an employment, non-competition or
        confidentiality agreement with our manager, or us and we do not maintain
“key
        man” life insurance policies on any of them.  Our future success also
        depends in large part upon our manager’s ability to hire and retain additional
        highly skilled managerial, operational and marketing personnel.  Our
        manager may require additional operations and marketing people who are
        experienced in obtaining, processing, making and brokering loans and who
        also
        have contacts in the relevant markets.  Competition for personnel is
        intense, and we cannot be assured that we will be successful in attracting
        and
        retaining skilled personnel.  If our manager were unable to attract
        and retain key personnel, the ability of our manager to make prudent investment
        decisions on our behalf may be impaired.
 
 **Vestin
        Mortgage serves as our manager pursuant to a long-term management agreement
        that
        may be difficult to terminate and does not reflect arm’s length
        negotiations.**
 
 We
        have
        entered into a long-term management agreement with Vestin Mortgage to act
        as our
        manager.  The term of the management agreement is for the duration of
        our existence.  The management agreement may only be terminated upon
        the affirmative vote of a majority in interest of stockholders entitled to
        vote
        on the matter or by our board of directors for cause upon 90 days’ written
        notice of termination.  Consequently, it may be difficult to terminate
        our management agreement and replace our manager in the event that our
        performance does not meet expectations or for other reasons unless the
        conditions for termination of the management agreement are
        satisfied.  The management agreement was negotiated by related parties
        and may not reflect terms as favorable as those subject to arm’s length
        bargaining.
 
 **Our
        manager will face conflicts of interest concerning the allocation of its
        personnel’s time.**
 
 Our
        manager is also the manager of VRM I, Fund III and inVestin, companies with
        investment objectives similar to ours.  Our manager and Mr. Shustek,
        who indirectly owns 100% of our manager, anticipate that they may also sponsor
        other real estate programs having investment objectives similar to
        ours.  As a result, our manager and Mr. Shustek may have conflicts of
        interest in allocating their time and resources between our business and
        other
        activities.  During times of intense activity in other programs and
        ventures, our manager and its key people will likely devote less time and
        resources to our business than they ordinarily would.  Our management
        agreement with our manager does not specify a minimum amount of time and
        attention that our manager and its key people are required to devote to our
        company.  Thus, our manager may not spend sufficient time managing our
        operations, which could result in our not meeting our investment
        objectives.
 
 **Our
        manager and its affiliates will face conflicts of interest arising from our
        fee
        structure.**
 
 Vestin
        Originations, an affiliate of our manager, will receive substantial fees
        from
        borrowers for transactions involving real estate loans.  Many of these
        fees are paid on an up-front basis.  In some cases, Vestin
        Originations or our manager may be entitled to additional fees for loan
        extensions or modifications and loan assumptions and
        reconveyances.  These and other fees are quantified and described in
        greater detail under “Management Agreement — Compensation.”  Vestin
        Originations’ compensation is based on the volume and size of the real estate
        loans selected for us, regardless of their performance, which could create
        an
        incentive to make or extend riskier loans.  Our interests may diverge
        from those of our manager, Vestin Originations and Mr. Shustek to the extent
        that Vestin Originations benefits from up-front fees that are not shared
        with
        us.
 
 Vestin
        Originations will be receiving fees from borrowers that would otherwise increase
        our returns.  Because Vestin Originations receives all of these fees,
        our interests will diverge from those of our manager, Vestin Originations
        and
        Mr. Shustek when our manager decides whether we should charge the borrower
        higher interest rates or our manager’ affiliates should receive higher fees from
        borrowers.
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  We
        paid
        our manager a management fee of approximately $822,000 for the nine months
        ended
        September 30, 2007.  In addition, Vestin Mortgage and Vestin
        Originations received a total of approximately $1.0 million and $10.2 million,
        respectively in fees directly from borrowers for the nine months ended September
        30, 2007.  The amounts received from borrowers represent fees earned
        by Vestin Mortgage and Vestin Originations for loans originated for all funds
        managed by Vestin Mortgage, including us, VRM I, Fund III and
        inVestin.  Our assets represented approximately 75% of the assets
        managed by Vestin Mortgage as of September 30, 2007.
 
