**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 WASHINGTON,
        D.C. 20549
 
 **FORM
        10-Q**
 
 (MARK
        ONE)
 
 **[X]
                  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE****SECURITIES
                  EXCHANGE ACT OF 1934**
 
 **FOR
        THE QUARTERLY PERIOD ENDED** **JUNE
        30, 2006**
 
 **Or**
 
 **[   ]
                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE****SECURITIES
                  EXCHANGE ACT OF 1934**
 
 **Transition
        Period From** **_______** **To** **________**
 
 *COMMISSION
        FILE NUMBER 333-125347*
 
 **VESTIN
                  REALTY MORTGAGE I, INC.**(Exact
                  name of registrant as specified in its
                  charter)
 
 
 MARYLAND
              
              20-4028839(State
                  or Other Jurisdiction of
              
              (I.R.S.
                  EmployerIncorporation
                  or Organization)
              
              Identification
                  No.)
 
 **8379
        WEST SUNSET ROAD, LAS VEGAS, NEVADA 89113**
 (Address
        of Principal Executive Offices) **** (Zip
        Code)
 
 Registrant’s
        Telephone Number: 702.227.0965
 
 Indicate
        by check mark whether the registrant: (1) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.
 
 Yes
        [X]
        No [   ]
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
 
 Large
                  accelerated filer [   ]
              Accelerated
                  filer [X]
              Non-accelerated
                  filer [   ]
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Securities Exchange Act).
 
 Yes
        [   ] No [ X]
 
 As
        of
        July 27, 2006, there were 6,868,740 shares of the Company’s Common Stock
        outstanding.
 
  *Table
            of Contents*
  **Explanatory
        Note**
 
 On
        May 1,
        2006, Vestin Fund I, LLC, a Nevada limited liability company ("Fund I"),
        merged
        with and into Vestin Realty Mortgage I, Inc., a Maryland corporation ("VRM
        I"),
        with VRM I as the surviving corporation. VRM I was formed in January 2006
        for
        the sole purpose of effecting the merger. The merger was effected to reorganize
        Fund I as a real estate investment trust, (a “REIT”). Prior to the merger, VRM I
        did not have any material assets or operations. VRM I filed a ten month
        Transition Report 10-K for the period ended April 30, 2006. As a REIT, VRM
        I's
        is required to have a December 31 st fiscal
        year end. This report has been filed for the two months ended June 30,
        2006.
 
 
 
  *Table
            of Contents*
   **TABLE
        OF CONTENTS**
 
 **PAGE**Part
                  I
              FINANCIAL
                  INFORMATIONItem
                  1.
              Consolidated
                  Financial
                  StatementsConsolidated
                  Balance Sheets As of June 30, 2006 (unaudited),
                  and April 30, 2006
              2Consolidated
                  Statements of Operations (unaudited)
                  for the Two Months Ended June 30, 2006 and 2005
              3Consolidated
                  Statement of Stockholders’ Equity
                  (unaudited) for the Two Months Ended June 30, 2006
              4Consolidated
                  Statements of Cash Flows (unaudited) for the
                  Two Months Ended June 30, 2006 and 2005
              5Notes
                  to Consolidated Financial Statements
                  (unaudited)
              6Report
                  of Independent Registered Public Accounting
                  Firm
              24Item
                  2.
              Management’s
                  Discussion and Analysis of Financial
                  Condition and Results of Operations
              25Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              34Item
                  4.
              Control
                  and Procedures
              35Part
                  II
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              36Item
                  1A.
              Risk
                  Factors
              37Item
                  2.
              Unregistered
                  Sales of Equity - Securities and Use of
                  Proceeds
              37Item
                  3.
              Defaults
                  Upon Senior Securities
              37Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              37Item
                  5.
              Other
                  Information
              37Item
                  6.
              Exhibits
              38SIGNATURES
              39Exhibits
                  31.1Exhibits
                  31.2Exhibits
                  32
  -
            1
            -
 *Table
            of Contents*
   **PART
        I - FINANCIAL INFORMATION**
 
 **ITEM
        1.**  **CONSOLIDATED
        FINANCIAL STATEMENTS**
 
 **VESTIN
                  REALTY MORTGAGEI, INC.****(SUCCESSOR
                  TO VESTIN FUND I, LLC)****CONSOLIDATED
                  BALANCE SHEETS****ASSETS****JUNE
                  30, 2006**
              
              **APRIL
                  30, 2006****(UNAUDITED)**Cash
              
              $
              4,637,000
              
              $
              10,732,000Certificates
                  of deposit
              
              
              2,832,000
              
              
              300,000Interest
                  and other receivables
              
              
              774,000
              
              
              953,000Note
                  receivable, net of allowance of $725,000 at June 30, 2006 and $729,000
                  at
                  April 30, 2006
              
              
              282,000
              
              
              291,000Real
                  estate held for sale
              
              
              2,472,000
              
              
              2,497,000Real
                  estate held for sale - seller financed
              
              
              8,797,000
              
              
              8,797,000Investment
                  in real estate loans, net of allowance for loan losses of $4,770,000
                  at
                  June 30, 2006 and $4,801,000 at April 30, 2006
              
              
              44,420,000
              
              
              39,975,000Other
                  assets
              
              
              203,000
              
              
              --Total
                  assets
              
              $
              64,417,000
              
              $
              63,545,000**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**LiabilitiesAccounts
                  payable and accrued liabilities
              
              $
              231,000
              
              $
              362,000Due
                  to Manager
              
              
              --
              
              
              37,000Due
                  to VRM II
              
              
              4,000
              
              
              --Notes
                  payable
              
              
              152,000
              
              
              --Deposit
                  liability
              
              
              1,031,000
              
              
              916,000Unearned
                  revenue
              
              
              228,000
              
              
              --Total
                  liabilities
              
              
              1,646,000
              
              
              1,315,000Commitments
                  and ContingenciesStockholders'
                  equityPreferred
                  stock, $0.0001 par value; 1,000,000 shares authorized; none
                  issued
              
              
              --
              
              
              --Common
                  stock, $0.0001 par value; 25,000,000 shares authorized; 6,868,740
                  shares
                  issued and outstanding at June 30, 2006 and April 30, 2006
              
              
              1,000
              
              
              1,000Capital
                  in excess of par
              
              
              62,229,000
              
              
              62,229,000Retained
                  earnings
              
              
              541,000
              
              
              --Total
                  stockholders' equity
              
              
              62,771,000
              
              
              62,230,000Total
                  liabilities and stockholders' equity
              
              $
              64,417,000
              
              $
              63,545,000
  The
              accompanying notes
              are
              an integralpart of these statements.
 See
                review report of Independent Registered Public Accounting
                Firm.
 -
            2
            -
 *Table
            of Contents*
  
 **VESTIN
                  REALTY MORTGAGEI,
                  INC.****(SUCCESSOR
                  TO VESTIN FUND I, LLC)****CONSOLIDATED
                  STATEMENTS OF OPERATIONS****(UNAUDITED)****FOR
                  THE TWO MONTHS**
                **ENDED
                  JUNE 30,****2006**
              
              **2005****Revenues**Interest
                  income from investment in real estate loans
              
              $
              635,000
              
              $
              1,098,000Other
                  income
              
              
              102,000
              
              
              9,000Total
                  revenues
              
              
              737,000
              
              
              1,107,000**Operating
                  expenses**Management
                  fees - related party
              
              
              46,000
              
              
              46,000Provision
                  for loan loss
              
              
              --
              
              
              1,223,000Interest
                  expense
              
              
              2,000
              
              
              117,000Professional
                  fees
              
              
              78,000
              
              
              212,000Professional
                  fees - related party
              
              
              10,000
              
              
              4,000Other
              
              
              41,000
              
              
              3,000Total
                  operating expenses
              
              
              177,000
              
              
              1,605,000**Income
                  (loss) from Operations**
              
              
              560,000
              
              
              (498,000
              )Expenses
                  related to real estate held for sale
              
              
              19,000
              
              
              81,000Write
                  down on real estate held for sale
              
              
              --
              
              
              354,000Total
                  loss from real estate held for sale
              
              
              19,000
              
              
              435,000Income
                  (loss) before income tax provision
              
              
              541,000
              
              
              (933,000
              )Provision
                  for income taxes
              
              
              --
              
              
              --**NET
                  INCOME (LOSS)**
              
              $
              541,000
              
              $
              (933,000
              )Basic
                  and diluted earnings per common share
              
              $
              0.08Net
                  loss per weighted average members’ unit
              
              
              
              
              $
              (0.12
              )Weighted
                  average common shares / members’ units
              
              
              6,868,740
              
              
              7,700,001
 
  The
              accompanying notes are an integral part of these statements.
 See
                review report of Independent Registered Public Accounting
                Firm.
 -
              3
              -
 *Table
            of Contents*
  
 **VESTIN
                  REALTY MORTGAGEI, INC.****(SUCCESSOR
                  TO VESTIN FUND I, LLC)****CONSOLIDATED
                  STATEMENT OF STOCKHOLDERS' EQUITY****FOR
                  THE TWO MONTHS ENDED JUNE 30, 2006****(UNAUDITED)****Preferred
                  Stock**
              
              **Common
                  Stock****Number
                  of Shares**
              
              **Amount**
              
              **Number
                  of Shares**
              
              **Amount**
              
              **Additional
                  Paid-in- Capital**
              
              **Retained
                  Earnings**
              
              **Total**Stockholders'
                  Equity at April 30, 2006
              
              
              --
              
              $
              --
              
              
              6,868,740
              
              $
              1,000
              
              $
              62,229,000
              
              $
              --
              
              $
              62,230,000Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              541,000
              
              
              541,000Stockholders'
                  Equity at June 30, 2006
              
              
              --
              
              $
              --
              
              
              6,868,740
              
              $
              1,000
              
              $
              62,229,000
              
              $
              541,000
              
              $
              62,771,000
 
 
 
 
  The
              accompanying notes are an integral part of these statements.
 See
                review report of Independent Registered Public Accounting
                Firm.
 -
              4
              -
 *Table
            of Contents*
  
 **VESTIN
                  REALTY MORTGAGEI, INC.****(SUCCESSOR
                  TO VESTIN FUND I, LLC)****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(UNAUDITED)****FOR
                  THE TWO MONTHS**
                **ENDED
                  JUNE 30,****2006**
              
              **2005****Cash
                  flows from operating activities:**Net
                  income (loss)
              
              $
              541,000
              
              $
              (933,000
              )Adjustments
                  to reconcile net income (loss) to net cash provided by operating
                  activities:Write
                  down of real estate held for sale
              
              
              --
              
              
              354,000Provision
                  for loan losses
              
              
              --
              
              
              1,222,000Change
                  in operating assets and liabilities:Interest
                  and other receivables
              
              
              139,000
              
              
              (83,000
              )Allowance
                  for investment in real estate loan losses, related to legal
                  expense
              
              
              (31,000
              )
              
              --Due
                  to Manager
              
              
              (37,000
              )
              
              (32,000
              )Due
                  to VRM II
              
              
              4,000
              
              
              31,000Due
                  to Fund III
              
              
              --
              
              
              6,000Other
                  assets
              
              
              (9,000
              )
              
              --Accounts
                  payable and accrued liabilities
              
              
              (131,000
              )
              
              189,000Net
                  cash provided by operating activities
              
              
              476,000
              
              
              754,000**Cash
                  flows from investing activities:**Investments
                  in real estate loans
              
              
              (10,234,000
              )
              
              --Purchase
                  of investments in real estate loans from:VRM
                  II
              
              
              --
              
              
              (600,000
              )Third
                  parties
              
              
              (75,000
              )
              
              (11,000
              )Proceeds
                  from loan payoffs
              
              
              6,063,000
              
              
              806,000Principal
                  payments on real estate held for sale-seller financed
              
              
              --
              
              
              27,000Proceeds
                  from sale of investment in real estate
              
              
              25,000
              
              
              --Proceeds
                  from note receivable
              
              
              9,000
              
              
              --Purchase
                  of certificates of deposit
              
              
              (2,532,000
              )
              
              --Proceeds
                  from unearned revenue
              
              
              100,000
              
              
              --Deposit
                  liability
              
              
              115,000
              
              
              113,000Net
                  cash provided (used) by investing activities
              
              $
              (6,529,000
              )
              $
              335,000
 
  The
              accompanying notes are an integral part of these statements.
 
 -
              5
              -
 *Table
            of Contents*
  
 **VESTIN
                  REALTY MORTGAGE I, INC.****(SUCCESSOR
                  TO VESTIN FUND I, LLC)****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(UNAUDITED)****FOR
                  THE TWO MONTHS**
                **ENDED
                  JUNE 30,****2006**
              
              **2005****Cash
                  flows from financing activities:**Principal
                  payments on note payable
              
              $
              (42,000
              )
              $
              --Members'
                  distributions, net of reinvestments
              
              
              --
              
              
              (771,000
              )Members'
                  distributions, net of reinvestments-related party
              
              
              --
              
              
              (10,000
              )Members'
                  redemptions
              
              
              --
              
              
              (244,000
              )Net
                  cash used in financing activities
              
              
              (42,000
              )
              
              (1,025,000
              )**NET
                  CHANGE IN CASH**
              
              
              (6,095,000
              )
              
              64,000**Cash,
                  beginning of period**
              
              
              10,732,000
              
              
              2,798,000**Cash,
                  end of period**
              
              $
              4,637,000
              
              $
              2,862,000**Supplemental
                  disclosures of cash flows information:**Income
                  taxes paid
              
              $
              --
              
              $
              --Interest
                  paid
              
              $
              2,000
              
              $
              117,000Non-cash
                  investing and financing activities:Loans
                  funded through secured borrowings
              
              $
              --
              
              $
              1,228,000Note
                  payable relating to prepaid E & O insurance policy
              
              $
              194,000
              
              $
              --Unearned
                  revenue for loan rewritten with the same or similar property as
                  collateral
              
              $
              168,000
              
              $
              --
 
 
 
 
  The
                accompanying notes are an integral part of these statements.
 -
              6
              -
 *Table
            of Contents*
   
 **VESTIN
        REALTY MORTGAGEI, INC**
 **(SUCCESSOR
        TO VESTIN FUND I, LLC)**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **JUNE
        30, 2006**
 
 **(UNAUDITED)**
 **NOTE
        A — ORGANIZATION**
 
 Vestin
        Realty Mortgage I, Inc. (“VRM I”) was organized in January 2006 as a Maryland
        corporation for the sole purpose of effecting a merger with Vestin Fund I,
        LLC
        (“Fund I”). On May 1, 2006, Fund I merged into VRM I and the members of Fund I
        received one share of VRM I’s common stock for each membership unit of Fund I.
        References in this report to the “Company”, “we”, “us” or “our” refer to Fund I
        with respect to the period prior to May 1, 2006 and to VRM I with respect
        to the
        period commencing on May 1, 2006. Because Fund I was a limited liability
        company
        (“LLC”) during the periods reflected in this report, where appropriate, we make
        reference to Fund I’s members in reporting our financial results.
 
