**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-K**
 
 (Mark
        one)
 
 [X]
        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF
        1934
 
 For
        the
        fiscal year ended December 31, 2006
 
 Or
 [   ]
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT
        OF 1934
 
 For
        the
        transition period from ________________ to ________________
 
 Commission
        File Number 333-105017
 
 **VESTIN
                  FUND III, LLC**(Exact
                  name of registrant as specified in its
                  charter)
 
 NEVADA
              
              87-0693972(State
                  or Other Jurisdiction of
              
              (I.R.S.
                  EmployerIncorporation
                  or Organization)
              
              Identification
                  No.)
 
 
 8379
        WEST
        SUNSET ROAD, LAS VEGAS, NEVADA 89113
 (Address
        of principal executive offices) (Zip Code)
 
 Registrant’s
        telephone number, including area code 702.227.0965
 
 Securities
        registered pursuant to Section 12(b) of the Act:
 
 None
              
              None(Title
                  of each class)
              
              (Name
                  of each exchange on which
                  registered)
 
 Securities
        registered pursuant to Section 12(g) of the Act:
 
 None(Title
                  of class)
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.
 Yes
        [   ] No [X]
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Act.
 Yes
        [   ] No [X]
 
 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 if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K (Sec 229.405 of this chapter) is not contained herein, and
        will
        not be contained, to the best of the registrant’s knowledge, in definitive proxy
        or information statements incorporated by reference in Part III of this Form
        10-K or any amendment to this Form 10-K. [   ]
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
 
 Large
                  accelerated filer [   ]
              Accelerated
                  filer[   ]
              Non-accelerated
                  filer [X]
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Act).
 Yes
        [   ] No [X]
 
 State
        the
        aggregate market value of the voting and non-voting common equity held by
        non-affiliates computed by reference to the price at which the common equity
        was
        last sold, or the average bid and asked price of such common equity, as of
        the
        last business day of the registrant’s most recently completed second fiscal
        quarter. Not applicable.
 
 As
        of
        March 28, 2007, the Company had 2,653,601 Units outstanding.
 
 
 
  *Table
            of Contents*
   **TABLEOF
        CONTENTS**
 
 **Page**PART
                  IITEM
                  1.
              BUSINESS
              1ITEM
                  1A.
              RISK
                  FACTORS
              12ITEM
                  1B.
              UNRESOLVED
                  STAFF COMMENTS
              21ITEM
                  2.
              PROPERTIES
              21ITEM
                  3.
              LEGAL
                  PROCEEDINGS
              21ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS
              23PART
                  IIITEM
                  5.
              MARKET
                  FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
                  MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
              24ITEM
                  6.
              SELECTED
                  FINANCIAL DATA
              25ITEM
                  7.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
              26ITEM
                  7A.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK
              37ITEM
                  8.
              FINANCIAL
                  STATEMENTS AND SUPPLEMENTARY
                  DATA
              38ITEM
                  9.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE
              38ITEM
                  9A.
              CONTROLS
                  AND PROCEDURES
              39ITEM
                  9B.
              OTHER
                  INFORMATION
              40PART
                  IIIITEM
                  10.
              DIRECTORS,
                  EXECUTIVE OFFICERS AND CORPORATE
                  GOVERNANCE
              40ITEM
                  11.
              EXECUTIVE
                  COMPENSATION
              41ITEM
                  12.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT AND RELATED STOCKHOLDER MATTERS
              41ITEM
                  13.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND
                  DIRECTOR INDEPENDENCE
              42ITEM
                  14.
              PRINCIPAL
                  ACCOUNTING FEES AND SERVICES
              43PART
                  IVITEM
                  15.
              EXHIBITS,
                  FINANCIAL STATEMENT SCHEDULES
              43EXHIBIT
                  INDEX
              44SIGNATURES
              45CONSOLIDATED
                  BALANCE SHEETS
              F-3CONSOLIDATED
                  STATEMENTS OF INCOME
              F-4CONSOLIDATED
                  STATEMENTS OF MEMBERS’ EQUITY AND OTHER
                  COMPREHENSIVE INCOME
              F-5CONSOLIDATED
                  STATEMENTS OF CASH FLOWS
              F-6NOTES
                  TO THE CONSOLIDATED FINANCIAL
                  STATEMENTS
              F-8SUPPLEMENTARY
                  INFORMATION
              F-32
 
 
 
 
 *Table
            of Contents*
  
 **PARTI**
 
 
 **Note
        Regarding Forward-Looking Statements**
 
 This
        report and other written reports and oral statements made from time to time
        by
        us may contain forward-looking statements. Such forward-looking statements
        may
        be identified by the use of such words as “expects,” “plans,” “estimates,”
“intend,” “might,” “may,” “could,” “will,” “feel,” “forecasts,” “projects,”
“anticipates,” “believes” and words of similar expression. Forward-looking
        statements are likely to address such matters as our business strategy, future
        operating results, future sources of funding for real estate loans brokered
        by
        us, future economic conditions and pending litigation involving us. Some
        of the
        factors which could affect future results are set forth in the discussion
        under
“Management’s Discussion and Analysis of Financial Condition and Results of
        Operations — Factors Affecting Our Operating Results.”
 
 **ITEM** **1.**  **BUSINESS******
 
 **General**
 
 Vestin
        Fund III, LLC was organized in April 2003 as a Nevada limited liability company
        for the purpose of investing in real estate loans and income-producing real
        property. On March 5, 2007, a majority of our members approved the Third
        Amended
        and Restated Operating Agreement, which limits the Company’s investment
        objectives to investments in real estate loans. Prior to adopting this
        amendment, we also invested in revenue-generating commercial real estate.
        We
        sold our last real estate investment in November 2006. In this report, we
        refer
        to Vestin Fund III, LLC as “the Company”, “our Company”, the “Fund”, “we”, “us”,
        or “our”.
 
 We
        invest
        in loans secured by real estate through deeds of trust or mortgages (hereafter
        referred to collectively as “deeds of trust” and as defined in our Operating
        Agreement as “Mortgage Assets”). We commenced operations in February 2004. We
        will continue our operations until December 2023 unless dissolved prior thereto
        or extended by vote of the members under the provisions of our Operating
        Agreement.
 
 We
        are
        not a mutual fund or an investment company within the meaning of the Investment
        Company Act of 1940, nor are we subject to any regulation thereunder. As
        a
        company investing in real estate loans, investments in real estate, prior
        to
        March 5, 2007, and raising funds through our Distribution Reinvestment Plan,
        we
        are subject to the North American Securities Administration Act Mortgage
        Program
        Guidelines and Real Estate Guidelines (collectively, the “NASAA Guidelines”)
        promulgated by the state securities administrators.
 
 On
        November 7, 2003, our Registration Statement as filed with the United States
        Securities and Exchange Commission (SEC) became effective for the initial
        public
        offering of up to 10,000,000 units at $10 per unit (“unit”). On November 7,
        2005, we discontinued the offering of our units; however, members may continue
        to purchase additional Units through our Distribution Reinvestment Plan whereby
        the members’ distributions may be used to purchase additional units at the
        current value. As of December 31, 2006, we had sold approximately 3,087,564
        units, which includes 221,643 units purchased through our Distribution
        Reinvestment Plan.
 
 Our
        manager is Vestin Mortgage, Inc. (the “manager” or “Vestin Mortgage”), a Nevada
        corporation, which is a wholly owned subsidiary of Vestin Group, Inc. (“Vestin
        Group”), a Delaware corporation. Michael Shustek, the CEO and director of the
        manager wholly owns Vestin Group, Inc., which is engaged in asset management,
        real estate lending and other financial services through its subsidiaries.
        Our
        manager, prior to June 30, 2006, also operated as a licensed Nevada mortgage
        broker and was engaged in the business of brokerage, placement and servicing
        of
        commercial loans secured by real property. On July 1, 2006, the mortgage
        broker
        license was issued to an affiliated company, Vestin Originations, Inc. (“Vestin
        Originations”), which has continued the business of brokerage, placement and
        servicing of commercial real estate loans. Vestin Originations is a wholly
        owned
        subsidiary of Vestin Group.
 
  -
            1
            -
 *Table
            of Contents*
  Pursuant
        to our operating agreement, our manager shall implement our business strategies
        on a day-to-day basis, manage and provide services to us, and shall provide
        similar services to any of our subsidiaries. Without limiting the foregoing,
        our
        manager shall perform other services as may be required from time to time
        for
        management and other activities relating to our assets, as our manager shall
        deem appropriate under the particular circumstances. Consequently, our operating
        results are dependent upon our manager’s ability and performance in managing our
        operations and servicing our assets.
 
 Vestin
        Mortgage, Inc. is also the manager of Vestin Realty Mortgage I, Inc., as
        the
        successor by merger to Vestin Fund I, LLC, referred to as “VRM I,” Vestin Realty
        Mortgage II, Inc., as the successor by merger to Vestin Fund II, LLC, referred
        to as “VRM II,” and inVestin Nevada, Inc., referred to as “inVestin,” a company
        wholly owned by our manager’s CEO. These entities also invest in real estate
        loans.
 
 We
        now
        seek to invest substantially all of our assets in real estate loans. The
        allocation of our investments between real property, prior to March 5, 2007,
        and
        real estate loans was dependant upon the amounts available for investment
        and
        investment opportunities. The NASAA Guidelines require reserves of not less
        than
        1% of our offering proceeds. Approximately 3% of net proceeds we raised in
        our
        offering will be held as a working capital cash reserve.
 
 **Real
        Estate Program Objectives**  **(Prior
        to March 5, 2007)**
 
 Prior
        to
        March 5, 2007, we sought to invest in income-producing multifamily residential
        units, office, industrial, and retail properties, assisted living facilities
        and
        other income-producing real property. Such properties could include properties
        used for hotels and resorts, restaurants, parking lots, amusement parks or
        other
        leasehold properties. We intended to primarily lease the real property owned
        by
        us. We sought to hold our properties until such time as we believed it was
        the
        optimal time to enable us to capitalize on the potential for appreciation
        of our
        properties.
 
 A
        Special
        Meeting of our members was held on March 5, 2007 to vote on approval of the
        Third Amended and Restated Operating Agreement, which limits the Company’s
        investment objectives to investment in real estate loans. A majority of our
        members approved the Third Amended and Restated Operating
        Agreement.
 
 **Real
        Estate Loan Objectives**
 
 As
        of
        December 31, 2006, our loans were in the following states: Arizona, California,
        Nevada, Oklahoma, Oregon, Texas and Washington .
        The
        loans we invest in are selected for us by our manager from among loans
        originated by Vestin Originations or non-affiliated mortgage brokers. When
        Vestin Originations or a non-affiliated mortgage broker originates a loan
        for
        us, that entity identifies the borrower, processes the loan application,
        makes
        or invests in the loan and brokers or sells the loan to us. We believe that
        our
        loans are attractive to borrowers because of the expediency of our manager’s
        loan approval process, which takes about ten to twenty days.
 