 **Our
        manager will face conflicts of interest relating to other investments in
        real
        estate loans.**
 
 We
        expect
        to invest in real estate loans when one or more other companies managed by
        our
        manager are also investing in real estate loans.  There is a risk that
        our manager may select for us a real estate loan investment that provides
        lower
        returns than a real estate loan investment purchased by another program or
        entity managed by our manager.  Our manager also serves as the manager
        for VRM I, Fund III and inVestin, which have similar investment objectives
        as
        our company.  There are no restrictions or guidelines on how our
        manager will determine which loans are appropriate for us and which are
        appropriate for VRM I, Fund III, inVestin or another company that our manager
        manages.  Moreover, our manager has no obligation to provide us with
        any particular opportunities or even a pro rata share of opportunities afforded
        to other companies it manages.
 
 **UNITED
        STATES FEDERAL INCOME TAX RISKS RELATING TO OUR REIT
        QUALIFICATION**
 
 **Our
        failure to qualify as a REIT would subject us to U.S. federal income tax,
        which
        would reduce amounts available for distribution to our
        stockholders.**
 
 We
        have
        elected to be taxed as a REIT under the Code.  Our qualification as a
        REIT requires us to satisfy numerous requirements (some on an annual and
        quarterly basis) established under highly technical and complex Code provisions
        for which there are only limited judicial or administrative interpretations,
        and
        involves the determination of various factual matters and circumstances not
        entirely within our control.  We intend that our organization and
        method of operation will enable us to qualify as a REIT, but we may not so
        qualify or we may not be able to remain so qualified in the
        future.  Future legislation, new regulations, administrative
        interpretations or court decisions could adversely affect our ability to
        qualify
        as a REIT or adversely affect our stockholders.
 
 If
        we
        fail to qualify as a REIT in any taxable year, we would be subject to U.S.
        federal income tax (including any applicable alternative minimum tax) on
        our
        taxable income at corporate rates, and we would not be allowed to deduct
        distributions made to our stockholders in computing our taxable
        income.  We may also be disqualified from treatment as a REIT for the
        four taxable years following the year in which we failed to
        qualify.  The additional tax liability would reduce our net earnings
        available for investment or distribution to stockholders.  In
        addition, we would no longer be required to make distributions to our
        stockholders.  Even if we continue to qualify as a REIT, we will
        continue to be subject to certain U.S. federal, state and local taxes on
        our
        income and property.
 
 **Distributions
        from a REIT are currently taxed at a higher rate than corporate
        distributions.**
 
 Under
        the
        Tax Relief and Reconciliation Act of 2003, the maximum U.S. federal income
        tax
        rate on both distributions from certain domestic and foreign corporations
        and
        net long-term capital gain for individuals was reduced to 15% until
        2008.  The Tax Increase Prevention and Reconciliation Act of 2005,
        which signed into law on May 17, 2006, extended the 15% long-term net capital
        gain rate to 2010.  However, this reduced rate of tax on distributions
        generally will not apply to our distributions (except those distributions
        identified by the company as “capital gain dividends” which are taxable as
        long-term capital gain) and therefore such distributions generally will be
        taxed
        as ordinary income.  Ordinary income generally is subject to U.S.
        federal income tax rate at a rate of up to 35% for individuals.  The
        higher tax rate on our distributions may cause the market to devalue our
        common
        stock relative to stock of those corporations whose distributions qualify
        for
        the lower rate of taxation.  Please note that, as a general matter,
        distributions from a REIT will be taxed at the same rate as stockholders’ share
        of Vestin Realty Mortgage II’s taxable income attributable to its realized net
        interest income.
 
 **A
        portion of our business is potentially subject to prohibited transactions
        tax.**
 
 As
        a
        REIT, we are subject to a 100% tax on our net income from “prohibited
        transactions.”  In general, prohibited transactions are sales or other
        dispositions of property to customers in the ordinary course of
        business.  Sales by us of property in the course of our business will
        generally constitute prohibited transactions.
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  We
        intend
        to avoid the 100% prohibited transactions tax on property foreclosed upon
        by
        Fund II prior to the REIT conversion by holding and selling such properties
        through one or more wholly-owned taxable REIT subsidiaries.  However,
        under the Code, no more than 20% of the value of the assets of a REIT may
        be
        represented by securities of one or more taxable REIT subsidiaries and a
        taxable
        REIT subsidiary generally cannot operate a lodging or health care
        facility.
 