 We
        invest
        in loans secured by real estate through deeds of trust or mortgages (hereafter
        referred to collectively as “deeds of trust”).
 
 We
        operate as a real estate investment trust (“REIT”). We are not a mutual fund or
        an investment company within the meaning of the Investment Company Act of
        1940,
        nor are we subject to any regulation thereunder. As a REIT we are required
        to
        have a December 31 st fiscal
        year end.
 
 Our
        Manager is Vestin Mortgage, Inc. (the “Manager” or “Vestin Mortgage”), a Nevada
        corporation, which is a wholly owned subsidiary of Vestin Group, Inc. (“Vestin
        Group”), a Delaware corporation. Michael Shustek, the CEO and director of the
        Manager and us wholly owns Vestin Group, Inc., which is engaged in asset
        management, real estate lending and other financial services though its
        subsidiaries. Our Manager, prior to June 30, 2006, also operated as a licensed
        Nevada mortgage broker and was engaged in the business of brokerage, placement
        and servicing of commercial loans secured by real property. As of July 1,
        2006,
        the mortgage broker license has been issued to an affiliated company, Vestin
        Originations (“Vestin”), who will continue the business of brokerage, placement
        and servicing of commercial real estate loans. Vestin is a wholly owned
        subsidiary of Vestin Group.
 
 Pursuant
        to our management agreement, the Manager controls the daily operating activities
        of the Company, including the power to assign duties, to determine how to
        invest
        our assets, to sign bills of sale, title documents, leases, notes, security
        agreements, real estate loan investments and contracts, and to direct our
        business operations. Consequently, our operating results are dependent upon
        the
        Manager’s ability and performance in managing our operations and servicing our
        assets.
 
 Vestin
        Mortgage, Inc. is also the Manager of Vestin Realty Mortgage II, Inc., as
        the
        successor by merger to Vestin Fund II, LLC, referred to as “VRM II”, Vestin Fund
        III, LLC (“Fund III”) and inVestin Nevada, Inc., a company wholly owned by our
        Manager’s CEO. These entities also invest in commercial real estate
        loans.
 
 The
        consolidated financial statements include the accounts of the Company and
        our
        wholly owned taxable REIT subsidiary, TRS I, Inc. All significant inter-company
        transactions and balances have been eliminated in consolidation.
 
 The
        results of operations for the interim periods shown in this report are not
        necessarily indicative of results to be expected for the full year. In the
        opinion of management, the information contained herein reflects all adjustments
        necessary to make the results of operations for the interim periods a fair
        statement of such operation. All such adjustments are of a normal recurring
        nature.
 
  The
                accompanying notes are an integral part of these statements.
 -
              7
              -
 *Table
            of Contents*
  **NOTE
        B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 **Management
        Estimates**
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America (“GAAP”) requires management
        to make estimates and assumptions that affect the reported amounts of assets
        and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those
        estimates.
 
 **Cash
        and Cash Equivalents**
 
 Cash
        and
        cash equivalents include interest-bearing and non-interest-bearing bank
        deposits, money market accounts, short-term certificates of deposit with
        original maturities of three months or less, and short-term instruments with
        a
        liquidation provision of one month or less.
 
 **Revenue
        Recognition**
 
 Interest
        is recognized as revenue when earned according to the terms of the loans,
        using
        the effective interest method. We do not recognize interest income on loans
        once
        they are determined to be impaired. A loan is impaired when based on current
        information and events, it is probable that we will be unable to collect
        all
        amounts due according to the contractual terms of the loan agreement or when
        the
        payment of interest is 90 days past due. Cash receipts will be allocated
        to
        interest income, except when such payments are specifically designated by
        the
        terms of the loan as principal reduction or when management does not believe
        our
        investment in the loan is fully recoverable.
 
 **Investments
        in Real Estate Loans**
 
 We
        may
        from time to time acquire or sell investments in real estate loans from or
        to
        the Manager or other related parties pursuant to the terms of our Management
        Agreement provided the price does not exceed the original cost. The primary
        purpose is to either free up capital to provide liquidity for various reasons,
        such as loan diversification, or place excess capital in investments to maximize
        the use of our capital. Selling or buying loans allows us to diversify our
        loan
        portfolio within these parameters. Due to the short term nature of the loans
        we
        make and the similarity of interest rates in loans we normally would invest
        in,
        the fair value of a loan typically approximates its carrying value. Accordingly,
        discounts or premiums typically do not apply upon sales of loans and therefore,
        generally no gain or loss is recorded on these transactions, regardless of
        whether to a related or unrelated party.
 
 Investments
        in real estate loans are secured by deeds of trust. Generally, our real estate
        loans require interest only payments with a balloon payment of the principal
        at
        maturity. We have both the intent and ability to hold real estate loans until
        maturity and therefore, real estate loans are classified and accounted for
        as
        held for investment and are carried at amortized cost. Loans sold to or
        purchased from affiliates are accounted for at the principal balance and
        no gain
        or loss is recognized by us or any affiliate. Loan to value ratios are based
        on
        appraisals obtained at the time of loan origination and may not reflect
        subsequent changes in value estimates. Such appraisals are generally dated
        within 12 months of the date of loan origination and may be commissioned
        by the
        borrower. The appraisals may be for the current estimate of the “as-if
        developed” value of the property, which approximates the post-construction value
        of the collateralized property assuming that such property is developed.
“As-if
        developed” values on raw land loans or acquisition and development loans often
        dramatically exceed the immediate sales value and may include anticipated
        zoning
        changes and timely successful development by the purchaser. As most of the
        appraisals will be prepared on an “as-if developed” basis, if a loan goes into
        default prior to any development of a project, the market value of the property
        may be substantially less than the appraised value. As a result, there may
        be
        less security than anticipated at the time the loan was originally made.
        If
        there is less security and a default occurs, we may not recover the full
        amount
        of the loan.
 
 .
 The
                accompanying notes are an integral part of these statements.
 -
              8
              -
 *Table
            of Contents*
  As
        of
        June 30, 2006, all of our loans provided for payments of interest only with
        a
“balloon” payment of principal payable in full at the end of the term, with the
        exception of one of our loans which include principal and interest payments.
        As
        of June 30, 2006, one of our loans is an amortizing loan with a balance of
        approximately $7.6 million and a term of 36 months, maturing in the next
        15
        months. In addition, we also invest in real estate loans that have interest
        reserves. Loans with interest reserves require the borrowers to maintain
        interest reserves funded from the principal amount of the loan for a period
        of
        time. At June 30, 2006, we had $6.5 million in investments in real estate
        loans
        that had interest reserves where the total outstanding principal was
        approximately $43.3 million, including participating lenders. These loans
        had
        interest reserves of approximately $2.6 million, of which our portion is
        $0.5
        million. At April 30, 2006, we had $5.8 million invested in real estate loans
        which had interest reserves where the total outstanding principal was
        approximately $29.6 million, including participating lenders. These loans
        had
        interest reserves of approximately $1.3 million, of which our portion is
        $0.2
        million.
 
 **Allowance
        for Loan Losses**
 
 We
        maintain an allowance for loan losses on our investments in real estate loans
        for estimated credit impairment. The Manager’s estimate of losses is based on a
        number of factors including the types and dollar amounts of loans in the
        portfolio, adverse situations that may affect the borrower’s ability to repay,
        prevailing economic conditions and the underlying collateral securing the
        loan.
        Additions to the allowance are provided through a charge to earnings and
        are
        based on an assessment of certain factors, which may indicate estimated losses
        on the loans. Actual losses on loans are recorded as a charge-off or a reduction
        to the allowance for loan losses. Subsequent recoveries of amounts previously
        charged off are added back to the allowance or included as income.
 
 Estimating
        allowances for loan losses requires significant judgment about the underlying
        collateral, including liquidation value, condition of the collateral, competency
        and cooperation of the related borrower and specific legal issues that affect
        loan collections or taking possession of the property. As a non-conventional
        lender willing to invest in loans to borrowers who may not meet the credit
        standards of conventional lenders, the default rate on our loans could be
        higher
        than those generally experienced in the real estate lending industry. We
        generally approve loans more quickly than other real estate lenders and,
        due to
        our expedited underwriting process; there is a risk that the credit inquiry
        we
        perform will not reveal the material facts pertaining to a borrower and the
        security.
 
 Additional
        facts and circumstances are discovered as we continue our efforts in the
        collection and foreclosure processes. This additional information often causes
        management to reassess its estimates. In recent years, we have revised estimates
        of our allowance for loan losses. Circumstances that have caused significant
        changes in our estimated allowance include, but are not limited to:
 
 ·
            Declines
                in real estate market conditions, which can cause a decrease in expected
                market value; 
 ·
            Discovery
                of undisclosed liens for community improvement bonds, easements and
                delinquent property taxes; 
 ·
            Lack
                of progress on real estate developments after we advance funds. We
                customarily utilize disbursement agents to monitor the progress of
                real
                estate developments and approve loan advances. After further inspection
                of
                the related property, progress on construction occasionally does
                not
                substantiate an increase in value to support the related loan
                advances; 
 ·
            Unanticipated
                legal or business issues that may arise subsequent to loan origination
                or
                upon the sale of foreclosed upon property;
                and 
 ·
            Appraisals,
                which are only opinions of value at the time of the appraisal, may
                not
                accurately reflect the value of the
                property. 
  The
                accompanying notes are an integral part of these statements.
 -
              9
              -
 *Table
            of Contents*
  **Real
        Estate Held For Sale**
 
 Real
        estate held for sale includes real estate acquired through foreclosure and
        will
        be carried at the lower of the recorded amount, inclusive of any senior
        indebtedness, or the property's estimated fair value, less estimated costs
        to
        sell, with fair value based on appraisals and knowledge of local market
        conditions. While pursuing foreclosure actions, the Company seeks to identify
        potential purchasers of such property. It is not the Company's intent to
        invest
        in or own real estate as a long-term investment. In accordance with Statement
        of
        Financial Accounting Standards (“FAS”) 144 - *Accounting
        for the Impairment or Disposal of Long Lived Assets* (“FAS
        144”), the Company seeks to sell properties acquired through foreclosure as
        quickly as circumstances permit. The carrying values of real estate held
        for
        sale are assessed on a regular basis from updated appraisals, comparable
        sales
        values or purchase offers.
 
 Management
        classifies real estate held for sale when the following criteria are
        met:
 
 ·
            Management
                commits to a plan to sell the properties; 
 ·
            The
                property is available for immediate sale in its present condition
                subject
                only to terms that are usual and
                customary; 
 ·
            An
                active program to locate a buyer and other actions required to complete
                a
                sale have been initiated; 
 ·
            The
                sale of the property is probable; 
 ·
            The
                property is being actively marketed for sale at a reasonable price;
                and 
 ·
            Withdrawal
                or significant modification of the sale is not
                likely. 
 **Real
        Estate Held For Sale - Seller Financed**
 
 We
        occasionally finance sales of foreclosed properties to independent third
        parties. In order to record a sale of real estate when the seller is providing
        continued financing, FAS 66 - *Accounting
        for Sales of Real Estate* ("FAS
        66'') requires the buyer of the real estate to make minimum and initial
        continuing investments. Minimum initial investments as defined by FAS 66
        range
        from 10% to 25% based on the type of real estate sold. In addition, FAS 66
        limits commitments and contingent obligations incurred by a seller in order
        to
        record a sale.
 
 Because
        we occasionally foreclose on loans with raw land or developments in progress,
        available financing for such properties is often limited and we frequently
        provide financing up to 100% of the selling price on these properties. In
        addition, we may make additional loans to the buyer to continue development
        of a
        property. Although sale agreements are consummated at closing, they lack
        adequate initial investment by the buyer to qualify as a sales transaction
        as
        defined in FAS 66. These sale agreements are not recorded as a sale until
        the
        requirements of FAS 66 are met.
 
 These
        sale agreements are recorded under the deposit method or cost recovery method
        as
        defined in FAS 66. Under the deposit method, no profit is recognized and
        any
        cash received from the buyer is reported as a deposit liability on the balance
        sheet. Under the cost recovery method, no profit is recognized until payments
        by
        the buyer exceed the carrying basis of the property sold. Principal payments
        received will reduce the related receivable, and interest collections will
        be
        recorded as unrecognized gross profit on the balance sheet. The carrying
        values
        of these properties are included in real estate held for sale on the
        accompanying consolidated balance sheets.
 
 In
        cases
        where the investment by the buyer is significant (generally 20% or more)
        and the
        buyer has an adequate continuing investment, the purchase money debt is not
        subject to future subordination, and a full transfer of risks and rewards
        has
        occurred, we will use the full accrual method. Under the full accrual method
        a
        sale is recorded and the balance remaining to be paid is recorded as a normal
        note. Interest is recorded as income when received.
 
  The
                accompanying notes are an integral part of these statements.
 -
              1 0
              -
 *Table
            of Contents*
  **Classification
        of Operating Results from Real Estate Held for Sale**
 
 FAS
        144 - *Accounting
        for the Impairment or Disposal of Long-Lived Assets* ("FAS
        144'') generally requires operating results from long lived assets held for
        sale
        to be classified as discontinued operations as a separately stated component
        of
        net income. The Company's operations involve foreclosing on real estate when
        necessary and the Company considers these operating results to be part of
        the
        Company's continuing operations. Accordingly, expenses related to real estate
        held for sale and related rental income, when applicable, have been included
        on
        the accompanying consolidated statements of operations.
 
 **Fair
        Value of Financial Instruments**
 
 FAS
        107 - *Disclosures
        about Fair Value of Financial Instruments* (“FAS
        107”), requires the determination of fair value of the Company’s financial
        assets. The following methods and assumptions were used to estimate the fair
        value of financial instruments included in the following
        categories:
 
 (a)
            Certificate
                of Deposits and Short-Term Investments: The carrying amounts of these
                instruments are at amortized cost, which approximates fair
                value. 
 (b)
            Investment
                in Real Estate Loans: The carrying value of these instruments, net
                of the
                allowance for loan losses, approximates the fair value due to their
                short-term maturities. Fair values for loans, which are delinquent
                and/or
                in foreclosure are determined by underlying collateral securing the
                loans. 
 (c)
            Assets
                under Secured Borrowing: The carrying amount of these instruments
                approximate fair value. The fair value is estimated based upon projected
                cash flows discounted at the estimated current interest rates at
                which
                similar loans would be made. 
 At
        June
        30, 2006 and April 30, 2006, the estimated fair values of the real estate
        loans,
        including seller financed loans, were approximately $51.1 million and $46.7
        million, respectively. At June 30, 2006 and April 30, 2006, we had no assets
        under secured borrowings. These estimates were based upon the present value
        of
        expected cash flows discounted at rates currently available for similar loans.
        Fair value estimates are made at a specific point in time; based on relevant
        market information; are subjective in nature; and involve uncertainties and
        matters of significant judgment. Accordingly, the estimates presented herein
        are
        not necessarily indicative of the amounts that would be collected upon maturity
        or disposition of the loans.
 