 As
        a
        non-conventional lender, we are more willing to invest in real estate loans
        to
        borrowers that conventional lenders might not deem to be creditworthy. Because
        of our increased willingness to fund riskier loans, borrowers are generally
        willing to pay us an interest rate that is two to five points above the rates
        generally charged by conventional lenders. We invest a significant amount
        of our
        funds in loans in which the real property, held as collateral, is not generating
        any income to the borrower. The loans in which we invest are riskier because
        the
        borrower’s repayment depends on its ability to refinance the loan or develop the
        property so it can refinance the loan or sell the property.
 
 Our
        principal investment objectives are to:
 
 ·
            Produce
                revenues from the interest income on our real estate
                loans; 
 ·
            Provide
                cash distributions from the net income generated by our real estate
                loans; 
 -
            2
            -
 *Table
            of Contents*
 ·
            Preserve
                capital contributions; and 
 ·
            Reinvest,
                to the extent permissible, payments of principal and sales (net of
                expenses). 
 **Real
        Estate Loan Program Policies and Guidelines**
 
 Generally,
        the collateral on our real estate loans is the real property that the borrower
        is purchasing or developing with the funds that we make available. We sometimes
        refer to these real properties as the security properties. While we may invest
        in other types of loans, most of the loans in which we invest have been made
        to
        real estate developers.
 
 Our
        real
        estate investments are not insured or guaranteed by any government
        agency.
 
 Our
        manager continuously evaluates prospective investments, selects the loans
        in
        which we invest and makes all investment decisions on our behalf in its sole
        discretion. In evaluating prospective real estate loan investments, our manager
        considers such factors as the following:
 
 ·
            The
                ratio of the amount of the investment to the value of the property
                by
                which it is secured, or the loan-to-value
                ratio; 
 ·
            The
                potential for capital appreciation or depreciation of the property
                securing the investment; 
 ·
            Expected
                levels of rental and occupancy rates if
                applicable; 
 ·
            Potential
                for rental increases if applicable; 
 ·
            Current
                and projected revenues from the property if
                applicable; 
 ·
            The
                status and condition of the record title of the property securing
                the
                investment; 
 ·
            Geographic
                location of the property securing the investment;
                and 
 ·
            The
                financial condition of the borrowers and their principals, if any,
                who
                guarantee the loan. 
 Our
        manager may obtain our loans from an affiliated or non-affiliated mortgage
        broker who may solicit previous or new borrowers in those states where
        permissible. We may purchase existing loans that were originated by third
        party
        lenders and acquired by Vestin Originations to facilitate our purchase of
        the
        loans. Vestin Originations will sell the loans to us for no greater than
        the par
        value of the loan, not including its service fees and compensation.
 
 When
        selecting real estate loans for us, our manager adheres to the following
        guidelines, which are intended to control the quality of the collateral given
        for our loans:
 
 1. *Priority of Loans.* Generally,
        our assets are secured by first deeds of trust. First deeds of trust are
        loans
        secured by a full or divided interest in a first deed of trust secured by
        the
        property. Other loans (on the security property) that we invest in will not
        be
        junior to more than one other loan. As of December 31, 2006, approximately
        98.89% of the principal amount of our outstanding interest in loans was secured
        by first deeds of trust.
 
 2. *Loan-to-Value Ratio.* The
        amount of our loan combined with the outstanding debt secured by a senior
        loan
        on a security property generally does not exceed the following percentage
        of the
        appraised value of the security property at origination:
 
  -
            3
            -
 *Table
            of Contents*
  
 **Type
                  of Secured Property**
              **Loan-to-Value
                  Ratio**Residential
              75%Unimproved
                  Land
              60%
                   (of anticipated as-if developed value)Acquisition
                  and Development
              60%
                   (of anticipated as-if developed value)Commercial
                  Property
              75%
                   (of anticipated as-if developed value)Construction
              75%
                   (of anticipated post- developed value)Leasehold
                  Interest
              75%
                   (of value of leasehold
                  interest)
 
 We
        may
        deviate from these guidelines under certain circumstances. For example, our
        manager, in its discretion, may increase any of the above loan-to-value ratios
        if a given loan is supported by credit adequate to justify a higher
        loan-to-value ratio, including personal guarantees. Occasionally, our collateral
        may include personal property attached to the real property as well as real
        property. We do not have specific requirements with respect to the projected
        income or occupancy levels of a property securing our investment in a particular
        loan. These loan-to-value ratios will not apply to financing offered to the
        purchaser of any real estate acquired through foreclosure or to refinance
        an
        existing loan that is in default when it matures. In those cases, our manager,
        in its sole discretion, shall be free to accept any reasonable financing
        terms
        that it deems to be in our best interest. The target loan-to-value ratio
        for our
        loan portfolio as a whole is approximately 70%. As of December 31, 2006,
        our
        actual loan to value ratio for our loan portfolio as a whole was 65.06% on
        a
        weighted average basis.
 
 Loan
        to
        value ratios are based on appraisals that the manager receives at the time
        of
        loan underwriting and may not reflect subsequent changes in value estimates.
        Such appraisals, which may have been commissioned by the borrower and may
        precede the placement of the loan with us, 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.
 
 We
        or the
        borrower retain appraisers who are state certified or licensed appraisers
        and/or
        hold designations from one or more of the following organizations: the Federal
        National Mortgage Association, the Federal Home Loan Mortgage Corporation,
        the
        National Association of Review Appraisers, the Appraisal Institute, the National
        Society of Real Estate Appraisers, American Society of Real Estate Appraisers,
        or from among appraisers with other qualifications acceptable to Vestin
        Originations and/or our manager. However, appraisals are only estimates of
        value
        and cannot be relied on as measures of realizable value. An employee or agent
        of
        Vestin Originations and our manager will review each appraisal report and
        will
        conduct a physical inspection for each property. A physical inspection includes
        an assessment of the subject property, the adjacent properties and the
        neighborhood, but generally does not include entering any structures on the
        property.
 
 3. *Terms
        of Real Estate Loans.* Our
        loans
        as of December 31, 2006 had original terms of six months to twenty-four months,
        excluding approved extensions. Most of our loans are for an initial term
        of 12
        months. Generally, our original loan agreements permit extensions to the
        term of
        the loan 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.
 
  -
            4
            -
 *Table
            of Contents*
  As
        of
        December 31, 2006, all of our loans provided for payments of interest only
        with
        a “balloon” payment of principal payable in full at the end of the term. In
        addition, we invest in real estate loans that require borrowers to maintain
        interest reserves funded from the principal amount of the loan for a period
        of
        time. At December 31, 2006, we had approximately $12.3 million in investments
        in
        real estate loans that had interest reserves where the total outstanding
        principal due to our co-lenders and us was approximately $120.3 million.
        These
        loans had interest reserves of approximately $5.6 million, of which our portion
        was approximately $0.6 million. At December 31, 2005, we had approximately
        $3.9
        million in investments in real estate loans that had interest reserves where
        the
        total outstanding principal due to our co-lenders and us was approximately
        $53.2
        million. These loans had interest reserves of approximately $2.4 million,
        of
        which our portion was approximately $0.7 million.
 
 4. *Escrow
        Conditions.* Our
        loans
        will often be funded by us through an escrow account held by a title insurance
        company, subject to the following conditions:
 
 ·
            Borrowers
                will obtain title insurance coverage for all loans, providing title
                insurance in an amount at least equal to the principal amount of
                the loan.
                Title insurance insures only the validity and priority of our deed
                of
                trust, and does not insure us against loss by other causes, such
                as
                diminution in the value of the security
                property. 
 ·
            Borrowers
                will obtain liability insurance coverage for all
                loans. 
 ·
            Borrowers
                will obtain fire and casualty insurance for all loans secured by
                improved
                real property, covering us in an amount sufficient to cover the
                replacement cost of improvements. 
 ·
            All
                insurance policies, notes, deeds of trust or loans, escrow agreements,
                and
                any other loan documents for a particular transaction will cover
                us as a
                beneficiary. 
 5. *Purchase
        of Real Estate Investments from Affiliates.* We may
        acquire real estate loans from our affiliates, including our manager, if
        the
        loans were acquired to facilitate their acquisition by us, provided that
        such
        loan is purchased by us for a price not in excess of the par value of the
        loan
        or its fair market value, whichever is lower, plus allowable fees and expenses
        in accordance with applicable NASAA guidelines, but without the allowance
        of any
        other compensation for the loans. Except for the compensation paid to our
        manager, all income generated and expense associated with the loans so acquired
        shall be treated as belonging to us.
 
 6. *Note
        Hypothecation.* We
        may
        also acquire real estate loans secured by assignments of secured promissory
        notes. These real estate loans must satisfy our stated investment standards,
        including our loan-to-value ratios, and may not exceed 80% of the principal
        amount of the assigned note upon acquisition. For example, if the property
        securing a note we acquire is commercial property, the total amount of
        outstanding debts secured by the property must not exceed 75% of the appraised
        value of the property, and the real estate loan will not exceed 80% of the
        principal amount of the assigned note. For real estate loans secured by
        promissory notes, we will rely on the appraised value of the underlying
        property, as determined by an independent written appraisal that was conducted
        within the then-preceding twelve months. If an appraisal was not conducted
        within that period, then we will arrange for a new appraisal to be prepared
        for
        the property prior to acquisition of the loan.
 
 7. *Participation.* We
        participate in loans with other lenders, including affiliates as permitted
        by
        the NASAA Guidelines, by providing funds for or purchasing an undivided interest
        in a loan meeting our investment guidelines described above. Typically, we
        participate in loans if:
 
 ·
            We
                did not have sufficient funds to invest in an entire
                loan; 
 ·
            We
                are seeking to increase the diversification of our loan portfolio;
                or 
 ·
            A
                loan fits within our investment guidelines, however it would constitute
                more than 20% of our anticipated capital contribution or otherwise
                be
                disproportionately large given our then existing
                portfolio. 
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            5
            -
 *Table
            of Contents*
  Loans
        in
        which unaffiliated investors have participated through inter-creditor agreements
        (“Inter-creditor Agreements”) are accounted for as secured borrowings in
        accordance with Statement of Financial Accounting Standards (“FAS”) 140 - *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities* (“FAS
        140”). The Inter-creditor Agreements provide us additional funding sources for
        real estate loans whereby an unaffiliated investor (the “Investor”) may
        participate on a non-pari passu basis in certain real estate loans with us
        and/or VRM I and/or VRM II (collectively, the “Lead Lenders”). In the event of
        borrower non- performance, the Inter-creditor Agreements generally provide
        that
        the Lead Lenders must repay the Investor’s loan amount either by (i) continuing
        to remit to the Investor the interest due on the participated loan amount;
        (ii)
        substituting an alternative loan acceptable to the Investor; or (iii)
        repurchasing the participation from the Investor for the outstanding balance
        plus accrued interest.
 
 An
        Investor may participate in certain loans with the Lead Lenders through
        participation agreements. In the event of borrower non-performance, the
        participation agreement may allow the Investor to be repaid up to the amount
        of
        the Investor’s investment prior to the Lead Lenders being repaid.
 
 As
        of
        December 31, 2006, 100% of our loans were loans in which we participated
        with
        other lenders, most of whom are our affiliates.
 
 We
        will
        not give our manager, Vestin Group or any of their affiliates any consideration
        similar to rebates or give-backs or enter into reciprocal arrangements with
        our
        manager or its affiliates that might be entered into in lieu of
        participations.
 