 As
        of
        September 30, 2007, we held two properties with a total carrying value of
        approximately $28.9 million recorded as investments in real estate held for
        sale.  As of September 30, 2007, we also held interests in one
        property with a total carrying value of approximately $7.4 million, which
        was
        sold in a transaction in which we or an affiliate provided the financing
        and
        recorded as seller financed real estate held for sale.  United States
        generally accepted accounting principals (“GAAP”) requires us to include this
        property in real estate held for sale until the borrower has met and maintained
        certain requirements.  The real estate held for sale and the seller
        financed real estate held for sale collectively constituted approximately
        10.6%
        of our assets as of September 30, 2007.  In addition, our seller
        financed real estate held for sale property is an assisted living facility,
        which cannot be operated by a taxable REIT subsidiary.
 
 **Taxable
        REIT subsidiaries are subject to corporate-level tax, which may devalue our
        common stock relative to other companies.**
 
 Taxable
        REIT subsidiaries are corporations subject to corporate-level
        tax.  Our use of taxable REIT subsidiaries may cause the market to
        value its common stock lower than the stock of other publicly traded REITs
        which
        may not use taxable REIT subsidiaries and lower than the equity of mortgage
        pools taxable as non-publicly traded partnerships such as Fund II’s intended
        qualification prior to the REIT conversion, which generally are not subject
        to
        any U.S. federal income taxation on their income and gain.
 
 **Our
        use of taxable REIT subsidiaries may have adverse U.S. federal income tax
        consequences.**
 
 We
        must
        comply with various tests to continue to qualify as a REIT for U.S. federal
        income tax purposes, and our income from and investments in taxable REIT
        subsidiaries generally do not constitute permissible income and investments
        for
        purposes of the REIT qualification tests.  While we will attempt to
        ensure that our dealings with our taxable REIT subsidiaries will not adversely
        affect our REIT qualification, we cannot be assured that we will successfully
        achieve that result.  Furthermore, we may be subject to a 100% penalty
        tax, or our taxable REIT subsidiaries may be denied deductions, to the extent
        our dealings with our taxable REIT subsidiaries are not deemed to be arm’s
        length in nature.
 
 **We
        may endanger our REIT status if the distributions we receive from our taxable
        REIT subsidiaries exceed applicable REIT gross income
        tests.**
 
 The
        annual gross income tests that must be satisfied to ensure REIT qualification
        may limit the amount of distributions that we can receive from our taxable
        REIT
        subsidiaries and still maintain our REIT status.  Generally, not more
        than 25% of our gross income can be derived from non-real estate related
        sources, such as distributions from a taxable REIT subsidiary.  If,
        for any taxable year, the distributions we received from our taxable REIT
        subsidiaries, when added to our other items of non-real estate related income,
        represent more than 25% of our total gross income for the year, we could
        be
        denied REIT status, unless we were able to demonstrate, among other things,
        that
        our failure of the gross income test was due to reasonable cause and not
        willful
        neglect.
 
 **We
        may lose our REIT status if we issue shares under our stockholders’ rights
        plan.**
 
 Under
        Section 562(c) of the Code, a REIT generally cannot make a distribution unless
        the distribution is pro rata, with no preference to any share of stock as
        compared to other shares of the same class of stock.  A REIT that is
        not in compliance with this requirement may lose its REIT
        status.  Under our stockholders’ rights plan, upon certain events,
        some holders of our common stock and not others will have the right to acquire
        shares of Series A preferred stock.  When effective, this right could
        be treated as a deemed distribution to those holders of our common stock
        entitled to the right with no distribution to other such
        holders.  Thus, this right, when effective, could be treated as a
        distribution that is not consistent with the requirements of Section 562(c)
        of
        the Code, which could result in the loss of our REIT qualification.
 
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  **RISK
        OF OWNERSHIP OF OUR COMMON STOCK**
 
 **The
        market price and trading volume of our common stock may be
        volatile.**
 
 The
        market price of our common stock since trading commenced, on May 1, 2006,
        to
        September 30, 2007, has ranged from $0.77 to $6.14 (adjusted for the 30%
        stock
        dividend paid in December 2006).  We believe the price of our stock
        has been affected by, among other things, selling pressure from stockholders
        seeking immediate liquidity and the level of non-performing assets, which
        we
        own.  Our stock price may be highly volatile and subject to wide
        fluctuations.  In addition, the trading volume in our common stock may
        fluctuate and cause significant price variations to occur.  Our
        Company will be dissolved on December 31, 2020 unless the holders of a majority
        of our common stock determine otherwise.  As we move closer to the
        dissolution date, we expect to stop making new loans and we expect that our
        stock price will approach our book value per share.
 