 **Net
        Basic and Diluted Earnings Per Share**
 
 Basic
        earnings per share (“EPS”) is computed, in accordance with FAS 128 - *Earnings
        per Share* (“FAS
        128”), by dividing net income available to common stockholders by the weighted
        average number of common shares outstanding. Diluted EPS is similar to basic
        EPS
        except that the weighted average of common shares outstanding is increased
        to
        include the number of additional common shares that would have been outstanding
        if the dilutive potential common shares had been exercised. We had no
        outstanding common shares equivalents during the period presented. The following
        is a computation of the EPS data for the two months ended June 30,
        2006:
 
 **For
                  the Two Months Ended June 30, 2006**Net
                  Income available to common stockholders
              
              $
              541,000Weighted
                  average number of common shares outstanding during the
                  period
              
              
              6,868,740Net
                  basic and diluted earnings per share
              
              $
              0.08
 
  The
              accompanying notes are an integral part of these statements.
 *Table
            of Contents*
  **Net
        Loss Allocated to Members Per Weighted Average Membership
        Unit**
 
 Because
        Fund I was an LLC prior to the merger, it stated net loss allocated to members
        per weighted average members’ unit, which is computed by dividing net loss
        calculated in accordance with GAAP by the weighted average number of members’
units outstanding for the period. The following is a computation of the net
        loss
        per weighted average unit for the two months ended June 30, 2005:
 
 **For
                  the Two Months Ended June 30, 2005**Net
                  loss available to members’
              
              $
              (933,000
              )Weighted
                  average number of members’ units outstanding during the
                  period
              
              
              7,700,001Net
                  loss per weighted average members’ unit
              
              $
              (0.12
              )
 
 **Segments**
 
 We
        operate as one business segment.
 
 **Income
        Taxes**
 
 The
        Company is organized and conducts its operations to qualify as a real estate
        investment trust (“REIT”) and to comply with the provisions of the Internal
        Revenue Code with respect thereto. A REIT is generally not subject to federal
        income tax on that portion of its REIT taxable income (“Taxable Income”) which
        is distributed to its stockholders, provided that at least 90% of Taxable
        Income
        is distributed and provided that certain other requirements are met.
 
 Certain
        assets of the Company are held in a taxable REIT subsidiary. Unlike other
        subsidiaries of a REIT, the income of a taxable REIT subsidiary is subject
        to
        federal and state income taxes. For the two months ended June 30, 2006, the
        Company’s taxable REIT subsidiary did not record any income tax provision due to
        losses it generated. The Company’s taxable REIT subsidiary deferred tax assets
        have been fully offset by a valuation allowance.
 
 **Reclassifications**
 
 Certain
        reclassifications have been made to the prior periods’ financial statements to
        conform to the current period presentation.
  **NOTE
        C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT
        RISK**
 
 Financial
        instruments with concentration of credit and market risk include cash and
        loans
        secured by trust deeds.
 
 We
        maintain cash deposit accounts and certificates of deposit, which at times,
        may
        exceed federally insured limits. We have not experienced any losses in such
        accounts and believe we are not exposed to any significant credit risk on
        cash.
        As of June 30, 2006 and April 30, 2006 we had $7.2 million and $11.1 million,
        respectively, in excess of the federally insured limits.
 
 As
        of
        June 30, 2006, 23% of our real estate loans were in Nevada compared to 26%
        at
        April 30, 2006 and 13% of our real estate loans were in California compared
        to
        17% at April 30, 2006. Additionally, as of June 30, 2006; 16% of our loans
        were
        in Hawaii compared to 17% at April 30, 2006 and 11% of our loans were in
        Arizona
        compared to 7% at April 30, 2006. As a result of this geographical concentration
        of our real estate loans, a downturn in the local real estate markets in
        these
        states could have a material adverse effect on us.
 
  The
              accompanying notes are an integral part of these statements.
 *Table
            of Contents*
  At
        June
        30, 2006, the aggregate amount of loans to our three largest borrowers
        represented 35.75% of our total investment in real estate loans. These real
        estate loans consisted of commercial and acquisition and development loans,
        located in California, Hawaii and Nevada, with a first lien position, earning
        between 5% and 14%, with an aggregate outstanding balance of approximately
        $20.7
        million and maturing through September 2007. At April 30, 2006, the aggregate
        amount of loans to our three largest borrowers represented 39.77% of our
        total
        investment in real estate loans. These real estate loans consisted of commercial
        and acquisition and development loans, located in California, Hawaii and
        Nevada,
        with a first lien position, earning between 5% and 14%, with an aggregate
        outstanding balance of approximately $21.3 million and maturing through
        September 2007. Because we have a significant concentration of credit risk
        with
        our three largest borrowers, a default by any of such borrowers could have
        a
        material adverse effect on us.
 
 As
        of
        June 30, 2006, all of our loans provided for payments of interest only with
        a
“balloon” payment of principal payable in full at the end of the term, with the
        exception of one of our loans which include principal and interest payments.
        The
        success of a borrower’s ability to repay its real estate loan obligation in a
        large lump-sum payment may be dependent upon the borrower’s ability to refinance
        the obligation or otherwise raise a substantial amount of cash. An increase
        in
        interest rates over the loan rate applicable at origination of the loan may
        have
        an adverse effect on the borrower’s ability to refinance.
 
 **NOTE
        D — INVESTMENTS IN REAL ESTATE LOANS**
 
 We
        have
        four real estate loan products, as of June 30, 2006 and April 30, 2006,
        consisting of commercial, construction, acquisition and development, and
        land.
        The effective interest rates on all product categories range from 5% to 14%.
        Revenue by product will fluctuate based upon relative balances during the
        period.
 
 Investments
        in real estate loans as of June 30, 2006 are as follows:
 
 **Loan
                  Type**
              
              **Number
                  Of Loans**
              
              **Balance
                  (2)**
              
              **Weighted
                  Average Interest Rate**
              
              **Portfolio
                  Percentage**
              
              **Weighted
                  Average Loan To Value (1)**Acquisition
                  and development
              
              
              4
              
              $
              5,541,000
              
              
              9.29
              %
              
              9.58
              %
              
              73.42
              %Commercial
              
              
              17
              
              
              37,147,000
              
              
              9.05
              %
              
              64.22
              %
              
              80.72
              %Construction
              
              
              3
              
              
              5,018,000
              
              
              12.00
              %
              
              8.68
              %
              
              61.31
              %Land
              
              
              5
              
              
              10,134,000
              
              
              11.82
              %
              
              17.52
              %
              
              48.48
              %29
              
              $
              57,840,000
              
              
              9.81
              %
              
              100.00
              %
              
              72.65
              %
 
 Investments
        in real estate loans as of April 30, 2006 are as follows:
 
 **Loan
                  Type**
              
              **Number
                  Of Loans**
              
              **Balance
                  (2)**
              
              **Weighted
                  Average Interest Rate**
              
              **Portfolio
                  Percentage**
              
              **Weighted
                  Average Loan To Value (1)**Acquisition
                  and development
              
              
              3
              
              $
              6,603,000
              
              
              9.39
              %
              
              12.35
              %
              
              54.87
              %Commercial
              
              
              16
              
              
              35,752,000
              
              
              9.20
              %
              
              66.88
              %
              
              81.62
              %Construction
              
              
              3
              
              
              5,018,000
              
              
              12.00
              %
              
              9.39
              %
              
              61.31
              %Land
              
              
              3
              
              
              6,081,000
              
              
              12.45
              %
              
              11.38
              %
              
              48.35
              %25
              
              $
              53,454,000
              
              
              9.85
              %
              
              100.00
              %
              
              72.62
              %
 
 
  The
              accompanying notes are an integral part of these statements.
 *Table
            of Contents*
  
 (1)
            Loan
                to value ratios are based on the most recent appraisals and may not
                reflect subsequent changes in value estimates. Such appraisals, which
                may
                be commissioned by the borrower, are generally dated no greater than
                12
                months prior to the date of loan origination. The appraisals may
                be for
                the current estimate of the “as-if developed” value of the property, which
                approximates the post-construction value of the collateralized property
                assuming that such property is developed. “As-if developed” values on raw
                land loans or acquisition and development loans often dramatically
                exceed
                the immediate sales value and may include anticipated zoning changes,
                and
                successful development by the purchaser; upon which development is
                dependent on availability of financing. As most of the appraisals
                will be
                prepared on an “as-if developed” basis, if a loan goes into default prior
                to any development of a project, the market value of the property
                may be
                substantially less than the appraised value. As a result, there may
                be
                less security than anticipated at the time the loan was originally
                made.
                If there is less security and a default occurs, we may not recover
                the
                full amount of the loan. 
 (2)
            The
                following table reconciles the balance of the loan portfolio to the
                amount
                shown on the accompanying Balance Sheet. The contra accounts represent
                the
                amount of real estate held for sale sold to third parties where the
                Company provided financing. GAAP requires the borrower to have a
                certain
                percentage equity ownership (ranging from 10% to 25%) to allow the
                Company
                to record the sale of a property. In addition, the borrower must
                maintain
                a minimum commitment in the property on a continuing basis. Therefore,
                until the borrower meets this requirement, the investment in the
                new loan
                is reduced by the amount originally invested in the real estate held
                for
                sale. 
 **June
                  30, 2006 Balance**
              
              **April
                  30, 2006 Balance**Balance
                  Per Loan Portfolio
              
              $
              57,840,000
              
              $
              53,454,000Less:Seller
                  Financed Loans Included in Real Estate Held for Sale
              
              
              (8,797,000
              )
              
              (8,797,000
              )Proceeds
                  of Principal on Seller Financed Loans Included in Deposit
                  Liability
              
              
              291,000
              
              
              263,000Unrealized
                  Gain on Seller Financed Loans
              
              
              (144,000
              )
              
              (144,000
              )Allowance
                  for Loan Losses
              
              
              (4,770,000
              )
              
              (4,801,000
              )Balance
                  per Balance Sheet
              
              $
              44,420,000
              
              $
              39,975,000
 
 The
        following is a schedule of priority of real estate loans as of June 30, 2006
        and
        April 30, 2006:
 
 **Loan
                  Type**
              
              **Number
                  of Loans**
              
              **June
                  30, 2006**
                **Balance***
              
              **Portfolio**
                **Percentage**
              
              **Number
                  of Loans**
              
              **April
                  30, 2006**
                **Balance***
              
              **Portfolio**
                **Percentage**First
                  Deeds of Trust
              
              
              27
              
              $
              57,502,000
              
              
              99.42
              %
              
              24
              
              $
              53,416,000
              
              
              99.93
              %Second
                  Deeds of Trust**
              
              
              2
              
              
              338,000
              
              
              0.58
              %
              
              1
              
              
              38,000
              
              
              0.07
              %29
              
              $
              57,840,000
              
              
              100.00
              %
              
              25
              
              $
              53,454,000
              
              
              100.00
              %
 
 *
        Please
        see note (2) above
 **
        Generally, our second trust deeds are junior to a first trust deed position
        held
        by either us or our Manager.
 
 The
        following is a schedule of contractual maturities of investments in real
        estate
        loans as of June 30, 2006:
 
 July
                  - December 2006
              
              $
              28,600,000January
                  - December 2007
              
              
              29,240,000$
              57,840,000
 
 
  The
              accompanying notes are an integral part of these statements.
 *Table
            of Contents*
  The
        following is a schedule by geographic location of investments in real estate
        loans as of June 30, 2006 and April 30, 2006:
 
 **June
                  30, 2006 Balance***
              
              **Portfolio
                  Percentage**
              
              **April
                  30, 2006 Balance***
              
              **Portfolio
                  Percentage**Arizona
              
              $
              6,530,000
              
              
              11.29
              %
              $
              3,530,000
              
              
              6.60
              %California
              
              
              7,741,000
              
              
              13.38
              %
              
              8,924,000
              
              
              16.70
              %Hawaii
              
              
              9,307,000
              
              
              16.09
              %
              
              9,307,000
              
              
              17.41
              %Nevada
              
              
              13,292,000
              
              
              22.98
              %
              
              13,721,000
              
              
              25.67
              %New
                  York
              
              
              3,246,000
              
              
              5.61
              %
              
              3,249,000
              
              
              6.08
              %Oklahoma
              
              
              2,637,000
              
              
              4.56
              %
              
              2,636,000
              
              
              4.93
              %Oregon
              
              
              3,200,000
              
              
              5.54
              %
              
              3,200,000
              
              
              5.99
              %Texas
              
              
              5,167,000
              
              
              8.93
              %
              
              2,167,000
              
              
              4.05
              %Washington
              
              
              4,720,000
              
              
              8.16
              %
              
              4,720,000
              
              
              8.83
              %Wisconsin
              
              
              2,000,000
              
              
              3.46
              %
              
              2,000,000
              
              
              3.74
              %Total
              
              $
              57,840,000
              
              
              100.00
              %
              $
              53,454,000
              
              
              100.00
              %
 
 *
        Please
        see note (2) above
 
 At
        June
        30, 2006, our RightStar loans were non-performing (more than 90 days past
        due on
        interest payments or past due on principal). These loans are currently carried
        on our books at a value of approximately $4.5 million, net of allowance for
        loan
        losses of approximately $4.8 million. These loans have been placed on
        non-accrual of interest status and are the subject of pending foreclosure
        proceedings. The following schedule summarizes the non-performing
        loans:
 
 
 **Description
                  of Collateral**
              
              **Balance
                  June 30, 2006**
              
              **Maturity
                  Date**
              
              **Number
                  of Months Non-Performing**
              
              **Percentage
                  of Total Loan Balance**4
                  cemeteries and 8 mortuaries in Hawaii Part I***
              
              $
              4,415,000
              
              
              03/31/2004
              
              
              27
              
              
              21.00%
                  of Part I4
                  cemeteries and 8 mortuaries in Hawaii Part II***
              
              
              4,892,000
              
              
              03/31/2004
              
              
              27
              
              
              35.00%
                  of Part II$
              9,307,000
 
 ***
        Please refer to note (3) *Specific
        Reserve Allowance* below.
 
 On
        May 1,
        2006 the bankruptcy plan of Mid-State Raceway, Inc for Vernon Downs became
        effective. As a result of the bankruptcy plan, we and VRM II received the
        following:
 
 ·
            A
                new first deed of trust was received from the buyer, Vernon Downs
                Acquisition, LLC, approximating $22.8 million, of which our portion
                is
                approximately $3.2 million. The new terms included a $1.2 million
                principal payment, reducing our principal balance by approximately
                $171,000. This transaction resulted in us recording unearned revenue
                of
                approximately $171,000, to be recognized over the 6 months term of
                the
                loan. The terms of the loan are 9% due in 6 months, with an option
                to
                extend for an additional 6 months for a
                fee. 
 ·
            The
                loan is secured by a first deed of trust on the Vernon Downs properties
                and a 150% personal guarantee by the
                borrowers. 
 ·
            Prepayment
                of interest in the aggregate amount of $500,000, of which our portion
                was
                approximately $71,000.  The
              accompanying notes are an integral part of these statements.
 *Table
            of Contents*
  
 ·
            Delay
                fees from the date of the bankruptcy confirmation until the effective
                date
                in the aggregate amount of $282,000 of which our portion was approximately
                $40,000. 
 ·
            Payment
                of past due forbearance fees of approximately $555,000 of which our
                portion was approximately $79,000, to be recognized as unearned revenue
                and amortized over the next 6 months. 
 Our
        Manager periodically reviews and makes a determination as to whether the
        allowance for loan losses is adequate to cover any potential losses. Additions
        to the allowance for loan losses are made by charges to the provision for
        loan
        losses. Recoveries of previously charged off amounts are credited to the
        allowance for loan losses or included as income when the asset is disposed.
        As
        of June 30, 2006, we have provided a specific reserve related to the two
        loans
        secured by four cemeteries and eight mortuaries in Hawaii, of which our portion
        of the specific reserve is approximately $4.8 million. Our Manager evaluated
        the
        loans and concluded that the remaining underlying collateral was sufficient
        to
        protect us against further losses of principal or interest. Our Manager will
        continue to evaluate these loans in order to determine if any other allowance
        for loan losses should be recorded.
 