 8. *Diversification.* The
        NASAA
        Guidelines provide that we neither invest in nor make real estate loans on
        any
        one property, which would exceed in the aggregate, an amount equal to 20%
        of our
        capital, nor may we invest in or make real estate loans to or from any one
        borrower, which would exceed, in the aggregate, an amount greater than 20%
        of
        our capital, provided we are fully funded.
 
 9. *Reserve
        Fund.* Although
        the NASAA Guidelines require reserves of not less than 1% of the offering
        proceeds, we have established contingency working capital reserves of
        approximately 3% of our capital to cover our unexpected cash needs.
 
 10. *Credit
        Evaluations.* When
        reviewing a loan proposal, our manager determines whether a borrower has
        sufficient equity in the security property. Our manager may also consider
        the
        income level and creditworthiness of a borrower to determine its ability
        to
        repay the real estate loan.
 
 11. *Sale
        of Real Estate Loan Investments.* Although
        our manager has no plans to do so, our manager may sell our real estate loans
        or
        interest in our loans to either affiliates or non-affiliated parties when
        our
        manager believes that it is advantageous to us to do so. However, we do not
        expect that the loans will be marketable or that a secondary market will
        ever
        develop for them. We may sell our real estate loans to our manager under
        limited
        circumstances pursuant to the NASAA Guidelines.
 
 **Real
        Estate Loans to Affiliates**
 
 We
        will
        not invest in real estate loans made to our manager, Vestin Group or any
        of our
        affiliates. However, we may acquire an investment in a real estate loan payable
        by our manager when our manager has assumed the obligations of the borrower
        under that loan, through a foreclosure on the property.
 
 **Purchase
        of Loans from our manager and Its Affiliates**
 
 In
        addition to those loans our manager selects for us, we purchase loans that
        were
        originated by Vestin Originations or other parties and first held for Vestin
        Originations’ own portfolio, as long as the loan is not in default and otherwise
        satisfies all of our lending criteria. However, we will not acquire a loan
        from
        or sell a loan to a real estate program in which our manager or an affiliate
        has
        an interest except in compliance with NASAA Guidelines.
 
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            6
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  **Types
        of Loans We Invest In**
 
 We
        primarily invest in loans that are secured by first or second trust deeds
        on
        real property. Such loans fall into the following categories: raw and unimproved
        land, acquisition and development, construction, commercial and residential
        loans. The following discussion sets forth certain guidelines our manager
        intends to follow in allocating our investments among the various types of
        loans. Our manager, however, may change these guidelines at its discretion,
        subject to the terms of our Operating Agreement. Actual investments will
        be
        determined by our manager pursuant to the terms of the Operating Agreement,
        and
        the actual percentages invested among the various loan categories may vary
        from
        the guidelines below.
 
 **Raw
        and Unimproved Land Loans**
 
 Generally,
        15% to 25% of the loans invested in by us may be loans made for the purchase
        or
        development of raw, unimproved land. Generally, we determine whether to invest
        in these loans based upon the appraised value of the property and the borrower’s
        actual capital investment in the property. We will generally invest in loans
        for
        up to 60% of the as-if developed appraised value of the property and we
        generally require that the borrower has invested in the property actual capital
        expenditures of at least 25% of the property’s value. As-if developed values on
        raw and unimproved land 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 of December 31, 2006, approximately 34.73% of our loans were in this
        category.
 
 **Acquisition
        and Development Loans**
 
 Generally,
        10% to 25% of the loans invested in by us may be acquisition and development
        loans. Such loans enable borrowers to acquire and/or complete the basic
        infrastructure and development of their property prior to the construction
        of
        buildings or structures. Such development may include installing utilities,
        sewers, water pipes, and/or streets. We will generally invest in loans with
        a
        face value of up to 60% of the appraised value of the property. Loan to value
        ratios on acquisition and development loans are calculated using as-if developed
        appraisals. Such appraisals have the same valuation limitations as raw and
        unimproved land loans, described above. As of December 31, 2006, approximately
        12.59% of our loans were in this category.
 
 **Construction
        Loans**
 
 Generally,
        10% to 70% of our loans may be construction loans. Such loans provide funds
        for
        the construction of one or more structures on developed land. Funds under
        this
        type of loan will generally not be forwarded to the borrower until work in
        the
        previous phase of the project has been completed and an independent inspector
        has verified certain aspects of the construction and its costs. We will
        typically require material and labor lien releases by the borrower per completed
        phase of the project. We will review the appraisal of the value of the property
        and proposed improvements, and will generally finance up to 75% of the appraised
        value of the property and proposed improvements. Such appraisals have the
        same
        valuation limitations as raw and unimproved land loans, described above.
        As of
        December 31, 2006, approximately 21.58% of our loans were in this
        category.
 
 **Commercial
        Property Loans**
 
 Generally,
        20% to 50% of the loans we invest in may be commercial property loans. Such
        loans provide funds to allow commercial borrowers to acquire income-producing
        property or to make improvements or renovations to the property in order
        to
        increase the net operating income of the property so that it may qualify
        for
        institutional refinancing. Generally, we review the property appraisal and
        generally invest in loans for up to 75% of such appraised value of the property.
        As of December 31, 2006, approximately 31.10% of our loans were in this
        category.
 
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            7
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  **Residential
        Loans**
 
 A
        small
        percentage of the loans invested in by us may be residential loans. Such
        loans
        facilitate the purchase or refinance of one to four family residential property
        units provided the borrower uses one of the units on the property as such
        borrower’s principal residence. We will generally invest in loans for up to 75%
        of the value of the property. As of December 31, 2006, we did not have any
        loans
        in this category.
 
 **Collateral**
 
 The
        types
        of collateral that will secure the loans include first deeds of trust, second
        deeds of trust or a leasehold interest.
 
 **First
        Deed of Trust**
 
 Most
        of
        our loans are secured by first deeds of trust. Thus as a lender, we will
        have
        rights as a first priority lender of the collateralized property. As of December
        31, 2006, approximately 98.89% of our loans were secured by first deeds of
        trust.
 
 **Second
        Deed of Trust**
 
 Up
        to 10%
        of our loans may be secured by second deeds of trust. In a second priority
        loan,
        the rights of the lender (such as the right to receive payment on foreclosure)
        will be subject to the rights of the first priority lender. In a wraparound
        loan, the lender’s rights will be comparably subject to the rights of a first
        priority lender, but the aggregate indebtedness evidenced by the loan
        documentation will be the first priority loan plus the new funds the lender
        invests. The lender would receive all payments from the borrower and forward
        to
        the senior lender its portion of the payments the lender receives. As of
        December 31, 2006, approximately 1.11% of our loans were secured by a second
        deed of trust.
 
 **Leasehold
        Interest**
 
 Up
        to 20%
        of the loans we invest in may be in loans where the collateral is an interest
        in
        a lease. As of December 31, 2006, we did not have any loans secured by a
        leasehold interest.
 
 **Prepayment
        Penalties and Exit Fees**
 
 Generally,
        the loans we invest in will not contain prepayment penalties but may contain
        exit fees. If our loans are at a high rate of interest in a market of falling
        interest rates, the failure to have a prepayment penalty provision or exit
        fee
        in the loan allows the borrower to refinance the loan at a lower rate of
        interest, thus providing a lower yield to us on the reinvestment of the
        prepayment proceeds. However, these loans will usually be written with
        relatively high minimum interest rates, which we would expect to minimize
        the
        risk of lower yields. As of December 31, 2006, none of our loans had a
        prepayment penalty and nine of our loans had an exit fee.
 
 **Extensions
        to Term of Loan**
 
 Our
        original loan agreements generally permit extension to the term of the loan
        by
        mutual consent. Such extension is 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,
        we
        only grant 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. As of December 31, 2006, approximately 22%
        of our
        loans had received an extension to terms of the loan.
 
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            8
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  **Interest
        Reserves**
 
 We
        may
        invest in loans that include a commitment for an interest reserve, which
        is
        usually established at loan closing. The interest reserve may be advanced
        by us
        or other lenders with the amount of the borrower’s indebtedness increased by the
        amount of such advances. At December 31, 2006, we had approximately $12.3
        million in investments in real estate loans that had interest reserves where
        the
        total outstanding principal due to our co-lenders and us was approximately
        $120.3 million. These loans had interest reserves of approximately $5.6 million,
        of which our portion was approximately $0.6 million.
 
 **Balloon
        Payment**
 
 As
        of
        December 31, 2006, all of the loans we invest in or purchase will require
        the
        borrower to make a “balloon payment” on the principal amount upon maturity of
        the loan. There are no specific criteria used in evaluating the credit quality
        of borrowers for real estate loans requiring balloon payments. Furthermore,
        a
        substantial period of time may elapse between the review of the financial
        statements of the borrower and the date when the balloon payment is due.
        As a
        result, there is no assurance that a borrower will have sufficient resources
        to
        make a balloon payment when due. To the extent that a borrower has an obligation
        to pay real estate loan principal in a large lump sum payment, its ability
        to
        repay the loan may be dependent upon its ability to sell the property, obtain
        suitable refinancing or otherwise raise a substantial amount of cash. As
        a
        result, these loans can involve a higher risk of default than loans where
        the
        principal is paid at the same time as the interest payments.
 
 **Repayment
        of Loans on Sale of Properties**
 
 We
        may
        require a borrower to repay a real estate loan upon the sale of the property
        rather than allow the buyer to assume the existing loan. We will require
        repayment if we determine that repayment appears to be advantageous to us
        based
        upon then-current interest rates, the length of time that the loan has been
        held
        by us, the creditworthiness of the buyer and our objectives. We will either
        invest our net proceeds from any capital transaction in new real estate loans
        or
        hold the net proceeds as cash or distribute them to our members. These net
        proceeds will also include the principal of a loan deemed to be repaid for
        tax
        purposes as a result of the nature of a loan modification or loan extension.
        Our
        Operating Agreement provides that whether we choose to distribute the proceeds
        or reinvest them, members will be deemed to have received a distribution
        of
        capital and re-contributed the same amount to us. Capital transactions include
        payments of principal, foreclosures, and prepayments of real estate loans,
        to
        the extent classified as a return of capital under the Internal Revenue Code,
        and any other disposition of a real estate loan or property.
 
 **Variable
        Rate Loans**
 
 Occasionally
        we may acquire variable rate loans. Variable rate loans originated by Vestin
        Originations may use as indices the one and five year Treasury Constant Maturity
        Index, the Prime Rate Index and the Monthly Weighted Average Cost of Funds
        Index
        for Eleventh District Savings Institutions (Federal Home Loan Bank Board).
        As of
        December 31, 2006, all of the loans in the real estate loans portfolio were
        fixed rate loans, with the exception of one loan with a variable interest
        rate.
        This loan has a term of 18 months, with a maturity date of December 30, 2007
        and
        a balance of $18.0 million, of which our portion was approximately $1.2 million
        as of December 31, 2006. The interest rate on this loan started at 10.5%
        and
        increases every six months until it reaches the maximum interest rate of
        11.5%.
 