 We
        cannot
        be assured that the market price of our common stock will not fluctuate or
        decline significantly in the future.  Some of the factors, many of
        which are beyond our control, that could negatively affect our stock price
        or
        result in fluctuations in the price or trading volume of our common stock
        include:
 
 ·
              Increases
                  in loans defaulting or becoming non-performing or being written
                  off;
 
 ·
              Actual
                  or anticipated variations in our quarterly operating results or
                  distributions;
 
 ·
              Publication
                  of research reports about us or the real estate
                  industry;
 
 ·
              Changes
                  in market valuations of similar
                  companies;
 
 ·
              Changes
                  in tax laws affecting REITs;
 
 ·
              Litigation;
 
 ·
              Adverse
                  market reaction to any increased indebtedness we incur in the future;
                  and
 
 ·
              General
                  market and economic conditions.
 
 **Market
        interest rates could have an adverse effect on our stock
        price.**
 
 One
        of
        the factors that will influence the price of our common stock will be the
        dividend yield on our common stock (as a percentage of the price of our common
        stock) relative to market interest rates.  Thus, an increase in market
        interest rates may lead prospective purchasers of our common stock to expect
        a
        higher dividend yield, a lack of which could adversely affect the market
        price
        of our common stock.
 
 **We
        are the subject of shareholder litigation which may depress the price of
        our
        stock.**
 
 A
        number
        of lawsuits have been filed against us by shareholders who claim, among other
        things, that they were improperly denied dissenter’s rights in connection with
        the conversion of Fund II into a REIT.  We believe the suits are
        without merit and we intend to vigorously defend against such
        claims.  Nonetheless, the outcome of the lawsuits cannot be predicted
        at this time, nor can a meaningful evaluation be made of the potential impact
        upon us if the plaintiffs were to prevail in their claims.  The
        resulting uncertainty may depress the price of our stock.  Moreover,
        concerns about the potential diversion of our manager’s time to deal with these
        lawsuits may have an adverse effect upon the price of our stock.
 
 **Our
        charter documents and Maryland law contain provisions that may delay, defer
        or
        prevent a change of control transaction.**
 
 Our
        charter and bylaws and Maryland corporate law contain a number of provisions
        (as
        further described in exhibit 3.2 *Bylaws of the Registrant*under the
        Exhibit Index included in Part IV, Item 6 *Exhibits and Financial Statement
        Schedules* of this Report Form 10-Q) that could delay, defer or prevent a
        transaction or a change in control of us that might involve a premium price
        for
        holders of our common stock or otherwise be in their best interests,
        including:
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 ·
              *Ownership
                  Limit*.  Our articles of incorporation, subject to certain
                  exceptions, authorizes our board of directors to take such actions
                  as are
                  necessary and desirable to preserve our qualification as a REIT
                  and to
                  limit any person to actual or constructive ownership of no more
                  than a
                  9.8% of the number or value, whichever is more restrictive, of
                  the
                  outstanding shares of our stock, unless our board of directors
                  waives this
                  ownership limit.  However, our board of directors may not grant
                  a waiver of the ownership limit that would permit a person to acquire
                  more
                  than 15% of our stock without exception.  The ownership limit
                  may have the effect of precluding a change in control of us by
                  a third
                  party, even if such change in control would be in the interest
                  of the our
                  stockholders (and even if such change in control would not reasonably
                  jeopardize our REIT status).
 
 ·
              *Staggered
                  Board*.  Our board of directors is divided into three
                  classes, with each class serving staggered three-year
                  terms.  This classification of our board of directors may have
                  the effect of delaying or preventing changes in our control or
                  management.
 
 ·
              *Removal
                  of Directors.*  Directors may be removed only for cause and
                  only by the affirmative vote of stockholders holding at least a
                  majority
                  of the shares then outstanding and entitled to be cast for the
                  election of
                  directors.
 