 Because
        any decision regarding the allowance for loan losses reflects a judgment
        about
        the probability of future events, there is an inherent risk that such judgments
        will prove incorrect. In such event, actual losses may exceed (or be less
        than)
        the amount of any reserve. To the extent that we experience losses greater
        than
        the amount of our reserves, we may incur a charge to our earnings that will
        adversely affect our operating results and the amount of any distributions
        payable to our stockholders.
 
 The
        following is a roll-forward of the allowance for loan losses for the two
        months
        ended June 30, 2006:
 
 **Description**
              
              **Balance**
                **April
                  30, 2006**
              
              **Specific
                  Reserve Allocation**
              
              **RightStar
                  Legal Reserve**
              
              **Balance**
                **June
                  30, 2006**Specific
                  allowance (4)
              
              $
              4,801,000
              
              $
              --
              
              $
              (31,000
              )
              $
              4,770,000Total
              
              $
              4,801,000
              
              $
              --
              
              $
              (31,000
              )
              $
              4,770,000
 
 **(3)**
            **Specific
                Reserve Allowance** 
 *RightStar
        Loan Allowance* -RightStar, Inc. (“RightStar”) defaulted on our loans in the fall of 2004. The
        lenders commenced a judicial foreclosure on the loans, part I and part II,
        which
        is secured by a lien on the business and virtually all of the property of
        RightStar, which includes four cemeteries and eight mortuaries in Hawaii.
        The
        aggregate principal balance of the loan is approximately $32 million. The
        loans,
        part I and part II, are owned as follows:
 
 **Senior
                  Principal Amount**
              
              **Junior
                  Principal Amount**
              
              **Total**VRM
                  I
              
              $
              4,892,000
              
              $
              4,415,000
              
              $
              9,307,000VRM
                  II
              
              
              9,108,000
              
              
              8,183,000
              
              
              17,291,000Sunset
                  Financial Resources, Inc.
              
              
              --
              
              
              5,657,000
              
              
              5,657,000**Total**
              
              $
              14,000,000
              
              $
              18,255,000
              
              $
              32,255,000
 
 The
        loans
        are subject to an inter-creditor agreement which states the order of priority
        for any payments received are disbursed as follows:
 
 ·
            First
                to reimburse collection and foreclosure expenses advanced by the
                lenders; 
 ·
            Second
                to pay past due interest on the Senior Principal (including default
                rate
                interest); 
 ·
            Third
                to pay past due interest on the Junior Principal (including default
                rate
                interest);  The
              accompanying notes are an integral part of these statements.
 *Table
            of Contents*
  
 ·
            Fourth
                to pay Senior Principal; and 
 ·
            Fifth
                to pay Junior Principal. 
 We
        and
        VRM II acquired the senior portion of the loan on July 14, 2005 for
        approximately $15.5 million of which our portion was approximately $5.4 million
        (including accrued interest of approximately $0.5 million). We and VRM II
        acquired this balance to expedite the foreclosure process and remove the
        prior
        senior lender from its priority position, which had the potential to impair
        the
        value we may receive at the time the property is sold. In exchange for
        assistance in expediting the foreclosure process, the lenders jointly agreed
        to
        release the guarantors from their guaranty of the loan.
 
 RightStar
        is currently being operated by a Court appointed Receiver, installed at the
        request of the lenders. A Special Master appointed by the State of Hawaii
        is
        currently administering the pre-need and perpetual care trust
        funds.
 
 Foreclosure
        proceedings are being delayed by the State of Hawaii which has refused to
        issue
        licenses to potential buyers or the lenders to: (1) operate the facility,
        (2)
        operate a pre-need program and (3) operate a perpetual care program. During
        the
        ten month transition period ended April 30, 2006, the State of Hawaii notified
        the lenders of a potential statutory trust fund deficiency, estimated to
        be
        between $20 million and $30 million and claimed that this balance has priority
        over all lenders. The lenders dispute the amount and priority of this deficit.
        On April 20, 2006, the lenders filed suit against the State of Hawaii listing
        26
        causes of action, including allegations that the State of Hawaii has illegally
        blocked the lender’s right to foreclose and take title to its collateral by
        inappropriately attaching conditions to the granting of licenses needed to
        operate the business, the pre-need trust funds and the perpetual care trust
        funds and that the State of Hawaii has attempted to force the lenders to
        accept
        liability for any statutory trust fund deficits while no such lender liability
        exists under the laws of the State of Hawaii. On April 24, 2006, the State
        of
        Hawaii responded by filing allegations against Vestin Mortgage, Inc. and
        VRM II
        alleging that these Vestin entities improperly influenced the former RightStar
        trustees to transfer trust funds to VRM II. Our Manager believes these claims
        to
        be without merit and intend to vigorously defend those allegations. The outcome
        of this litigation is unforeseeable at this time. We cannot estimate when
        the
        foreclosure will ultimately be completed or when the lenders may obtain title
        to
        the underlying properties.
 
 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 $2.9 million during the ten month transition period ended April
        30, 2006 and specifically allocated our general allowance of approximately
        $0.7
        million to the RightStar loans. The increase in the reserve allowance includes
        approximately $0.5 million for estimated litigation fees and expenses which
        we
        anticipate incurring in enforcing our rights against the underlying collateral.
        We will continue to evaluate our position in the RightStar loan as the situation
        progresses. As of June 30, 2006, our specific reserve allowance on the RightStar
        loans totaled approximately $4.8 million.
 
 In
        addition, our Manager had granted extensions on four loans pursuant to the
        terms
        of the original loan agreements, which permit extensions by mutual consent.
        Such
        extensions are generally provided on loans where the original term was 12
        months
        or less and where a borrower requires additional time to complete a construction
        project or negotiate take-out financing. However, our Manager only grants
        extensions when a borrower is in full compliance with the terms of the loan,
        including, but not limited to the borrower’s obligation to make interest
        payments on the loan. The aggregate amount due from borrowers whose loans
        had
        been extended as of June 30, 2006 was approximately $5.7 million. Our Manager
        concluded that no allowance for loan loss was necessary with respect to these
        loans as of June 30, 2006.
 
 **Asset
        Quality and Loan Reserves**
 
 Losses
        may occur from investing in real estate loans. The amounts of losses will
        vary
        as the loan portfolio is affected by changing economic conditions and the
        financial condition of borrowers.
  The
              accompanying notes are an integral part of these statements.
 *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, the Manager evaluates
        our real estate loan portfolio for impairment. The fact that a loan is
        temporarily past due does not necessarily mean that the loan is impaired.
        Rather, all relevant circumstances are considered by our Manager to determine
        impairment and the need for specific reserves. Such evaluation, which includes
        a
        review of all loans on which full collectibility may not be reasonably assured,
        considers among other matters:
 
 ·
            Prevailing
                economic conditions; 
 ·
            Historical
                experience; 
 ·
            The
                nature and volume of the loan portfolio; 
 ·
            The
                borrowers’ financial condition and adverse situations that may affect the
                borrowers’ ability to pay; 
 ·
            Evaluation
                of industry trends; and 
 ·
            Estimated
                net realizable value of any underlying collateral in relation to
                the loan
                amount. 
 Based
        upon this evaluation, a determination is made as to whether the allowance
        for
        loan losses is adequate to cover any potential losses. Additions to the
        allowance for loan losses are made by charges to the provision for loan losses.
        As of June 30, 2006, our Manager had provided approximately $4.8 million
        as a
        specific allowance for loan losses. At June 30, 2006, our RightStar loans
        were
        non-performing (more than 90 days past due on interest payments or past due
        on
        principal). These loans are currently carried on our books at a value of
        approximately $4.5 million, net of allowance for loan losses of approximately
        $4.8 million. Our Manager evaluated the loans and concluded that the underlying
        collateral was sufficient to protect us against further losses of principal
        or
        interest. Our Manager will continue to evaluate these loans in order to
        determine if any other allowance for loan losses should be
        recorded.
 
 **NOTE
        E — REAL ESTATE HELD FOR SALE**
 
 At
        June
        30, 2006, we held one property with a total carrying value of approximately
        $2.5
        million, which was acquired through foreclosure and recorded as investments
        in
        real estate held for sale. The summary below includes our percentage ownership
        in the property. This investment in real estate held for sale is accounted
        for
        at the lower of cost or fair value less costs to sell with fair value based
        on
        appraisals and knowledge of local market conditions. It is not our intent
        to
        invest in or own real estate as a long-term investment. We seek to sell
        properties acquired through foreclosure as quickly as circumstances permit.
        The
        following is a roll-forward of investments in real estate held for sale for
        the
        two months ended June 30, 2006:
 
 **Description**
              
              **Date
                  Acquired**
              
              **Percentage
                  of Ownership**
              
              **Balance
                  at April 30, 2006**
              
              **Acquisitions
                  (Reductions)**
              
              **Seller
                  Financed Sales**
              
              **Sales**
              
              **Gain
                  on Sale of Real Estate**
              
              **Balance
                  at June 30, 2006 (2)**Land
                  containing 82 residential lots in Henderson, Nevada
              
              
              2/28/2003
              
              
              66
              %
              $
              2,497,000
              
              $
              (25,000
              )
              $
              --
              
              $
              --
              
              $
              --
              
              $
              2,472,000**Total**
              
              
              
              
              
              
              
              $
              2,497,000
              
              $
              (25,000
              )
              $
              --
              
              $
              --
              
              $
              --
              
              $
              2,472,000
 
 During
        July 2006, we and VRM II sold the land containing residential lots in Henderson,
        NV, for approximately $3.8 million, of which we received approximately $2.5
        million which will result in a gain of $36,000.
 
  The
              accompanying notes are an integral part of these statements.
 *Table
            of Contents*
  **NOTE
        F — REAL ESTATE HELD FOR SALE - SELLER FINANCED**
 
 At
        June
        30, 2006, we held an interest in two **** properties
        with a total carrying value of $8.8 million, which have been sold in
        transactions where we provided the financing to the purchaser. GAAP requires
        us
        to include these properties in real estate held for sale until the borrower
        has
        met and maintained a certain percentage of equity ownership, which ranges
        from
        10% to 25%. We may share ownership of such properties with VRM II, Fund III,
        the
        Manager, or other related and/or unrelated parties. The summary below includes
        our percentage ownership in each property. These investments in real estate
        held
        for sale are accounted for at the lower of cost or fair value less costs
        to sell
        with fair value based on appraisals and knowledge of local market conditions.
        The following is a roll-forward of seller financed real estate held for sale
        for
        the two months ended June 30, 2006:
 
 **Description**
              
              **Date
                  Acquired**
              
              **Percentage
                  of Ownership**
              
              **Balance
                  at April 30, 2006**
              
              **Acquisitions**
              
              **Adjustments**
              
              **Principal
                  Payments Received from Borrower**
              
              **Balance
                  at**
                **June
                  30, 2006**Assisted
                  living facility in Las Vegas, Nevada
              
              
              9/23/2004
              
              
              52
              %
              
              7,911,000
              
              
              --
              
              
              --
              
              
              --
              
              
              7,911,000126
                  Unit (207 bed) assisted living facility in Phoenix, AZ
              
              
              9/08/2004
              
              
              10
              %
              
              886,000
              
              
              --
              
              
              --
              
              
              --
              
              
              886,000$
              8,797,000
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              8,797,000
 
 We
        received $1,031,000 in payments from borrowers on the loans associated with
        the
        sale of the properties held as of June 30, 2006. These payments are recorded
        as
        a deposit liability.
 
 Until
        borrowers have met the minimum equity ownership requirement to allow us to
        record a sale, we will record payments received under the deposit method
        or the
        cost recovery method, which ever is applicable in accordance with FAS
        66.
 
 **NOTE
        G — RELATED PARTY TRANSACTIONS**
 From
        time
        to time we may acquire or sell investments in real estate loans from/to our
        Manager or other related parties pursuant to the terms of our Management
        Agreement provided the price does not exceed the original cost. No gain or
        loss
        is recorded on these transactions, as it is not our intent to make a profit
        on
        the purchase or sale of such investments. The purpose is generally to diversify
        our portfolio by syndicating loans, thereby providing us with additional
        capital
        to make additional loans.
 
 **Transactions
        with the Manager**
 
 Our
        Manager is entitled to receive from us an annual management fee of up to
        0.25%
        of our aggregate capital received by us and Fund I from the sale of shares
        or membership units paid monthly in arrears. The amount of management fees
        paid to our Manager for the two months ended June 30, 2006 and 2005 was
        approximately $46,000.
 
 As
        of
        April 30, 2006, we owed our Manager $37,000, related to unpaid management
        fees,
        and expenses paid on our behalf related to the maintenance of real estate
        held
        for sale. As of June 30, 2006 the balance due to our Manager was paid in
        full.
 