 It
        is
        possible that the interest rate index used in a variable rate loan will rise
        (or
        fall) more slowly than the interest rate of other loan investments available
        to
        us. Our manager and Vestin Originations attempt to minimize this interest
        rate
        differential by tying variable rate loans to indices that are sensitive to
        fluctuations in market rates. Additionally, most variable rate loans originated
        by Vestin Originations contain provisions under which the interest rate cannot
        fall below the initial rate.
 
 Variable
        rate loans generally have interest rate caps. For these loans, there is the
        risk
        that the market rate may exceed the interest cap rate.
 
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            9
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  **Borrowing
        For Real Estate Loans**
 
 We
        may
        incur indebtedness:
 
 ·
            To
                finance our investments in real estate
                loans, 
 ·
            To
                prevent a default under real estate loans that are senior to our
                real
                estate loans, 
 ·
            To
                discharge senior real estate loans if this becomes necessary to protect
                our investment in real estate loans, or 
 ·
            To
                operate or develop a property that we acquired under a defaulted
                loan. 
 Our
        indebtedness will not exceed 70% of the fair market value of our real estate
        loans. This indebtedness may be with recourse to our assets.
 
 In
        addition, we may enter into structured arrangements with other lenders in
        order
        to provide them with a senior position in real estate loans that we might
        jointly fund. For example, we might establish a wholly owned special purpose
        corporation that would borrow funds from an institutional lender under an
        arrangement where the resulting real estate loans would be assigned to a
        trust,
        and the trust would issue a senior certificate to the institutional lender
        and a
        junior certificate to the special purpose corporation. This would assure
        the
        institutional lender of repayment in full prior to our receipt of any repayment
        on the jointly funded real estate loans.
 
 **No
        Trust or Investment Company Activities**
 
 We
        have
        not qualified as a real estate investment trust under the Internal Revenue
        Code,
        and therefore we are not subject to the restrictions on its activities that
        are
        imposed on real estate investment trusts. We conduct our business so that
        we are
        not an “investment company” within the meaning of the Investment Company Act of
        1940. We also intend to conduct our business so that we are not to be deemed
        a
“dealer” in real estate loans for federal income tax purposes.
 
 **Various
        Other Policies and Procedures**
 
 Without
        approval of a majority of the members, we will not:
 
 ·
            Issue
                securities senior to the units or issue any units or other securities
                for
                other than cash; 
 ·
            Invest
                in the securities of other issuers for the purpose of exercising
                control,
                except when exercising our rights as a secured
                lender; 
 ·
            Underwrite
                securities of other issuers; 
 ·
            Discontinue
                providing our members with the reports described in our
                prospectus; 
 ·
            Offer
                securities in exchange for property; or 
 ·
            Change
                the nature of our business or our investment
                policies. 
 **Competition
        and General Economic Conditions**
 
 Generally,
        real estate developers depend upon the timely completion of a project to
        obtain
        a competitive advantage when selling their properties. We have sought to
        attract
        real estate developers by offering expedited loan processing, which generally
        provides quick loan approval and funding of a loan. As a result, we have
        established a market niche as a non-conventional real estate
        lender.
 
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            10
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  We
        consider our direct competitors to be the providers of real estate loans,
        that
        is non-conventional lenders who offer short-term, equity-based loans on an
        expedited basis for higher fees and rates than those charged by conventional
        lenders. In addition, we compete with conventional lenders such as commercial
        banks, insurance companies, mortgage brokers, pension funds and other
        institutional lenders. Many of the companies against which we compete have
        substantially greater financial, technical and other resources than either
        our
        company or our manager. Competition in our market niche depends upon a number
        of
        factors, including price and interest rates of the loan, speed of loan
        processing, cost of capital, reliability, quality of service and support
        services.
 
 **Regulation**
 
 We
        are
        managed by Vestin Mortgage pursuant to the terms and conditions of our Operating
        Agreement. Vestin Originations, an affiliated of Vestin Mortgage, operates
        as a
        mortgage broker and is subject to extensive regulation by federal, state
        and
        local laws and governmental authorities. Vestin Originations conducts its
        real
        estate loan business under a license issued by the State of Nevada Mortgage
        Lending Division. Under applicable Nevada law, the division has broad
        discretionary authority over Vestin Originations’ activities, including the
        authority to conduct periodic regulatory audits of all aspects of Vestin
        Originations’ operations.
 
 We
        and
        Vestin Originations are also subject to the Equal Credit Opportunity Act
        of
        1974, which prohibits creditors from discriminating against loan applicants
        on
        the basis of race, color, sex, age or marital status, and the Fair Credit
        Reporting Act of 1970, which requires lenders to supply applicants with the
        name
        and address of the reporting agency if the applicant is denied credit. We
        are
        also subject to various other federal and state securities laws regulating
        the
        issuance and sale of securities, as well as the Employee Retirement Income
        Security Act of 1974.
 
 The
        NASAA
        Guidelines have been adopted by various state agencies charged with protecting
        the interest of the investors. Administrative fees, loan fees, and other
        compensation paid to our manager and its affiliates would be generally limited
        by the NASAA Guidelines. These guidelines also include certain investment
        procedures and criteria, which are required for new loan
        investments.
 
 Because
        our business is regulated, the laws, rules and regulations applicable to
        us are
        subject to regular modification and change. There can be no assurance that
        laws,
        rules or regulations will not be adopted in the future that could make
        compliance much more difficult or expensive, restrict our ability to broker
        or
        service loans, further limit or restrict the amount of commissions, interest
        and
        other charges earned on loans brokered by us, or otherwise adversely affect
        our
        business or prospects.
 
 **Policies
        on Limitation on Investments**
 
 We
        will
        not invest in other limited partnerships except as permitted under our Operating
        Agreement and the NASAA Guidelines. We will not invest in limited partnership
        interests of any other limited partnership of which our manager serves as
        a
        managing or general partner unless our manager does not receive duplicate
        fees
        or compensation beyond what is permissible by the NASAA Guidelines.
 
 We
        will
        not engage in the following:
 
 ·
            Issue
                senior securities; 
 ·
            Acquire
                property for membership interests; 
 ·
            Issue
                any units after termination of this Offering, except for the reinvestment
                plan offered to our members, or issue units in exchange for
                property; 
 ·
            Underwrite
                securities of other issuers; 
 ·
            Make
                loans to our manager or its affiliates. 
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            11
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 *Table
            of Contents*
  We
        do not
        intend to become an investment company under the Investment Company Act of
        1940.
        We will only repurchase our securities in response to a request for redemption
        pursuant to our Operating Agreement.
 
 **Employees**
 
 We
        have
        no employees. Our manager (Vestin Mortgage), Vestin Originations and their
        parent company, Vestin Group, Inc., have provided and will continue to provide
        all of the employees necessary for our operations. As of December 31, 2006,
        those entities had a total of 23 full-time and no part-time employees. All
        employees are at-will employees and none are covered by collective bargaining
        agreements, except John Alderfer our manager’s prior CFO. Mr. Alderfer is a
        party to an employment, non-competition and confidentiality contract with
        Vestin
        Group, Inc., the parent company of our manager, through December 31,
        2008.
 
 **Available
        Information**
 
 Our
        Internet website address is http://www.vestinmortgage.com We make
        available free of charge through http://www.vestinmortgage.com our
        Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
        on
        Form 8-K and all amendments to those reports, as soon as reasonably practical,
        after such material is electronically filed with or furnished to the United
        States Securities and Exchange Commission (“SEC”). Information contained on our
        website does not constitute a part of this Report on Form 10-K.
 
 **ITEM
        1A.**  **RISK
        FACTORS**
 
 In
        considering our future performance and any forward-looking statements made
        in
        this report, the material risks described below should be considered carefully.
        These factors should be considered in conjunction with the other information
        included elsewhere in this report.
 
 **INVESTMENT
        RISKS**
 
 **Units
        lack liquidity and marketability.**
 
 There
        is
        no public trading market for units, and members cannot freely sell or transfer
        units or use them as collateral for a loan. Currently, we do not intend to
        list
        the units on any national exchange or on Nasdaq. Our Operating Agreement
        restricts the transfer of units so that we may avoid being classified as
        a
“publicly traded partnership” under Section 7704 of the Internal Revenue Code.
        If we were classified as a publicly traded partnership taxable as a corporation,
        the taxable income derived from our operations would be subject to the double
        tax system applicable to corporations and shareholders for federal income
        tax
        purposes (i.e., the taxable income would be subject to tax at the entity
        level
        at regular corporate tax rates and members would be subject to tax at
        distribution or capital gain rates on our share of our taxable income to
        the
        extent we distribute). As a result of this entity level tax, cash available
        for
        distribution to unit holders would be significantly reduced which in turn
        would
        result in a significant reduction in the value of members’ units. In order to
        attempt to avoid these adverse income tax consequences, members may not sell
        or
        assign their units and will not be entitled to have their units redeemed
        without
        the consent of our manager. Our manager will withhold its consent to any
        sale,
        assignment or redemption of units to the extent necessary to prohibit transfers
        that could cause us to be classified as a publicly traded partnership. Further,
        the resale of units may be restricted by state securities laws.
 
 **Members
        have limited ability to have units redeemed.**
 
 Members
        have a limited ability to have their units redeemed by us. Requests by members
        for redemptions are honored in the order in which they are received by the
        manager. The significant limitations on the ability to have units redeemed
        are
        the following:
 
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 There is no reserve fund for redemptions.  Redemption payments are made only to the extent we have
          available cash from proceeds of repayments of principal on real estate
          loans
          and capital contributions; and the redemption would not impair the capital
          or
          operation of the Fund.  Accordingly, a significant amount of redemption
          requests may delay the payment of subsequent redemptions.  The total amount withdrawn by all members during any
          calendar
          year cannot exceed 10% of the amount of capital accounts of all the members
          with a yearly limit of $100,000 per member subject to the manager’s discretion
          to allow a greater amount.  We will only make redemption payments once a quarter. Because
        a
        substantial portion of our loans are made on an “interest only” basis, we will
        not receive proceeds from the repayment of principal as frequently as we
        would
        with loans where the principal is repaid in periodic installments. To help
        permit redemptions, we will not refinance or invest in new loans using payments
        of loan principal by borrowers or new invested capital of members unless
        we have
        sufficient funds to cover permitted withdrawals.
 
 **Any
        borrowing by us will increase members risk and may reduce the amount we have
        available to distribute.**
 
 We
        anticipate that we may borrow funds to expand our capacity to invest in real
        estate loans. Our total indebtedness shall not exceed 70% of the aggregate
        fair
        market value of our assets. Any such borrowings will require us to carefully
        manage our cost of funds. No assurance can be given that we will be successful
        in this effort. Should we be unable to repay the indebtedness and make the
        interest payments on the loans, the lender will likely declare us in default
        and
        require that we repay all amounts owing under the loan facility. Even if
        we are
        repaying the indebtedness in a timely manner, interest payments owing on
        the
        borrowed funds may reduce our income and the distributions members
        receive.
 