 ·
              *Stockholders’
                  Rights Plan*.  We have a stockholders’ rights plan that
                  enables our board of directors to deter coercive or unfair takeover
                  tactics and to prevent a person or a group from gaining control
                  of us
                  without offering a fair price to all stockholders.  Unless our
                  board of directors approves the person’s or group’s purchase, after that
                  person gains control of us, all other stockholders will have the
                  right to
                  purchase securities from us at a price that is less than their
                  then fair
                  market value.  Purchases by other stockholders would
                  substantially reduce the value and influence of the shares of our
                  common
                  stock owned by the acquiring person or group.  Our board of
                  directors, however, can prevent the stockholders’ rights plan from
                  operating in this manner.  This gives our board of directors’
                  significant discretion to approve or disapprove a person’s or group’s
                  efforts to acquire a large interest in
                  us.
 
 ·
              *Duties
                  of Directors with Respect to Unsolicited Takeovers*.  Under
                  Maryland law, a director is required to perform his or her duties
                  (a) in
                  good faith, (b) in a manner he or she believes to be in the best
                  interests
                  of the corporation and (c) with the care that an ordinarily prudent
                  person
                  in a like position would use under similar
                  circumstances.  Maryland law provides protection for Maryland
                  corporations against unsolicited takeovers by, among other things,
                  retaining the same standard of care in the performance of the duties
                  of
                  directors in unsolicited takeover situations.  The duties of
                  directors of Maryland corporations do not require them to (a) accept,
                  recommend or respond to any proposal by a person seeking to acquire
                  control of the corporation, (b) authorize the corporation to redeem
                  any
                  rights under, or modify or render inapplicable, any stockholders
                  rights
                  plan, (c) make a determination under Maryland Business Combination
                  Act or
                  Maryland Control Share Acquisition Act or (d) act or fail to act
                  solely
                  because of the effect of the act or failure to act may have on
                  an
                  acquisition or potential acquisition of control of the corporation
                  or the
                  amount or type of consideration that may be offered or paid to
                  the
                  stockholders in an acquisition. Moreover, under Maryland law the
                  act of
                  the directors of a Maryland corporation relating to or affecting
                  an
                  acquisition or potential acquisition of control is not subject
                  to any
                  higher duty or greater scrutiny than is applied to any other act
                  of a
                  director.  Maryland law also contains a statutory presumption
                  that an act of a director of a Maryland corporation satisfies the
                  applicable standards of conduct for directors under Maryland
                  law.
 
 ·
              *Maryland
                  General Corporation Law*.  Certain provisions of the MGCL
                  may have the effect of inhibiting a third party from making a proposal
                  to
                  acquire us or of impeding a change of control under circumstances
                  that
                  otherwise could provide the holders of shares of our common stock
                  with the
                  opportunity to realize a premium over the then-prevailing market
                  price of
                  such shares, including:
 
 ·
              “business
                  combination” provisions that, subject to limitations, prohibit certain
                  business combinations between us and an “interested stockholder” (defined
                  generally as any person who beneficially owns 10% or more of the
                  voting
                  power of our shares or an affiliate or associate of ours who, at
                  any time
                  within the two-year period prior to the date in question, was the
                  beneficial owner of 10% or more of our then outstanding voting
                  shares) or
                  an affiliate thereof for five years after the most recent date
                  on which
                  the stockholder becomes an interested stockholder, and thereafter
                  imposes
                  special appraisal rights and special stockholder voting requirements
                  on
                  these combinations; and
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 ·
              “control
                  share” provisions that provide that “control shares” of our company
                  (defined as shares which, when aggregated with other shares controlled
                  by
                  the stockholder, entitle the stockholder to exercise one of three
                  increasing ranges of voting power in electing directors) acquired
                  in a
                  “control share acquisition” (defined as the direct or indirect acquisition
                  of ownership or control of “control shares”) have no voting rights except
                  to the extent approved by our stockholders by the affirmative vote
                  of at
                  least two-thirds of all the votes entitled to be cast on the matter,
                  excluding all interested shares.
 
 ·
              We
                  have opted out of the control share provisions of the MGCL pursuant
                  to a
                  provision in our bylaws.  However, our board of directors may by
                  amendment to our bylaws opt in to the control share provisions
                  of the MGCL
                  in the future.
 
 ·
              *Advance
                  Notice of Director Nominations and Stockholder
                  Proposals*.  Our bylaws impose certain advance notice
                  requirements that must be met for nominations of persons for election
                  to
                  the board of directors and the proposal of business to be considered
                  by
                  stockholders.
 