 As
        of
        June 30, 2006, Vestin Mortgage had an investment in us of approximately $1
        million, which consists of certain costs paid on our behalf related to the
        registration and start-up costs. Vestin Mortgage has received 100,000 units
        from
        Fund I related to this investment, which were converted into VRM I shares
        when
        we merged with Fund I. For the two months ended June 30, 2005 we recorded
        pro-rata distributions owed to our Manager of approximately
        $10,000.
 
  The
              accompanying notes are an integral part of these statements.
 *Table
            of Contents*
  **Transactions
        with Other Related Parties**
 
 For
        the
        two months ended June 30, 2006 and 2005, we incurred $15,000 and $4,000
        respectively, for legal fees to the law firm of Levine, Garfinkel & Katz in
        which the Secretary of Vestin Group has an equity ownership interest in the
        law
        firm.
 
 **NOTE
        H — NOTES RECEIVABLE**
 
 During
        October 2004, we and VRM II sold the Castaways Hotel/Casino in Las Vegas,
        Nevada
        of which our portion of the net cash proceeds was approximately $2,118,000.
        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 $160,000 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 $119,000, which is based on a discount
        rate of 8% as of that date. For the two months ended June 30, 2006, we received
        approximately $9,000 in principal payments.
 
 During
        March 2005, we and VRM II sold the
        126
        unit hotel in Mesquite, Nevada for $5,473,000 of which our share of the proceeds
        were approximately $1.8 million which resulted in a loss of approximately
        $389,000. In
        addition, during June 2005, we and VRM II entered into a settlement agreement
        with the guarantors of the loan in the amount of $2,000,000 in exchange for
        a
        release of their personal guarantees of which our share was approximately
        $640,000. The balance is secured by a second trust deed and is payable in
        a
        first installment of $100,000 due in July 2005 and monthly interest only
        payments of 5% on $1,100,000 from July 2005 through July 2008, at which time
        the
        entire balance is due. The guarantors are entitled to a discount of $782,000
        from the principal balance in the event the entire balance is paid by December
        2006. The first installment was received and recognized as income in July
        2005,
        of which our portion was $32,000. Payments will be recognized as income when
        received. For the two months ended June 30, 2006, we received approximately
        $1,000 in interest payments.
 
 During
        November 2004, we and VRM II sold the 140 Unit/224 bed senior facility in
        Mesa,
        Arizona of which our consideration received totaled $1,009,000. We and VRM
        II
        received a promissory note from the original guarantor in the amount of $478,000
        of which our portion was $67,000. The promissory note is payable in interest
        only payments of 8% on the principal balance outstanding. Commencing June
        25,
        2005 through May 25, 2006, monthly payments shall increase to $15,000 and
        be
        applied to principal and accrued interest. Beginning June 25, 2006 through
        May
        25, 2009 payments are to increase to $20,000 monthly. Due to the uncertainty
        of
        collectibility, we have provided a valuation allowance for the entire balance
        of
        the promissory note. Income
        will be recognized when payments are received. As of June, 2006, the note
        receivable balance was $45,000. As of June 30, 2006, we received approximately
        $22,000 in principal and interest payments.
 
 During
        December 2005, we and VRM II sold the 460 acre residential subdivision in
        Lake
        Travis, TX for $5.5 million, of which our portion was $1.8 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 $24,000.
 
 **NOTE
        I — NOTE PAYABLE**
 
 In
        May
        2006, we financed a 12 month E & O insurance policy for Directors and
        Officers liability, with an annual interest rate of 6.92%. The agreement
        required $49,000 down and nine monthly payments of approximately $22,000
        beginning on May 27, 2006. At June 30, 2006 the outstanding balance of the
        note
        was approximately $152,000.
 
  The
              accompanying notes are an integral part of these statements.
 *Table
            of Contents*
  **NOTE
        J — RECENT ACCOUNTING PRONOUNCEMENTS**
 
 In
        July
        2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
        No. 48 - *Accounting
        for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
        109* (FIN
        48), which clarifies the accounting for uncertainty in tax positions. This
        Interpretation requires that we recognize in our financial statements, the
        impact of a tax position, if that position is more likely than not of being
        sustained on audit, based on the technical merits of the position. The
        provisions of FIN 48 are effective as of the beginning of our 2007 fiscal
        year,
        with the cumulative effect of the change in accounting principle recorded
        as an
        adjustment to opening retained earnings. We are currently evaluating the
        impact
        of adopting FIN 48 on our consolidated financial statements.
 
 **NOTE
        K — LEGAL MATTERS INVOLVING THE MANAGER**
 
 Our
        Manager is involved in a number of legal proceedings concerning matters arising
        in connection with the conduct of its business activities. The Manager believes
        it has meritorious defenses to each of these actions and intends to defend
        them
        vigorously. The Manager believes that it is not a party to any pending legal
        or
        arbitration proceedings that would have a material adverse effect on the
        Manager’s financial condition or results of operations or cash flows, although
        it is possible that the outcome of any such proceedings could have a material
        impact on the Manager’s net income in any particular period.
 
 **NOTE
        L — LEGAL MATTERS INVOLVING THE COMPANY**
 
 Vestin
        Group, Vestin Mortgage, and Del Mar Mortgage, Inc., a company wholly owned
        by
        Michael V. Shustek, the sole stockholder and CEO of Vestin Group, are defendants
        in a civil action entitled Desert Land, LLC et al. v. Owens Financial Group,
        Inc. et al (the “Action”). The Action is based upon allegations that Del Mar
        Mortgage, Inc. and/or Vestin Mortgage charged unlawful fees on various loans
        arranged by them. Desert Land sought in excess of $10 million in monetary
        damages. On April 10, 2003, the United States District Court for the District
        of
        Nevada (the “Court”) entered judgment jointly and severally in favor of Desert
        Land against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. Judgment
        was predicated upon the Court’s finding that Del Mar Mortgage, Inc. received an
        unlawful penalty fee from the plaintiffs.
 
 The
        defendants subsequently filed a motion for reconsideration. The Court denied
        the
        motion and, on August 13, 2003, held that Vestin Group, Vestin Mortgage,
        and Del
        Mar Mortgage, Inc. were jointly and severally liable for the judgment in
        the
        amount of $5,683,312 (which amount includes prejudgment interest and attorney’s
        fees). On August 27, 2003, the Court stayed execution of the judgment against
        Vestin Group and Vestin Mortgage based upon the posting of a bond in the
        amount
        of $5,830,000. Mr. Shustek personally posted a cash bond without any cost
        or
        obligation to Vestin Group and Vestin Mortgage. Additionally, Del Mar Mortgage,
        Inc. had indemnified Vestin Group and Vestin Mortgage for any losses and
        expenses in connection with the Action, and Mr. Shustek had guaranteed the
        indemnification with his cash bond. On September 12, 2003, all of the defendants
        held liable to Desert Land appealed the judgment to the United States Court
        of
        Appeals for the Ninth Circuit, which heard the case on October 18, 2005.
        On
        November 15, 2005, the Ninth Circuit vacated the judgment of the District
        Court
        and dismissed the state law claims against the defendants without prejudice
        on
        the basis that the District Court lacked subject matter jurisdiction in the
        case. On November 29, 2005, Desert Land petitioned the Ninth Circuit Court
        for
        rehearing with a suggestion that the matter be heard en banc. On December
        16,
        2005, the District Court issued an Order releasing the bond, and on January
        6,
        2006, the Ninth Circuit denied Desert Land’s petition and the matter remains
        dismissed.
 
 Most
        recently, on or about April 6, 2006, Desert Land filed a Writ of Certiorari
        seeking review of the 9th Circuit’s decision by the United States Supreme Court.
        The U.S. Supreme Court denied Desert Land’s Writ of Certiorari on June 12,
        2006.
 
  The
              accompanying notes are an integral part of these statements.
 *Table
            of Contents*
  On
        November 21, 2005, Desert Land filed a complaint in the state courts of Nevada,
        which complaint is substantially similar to the original complaint previously
        filed by Desert Land in the United States District Court, with the exception
        of
        claiming Nevada State Law violations and seeking Nevada State Law remedies
        rather than claiming Federal Law violations and seeking Federal Law remedies.
        On
        March 6, 2006, Desert Land amended the state court complaint to name us as
        a
        defendant. Desert Land alleges that one or more of the defendants have
        transferred assets to other entities without receiving reasonable value
        therefore; alleges plaintiffs are informed and believe that defendants have
        made
        such transfers with the actual intent to hinder, delay or defraud Desert
        Land;
        that such transfers made the transferor insolvent and that sometime between
        February 27 and April 1, 2003, Vestin Group transferred $1.6 million to us
        for
        that purpose. The state court complaint further alleges that Desert Land
        is
        entitled to avoid such transfers and that pursuant to NRS 112.20, Desert
        Land is
        entitled to an injunction to enjoin defendants from further disposition of
        assets. Additionally, Del Mar Mortgage, Inc. has indemnified Vestin Group
        and
        Vestin Mortgage for any losses and expenses in connection with the Action,
        and
        Mr. Shustek has guaranteed the indemnification.
 
 The
        United States Securities and Exchange Commission, (“SEC” or the “Commission”)
        conducted an investigation into certain matters related to us, Vestin Group,
        Vestin Capital, VRM II and Fund III (the “Vestin Entities”). We have fully
        cooperated during the course of the investigation.
 
 The
        SEC
        Staff has notified the Vestin Entities that they believe certain slides used
        at
        sales seminars held to promote the sale of Fund II and Fund III units included
        disclosure regarding distributions to members of Fund I and Fund II that
        were
        allegedly misleading. The Vestin Entities have engaged in discussions with
        the
        Staff regarding a possible resolution of this matter and have reached a
        tentative agreement, subject to Commission review and approval, to resolve
        the
        matter. Based upon these discussions, we currently believe that neither we
        nor
        VRM II and Fund III will be named as parties in the enforcement action. We
        do
        not know if the Commission will approve the proposed settlement.
 
 On
        April
        21, 2006, through our Manager, we filed a complaint in the Circuit Court
        of the
        First Circuit in Hawaii to expedite our efforts to foreclose upon first trust
        deeds secured by the assets of RightStar International, Inc. (the “RightStar
        Trust Deeds”). In the filing, we allege that the State of Hawaii has
        unreasonably blocked the foreclosure without any legal basis for doing so.
        On
        April 24, 2006, the State of Hawaii responded by filing allegations against
        Vestin Mortgage, Inc., and VRM II alleging that these Vestin entities improperly
        influenced the former RightStar trustees to transfer trust funds to VRM II.
        We
        believe the State’s claims to be without merit and intend to vigorously pursue
        our remedies while defending against the allegations made by the State. The
        outcome of this litigation is unforeseeable at this time.
 
 In
        addition to the matters described above, we are involved in a number of other
        legal proceedings concerning matters arising in connection with the conduct
        of
        our business activities. We believe we have meritorious defenses to each
        of
        these actions and intend to defend them vigorously. Other than the matters
        described above, we believe that we are not a party to any pending legal
        or
        arbitration proceedings that would have a material adverse effect on our
        financial condition or results of operations or cash flows, although it is
        possible that the outcome of any such proceedings could have a material impact
        on our net income in any particular period.
 
 **NOTE
        M — 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.
 
  The
              accompanying notes are an integral part of these statements.
 *Table
            of Contents*
  **NOTE
        N — SUBSEQUENT EVENTS**
 
 During
        July 2006, four of our loans in our investment in real estate loans totaling
        approximately $6.2 million were paid in full. In addition, $6.0 million was
        invested in new investments in real estate loans.
 
 The
        Board
        of Directors declared a first quarter dividend of $0.08 per share on July
        27,
        2006 to be paid on August 21, 2006, to the stockholders of record as of August
        7, 2006.
 
 During
        July 2006, we and VRM II sold the land containing residential lots in Henderson,
        NV, for approximately $3.8 million, of which we received approximately $2.5
        million resulting in a gain of $36,000.
 
  The
              accompanying notes are an integral part of these statements.
 *Table
            of Contents*
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
        the
        Board of Directors and Stockholders of Vestin Realty Mortgage I,
        Inc.:
 
 We
        have
        reviewed the accompanying consolidated balance sheet of Vestin Realty Mortgage
        I, Inc. as of June 30, 2006, and the related consolidated statements of
        operations, stockholders’ equity, and cash flows for the two months ended June
        30, 2006 and 2005. All information included in these consolidated financial
        statements is the representation of the management of Vestin Realty Mortgage
        I,
        Inc.
 
 We
        conducted our review in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). A review of interim financial
        information consists principally of applying analytical procedures and making
        inquiries of persons responsible for financial and accounting matters. It
        is
        substantially less in scope than an audit conducted in accordance with the
        standards of the Public Company Accounting Oversight Board, the objective
        of
        which is the expression of an opinion regarding the financial statements
        taken
        as a whole. Accordingly, we do not express such an opinion.
 
 Based
        on
        our review, we are not aware of any material modifications that should be
        made
        to the accompanying consolidated financial statements referred to above for
        them
        to be in conformity with accounting principles generally accepted in the
        United
        States of America.
 
 We
        have
        previously audited, in accordance with the standards of the Public Company
        Accounting Oversight Board (United States), the consolidated balance sheet
        of
        Vestin Realty Mortgage I, Inc. as of April 30, 2006 and the related consolidated
        statements of operations, stockholders’ equity and cash flows for the ten month
        transition period ended April 30, 2006 (not presented herein); and in our
        report
        dated June 27, 2006, we expressed an unqualified opinion on those consolidated
        financial statements. In our opinion, the information set forth in the
        accompanying consolidated balance sheet as of April 30, 2006, is fairly stated,
        in all material respects, in relation to the consolidated balance sheet from
        which it has been derived.
 
 
 
 /s/Moore
        Stephens Wurth Frazer and Torbet, LLP
 
 
 Orange,
        California
 July
        24,
        2006
 
 
  -
            24
            -
 *Table
            of Contents*
  **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND 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 two months ended June 30, 2006. This discussion
        should be read in conjunction with our financial statements and accompanying
        notes and other detailed information regarding us appearing elsewhere in
        this
        Form 10-Q and our report on Form 10-K, Part II, Item 7 *Management’s
        Discussion and Analysis of Financial Conditions and Results of
        Operations* for the
        ten month transition period ended April 30, 2006.
 