 We
        may
        borrow funds from several sources, and the terms of any indebtedness we incur
        may vary. However, some lenders may require as a condition of making a loan
        to
        us that the lender will receive a priority on loan repayments received by
        us. As
        a result, if we do not collect 100% on our investments, the first dollars
        may go
        to our lenders and we may incur a loss, which will result in a decrease of
        the
        amount available for distribution. In addition, we may enter into securitization
        arrangements in order to raise additional funds. Such arrangements could
        increase our leverage and adversely affect our cash flow and our ability
        to make
        distributions.
 
 During
        October 2006, we, our manager, Vestin Origination, Inc., VRM I and VRM II
        entered into an intercreditor agreement with an unrelated third party related
        to
        the funding of a construction real estate loan. (See exhibit 10.10 Intercreditor
        Agreement under the Exhibit Index included in Part IV, Item 15 Exhibits and
        Financial Statement Schedules of this Report Form 10-K). The secured borrowing
        will be recognized pro rata between us, VRM I and VRM II for the amount each
        entity has funded for the loan. As of December 31, 2006, approximately $24.3
        million has been funded on this loan, of which our portion was approximately
        $1.4 million. As of December 31, 2006, this secured borrowing totaled
        approximately $18.5 million, of which our portion was approximately $4.4
        million. In the event VRM I and VRM II were unable to pay their pro rata
        share
        of the secured borrowing, we would be liable for the full outstanding balance.
        As of December
        31, 2005, we had $527,000 in funds being used under Inter-creditor
        Agreements.
 
 Lenders
        may require us to enter into restrictive covenants that may have an adverse
        effect on our operations. **** In
        connection with obtaining certain financing, a lender could impose restrictions
        on us that affect our ability to incur additional debt and our distribution
        and
        operating policies.
 
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  Increases
        in interest rates could increase the amount of our debt payments and adversely
        affect our ability to pay distributions to our members. **** In
        addition, if rising interest rates cause us to need additional capital to
        repay
        indebtedness in accordance with its terms or otherwise, we would be required
        to
        liquidate one or more of our investments at times, which may not permit
        realization of the maximum return on such investments.
 
 **RISKS
        OF THE MORTGAGE LENDING BUSINESS**
 
 **Defaults
        on our real estate loans will decrease our revenues and members’
distributions.**
 
 We
        are in
        the business of investing in real estate loans and, as such, we are subject
        to
        risk of defaults by borrowers. To date, we have not seen an increase in defaults
        on commercial mortgages comparable to the recent increase in defaults on
        residential mortgages experienced by certain residential mortgage lenders.
        However, a significant decline in real estate values or a general tightening
        of
        credit for real estate lending may ultimately impact the commercial mortgage
        sector in which we operate. Any failure of a borrower to repay loans or interest
        on loans will reduce our revenues and members’ distributions and the value of
        members’ units.
 
 In
        addition, foreclosures on defaulted loans create additional risks that may
        adversely affect our operating results. These risks include:
 
 ·
            We
                may incur substantial legal fees and court costs in acquiring a mortgaged
                property through a foreclosure sale and/or bankruptcy
                proceedings. 
 ·
            During
                the period of time when a defaulted loan is the subject of foreclosure
                proceedings, it is likely that we will earn less, if any, income
                from such
                loans, thereby reducing our earnings. 
 ·
            Properties
                foreclosed upon may not generate sufficient income from operations
                to meet
                expenses, such as property taxes, maintenance costs, real estate
                loan
                payments, insurance cost and related
                charges. 
 ·
            Operation
                of foreclosed properties may require us to spend substantial funds
                for an
                extended period until we are able to find a suitable
                buyer. 
 ·
            We
                incur liability risks in owning and operating real property such
                as
                possible liability for injury to persons and property or for the
                cost
                involved in cleaning up any contamination by materials hazardous
                to the
                environment. 
 ·
            Proceeds
                from the sale of foreclosed property may not generate full repayment
                of
                our loans and, in connection with such sale, we may be required to
                provide
                seller financing and incur the risk that the buyer may default on
                such
                financing. 
 **The
        value of our real estate security may be insufficient.**
 
 We
        depend
        upon our real estate security to protect us on the loans that we make. We
        depend
        upon the skill of independent appraisers to value the security underlying
        our
        loans. However, notwithstanding the experience of the appraisers, they may
        make
        mistakes, or the value of the real estate may decrease due to subsequent
        events.
        Our appraisals are generally dated within 12 months of the date of loan
        origination and may have been commissioned by the borrower. Therefore, the
        appraisals may not reflect a decrease in the value of the real estate due
        to
        events subsequent to the date of the appraisals. In addition, most of the
        appraisals will be prepared on an “as if-developed basis,” which approximates
        the post-construction value of the collateralized property assuming that
        such
        property is developed. As if-developed values on new 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. If the loan goes into default prior to completion of the project,
        the
        market value of the property may be substantially less than the appraised
        value.
        As a result, there may be less security than anticipated at the time the
        loan
        was originally made. If there is less security and a default occurs, we may
        not
        recover the full amount of our loan, thus reducing the amount of funds available
        to distribute.
 
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  **We
        may invest in unimproved land loans that do not generate income.**
 
 We
        may
        invest up to 25%, of our total real estate loan assets in loans to purchase
        or
        develop raw, unimproved land. Generally, we will determine whether to invest
        in
        these loans based upon the appraised value of the property and the borrower’s
        actual capital investment in the property. We intend to invest in loans with
        a
        face value of up to 60% of the as-if developed appraised value of the property
        and we will usually require that the borrower have invested in the property
        actual capital expenditures of at least 25% of the property’s value. As-if
        developed values on raw and unimproved land loans often dramatically exceed
        the
        immediate sales value and may include anticipated zoning changes, selection
        of a
        purchaser against multiple alternatives, and successful development by the
        purchaser; upon which development is dependent on availability of financing.
        These loans are riskier because the property is not capable of generating
        any
        income, as compared to a commercial property.
 
 **We
        may invest in acquisition and development loans that do not generate
        income.**
 
 We
        may
        invest up to 25% of our total real estate loan assets in acquisition and
        development loans. These loans enable borrowers to acquire and/or complete
        the
        basic infrastructure and development of their property prior to the construction
        of buildings or structures. Such development may include installing utilities,
        sewers, water pipes, and/or streets. Generally, we may invest in loans with
        a
        face value of up to 60% of the as-if developed appraised value of the property.
        Such appraisals have the same valuation limitations as raw and unimproved
        land
        loans, described above.
 
 **We
        may invest in construction loans that do not generate
        income.**
 
 We
        may
        invest up to 70% of our total real estate loan assets in construction loans.
        These are loans generally made to real estate developers to fund the
        construction of one or more buildings on real property. Funds under this
        type of
        loan will generally not be forwarded to the borrower until work in the previous
        phase of the project has been completed and an independent inspector has
        verified certain aspects of the construction and its costs. We will typically
        require material and labor lien releases by the borrower per completed phase
        of
        the project. We will review the appraised value of the property and proposed
        improvements, and will arrange loans for up to 75% of the as-if developed
        appraised value. Such appraisals have the same valuation limitations as raw
        and
        unimproved land loans, described above. These loans are riskier than loans
        secured by income producing properties because during construction the borrower
        does not receive income from the property to make payments on the
        loan.
 
 **Our
        investments in commercial property loans may not yield the anticipated increase
        in value and income.**
 
 We
        expect
        to invest up to 50% of our total real estate loan assets in commercial property
        loans. These loans provide funds to allow commercial borrowers to acquire
        income-producing property or to improve or renovate property to increase
        the
        value or net operating income of the property so that it may qualify for
        institutional refinancing. Bridge loans are a subcategory of commercial loans
        in
        which we provide interim financing to enable commercial borrowers to qualify
        for
        permanent refinancing. We will review the appraised value of the property
        and
        will invest in loans for up to 75% of such appraised value. To the extent
        such
        loans include renovations, appraisals may include as-if developed valuations
        with the limitations described above. These loans are riskier because there
        is
        no assurance that the commercial borrower will qualify for the refinancing
        or
        that the improvements will yield the anticipated increase in value and
        income.
 
 **We
        may invest in residential loans.**
 
 We
        may
        invest approximately 5% of our total real estate loan assets in residential
        loans. Such loans facilitate the purchase or refinance of one to four family
        residential property units provided the borrower used one of the units on
        the
        property as such borrower’s principal residence. We will review the appraisal of
        the value of the property and will invest in loans for up to 75% of such
        appraised value.
 
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  **Investments
        in second deeds of trust and wraparound loans are subject to the rights of
        the
        first deed of trust.**
 
 We
        may
        also invest up to 10% of our total real estate loan assets in deeds of trust
        and, in rare instances, wraparound, or all-inclusive, real estate loans.
        In a
        second deed of trust, our rights as a lender, including our rights to receive
        payment on foreclosure, will be subject to the rights of the first deed of
        trust. In a wraparound real estate loan, our rights will be similarly subject
        to
        the rights of a first deed of trust, but the aggregate indebtedness evidenced
        by
        our loan documentation will be the first deed of trust plus the new funds
        we
        invest. We would receive all payments from the borrower and forward to the
        senior lender its portion of the payments we receive. Because both of these
        types of loans are subject to the first deed of trust’s right to payment on
        foreclosure, we incur a greater risk when we invest in each of these types
        of
        loans.
 
 **Balloon
        payments require sufficient resources to make payment when
        due.**
 
 We
        anticipate that 90% to 100% of our loans will require the borrower to make
        a
“balloon payment” on the principal amount upon maturity of the loan. A balloon
        payment is a large principal balance that is payable after a period of time
        during which the borrower has repaid none or only a small portion of the
        principal balance. Loans with balloon payments are riskier than loans with
        even
        payments of principal over an extended time period of 15 or 30 years because
        the
        borrower’s repayment depends on its ability to sell the property profitably,
        obtain suitable refinancing or otherwise raise a substantial amount of cash
        when
        the loan comes due. There are no specific criteria used in evaluating the
        credit
        quality of borrowers for real estate loans requiring balloon payments.
        Furthermore, a substantial period of time may elapse between the review of
        the
        financial statements of the borrower and the date when the balloon payment
        is
        due. As a result, there is no assurance that a borrower will have sufficient
        resources to make a balloon payment when due.
 
 **Investment
        in large loans may reduce our ability to diversify our loan
        portfolio.**
 
 We
        will
        generally invest in loans that constitute an amount equal to less than 5%
        of our
        total capital. However, we may invest in a larger loan depending on such
        factors
        as the performance of the Fund and the value of the collateral. These larger
        loans have greater risk because they may reduce our ability to diversify
        our
        loan portfolio.
 
 **Taking
        a lease interest as collateral only provides a right to assume the borrower’s
        obligations under the lease.**
 
 We
        may
        invest up to 20% of our total real estate loan assets in loans where the
        collateral is an interest in a lease. These loans are riskier because the
        only
        rights we will have are to assume the borrower’s obligations under the lease and
        to use the property for the length of time and in the limited manner permitted
        under the lease.
 
 **Our
        underwriting standards and procedures are more lenient than conventional
        lenders.**
 
 We
        will
        invest in loans to borrowers who may not be required to meet the credit
        standards of conventional real estate lenders and we will approve real estate
        loans more quickly than other real estate lenders. Generally, we will not
        spend
        more than 20 days assessing the character and credit history of our borrowers.
        Due to the nature of loan approvals, there is a risk that the credit inquiry
        we
        perform will not reveal all material facts pertaining to the borrower and
        the
        security. There may be a greater risk of default by our borrowers, which
        may
        impair our ability to make distributions or may reduce the amount we have
        available to distribute, particularly in the case of foreclosures.
 