 **Our
        rights and the rights of our stockholders to take action against our directors
        and officers are limited.**
 
 Maryland
        law provides that a director has no liability in that capacity if he or she
        performs his or her duties in good faith, in a manner he or she reasonably
        believes to be in our best interests and with the care that an ordinarily
        prudent person in a like position would use under similar
        circumstances.  Our charter limits the liability of our directors and
        officers to us and our stockholders for money damages, except for liability
        resulting from:
 
 ·
              actual
                  receipt of an improper benefit or profit in money, property or
                  services;
                  or
 
 ·
              a
                  final judgment based upon a finding of active and deliberate dishonesty
                  by
                  the director or officer that was material to the cause of action
                  adjudicated.
 
 In
        addition, our articles of incorporation authorize us to obligate our company,
        and our bylaws require us, to indemnify our directors and officers for actions
        taken by them in those capacities to the maximum extent permitted by Maryland
        law.  As a result, we and our stockholders may have more limited
        rights against our directors and officers than might otherwise exist under
        common law.  Accordingly, in the event that actions taken in good
        faith by any of our directors or officers impede the performance of our company,
        stockholders’ ability to recover damages from such director or officer will be
        limited.
 
 **ITEM
                  2.**
              **UNREGISTEREDSALES
                  OF EQUITY AND USE OF
                  PROCEEDS**
 
 On
        June
        22, 2007,  as reported in our 8-K filed June 27, 2007, we completed
        the issuance of $60.1 million in unsecured trust preferred securities through
        the special purpose business trust, VCT I to Merrill Lynch International,
        Bear
        Stearns & Co. Inc. and Taberna Funding LLC.  We are obligated to
        pay the trust preferred securities with respect to distributions and amounts
        payable upon liquidation, redemption or repayment.  The securities
        were sold to three institutional investors in a non-public offering pursuant
        to
        Section 4(2) of the Securities Act of 1933.
 
 On
        March
        21, 2007, our Board of Directors authorized the repurchase of up to $10 million
        worth of the company’s common stock.  Depending upon market
        conditions, shares may be repurchased from time to time at prevailing market
        prices through open market or privately negotiated transactions.
 
 We
        are
        not obligated to purchase any shares.  Subject to applicable
        securities laws, including SEC Rule 10b-18, repurchases may be made at such
        times and in such amounts, as our management deems appropriate.  The
        share repurchase program may be discontinued or terminated at any time and
        we
        have not established a date for completion of the share repurchase
        program.  The repurchases will be financed from our available
        cash.
 
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  The
        following is a summary of our treasury stock purchases during the three months
        ended September 30, 2007, as required by Regulation S-K, Item 703.
 
 **Period**
              
              **(a)
                  Total Number of Shares Purchased**
              
              
              **(b)
                  Average Price Paid per Share**
              
              
              **(c)
                  Total Number of Shares Purchased as Part of Publicly Announced
                  Plans or
                  Programs**
              
              
              **(d)
                  Maximum Number of (or Approximate Dollar Value) of Shares that
                  May Yet Be
                  Purchase Under the Plans or Programs**July
                  1 - July 31, 2007
              
              
              --
              
              
              $
              --
              
              
              
              --
              
              
              $
              9,568,000August
                  1 - August 31, 2007
              
              
              210,000
              
              
              
              4.80
              
              
              
              210,000
              
              
              
              8,560,000September
                  1 - September 30, 2007
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              8,560,000Total
              
              
              210,000
              
              
              $
              4.80
              
              
              
              210,000
              
              
              $
              8,560,000
 
 **ITEM
                  3.**
              **DEFAULTS
                  UPON SENIOR SECURITIES**
 
 None.
 
 
 **ITEM
                  4.**
              **SUBMISSION
                  OF MATTERS TO A VOTEOF 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 Certificate4.4
                  (7)
              
              Junior
                  Subordinated Indenture10.1(3)
              
              Form
                  of Management Agreement between Vestin Mortgage, Inc. and the
                  Registrant10.2(3)
              
              Form
                  of Rights Agreement between the Registrant and the rights
                  agent10.3(1)
              
              Assignment
                  Agreement, dated January 23, 2004, by and between Vestin Mortgage,
                  Inc.,
                  Vestin Fund I, LLC, Vestin Fund III, LLC, Owens Financial Group,
                  Inc. and
                  Owens Mortgage Investment Fund10.4(1)
              