 **FORWARD
        LOOKING STATEMENTS**
 
 Certain
        statements in this report, including, without limitation, matters discussed
        under this Item 2, “Management’s Discussion and Analysis of Financial Condition
        and Results of Operations,” should be read in conjunction with the financial
        statements, related notes, and other detailed information included elsewhere
        in
        this Quarterly Report on Form 10-Q. We are including this cautionary statement
        to make applicable and take advantage of the safe harbor provisions of the
        Private Securities Litigation Reform Act of 1995. Statements that are not
        historical fact are forward-looking statements. Certain of these forward-looking
        statements can be identified by the use of words such as “believes,”
“anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,”
“assumes,” “may,” “should,” “will,” or other similar expressions. Such
        forward-looking statements involve known and unknown risks, uncertainties
        and
        other important factors, which could cause actual results, performance or
        achievements to differ materially from future results, performance or
        achievements. These forward-looking statements are based on our current beliefs,
        intentions and expectations. These statements are not guarantees or indicative
        of future performance. Important assumptions and other important factors
        that
        could cause actual results to differ materially from those forward-looking
        statements include, but are not limited to, those factors, risks and
        uncertainties described in Item 1A of our Transition Report on Form 10-K
        for the
        ten month transition period ended April 30, 2006 and in our other securities
        filings with the Securities and Exchange Commission. Our future financial
        condition and results of operations, as well as any forward-looking statements,
        are subject to change and involve inherent risks and uncertainties. The
        forward-looking statements contained in this report are made only as of the
        date
        hereof. We undertake no obligation to update or revise information contained
        herein to reflect events or circumstances after the date hereof or to reflect
        the occurrence of unanticipated events.
 
 **Overview**
 
 Our
        primary business objective is to generate income by investing in real estate
        loans. We believe there is a significant market opportunity to make real
        estate
        loans to owners and developers of real property whose financing needs are
        not
        met by traditional real estate lenders. The loan underwriting standards our
        Manager utilizes are less strict than traditional real estate lenders. In
        addition, one of our competitive advantages is our ability to approve loan
        applications more quickly than traditional lenders. As a result, in certain
        cases, we may make real estate loans that are riskier than real estate loans
        made by commercial banks. However, in return we seek a higher interest rate
        and
        our Manager takes steps to mitigate the lending risks such as imposing a
        lower
        loan to value ratio. While we may assume more risk than traditional real
        estate
        lenders, in return, we seek to generate higher yields from our real estate
        loans.
 
 Our
        operating results are affected primarily by: (i) the amount of capital we
        have
        to invest in real estate loans, (ii) the level of real estate lending activity
        in the markets we service, (iii) our ability to identify and work with suitable
        borrowers, (iv) the interest rates we are able to charge on our loans and
        (v)
        the level of non-performing assets, foreclosures and related loan losses
        which
        we may experience. Our capital, subject to a 3% reserve, will constitute
        the
        bulk of the funds we have available for investment in real estate loans.
        We do
        not have any arrangements in place to materially increase the funds we will
        have
        available to invest from any other sources. See discussion under - “Capital and
        Liquidity.”
 
  -
            25
            -
 *Table
            of Contents*
  Our
        operating results during the past several years have been adversely affected
        by
        allowances for non-performing loans. As of June 30, 2006, we have provided
        a
        specific allowance of approximately $4.8 million on loans secured by 4
        cemeteries and 8 mortuaries in Hawaii. For additional information see “Specific
        Loan Allowance” in Note D - *Investment
        Real Estate Loans* of the
        Notes to Financial Statements included in Part I, Item 1 *Financial
        Statements* of
        this
        Report Form 10-Q. Non-performing assets, net of allowance for loan losses,
        totaled approximately $7.0 million or 10.88% of our total assets as of June
        30,
        2006 as compared to $10.3 million or 16.1% of our total assets as of April
        30,
        2006. At June 30, 2006, non-performing assets consist of approximately $2.5
        million of real estate held for sale not sold through seller financing and
        approximately $4.5 million of non-performing loans, net of allowance for
        loan
        losses of approximately $4.8 million. During July 2006, we and VRM II sold
        the
        land containing residential lots in Henderson, NV, for approximately $3.8
        million, of which we received approximately $2.5 million resulting in a gain
        of
        $36,000. The level of non-performing assets may reflect the continuing weakness
        in certain sectors of the economy and the risk inherent in our business strategy
        which entails more lenient underwriting standards and expedited loan approval
        procedures. If the economy weakens and our borrowers who develop and sell
        commercial real estate projects are unable to complete their projects or
        obtain
        takeout financing or are otherwise adversely impacted, we may experience
        an
        increase in loan defaults which may reduce the amount of funds we have for
        dividend distribution to our stockholders. Such conditions may also require
        us
        to restructure loans. The weighted average term of our outstanding loans
        as of
        June 30, 2006 and April 30, 2006 was 18 months.
 
 Uncertain
        economic conditions during the next year could have a material impact on
        the
        collectibility of our loans. Recognizing the risk, we seek to maintain an
        adequate loan-to-value ratio which, as of June 30, 2006, was 72.65% on a
        weighted average basis, generally using appraisals prepared on an “as-if
        developed” basis in connection with the loan origination. In this manner, we
        hope to retain sufficient cushion in the underlying equity position to protect
        the value of our loan in the event of a default. Nevertheless, no assurances
        can
        be given that a marked increase in loan defaults accompanied by a rapid decline
        in real estate values will not have a material adverse effect upon our financial
        condition and operating results.
 
 We
        generally invest in real estate loans throughout the areas in which Vestin
        Mortgage and its correspondents have experience. As of April 30, 2006 our
        loans
        were in the following states; Arizona, California, Hawaii, Nevada, New York,
        Oklahoma, Oregon, Texas, Washington and Wisconsin.
 
  -
            26
            -
 *Table
            of Contents*
  **Summarization
        of Financial Results**
 
 **For
                  the Two Months Ended June 30,****2006**
              
              **2005**Total
                  Revenues
              
              $
              737,000
              
              $
              1,107,000Total
                  Operating Expenses
              
              
              177,000
              
              
              1,605,000Total
                  Loss from Real Estate Held for Sale
              
              $
              19,000
              
              $
              435,000**NET
                  INCOME (LOSS)**
              
              $
              541,000
              
              $
              (933,000
              )Net
                  Income (Loss) Allocated to Members
              
              $
              541,000
              
              $
              (933,000
              )Net
                  Income (Loss) Allocated to Members Per Weighted Average Members’
                  Units
              
              
              
              
              $
              (0.12
              )Basic
                  and Diluted Earnings Per Common Share
              
              $
              0.08Weighted
                  Average Common Shares / Members’ Units
              
              
              6,868,740
              
              
              7,700,001Annualized
                  Rate of Return to Members’ (a)
              
              
              --
              
              
              -7.25
              %Dividends
                  / Cash Distributions
              
              $
              --
              
              $
              868,000Dividends
                  / Cash Distributions Per Weighted Average Common Share / Members’
                  Units
              
              $
              --
              
              $
              0.11Weighted
                  Average Term of Outstanding Loans
              
              
              18
                  months
              
              
              19
                  months
 
 (a)
            The
                annualized rate of return to members is calculated based upon the
                net GAAP
                income allocated to members per weighted average units as of June
                30, 2005
                divided by the number of days during the period (61 days for the
                two
                months ended June 30, 2005) and multiplied by three hundred sixty
                five
                (365) days, then divided by ten (the cost per
                unit). 
 *Total
        Revenues* For the
        two months ended June 30, 2006, total revenues decreased by approximately
        $370,000 or 34% compared to the same period in 2005 due in significant part
        to
        the following factors:
 
 ·
            Our
                interest income decreased by approximately $463,000 as a result of
                a
                decrease in investment in real estate loans. Investment in real estate
                loans, net of allowance, declined approximately $10.5 million from
                $54.9
                million at June 30, 2005 to $44.4 million at June 30, 2006. The decline
                in
                investment in real estate loans is attributable to the reduction
                in
                capital, resulting from membership units redemptions, we had available
                for
                investments. See further discussion in Note D -*Investment
                in Real Estate Loans*of
                the notes to Financial Statements included in Part I of this Report
                on
                From 10Q. Fund I’s capital was reduced by redemptions of member units of
                approximately $8.3 million paid to its’ members during the ten month
                transition period ended April 30, 2006. 
 This
        decrease was offset by the increase in bank interest income earned on cash
        accounts held at banking institutions. Bank interest income increased by
        approximately $89,000 for the two months ended June 30, 2006 compared to
        the
        same period in 2005. This increase is due to the increase of approximately
        $4.3
        million in cash and cash equivalents as of June 30, 2006 compared to June
        30,
        2005. The increase in cash is attributable to the proceeds received from
        loan
        payoffs of approximately $6.1 million during the two months ended June 30,
        2006.
 
  -
            27
            -
 *Table
            of Contents*
  *Total
        Expenses* :
        For the
        two months ended June 30, 2006, total operating expenses decreased approximately
        $1.4 million or 89% compared to the same period in 2005. Expenses were primarily
        affected by the following factors:
 
 ·
            During
                the two months ended June 30, 2005, expenses were significantly impacted
                by the recognition of additions for loan loss of approximately $1.2
                million related to the loans secured by 4 cemeteries and 8 mortuaries
                in
                Hawaii. See “Specific Loan Allowance” in Note D -*Investment
                in Real Estate Loans*of
                the notes to Financial Statements included in Part I of this Report
                on
                Form 10-Q. There were no additions to the provision for loan loss
                during
                the two months ended June 30, 2006. 
 ·
            Interest
                expense decreased by approximately $115,000 primarily due to the
                payoffs
                of secured borrowings of approximately $11.4 million during the ten
                month
                transition period ended April 30, 2006. 
 ·
            Professional
                fees decreased approximately $128,000 primarily due to fees related
                to our
                annual report incurred during the two months ended June 30,
                2005. 
 *Total
        Income (Loss) from Real Estate Held for Sale:* Loss
        from real estate owned decreased approximately $416,000 or 96% compared to
        the
        two months ended June 30, 2006 to the same period in 2005. During the two
        months
        ended June 30, 2005, we recorded a charge of approximately $354,000 in
        connection with two write downs on real estate held for sale related to a
        126
        unit assisted living facility in Phoenix, Arizona and residential lots in
        Henderson, Nevada. There were no write downs on real estate held for sale
        during
        the two months ended June 30, 2006.
 
 *Net
        Income (Loss)* .
        Overall, net income (loss) for the two months ended June 30, 2006 and 2005
        totaled approximately $541,000 and $(933,000), respectively.
 
 *Dividends* .
        To
        maintain our status as a REIT, we are required to make distributions, other
        than
        capital gain dividends, to our stockholders each year in an amount at least
        equal to (1) the sum of (a) 90% of our taxable income, computed without regards
        to the dividends paid deduction and our net capital gain, and (b) 90% of
        the net
        income, after tax, from foreclosure property, minus (2) the sum of certain
        specified items of noncash income over 5% of our REIT taxable income. The
        Board
        of Directors declared a first quarter dividend of $0.08 per share on July
        27,
        2006 to be paid on August 21, 2006, to the stockholders of record as of August
        7, 2006.
 
 **CAPITAL
        AND LIQUIDITY**
 
 Liquidity
        is a measure of a company’s ability to meet potential cash requirements,
        including ongoing commitments to fund lending activities and general operating
        purposes. Subject to a 3% reserve, we generally use all of our available
        funds
        to invest in real estate loans. Distributable cash flow generated from such
        loans is paid out to our stockholders, in the form of a dividend. We do not
        anticipate the need for hiring any employees, acquiring fixed assets such
        as
        office equipment or furniture, or incurring material office expenses during
        the
        next twelve months because Vestin Mortgage will manage our affairs. We may
        pay
        Vestin Mortgage an annual management fee of up to 0.25% of our aggregate
        capital
received
        by us and Fund I from the sale of shares or membership units.
 During
        the two months ended June 30, 2006, cash flows provided by operating activities
        approximated $0.5 million. Investing activities consisted of cash provided
        by
        loan payoffs of approximately $6.1 million. Cash used for new investments
        and
        purchases of real estate loans totaled approximately $10.2 million. In addition,
        investing activities consisted of the purchase of $2.5 million in certificates
        of deposit. Financing activities consisted of payments on note payable in
        the
        amount of approximately $42,000.
 
 At
        June
        30, 2006, we had approximately $4.6 million in cash, $2.8 million in
        certificates of deposit, and approximately $64.4 million in total assets.
        We
        intend to meet short-term working capital needs through a combination of
        proceeds from loan payoffs, loan sales and/or borrowings. We believe we have
        sufficient working capital to meet our operating needs in the near
        term.
 
  -
            28
            -
 *Table
            of Contents*
  Since
        we
        distribute most or all of our distributable cash generated by operations,
        our
        sources of liquidity include: repayments of outstanding loans, dividend
        distribution reinvestments by our stockholders and arrangements with third
        parties to participate in our loans and proceeds from issuance of note payable
        and secured borrowings.
 
 We
        have
        no current plans to sell any new shares except through our dividend reinvestment
        program. The level of dividend reinvestment in the future will depend upon
        our
        performance, as well as the number of our stockholders who prefer to reinvest
        rather than receive current dividends.
 
 We
        rely
        primarily upon repayment of outstanding loans to provide capital for investment
        in new loans. Any significant level of defaults on outstanding loans could
        reduce the funds we have available for investment in new loans. Resulting
        foreclosure proceedings may not generate full repayment of our loans and
        may
        result in significant delays in the return of invested funds. This would
        diminish our capital resources and would impair our ability to invest in
        new
        loans. Non-performing assets include loans in non-accrual status, net of
        allowance for loan losses, and real estate held for sale totaling $4.5 million
        and $2.5 million, respectively, as of June 30, 2006 compared to $7.8 million
        and
        $2.5 million, respectively, as of April 30, 2006. It is possible that no
        earnings will be recognized from these assets until they are disposed of,
        or
        that no earnings will be recognized at all, and the time it will take to
        dispose
        of these assets cannot be predicted. Our Manager believes that these
        non-performing assets are a result of factors unique to specific borrowers
        and
        properties. Because of the estimated value of the underlying properties,
        we do
        not currently believe that any losses beyond those already recognized will
        be
        incurred from these assets upon final disposition. However, it is possible
        that
        we will not be able to realize the full estimated carrying values upon
        disposition.
 
 To
        maintain our status as a REIT, we will be required to make distributions,
        other
        than capital gain dividends, to our stockholders each year in an amount at
        least
        equal to (1) the sum of (a) 90% of our taxable income, computed without regards
        to the dividends paid deduction and our net capital gain, and (b) 90% of
        the net
        income, after tax, from foreclosure property, minus (2) the sum of certain
        specified items of noncash income over 5% of our REIT taxable
        income.
 