 **Our
        loans are not guaranteed by any government agency.**
 
 Our
        loans
        will not be insured or guaranteed by a federally owned or guaranteed mortgage
        agency. Consequently, our recourse if there is a default may only be to
        foreclose upon the real property. The value of the foreclosed property may
        have
        decreased and may not be equal to the amount outstanding under the corresponding
        loan, resulting in a decrease of the amount available to distribute.
 
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  **Our
        real estate loans will not be marketable and we expect no secondary market
        to
        develop.**
 
 We
        do not
        expect our real estate loans to be marketable and we do not expect a secondary
        market to develop for them. As a result, we will generally bear all the risk
        of
        our investment until the loans mature. This will limit our ability to hedge
        our
        risk in changing real estate markets and may result in reduced returns to
        our
        Members.
 
 **As
        a result of our small size, we will not be able to build a diversified loan
        portfolio, thereby increasing our risk that defaults on one or more loans
        could
        have a material adverse effect upon our operating results.**
 
 We
        are
        limited in the number of real estate loans in which we may invest and the
        value
        of members’ investment will fluctuate with the performance of the specific
        investments we make. As of December 31, 2006, we had approximately $29.4
        million
        in capital, and we currently are not raising additional funds through the
        sale
        of units, except through our distribution reinvestment plan. Accordingly,
        we are
        a relatively small fund and will make a limited number of investments resulting
        in less diversification in terms of the number of investments owned, the
        geographic regions in which our investments are located and the types of
        investments that we make as compared with larger funds. As a result, our
        performance will be closely tied to the performance of each loan we invest
        in
        and a default on a loan could materially reduce the funds available for
        distribution. Our profitability may be affected by the performance of any
        one of
        our investments and members’ investment in our units will be subject to greater
        risk.
 
 **Our
        loan portfolio may exhibit greater risk if it is not diversified
        geographically.**
 
 As
        of
        December 31, 2006, our loans were in the following states: Arizona, California,
        Nevada, Oklahoma, Oregon, Texas and Washington. Depending on the market and
        on
        our company’s performance, we plan to expand our investments throughout the
        United States. However, our manager has limited experience outside of the
        Western and Southern United States. Real estate markets vary greatly from
        location to location and the rights of secured real estate lenders vary
        considerably from state to state. Our manager’s limited experience in most U.S.
        real estate markets may impact its ability to make prudent investment decisions
        on our behalf. Accordingly, where our manager deems it necessary, it plans
        to
        utilize independent real estate advisors and local legal counsel located
        in
        markets where it lacks experience for consultation prior to making investment
        decisions. Members will not have an opportunity to evaluate the qualifications
        of such advisors and no assurance can be given that they will render prudent
        advice to our manager.
 
 **We
        may have difficulty protecting our rights as a secured
        lender.**
 
 We
        believe that our loan documents will enable us to enforce our commercial
        arrangements with borrowers. However, the rights of borrowers and other secured
        lenders may limit our practical realization of those benefits. For example:
 
 ·
            Judicial
                foreclosure is subject to the delays of protracted litigation. Although
                we
                expect non-judicial foreclosure to be quicker, our collateral may
                deteriorate and decrease in value during any delay in foreclosing
                on
                it. 
 ·
            The
                borrower’s right of redemption during foreclosure proceedings can deter
                the sale of our collateral and can for practical purposes require
                us to
                manage the property. 
 ·
            Unforeseen
                environmental hazards may subject us to unexpected liability and
                procedural delays in exercising our
                rights. 
 ·
            The
                rights of senior or junior secured parties in the same property can
                create
                procedural hurdles for us when we foreclose on
                collateral. 
 ·
            We
                may not be able to pursue deficiency judgments after we foreclose
                on
                collateral. 
 ·
            State
                and federal bankruptcy laws can prevent us from pursuing any actions,
                regardless of the progress in any of these suits or
                proceedings. 
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  **By
        becoming the owner of property, we may become liable for unforeseen
        environmental obligations.**
 
 We
        intend
        to own real property if we foreclose on a defaulted loan and purchase the
        property at the foreclosure sale. Under applicable environmental laws, any
        owner
        of real property may be fully liable for the costs involved in cleaning up
        any
        contamination by materials hazardous to the environment. Even though we might
        be
        entitled to indemnification from the person that caused the contamination,
        there
        is no assurance that the responsible person would be able to indemnify us
        to the
        full extent of our liability. Furthermore, we would still have court and
        administrative expenses for which we may not be entitled to indemnification.
 
 **Our
        results are subject to fluctuations in interest rates and other economic
        conditions.**
 
 As
        of
        December 31, 2006, none of our loans had a prepayment penalty and nine loans
        had
        an exit fee. Based on our manager’s historical experience, we expect that our
        loans will continue to not have a prepayment penalty. Should interest rates
        decrease, our borrowers may prepay their outstanding loans with us in order
        to
        receive a more favorable rate. This may reduce the amount of funds we have
        available to distribute.
 
 Our
        results of operations will vary with changes in interest rates and with the
        performance of the relevant real estate markets. If the economy is healthy,
        we
        expect that more people will be borrowing money to acquire, develop or renovate
        real property. However, if the economy grows too fast, interest rates may
        increase too much and the cost of borrowing may become too expensive.
        Alternatively, if the economy enters a recession, real estate development
        may
        slow. A slowdown in real estate lending may mean we will have fewer loans
        to
        acquire, thus reducing our revenues and the distributions.
 
 One
        of
        the results of interest rate fluctuations is that borrowers may seek to extend
        their low-interest-rate loans after market interest rates have increased.
        This
        creates two risks for us:
 
 ·
            If
                interest rates rise, borrowers under loans with monthly or quarterly
                principal payments may be compelled to extend their loans to decrease
                the
                principal paid with each payment because the interest component has
                increased. If this happens, we are likely to be at a greater risk
                of the
                borrower defaulting on the extended loan, and the increase in the
                interest
                rate on our loan may not be adequate compensation for the increased
                risk.
                Additionally, any fees paid to extend the loan are paid to Vestin
                Originations, not to us. Our revenues and distributions will decline
                if we
                are unable to reinvest at higher rates or if an increasing number
                of
                borrowers default on their loans; and 
 ·
            If,
                at a time of relatively low interest rates, a borrower should prepay
                obligations that have a higher interest rate from an earlier period,
                we
                will likely not be able to reinvest the funds in real estate loans
                earning
                that higher rate of interest. In the absence of a prepayment fee,
                we will
                receive neither the anticipated revenue stream at the higher rate
                nor any
                compensation for its loss. This is a risk if the loans we invest
                in do not
                have prepayment penalties or exit fees. 
 Our
        results will also reflect other economic conditions, such as a particular
        industry migrating to or from one of the states into which we make
        loans.
 
 **We
        face competition for real estate loans that may reduce available yields and
        fees
        available.**
 
 We
        consider our direct competitors to be non-conventional lenders who offer
        short-term, equity-based loans on an expedited basis for higher fees and
        rates
        than those charged by conventional lenders. In addition, we compete with
        conventional lenders such as commercial banks, insurance companies, mortgage
        brokers, pension funds and other institutional lenders. Many of the companies
        against which we compete have substantially greater financial, technical
        and
        other resources than either our company or our manager. Competition in our
        market niche depends upon a number of factors, including price and interest
        rates of the loan, speed of loan processing, cost of capital, reliability,
        quality of service and support services. If our competition decreases interest
        rates on their loans or makes funds more easily accessible, yields on our
        loans
        could decrease and the costs associated with making loans could increase,
        both
        of which would reduce our revenues and the distributions.
 
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            18
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  **Our
        lending operations are subject to certain regulatory
        requirements.**
 
 As
        a
        company investing in real estate loans and having raised funds through a
        public
        offering, we are subject to the NASAA Guidelines promulgated by the state
        securities administrators. The NASAA Guidelines govern, among other things,
        our
        debt to equity ratio and the diversity and composition of our investments.
        For
        example, the NASAA Guidelines provide that we may not invest in or make real
        estate loans to or from any one borrower that would exceed, in the aggregate,
        an
        amount greater than 20% of the capital contributions that we have raised.
        Additionally, the NASAA Guidelines require reserves of not less than 1% of
        the
        offering proceeds. The NASAA Guidelines are intended to protect the interests
        of
        investors. However, our flexibility in making business decisions may be limited
        by our obligation to comply with the NASAA Guidelines.
 
 **MANAGEMENT
        RISKS**
 
 **We
        are dependent on our Manager to select our loans and manage our loan
        portfolio.**
 
 We
        must
        rely on Vestin Mortgage to manage our operations and select our loans for
        investment. Our ability to achieve our investment objectives and to pay
        distributions depends upon our manager's and affiliates’ performance in
        obtaining, processing, making and brokering loans for us to invest in and
        determining the financing arrangements for borrowers.
 
 **Our
        Manager lacks experience with certain real estate markets.**
 
 As
        of
        December 31, 2006, our loans were in the following states: Arizona, California,
        Nevada, Oklahoma, Oregon, Texas and Washington. Depending on the market and
        on
        our company’s performance, we plan to expand our investments throughout the
        United States. However, our manager has limited experience outside of the
        Western and Southern United States. Real estate markets vary greatly from
        location to location and the rights of secured real estate lenders vary
        considerably from state to state. Our manager’s limited experience in most U.S.
        real estate markets may impact its ability to make prudent investment decisions
        on our behalf. Accordingly, where our manager deems it necessary, it plans
        to
        utilize independent real estate advisors and local legal counsel located
        in
        markets where it lacks experience for consultation prior to making investment
        decisions. Members will not have an opportunity to evaluate the qualifications
        of such advisors and no assurance can be given that they will render prudent
        advice to our manager.
 
 **Our
        success depends on key personnel of our manager, the loss of whom could
        adversely affect our operating results, and on our manager’s ability to attract
        and retain qualified personnel.**
 
 Our
        success depends in part upon the continued contributions of certain key
        personnel of our manager, including: Michael V. Shustek (Chief Executive
        Officer
        and President), Maria Rocio Revollo (Chief Financial Officer as of March
        21,
        2007), James M. Townsend (Chief Operating Officer) and Daniel B. Stubbs (Senior
        Vice President) some of whom would be difficult to replace because of their
        extensive experience in the field, extensive market contacts and familiarity
        with our company. If any of these key employees were to cease employment,
        our
        operating results could suffer. None of the current key personnel of our
        manager
        are subject to an employment, non-competition or confidentiality agreement
        with
        our manager or us, and we do not maintain “key man” life insurance policies on
        any of them. Our future success also depends in large part upon our manager’s
        ability to hire and retain additional highly skilled managerial, operational
        and
        marketing personnel. Our manager may require additional operations and marketing
        people who are experienced in obtaining, processing, making and brokering
        loans
        and who also have contacts in the relevant markets. Competition for personnel
        is
        intense, and we cannot be assured that we will be successful in attracting
        and
        retaining skilled personnel. If our manager were unable to attract and retain
        key personnel, the ability of our manager to make prudent investment decisions
        on our behalf may be impaired.
 