              Intercreditor
                  Agreement, dated January 17, 2003, by and among Vestin Mortgage,
                  Inc.,
                  Vestin Fund I, LLC, Vestin Fund III, LLC and Western United Life
                  Assurance
                  Company10.5(1)
              
              Intercreditor
                  Agreement, dated April 22, 2004, by and between Vestin Mortgage,
                  Inc. and
                  Owens Mortgage Investment Fund10.6(1)
              
              Intercreditor
                  Agreement, dated June 24, 2004, by and between Vestin Mortgage,
                  Inc. and
                  Owens Mortgage Investment Fund10.7(1)
              
              Participation
                  Agreement, dated May 13, 2004, by and among the Registrant, Vestin
                  Fund I,
                  LLC, Vestin Fund III, LLC and Royal Bank of America10.8(6)
              
              Intercreditor
                  Agreement, dated October 13, 2006, by and between Vestin Originations,
                  Inc., Vestin Mortgage, Inc. Vestin Realty Mortgage I, Inc., Vestin
                  Realty
                  Mortgage II, Inc., Vestin Fund III, LLC, Owens Financial Group,
                  Inc. and
                  Owens Mortgage Investment Fund10.9
                  (7)
              
              Form
                  of Purchase Agreement10.10
                  (7)
              
              Amended
                  and Restated Trust Agreement21.1(4)
              
              List
                  of subsidiaries of the Registrant31.1
              
              Section
                  302 Certification of Michael V.
                  Shustek31.2
              
              Section
                  302 Certification of Rocio
                  Revollo32
              
              Certification
                  Pursuant to U.S.C. 18 Section
                  135099.2R(5)
              
              Vestin
                  Realty Mortgage II, Inc. Code of Business Conduct and
                  Ethics
 
 (1)
              
              Incorporated
                  herein by reference to our Form S-4 Registration Statement filed
                  on May
                  20, 2005 (File No. 333-125121).(2)
              
              Incorporated
                  herein by reference to Post-Effective Amendment No. 5 to our Form
                  S-4
                  Registration Statement filed on December 20, 2005 (File No.
                  333-125121).(3)
              
              Incorporated
                  herein by reference to Post-Effective Amendment No. 6 to our Form
                  S-4
                  Registration Statement filed on January 4, 2006 (File No.
                  333-125121).(4)
              
              Incorporated
                  herein by reference to Post-Effective Amendment No. 7 to our Form
                  S-4
                  Registration Statement filed on January 13, 2006 (File No.
                  333-125121).(5)
              
              Incorporated
                  herein by reference to the Transition Report on Form 10-K for the
                  nine
                  month transition period ended March 31, 2006 filed on September
                  7, 2006
                  (File No. 000-51892)(6)
              
              Incorporated
                  herein by reference to the Quarterly Report on Form 10-Q for the
                  three
                  months ended September 30, 2006 filed on October 26, 2006 (File
                  No.
                  000-51892)(7)
              
              Incorporated
                  herein by reference to the Current Report on Form 8-K filed on
                  June 27,
                  2007 (File No. 000-51892)
 
 
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 **SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the Registrant has duly caused this report to be signed on its behalf
        by
        the undersigned thereunto duly authorized.
 
 **Vestin
                  Realty Mortgage II, Inc.**By:
              */s/
                  Michael V. Shustek*Michael
                  V. ShustekPresident
                  and Chief Executive OfficerDate:
              November
                  6, 2007
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the registrant and in
        the
        capacities and on the dates indicated.
 
 **Signature**
              
              **Capacity**
              
              **Date***/s/
                  Michael V. Shustek*
              
              President
                  and Chief Executive Officer and Director
              
              November
                  6, 2007Michael
                  V. Shustek
              
              (Principal
                  Executive Officer)*/s/
                  Rocio Revollo*
              
              Chief
                  Financial Officer
              
              November
                  6, 2007Rocio
                  Revollo
              
              (Principal
                  Financial and Accounting Officer)*/s/
                  John E. Dawson*
              
              Director
              
              November
                  6, 2007John
                  E. Dawson*/s/
                  Robert J. Aalberts*
              
              Director
              
              November
                  6, 2007Robert
                  J. Aalberts*/s/
                  Fredrick J. Zaffarese Leavitt*
              
              Director
              
              November
                  6, 2007Fredrick
                  J. Zaffarese Leavitt*/s/
                  Roland M. Sansone*
              
              Director
              
              November
                  6, 2007Roland
                  M. Sansone
 
 
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