 Loans
        in
        which third party investors have participated through inter-creditor agreements
        (“Inter-creditor Agreements”) are accounted for as secured borrowings in
        accordance with FAS 140 - *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities* (“FAS
        140”). The Inter-creditor Agreements provide us additional funding sources for
        real estate loans whereby a third party investor (the “Investor”) may
        participate on a senior basis in certain real estate loans with us and/or
        VRM II
        and/or Fund III (collectively, the “Lead Lenders”). In the event of borrower
        non-performance, the Inter-creditor Agreements generally provide that the
        Lead
        Lenders must repay the Investor’s loan amount either by (i) continuing to remit
        to the Investor the interest due on the participated loan amount; (ii)
        substituting an alternative loan acceptable to the Investor; or (iii)
        repurchasing the participation from the Investor for the outstanding balance
        plus accrued interest.
 
 As
        of
        June 30, 2006 and April 30, 2006, we had no funds being used under
        Inter-creditor Agreements where we have potential obligations as defined
        above.
 
 We
        maintain working capital reserves of approximately 3% in cash and cash
        equivalents, certificates of deposits and short-term investments or liquid
        marketable securities. This reserve is available to pay expenses in excess
        of
        revenues, satisfy obligations of underlying properties, expend money to satisfy
        our unforeseen obligations and for other permitted uses of working
        capital.
 
 **INVESTMENTS
        IN REAL ESTATE LOANS SECURED BY REAL ESTATE PORTFOLIO**
 
 We
        offer
        five real estate loan products consisting of commercial, construction,
        acquisition and development, land, and residential loans. The effective interest
        rates on all product categories range from 5% to 14%. Revenue by product
        will
        fluctuate based upon relative balances during the period. We had investments
        in
        29 real estate loans as of June 30, 2006, with a balance of $57.8 million
        as
        compared to investments in 25 real estate loans as of April 30, 2005, with
        a
        balance of $53.4 million.
 
  -
            29
            -
 *Table
            of Contents*
  At
        June
        30, 2006, our RightStar loans were non-performing (more than 90 days past
        due on
        interest payments or past due on principal). These loans are currently carried
        on our books at a value of approximately $4.5 million, net of allowance for
        loan
        losses of approximately $4.8 million. These loans have been placed on
        non-accrual of interest status and are the subject of pending foreclosure
        proceedings.
 
 On
        May 1,
        2006 the bankruptcy plan of Mid-State Raceway, Inc for Vernon Downs became
        effective. As a result of the bankruptcy plan, we and VRM II received the
        following:
 
 ·
            A
                new first deed of trust was received from the buyer, Vernon Downs
                Acquisition, LLC, approximating $22.8 million, of which our portion
                is
                approximately $3.2 million. The new terms included a $1.2 million
                principal payment, reducing our principal balance by approximately
                $171,000. This transaction resulted in us recording unearned revenue
                of
                approximately $171,000, to be recognized over the 6 months term of
                the
                loan. The terms of the loan are 9% due in 6 months, with an option
                to
                extend for an additional 6 months for a
                fee. 
 ·
            The
                loan is secured by a first deed of trust on Vernon Downs properties
                and a
                150% personal guarantee by the borrowers. 
 ·
            Prepayment
                of interest in the aggregate amount of $500,000, of which our portion
                was
                approximately $71,000. 
 ·
            Delay
                fees from the date of the bankruptcy confirmation until the effective
                date
                in the aggregate amount of $282,000 of which our portion was approximately
                $40,000. 
 ·
            Payment
                of past due forbearance fees of approximately $555,000 of which our
                portion was approximately $79,000, to be recognized as unearned revenue
                and amortized over the next 6 months. 
 Our
        Manager periodically reviews and makes a determination as to whether the
        allowance for loan losses is adequate to cover any potential losses. Additions
        to the allowance for loan losses are made by charges to the provision for
        loan
        losses. Recoveries of previously charged off amounts are credited to the
        allowance for loan losses or included as income when the asset is disposed.
        As
        of June 30, 2006, we have provided a specific reserve related to the four
        cemeteries and eight mortuaries in Hawaii, of which our portion of the specific
        reserve is approximately $4.8 million. Our Manager evaluated the loans and
        concluded that the remaining underlying collateral was sufficient to protect
        us
        against further losses of principal or interest. Our Manager will continue
        to
        evaluate these loans in order to determine if any other allowance for loan
        losses should be recorded. For additional information on our investments
        in real
        estate loans, refer to Note D - *Investments
        In Real Estate Loans* of the
        Notes to the Financial Statements included in Part I, Item 1 *Financial Statements* of
        this
        Report Form 10-Q.
 
 **Asset
        Quality and Loan Reserves**
 
 Losses
        may occur from investing in real estate loans. The amounts of losses will
        vary
        as the loan portfolio is affected by changing economic conditions and the
        financial condition of borrowers.
 
 The
        conclusion that a real estate loan is uncollectible or that collectibility
        is
        doubtful is a matter of judgment. On a quarterly basis, the Manager evaluates
        our real estate loan portfolio for impairment. The fact that a loan is
        temporarily past due does not necessarily mean that the loan is impaired.
        Rather, all relevant circumstances are considered by our Manager to determine
        impairment and the need for specific reserves. Such evaluation, which includes
        a
        review of all loans on which full collectibility may not be reasonably assured,
        considers among other matters:
  ·
            Prevailing
                economic conditions;  ·
              Historical
                  experience;
  -
            30
            -
 *Table
            of Contents*
  
 ·
            The
                nature and volume of the loan portfolio; 
 ·
            The
                borrowers’ financial condition and adverse situations that may affect the
                borrowers’ ability to pay; 
 ·
            Evaluation
                of industry trends; and 
 ·
            Estimated
                net realizable value of any underlying collateral in relation to
                the loan
                amount. 
 Based
        upon this evaluation, a determination is made as to whether the allowance
        for
        loan losses is adequate to cover any potential losses. Additions to the
        allowance for loan losses are made by charges to the provision for loan losses.
        Recoveries of previously charged off amounts are credited to the allowance
        for
        loan losses. For additional information regarding the roll-forward of the
        allowance for loan losses for the two months ended June 30, 2006, refer to
        Note
        D - *Investments
        In Real Estate Loans* of the
        Notes to the Financial Statements included in Part I, Item 1 *Financial Statements* of
        this
        Interim Report Form 10-Q.
 
 **Investments
        in Real Estate Held for Sale**
 
 At
        June
        30, 2006, we held one property with a total carrying value of approximately
        $2.5
        million, which was acquired through foreclosure and recorded as investments
        in
        real estate held for sale. During the ten month transition period ended April
        30, 2006, we sold two properties. These investments in real estate held for
        sale
        are accounted for at the lower of cost or fair value less costs to sell with
        fair value based on appraisals and knowledge of local market conditions.
        It is
        not our intent to invest in or own real estate as a long-term investment.
        We
        seek to sell properties acquired through foreclosure as quickly as circumstances
        permit.
 
 During
        July 2006, we and VRM II sold the land containing residential lots in Henderson,
        NV, for approximately $3.8 million, of which we received approximately $2.5
        million resulting in a gain of $36,000. For additional information on our
        investments in real estate held for sale, refer to Note E - *Real
        Estate Held for Sale* of the
        Notes to the Financial Statements included in Part I, Item *Financial
        Statements* of
        this
        Report Form 10-Q.
 
 **Investments
        in Real Estate Held for Sale — Seller Financed**
 
 At
        June
        30, 2006, we held an interest in two **** properties
        with a total carrying value of approximately $8.8 million, which have been
        sold
        in transactions where we provided the financing to the purchaser. GAAP requires
        us to include these properties in real estate held for sale until the borrower
        has met and maintained a certain percentage of equity ownership, which ranges
        from 10% to 25%. We may share ownership of such properties with VRM II, Fund
        III, the Manager, or other related and/or unrelated parties. These investments
        in real estate held for sale are accounted for at the lower of cost or fair
        value less costs to sell with fair value based on appraisals and knowledge
        of
        local market conditions. For additional information on our investments in
        real
        estate loans, refer to Note G - *Real
        Estate Held for Sale-Seller Financed* of the
        Notes to the Financial Statements included in Part I, Item 1 *Financial
        Statements* of
        this
        Report Form 10-Q.
 
 **OFF-BALANCE
        SHEET ARRANGEMENTS**
 
 We
        do not
        have any interests in off-balance sheet special purpose entities nor do we
        have
        any interests in non-exchange traded commodity contracts
 
  -
            31
            -
 *Table
            of Contents*
  **CONTRACTUAL
        OBLIGATIONS**
 
 The
        following summarizes our contractual obligation at June 30, 2006:
 
 **Contractual
                  Obligation**
              
              **Total**
              
              **Less
                  Than**
                **1
                  Year**
              
              **1-3
                  Years**
              
              **3-5
                  Years**
              
              **More
                  Than**
                **5
                  Years**Note
                  Payable
              
              $
              152,000
              
              $
              152,000
              
              $
              --
              
              
              
              
              $
              --
              
              
              
              
              $
              --Total
              
              $
              152,000
              
              $
              152,000
              
              $
              --
              
              
              
              
              $
              --
              
              
              
              
              $
              --
 
 **CRITICAL
        ACCOUNTING ESTIMATES**
 
 **Revenue
        Recognition**
 
 Interest
        income on loans is accrued by the effective interest method. We do not recognize
        interest income from loans once they are determined to be impaired. A loan
        is
        impaired when, based on current information and events, it is probable that
        we
        will be unable to collect all amounts due according to the contractual terms
        of
        the loan agreement or when the payment of interest is 90 days past
        due.
 
 The
        following table presents a sensitivity analysis to show the impact on our
        financial condition at June 30, 2006 from fluctuations in weighted average
        interest rate charged on loans as a percentage of the loan
        portfolio:
 
 **Changed
                  Assumption**
              
              **Increase
                  (Decrease) in Interest Income**Weighted
                  average interest rate assumption increased by 1% or 100 basis
                  points
              
              $
              602,000Weighted
                  average interest rate assumption increased by 5% or 500 basis
                  points
              
              $
              3,008,000Weighted
                  average interest rate assumption decreased by 1% or 100 basis
                  points
              
              $
              (602,000
              )Weighted
                  average interest rate assumption decreased by 5% or 500 basis
                  points
              
              $
              (3,008,000
              )
 
 The
        purpose of this analysis is to provide an indication of the impact that the
        weighted average interest rate fluctuations would have on our financial results.
        It is not intended to imply our expectation of future revenues or to estimate
        earnings. We believe that the assumptions used above are appropriate to
        illustrate the possible material impact on the financial
        statements.
 
 **Allowance
        for Loan Losses**
 
 We
        maintain an allowance for loan losses on our investments in real estate loans
        for estimated credit impairment. The Manager’s estimate of losses is based on a
        number of factors including the types and dollar amounts of loans in the
        portfolio, adverse situations that may affect the borrower’s ability to repay,
        prevailing economic conditions and the underlying collateral securing the
        loan.
        Additions to the allowance are provided through a charge to earnings and
        are
        based on an assessment of certain factors, which may indicate estimated losses
        on the loans. Actual losses on loans are recorded as a charge-off or a reduction
        to the allowance for loan losses. Subsequent recoveries of amounts previously
        charged off are added back to the allowance or included as income.
 
 The
        following table presents a sensitivity analysis to show the impact on our
        financial condition at June 30, 2006 from increases and decreases to our
        allowance for loan losses as a percentage of the loan portfolio:
 
 **Changed
                  Assumption**
              
              **Increase
                  (Decrease) in Allowance for Loan Losses**Allowance
                  for loan losses assumption increased by 1.0% of loan
                  portfolio
              
              $
              578,000Allowance
                  for loan losses assumption increased by 5.0% of loan
                  portfolio
              
              $
              2,892,000Allowance
                  for loan losses assumption decreased by 1.0% of loan
                  portfolio
              
              $
              (578,000
              )Allowance
                  for loan losses assumption decreased by 5.0% of loan
                  portfolio
              
              $
              (2,892,000
              )
  -
            32
            -
 *Table
            of Contents*
  Estimating
        allowances for loan losses requires significant judgment about the underlying
        collateral, including liquidation value, condition of the collateral, competency
        and cooperation of the related borrower and specific legal issues that affect
        loan collections or taking possession of the property. As a non-conventional
        lender willing to invest in loans to borrowers who may not meet the credit
        standards of conventional lenders, the default rate on our loans could be
        higher
        than those generally experienced in the mortgage lending industry. We generally
        approve loans more quickly than other real estate lenders and, due to our
        expedited underwriting process, there is a risk that the credit inquiry we
        perform will not reveal the material facts pertaining to a borrower and the
        security.
 
 We
        may
        discover additional facts and circumstances as we continue our efforts in
        the
        collection and foreclosure processes. This additional information often causes
        management to reassess its estimates. In recent years, we have revised estimates
        of our allowance for loan losses. Circumstances that have caused significant
        changes in our estimated allowance include:
 
 ·
            Declines
                in real estate market conditions that can cause a decrease in expected
                market value; 
 ·
            Discovery
                of undisclosed liens for community improvement bonds, easements and
                delinquent property taxes; 
 ·
            Lack
                of progress on real estate developments after we advance funds. We
                customarily utilize disbursement agents to monitor the progress of
                real
                estate developments and approve loan advances. After further inspection
                of
                the related property, progress on construction occasionally does
                not
                substantiate an increase in value to support the related loan
                advances; 
 ·
            Unanticipated
                legal or business issues that may arise subsequent to loan origination
                or
                upon the sale of foreclosed upon property;
                and 
 ·
            Appraisals,
                which are only opinions of value at the time of the appraisal, may
                not
                accurately reflect the value of the
                property. 
 **Real
        Estate Held for Sale**
 
 Real
        estate held for sale includes real estate acquired through foreclosure and
        will
        be carried at the lower of the recorded amount, inclusive of any senior
        indebtedness, or the property's estimated fair value, less estimated costs
        to
        sell, with fair value based on appraisals and knowledge of local market
        conditions. While pursuing foreclosure actions, the Company seeks to identify
        potential purchasers of such property. It is not the Company's intent to
        invest
        in or own real estate as a long-term investment. In accordance with FAS 144
        - *Accounting
        for the Impairment or Disposal of Long Lived Assets,* the
        Company seeks to sell properties acquired through foreclosure as quickly
        as
        circumstances permit. The carrying values of real estate held for sale are
        assessed on a regular basis from updated appraisals, comparable sales values
        or
        purchase offers.
 