 Any
        indemnification of our manager by us will decrease the amount available for
        distribution. Pursuant to our Operating Agreement, we may be required to
        indemnify our manager or any of its affiliates, agents, or attorneys from
        any
        action, claim or liability arising from any act or omission made in good
        faith
        and in performance of its duties under the Operating Agreement. The availability
        of such indemnification may reduce the amount of funds we have available
        for
        distribution.
 
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  **CONFLICTS
        OF INTEREST RISKS**
 
 **Our
        manager and its affiliates will face conflicts of interest arising from our
        fee
        structure.**
 
 Vestin
        Originations, an affiliate of our manager, will receive substantial fees
        from
        borrowers for transactions involving real estate loans. Many of these fees
        are
        paid on an up-front basis. In some cases, Vestin Originations is entitled
        to
        additional fees for loan extensions or modifications and loan assumptions
        and
        reconveyances. Vestin Originations’ compensation is based on the volume and size
        of the real estate loans selected for us, regardless of their performance,
        which
        could create an incentive to make or extend riskier loans. Our interests
        may
        diverge from those of our manager, Vestin Originations and Mr. Shustek to
        the
        extent that Vestin Originations benefits from up-front fees that are not
        shared
        with us.
 
 Vestin
        Originations will be receiving fees from borrowers that would otherwise increase
        our returns. Because Vestin Originations receives all of these fees, our
        interests will diverge from those of our manager, Vestin Originations and
        Mr.
        Shustek when our manager decides whether we should charge the borrower higher
        interest rates or our manager’ affiliates should receive higher fees from
        borrowers.
 
 We
        paid
        our manager a total of $45,000 for the year ended December 31, 2006 for managing
        us. In
        addition, Vestin Mortgage and Vestin Originations received a total of
        approximately $8.5 million and $7.4 million, respectively in fees directly
        from
        borrowers for the year ended December 31, 2006 .
        The
        amounts received from borrowers represent fees earned by Vestin Mortgage
        and
        Vestin Originations for loans originated for all funds managed by Vestin
        Mortgage, including us, VRM I, VRM II and inVestin. Our assets represented
        approximately 8% of the assets managed by Vestin Mortgage as of December
        31,
        2006.
 
 **Our
        manager will face conflicts of interest concerning the allocation of its
        personnel’s time.**
 
 Our
        manager is also the manager of VRM I, VRM II and inVestin, companies with
        investment objectives similar to ours. Our manager and Mr. Shustek, who
        indirectly owns 100% of our manager, anticipate that they may also sponsor
        other
        real estate programs having investment objectives similar to ours. As a result,
        our manager and Mr. Shustek may have conflicts of interest in allocating
        their
        time and resources between our business and other activities. During times
        of
        intense activity in other programs and ventures, our manager and its key
        people
        will likely devote less time and resources to our business than they ordinarily
        would. Our Operating Agreement does not specify a minimum amount of time
        and
        attention that our manager and its key people are required to devote to our
        company. Thus, our manager may not spend sufficient time managing our
        operations, which could result in our not meeting our investment
        objectives.
 
 **Our
        manager will face conflicts of interest relating to other investments in
        real
        estate loans.**
 
 We
        expect
        to invest in real estate loans when one or more other companies managed by
        our
        manager are also investing in real estate loans. There is a risk that our
        manager may select for us a real estate loan investment that provides lower
        returns than a real estate loan investment purchased by another program or
        entity managed by our manager. Our manager also serves as the manager for
        VRM I,
        VRM II and inVestin, which have similar investment objectives as our company.
        There are no restrictions or guidelines on how our manager will determine
        which
        loans are appropriate for us and which are appropriate for VRM I, VRM II,
        inVestin or another company that our manager manages. Moreover, our manager
        has
        no obligation to provide us with any particular opportunities or even a pro
        rata
        share of opportunities afforded to other companies it manages.
 
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  **We
        may have a lack of control over participations.**
 
 We
        will
        consider investing in or purchasing loans jointly with other lenders and
        purchasers, some of whom might be affiliates of Vestin Mortgage. We will
        initially have, and will maintain a controlling interest as lead lender in
        participations with non-affiliates. Although it is not our intention to lose
        control, there is a risk that we will be unable to remain as the lead lender
        in
        the loans in which we participate in the future. In the event of participation
        with a publicly registered affiliate, the investment objectives of the
        participants shall be substantially identical. There shall be no duplicate
        fees.
        The compensation to the sponsors must be substantially identical, and the
        investment of each participant must be on substantially the same terms and
        conditions. Each participant shall have a right of first refusal to buy the
        other's interest if the co-participant decides to sell its interest. We will
        not
        participate in joint ventures or partnerships with affiliates that are not
        publicly registered except as permitted in the NASAA Guidelines. If our
        co-participant affiliate determines to sell its interest in the loan, there
        is
        no guarantee that we will have the resources to purchase such interest and
        we
        will have no control over a sale to a third party purchaser.
 
 **ITEM
        1B.**  **UNRESOLVED
        STAFF COMMENTS**
 
 None.
 
 **ITEM
        2.**  **PROPERTIES**
 
 Our
        manager, Vestin Mortgage, operates from its executive offices at 8379 West
        Sunset Road, Las Vegas, Nevada 89113. We do not have any separate
        offices.
 
 Our
        manager shares office facilities of approximately 42,000 square feet with
        its
        parent corporation, Vestin Group, which in turn leases its principal executive
        offices from an unrelated third party. The lease agreement governing this
        property expires in March 2014. The building was previously owned by us and
        was
        sold to an unrelated third party during November 2006.
 
 **ITEM
        3.**  **LEGAL
        PROCEEDINGS**
 
 **Legal
        Matters Involving Our Manager**
 
 The
        United States Securities and Exchange Commission (the “Commission”), conducted
        an investigation of certain matters related to us, our manager, Vestin Capital,
        VRM I and VRM II. We fully cooperated during the course of the investigation.
        On
        September 27, 2006, the investigation was resolved through the entry of an
        Administrative Order by the Commission (the “Order”). Our manager, Vestin
        Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin
        Capital (collectively, the “Respondents”), consented to the entry of the Order
        without admitting or denying the findings therein. In the Order, the Commission
        finds that the Respondents violated Sections 17(a)(2) and 17(a)(3) of the
        Securities Act of 1933 through the use of certain slide presentations in
        connection with the sale of units in us and in VRM II’s predecessor, Vestin Fund
        II, LLC. The Respondents consented to the entry of a cease and desist order,
        the
        payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s suspension from
        association with any broker or dealer for a period of six months, which expires
        in March 2007. In addition, the Respondents agreed to implement certain
        undertakings with respect to future sales of securities. We are not a party
        to
        the Order and we do not expect that the sanctions imposed upon the Respondents
        will have any material affect upon our operations.
 
 Vestin
        Group, Vestin Mortgage, and Del Mar Mortgage, Inc., a company wholly owned
        by
        Michael V. Shustek, the sole stockholder and CEO of Vestin Group, are defendants
        in a civil action entitled Desert Land, LLC et al. v. Owens Financial Group,
        Inc. et al (the “Action”). The Action is based upon allegations that Del Mar
        Mortgage, Inc. and/or Vestin Mortgage charged unlawful fees on various loans
        arranged by them in 1999, prior to the formation of Vestin Fund III, LLC.
        Desert
        Land sought in excess of $10 million in monetary damages. On April 10, 2003,
        the
        United States District Court for the District of Nevada (the “Court”) entered
        judgment jointly and severally in favor of Desert Land against Vestin Group,
        Vestin Mortgage and Del Mar Mortgage, Inc. Judgment was predicated upon the
        Court’s finding that Del Mar Mortgage, Inc. received an unlawful penalty fee
        from the plaintiffs.
 
  -
            21
            -
 *Table
            of Contents*
  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.
 
 On
        or
        about April 6, 2006, Desert Land filed a Writ of Certiorari seeking review
        of
        the 9th Circuit’s decision by the United States Supreme Court. The U.S. Supreme
        Court denied Desert Land’s Writ of Certiorari on June 12, 2006, effectively
        ending this action.
 
 On
        November 21, 2005, Desert Land filed a complaint in the state courts of Nevada,
        which complaint is substantially similar to the original complaint previously
        filed by Desert Land in the United States District Court, with the exception
        of
        claiming Nevada State Law violations and seeking Nevada State Law remedies
        rather than claiming Federal Law violations and seeking Federal Law remedies.
        On
        March 6, 2006, Desert Land amended the state court complaint to name VRM
        I.
        Desert Land alleges that one or more of the defendants have transferred assets
        to other entities without receiving reasonable value therefore; alleges
        plaintiffs are informed and believe that defendants have made such transfers
        with the actual intent to hinder, delay or defraud Desert Land; that such
        transfers made the transferor insolvent and that sometime between February
        27
        and April 1, 2003, Vestin Group transferred $1.6 million to VRM I for that
        purpose. The state court complaint further alleges that Desert Land is entitled
        to avoid such transfers and that pursuant to NRS 112.20, Desert Land is entitled
        to an injunction to enjoin defendants from further disposition of assets.
        Additionally, Del Mar Mortgage, Inc. has indemnified Vestin Group and Vestin
        Mortgage for any losses and expenses in connection with the Action, and Mr.
        Shustek has guaranteed the indemnification. The Defendants believe that the
        allegations are without merit and that they have adequate defenses. The
        Defendants intend to undertake a vigorous defense. We are not a party to
        this
        action.
 
 In
        April
        2006, our manager, Vestin Mortgage Inc., filed suit against the State of
        Hawaii
        listing 26 causes of action, including allegations that the State of Hawaii
        has
        illegally blocked VRM I and VRM II (“the lenders”) right to foreclose and take
        title to its collateral by inappropriately attaching conditions to the granting
        of licenses needed to operate the business, the pre-need trust funds and
        the
        perpetual care trust funds and that the State of Hawaii has attempted to
        force
        the lenders to accept liability for any statutory trust fund deficits while
        no
        such lender liability exists under the laws of the State of Hawaii. The State
        of
        Hawaii responded by filing allegations against Vestin Mortgage, Inc. and
        VRM II
        alleging that these Vestin entities improperly influenced the former RightStar
        trustees to transfer trust funds to VRM II. Our manager believes the State’s
        claims to be without merit and intend to vigorously pursue our remedies while
        defending against any allegations made by the State.
 
 In
        October 2006, a Judge of the Circuit Court of the First Circuit in Hawaii
        imposed new restrictions upon the lenders right to foreclose and denied any
        subsequent owner the licensing necessary to operate the funeral service until
        the alleged pre-need and perpetual care trust funds shortages are cured.
        Our
        manager believes these restrictions are both unauthorized under state law
        and
        unconstitutional under federal law. In January 2007, the lenders filed a
        petition with the Supreme Court of Hawaii seeking mandamus relief from that
        ruling. As of March 28, 2007, the Supreme Court of Hawaii has not ruled on
        the
        lender’s petition, but has requested briefing from the State of Hawaii regarding
        the petition. The outcome of this litigation is unforeseeable at this time.
        Our
        manager cannot estimate when the foreclosure will ultimately be completed
        or
        when the lenders may obtain title to the underlying properties. We are not
        a
        party to this action.
 