 Management
        classifies real estate held for sale when the following criteria are
        met:
 
 ·
            Management
                commits to a plan to sell the properties; 
 ·
            The
                property is available for immediate sale in its present condition
                subject
                only to terms that are usual and
                customary; 
 ·
            An
                active program to locate a buyer and other actions required to complete
                a
                sale have been initiated; 
 ·
            The
                sale of the property is probable; 
 ·
            The
                property is being actively marketed for sale at a reasonable price;
                and 
 ·
            Withdrawal
                or significant modification of the sale is not
                likely. 
  -
            33
            -
 *Table
            of Contents*
  **Real
        Estate Held for Sale - Seller Financed**
 
 We
        occasionally finance sales of foreclosed properties to independent third
        parties. In order to record a sale of real estate when the seller is providing
        continued financing, FAS 66 requires the buyer of the real estate to make
        minimum and initial continuing investments. Minimum initial investments as
        defined by FAS 66 range from 10% to 25% based on the type of real estate
        sold.
        In addition, FAS 66 limits commitments and contingent obligations incurred
        by a
        seller in order to record a sale.
 
 Because
        we occasionally foreclose on loans with raw land or developments in progress,
        available financing for such properties is often limited and we frequently
        provide financing up to 100% of the selling price on these properties. In
        addition, we may make additional loans to the buyer to continue development
        of a
        property. Although sale agreements are consummated at closing, they lack
        adequate initial investment by the buyer to qualify as a sales transaction
        as
        defined in FAS 66. These sale agreements are not recorded as a sale until
        the
        requirements of FAS 66 are met.
 
 These
        sales agreements are recorded under the deposit method or cost recovery method
        as defined in FAS 66. Under the deposit method, no profit is recognized and
        any
        cash received from the buyer is reported as a deposit liability on the balance
        sheet. Under the cost recovery method, no profit is recognized until payments
        by
        the buyer exceed the carrying basis of the property sold. Principal payments
        received will reduce the related receivable, and interest collections will
        be
        recorded as unrecognized gross profit on the balance sheet. The carrying
        values
        of these properties are included in real estate held for sale on the
        accompanying consolidated balance sheets.
 
 **ITEM
        3.**  **QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
 
 We
        are
        exposed to market risk, primarily from changes in interest rates. We do not
        deal
        in any foreign currencies and do not own any options, futures or other
        derivative instruments. We do not have a significant amount of
        debt.
 
 Most
        of
        our assets consist of investments in real estate loans, including those that
        are
        financed under Inter-creditor Agreements. At June 30, 2006, our aggregate
        investment in real estate loans was approximately $44.4 million, net of
        allowance, with a weighted average effective interest rate of 9.81%. We had
        no
        loans financed under inter-creditor agreements at June 30, 2006 which would
        be
        classified as assets under secured borrowing. Most of the real estate loans
        have
        an initial term of 12 months; the weighted average term of outstanding loans
        at
        June 30, 2006 was 18 months. All of the outstanding real estate loans at
        June
        30, 2006 were fixed rate loans. All of the real estate loans are held for
        investment purposes; none are held for sale. We intend to hold such real
        estate
        loans to maturity. None of the real estate loans have prepayment penalties
        and
        one has an exit fee.
 
 Market
        fluctuations in interest rates generally do not affect the carrying value
        of our
        investment in real estate loans. However, significant and sustained changes
        in
        interest rates could affect our operating results. If interest rates decline
        significantly, some of the borrowers could prepay their loans with the proceeds
        of a refinancing at lower interest rates. This would reduce our earnings
        and
        funds available for dividend distribution to stockholders. On the other hand,
        a
        significant increase in interest rates could result in a slowdown in real
        estate
        development activity which would reduce the demand for commercial real estate
        loans. As a result, we might encounter greater difficulty in identifying
        appropriate borrowers. We are not in a position to quantify the potential
        impact
        on our operating results from a material change in interest rates.
 
 The
        following table contains information about the investment in real estate
        loans
        held in our portfolio as of June 30, 2006. The presentation aggregates the
        investment in real estate loans by their maturity dates for maturities occurring
        in each of the years 2006 through 2009 and thereafter and separately aggregates
        the information for all maturities arising after 2010. The carrying values
        of
        these assets approximate their fair value as of June 30, 2006.
 
  -
            34
            -
 *Table
            of Contents*
  
 **Interest
                  Earning Assets**
                **Aggregated
                  by Maturity at June 30, 2006****Interest
                  Earning Assets**
              
              **2006**
              
              **2007**
              
              **2008**
              
              **2009**
              
              **Thereafter**
              
              **Total**Investments
                  In Real Estate Loans
              
              $
              28,600,000
              
              $
              29,240,000
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              57,840,000Weighted
                  Average Interest Rates
              
              
              9.98
              %
              
              9.66
              %
              
              --
              %
              
              --
              %
              
              --
              %
              
              9.81
              %
 
 At
        June
        30, 2006, we also had approximately $7.5 million invested in cash, cash
        equivalents, and certificates of deposit. Approximately 3% of our assets
        will be
        held in such accounts as a cash reserve; additional deposits in such accounts
        will be made as funds are received from investors and repayment of loans
        pending
        the deployment of such funds in new real estate loans. We believe that these
        financial assets do not give rise to significant interest rate risk due to
        their
        short-term nature.
 
 **ITEM
        4.**  **CONTROLS
        AND PROCEDURES**
 
 **Disclosure
        Controls and Procedures**
 
 Our
        Manager’s Chief Executive Officer and Chief Financial Officer have reviewed and
        evaluated the effectiveness of the design and operation of our Company’s
        disclosure controls and procedures (as defined in the Securities Exchange
        Act of
        1934 Rules 13a-15(e) and 15d-15(e)) as of June 30, 2006.
 
 Our
        Manager’s Chief Executive Officer and Chief Financial Officer concluded that our
        Company’s disclosure controls and procedures as of the end of the period covered
        by this report were not effective as a result of material weaknesses in internal
        controls as of June 30, 2006 as discussed below.
 
 **Management’s
        Report on Internal Control Over Financial Reporting**
 
 Management
        is responsible for establishing and maintaining adequate internal control
        over
        financial reporting for our Company, as such term is defined in Rules 13a−15(f)
        and 15d−15(f) under the Exchange Act. Our internal control over financial
        reporting is a process designed to provide reasonable assurance regarding
        the
        reliability of financial reporting and the preparation of financial statements
        for external reporting purposes in accordance with accounting principles
        generally accepted in the United States. Internal control over financial
        reporting includes those policies and procedures that: pertain to the
        maintenance of records that, in reasonable detail, accurately and fairly
        reflect
        the transactions and dispositions of the assets of our Company; provide
        reasonable assurance that transactions are recorded as necessary to permit
        preparation of financial statements in accordance with accounting principles
        generally accepted in the United States, and that receipts and expenditures
        of
        our Company are being made only in accordance with authorizations of management
        and directors of our Company; and provide reasonable assurance regarding
        prevention or timely detection of unauthorized acquisition, use or disposition
        of our Company’s assets that could have a material effect on our financial
        statements. Because of its inherent limitations, internal control over financial
        reporting may not prevent or detect misstatements. Also, projections of any
        evaluation of effectiveness to future periods are subject to the risk that
        controls may become inadequate because of changes in conditions, or that
        the
        degree of compliance with the policies or procedures may
        deteriorate.
 
 A
        material weakness is a control deficiency, or combination of control
        deficiencies, that results in more than a remote likelihood that a material
        misstatement of the annual or interim financial statements will not be prevented
        or detected. As of June 30, 2006, management identified the following material
        weaknesses in their assessment of the effectiveness of our internal control
        over
        financial reporting:
 
  -
            35
            -
 *Table
            of Contents*
  
 ·
            We
                did not adequately implement certain controls over investments in
                real
                estate loans, specifically relating to the computer database of
                investments in real estate loans which summarizes information used
                to
                prepare the related disclosures, including the classification of
                the types
                of loans, portfolio percentage, loan to value percentage, and the
                geographical location of the investment in real estate loans. We
                also
                identified errors in recording transactions specifically related
                to
                interest income from investment in real estate loans. These areas
                included
                logical access security controls to the computer database, and we
                have
                therefore identified a material weakness in our information technology
                general controls as of June 30, 2006. 
 **Remediation
        Plan**
 
 To
        remediate our material weakness over the computer database of investments
        in
        real estate loans, management has established and implemented controls, policies
        and procedures, which are being tested, within our information technology
        department that are intended to provide monitoring and management of the
        computer systems access rights. Such procedures provide for various levels
        of
        access by certain individuals as deemed appropriate by management. These
        procedures also provide for appropriate approvals for programming changes,
        along
        with supporting documentation of such approvals. Management has reviewed
        all
        individuals and their functions and duties within our information technology
        department to establish these access and approval controls. Management will
        also
        continue evaluating controls related to the recognition of interest income
        from
        investment in real estate loans to determine whether additional controls
        and
        procedures should be implemented.
 
 **Changes
        in Internal Control Over Financial Reporting**
 
 Our
        management has commenced with the remediation plan discussed above which
        includes establishing
        and implementing controls, policies and procedures within our information
        technology department that are intended to provide monitoring and management
        of
        the computer systems access rights. Additionally, our management has implemented
        controls and procedures related to the recognition of interest income from
        investment in real estate loans. These controls have been implemented and
        will
        be tested during our quarter ending September 30, 2006 to determine their
        effectiveness.
 
 Because
        of the inherent limitations in all control systems, no evaluation of controls
        can provide absolute assurance that all control issues within our Company
        have
        been or will be detected. Even effective internal control over financial
        reporting can only provide reasonable assurance with respect to financial
        statement preparation. Furthermore, because of changes in conditions, the
        effectiveness of internal control over financial reporting may vary over
        time.
        Our management, including our Chief Executive Officer and Chief Financial
        Officer, does not expect that our controls and procedures will prevent all
        errors.
 
 Notwithstanding
        the above, nothing has come to the attention of management which would cause
        management to believe that the material weaknesses noted above have resulted
        in
        material misstatements or errors in our financial statements as of June 30,
        2006, or for any prior periods.
 
 **PART
        II - OTHER INFORMATION**
 
 **ITEM
        1.**  **LEGAL
        PROCEEDINGS**
 
 Please
        refer to Note K *Legal
        Matters Involving the Manager* and Note
        L *Legal
        Matters Involving the Company* in Part
        I Item 1 *Financial
        Statements* of this
        Form 10-Q for information regarding our legal proceedings, which are
        incorporated herein by reference.
 
  -
            36
            -
 *Table
            of Contents*
  **ITEM
        1A.**  **RISK
        FACTORS**
 
 There
        have been no material changes to the risk factors disclosed in Item 1A - *Risk
        Factors* of the
        Company’s Transition Report on Form 10-K for the ten month transition period
        ended April 30, 2006 (the “Form 10-K”). The materialization of any risks and
        uncertainties identified in the Company’s Forward Looking Statements contained
        herein together with those previously disclosed in the Form 10-K or those
        that
        are presently unforeseen could result in significant adverse effects on the
        Company’s financial condition, results of operations and cash flows. See Part I,
        Item 2 - *Management’s
        Discussion and Analysis of Financial Condition and Results of Operations
        -
        Forward Looking Statements* in this
        Quarterly Report on Form 10-Q.
 
 **ITEM
        2.**  **UNREGISTERED
        SALES OF EQUITY AND USE OF PROCEEDS**
 
 None.
 
 **ITEM
        3.**  **DEFAULTS
        UPON SENIOR SECURITIES**
 
 None.
 
 **ITEM
        4.**  **SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 None.
 
 **ITEM
        5.**  **OTHER
        INFORMATION**
 
 None.
 
  -
            37
            -
 *Table
            of Contents*
  
 **ITEM
        6.**  **EXHIBITS**
 
 **EXHIBIT
        INDEX**
 
 **Exhibit
                  No.**
              
              **Description
                  of Exhibits**2.1(2)
              
              Agreement
                  and Plan of Merger between Vestin Fund I, LLC and the
                  Registrant3.1(2)
              
              Articles
                  of Incorporation of the Registrant3.2(2)
              
              Bylaws
                  of the Registrant3.3(2)
              
              Form
                  of Articles Supplementary of the Registrant4.1(2)
              
              Reference
                  is made to Exhibits 3.1, 3.2 and 3.34.2(3)
              
              Specimen
                  Common Stock Certificate4.3(2)
              
              Form
                  of Rights Certificate10.1(2)
              
              Form
                  of Management Agreement between Vestin Mortgage, Inc. and the
                  Registrant10.2(2)
              
              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 II, 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 II, 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 II, LLC and Royal Bank of America21.1(3)
              
              List
                  of subsidiaries of the Registrant31.1
              
              Section
                  302 Certification of Michael V.
                  Shustek31.2
              
              Section
                  302 Certification of John
                  Alderfer32
              
              Certification
                  Pursuant to U.S.C. 18 Section
                  135099.2R(4)
              
              Vestin
                  Realty Mortgage I, Inc. Code of Business Conduct and
                  Ethics
 
 (1)
              
              Incorporated
                  herein by reference to our Form S-4 Registration Statement filed
                  on May
                  27, 2005 (File No. 333-125347).(2)
              
              Incorporated
                  herein by reference to Post-Effective Amendment No. 3 to our Form
                  S-4
                  Registration Statement filed on January 4, 2006 (File No.
                  333-125347).(3)
              
              Incorporated
                  herein by reference to Post-Effective Amendment No. 4 to our Form
                  S-4
                  Registration Statement filed on January 31, 2006 (File No.
                  333-125347).(4)
              
              Incorporated
                  herein by reference to the Transition Report on Form 10-K for the
                  ten
                  month transition period ended April 30, 2006 filed on June 28,
                  2006 (File
                  No. 000-51892)
 
 
  -
            38
            -
 *Table
            of Contents*
  **SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the registrant has duly caused this report to be signed on its behalf
        by
        the undersigned thereunto duly authorized.
 
 **Vestin
                  Realty Mortgage I, Inc.**By:
              */s/
                  Michael V. Shustek*Michael
                  V. ShustekPresident
                  and Chief Executive OfficerDate:
              July
                  28, 2006
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the registrant and in
        the
        capacities and on the dates indicated.
 
 **Signature**
              
              **Capacity**
              
              **Date***/s/
                  Michael V. Shustek*
              
              President
                  and Chief Executive Officer and Director
              
              July
                  28, 2006Michael
                  V. Shustek
              
              (Principal
                  Executive Officer)*/s/
                  John W. Alderfer*
              
              Chief
                  Financial Officer and Director
              
              July
                  28, 2006John
                  W. Alderfer
              
              (Principal
                  Financial and Accounting Officer)*/s/
                  Robert J. Aalberts*
              
              Director
              
              July
                  28, 2006Robert
                  J. Aalberts*/s/
                  Fredrick J.**Zaffarese**Leavitt*
              
              Director
              
              July
                  28, 2006Fredrick
                  J.ZaffareseLeavitt*/s/
                  Roland M. Sansone*
              
              Director
              
              July
                  28, 2006Roland
                  M. Sansone
  -
            39
            -
 *Table
            of
            Contents*