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            22
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  VRM
        II,
        Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
        civil action filed by 88 separate plaintiffs (“Plaintiffs”) in Superior Court
        for Clark County, Nevada. The Plaintiffs allege, among other things, that
        Defendants: breached certain alleged contractual obligations owed to Plaintiffs;
        breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented
        or
        omitted material facts regarding the conversion of Fund II into VRM II. The
        Action seeks monetary damages and a rescission of the REIT conversion. The
        Defendants believe that the allegations are without merit and that they have
        adequate defenses. The Defendants intend to undertake a vigorous defense.
        The
        terms of VRM II’s management agreement and Fund II’s operating agreement contain
        indemnity provisions whereby, Vestin Mortgage and Michael V. Shustek may
        be
        eligible for indemnification by the Company with respect to the above actions.
        We are not a party to this action.
 
 VRM
        I and
        Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
        action filed in San Diego Superior Court by certain plaintiffs who allege,
        among
        other things, that they were wrongfully denied appraisal rights in connection
        with the merger of Fund I into Vestin Realty Mortgage I, Inc. The action
        has
        been removed to the United States District Court for the Southern District
        of
        California, but the Company has agreed to stipulate to remand this action
        to San
        Diego Superior Court. The action is being brought as a purported class action
        on
        behalf of all members of Vestin Fund I who did not vote in favor of the merger.
        The Defendants believe that the allegations are without merit and that they
        have
        adequate defenses. The Defendants intend to undertake a vigorous defense.
        The
        terms of VRM I’s management agreement and Fund I’s Operating Agreement contain
        indemnity provisions whereby, Vestin Mortgage and Michael V. Shustek may
        be
        eligible for indemnification by VRM I with respect to the above
        actions.
 
 VRM
        II
        and Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
        action filed in San Diego Superior Court by certain plaintiffs who allege,
        among
        other things, that they were wrongfully denied appraisal rights in connection
        with the merger of Fund II into Vestin Realty Mortgage II, Inc. The action
        is
        being brought as a purported class action on behalf of all members of Vestin
        Fund II who did not vote in favor of the merger. The Defendants believe that
        the
        allegations are without merit and that they have adequate defenses. The
        Defendants intend to undertake a vigorous defense. The terms of VRM II’s
        management agreement and Fund II’s Operating Agreement contain indemnity
        provisions whereby, Vestin Mortgage and Michael V. Shustek may be eligible
        for
        indemnification by VRM II with respect to the above actions.
 
 In
        addition to the matters described above, our manager is involved in a number
        of
        legal proceedings concerning matters arising in connection with the conduct
        of
        its business activities. Our manager believes it has meritorious defenses
        to
        each of these actions and intends to defend them vigorously. Other than the
        matters described above, our manager believes that it is not a party to any
        pending legal or arbitration proceedings that would have a material adverse
        effect on our manager’s financial condition or results of operations or cash
        flows, although it is possible that the outcome of any such proceedings could
        have a material impact on our manager’s net income in any particular
        period.
 
 **Legal
        Matters Involving the Company**
 
 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.
 
 **ITEM
        4.**  **SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 A
        Special
        Meeting of our members was held on March 5, 2007, at 10:00 a.m., Pacific
        Standard Time at the Suncoast Hotel 9090 Alta Drive, Las Vegas, Nevada 89145
        to
        vote on approval of the Third Amended and Restated Operating Agreement, which
        limits the Company’s investment objectives to investment in real estate loans.
        The amendment is described in the definitive proxy statement we filed with
        the
        SEC on January 29, 2007. 1,858,196 units, constituting approximately 67.03%
        or
        our outstanding units, voted in favor of the Third Amended and Restated
        Operating Agreement, 231,888 units, or approximately 8.36% voted against
        and
        31,372 units, or approximately 1.13% abstained. There were 650,983 unites,
        which
        did not vote constituting approximately 23.48% of our outstanding
        units.
 
  -
            23
            -
 *Table
            of Contents*
  **PART
        II**
 **ITEM
        5.**  **MARKET
        FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS** **AND ISSUER PURCHASES OF EQUITY SECURITIES**
 
 **Market
        Information**
 
 There
        is
        no established public trading market for the trading of Units.
 
 **Holders**
 
 As
        of
        March 28, 2007, approximately 705 Unit holders held 2,653,601 Units of interest
        in the Company.
 
 **Distribution
        Policy**
 
 We
        generally distribute to members on a monthly basis most of our Net Income
        Available for Distribution (as defined in our Operating Agreement). Net Income
        Available for Distribution is based upon cash flow from operations, less
        certain
        reserves, and may exceed net income as calculated in accordance with U. S.
        generally accepted accounting principles (GAAP). Our Operating Agreement
        also
        permits distributions in excess of Net Income Available for Distribution.
        We
        made distributions of $2,544,000 (prior to reinvested distributions) during
        the
        year ended December 31, 2006, all of which represented distributions of Net
        Income Available for Distribution. It is our intention to continue to distribute
        most of our Net Income Available for Distribution to our unit
        holders.
 
 **Recent
        Sales of Unregistered Securities**
 
 None.
 
 **Equity
        Compensation Plan Information**
 
 None.
 
 **Purchases
        of Equity Securities by the Issuer and Affiliated
        Purchasers**
 
 **Period**
              
              **Total
                  Number of Units Purchased (1)**
              
              **Average
                  Price Paid per Unit**
              
              **Total
                  Number of Units Purchased as Part of Publicly Announced Plans or
                  Programs**
              
              **Maximum
                  Number (or Approximate Dollar Value) of Units that May Yet be Purchased
                  under the Plans or Programs**October
                  2006
              
              
              --
              
              
              --
              
              
              None
              
              
              NoneNovember
                  2006
              
              
              --
              
              
              --
              
              
              None
              
              
              NoneDecember
                  2006
              
              
              13,708
              
              $
              11.00
              
              
              None
              
              
              None
 
  (1)
            Pursuant
                to our Operating Agreement, members may request to have their units
                redeemed (all units purchased were purchased pursuant to redemption
                requests). However, in order to comply with our Operating Agreement
                and
                the Internal Revenue Code, we may redeem no more than 10% of the
                aggregate
                members’ capital in any calendar year.Balances
                in Members’ capital accounts as of January 1, 2006 were approximately
                $29.2 million, which limited redemptions to approximately $2.9 million
                for
                calendar year 2006. The remaining requests to redeem, as of December
                31,
                2006, were approximately $2.9 million in 2007, $2.5 million in 2008,
                $1.8
                million in 2009 and $47,000 in 2010 subject to unit valuation adjustments.
                On March 8, 2007, we redeemed 137,766 units totaling approximately
                $1.5
                million. 
  -
            24
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 *Table
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  **ITEM
        6.**  **SELECTED
        FINANCIAL DATA**
 
 **Balance
                  at****Vestin
                  Fund III, LLC**
              
              **December
                  31, 2006**
              
              **December
                  31, 2005**
              
              **December
                  31, 2004**
              
              **December
                  31, 2003**Balance
                  Sheet Data:Cash,
                  Cash Equivalents, Certificates of Deposits and Short-term
                  Investments
              
              $
              1,650,000
              
              $
              1,167,000
              
              $
              6,286,000
              
              $
              5,000Cash
                  - Restricted
              
              
              985,000Interest
                  and Other Receivables
              
              
              270,000
              
              
              194,000
              
              
              127,000
              
              
              --Real
                  Estate Held for Sale
              
              
              575,000
              
              
              --
              
              
              --
              
              
              --Investments
                  in Real Estate Loans (Net of Allowance)
              
              
              26,999,000
              
              
              22,964,000
              
              
              13,520,000
              
              
              --Investment
                  in Real Property (Net of Depreciation)
              
              
              --
              
              
              9,591,000
              
              
              9,814,000
              
              
              --Capitalized
                  Loan Fees (Net of Allowance)
              
              
              --
              
              
              99,000
              
              
              111,000
              
              
              --Assets
                  Under Secured Borrowing
              
              
              4,430,000
              
              
              527,000
              
              
              2,590,000
              
              
              --Due
                  from Vestin Originations
              
              
              10,000
              
              
              --
              
              
              --
              
              
              --Deferred
                  Rent Receivable
              
              
              --
              
              
              168,000
              
              
              --
              
              
              --Deferred
                  Offering Costs
              
              
              --
              
              
              --
              
              
              926,000
              
              
              667,000Other
                  Assets
              
              
              6,000
              
              
              --
              
              
              --
              
              
              --Total
                  Assets
              
              $
              34,925,000
              
              $
              34,710,000
              
              $
              33,374,000
              
              $
              672,000Liabilities
              
              
              5,508,000
              
              
              5,551,000
              
              
              8,612,000
              
              
              673,000Members’
                  Equity
              
              
              29,417,000
              
              
              29,159,000
              
              
              24,762,000
              
              
              (1,000
              )Total
                  Liabilities and Members’ Equity
              
              $
              34,925,000
              
              $
              34,710,000
              
              $
              33,374,000
              
              $
              672,000
 
 
 **For
                  the Years Ended**
              
              **For
                  the Period From April 16, 2003 (Inception) to****December
                  31, 2006**
              
              **December
                  31, 2005**
              
              **December
                  31, 2004**
              
              **December
                  31, 2003****Income
                  Statement Data:**Total
                  revenues
              
              $
              3,495,000
              
              $
              3,616,000
              
              $
              2,360,000
              
              $
              --Total
                  operating expenses
              
              
              1,277,000
              
              
              1,294,000
              
              
              990,000
              
              
              1,000Total
                  other income and expenses
              
              
              2,612,000
              
              
              --
              
              
              --
              
              
              --**Net
                  income**
              
              $
              4,830,000
              
              $
              2,322,000
              
              $
              1,370,000
              
              $
              (1,000
              )Net
                  income per weighted average membership units
              
              $
              1.67
              
              $
              0.82
              
              $
              0.78
              
              $
              --Annualized
                  rate of return to members**(a)**
              
              
              15.88%
              
              
              8.00%
              
              
              7.80%
              
              
              0.00%Cash
                  distributions
              
              $
              2,544,000
              
              $
              2,555,000
              
              $
              1,350,000
              
              $
              --Cash
                  distributions per weighted average membership units
              
              $
              0.88
              
              $
              0.91
              
              $
              0.77
              
              $
              --Weighted
                  average common shares / membership units
              
              
              2,896,025
              
              
              2,816,468
              
              
              1,751,700
              
              
              --Weighted
                  average term of outstanding loans**(b)**
              
              
              14
                  months
              
              
              17
                  months
              
              
              19
                  months
              
              
              N/A
 
  -
            25
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 *Table
            of Contents*
  
 **(a)**
            The
                annualized rate of return to members is calculated based upon the
                net GAAP
                income allocated to members per weighted average units, divided by
                the
                number of days during the period and multiplied by three hundred
                sixty
                five (365) days, then divided by the cost per unit ($10.50, $10.30
                and
                $10.00 for the years ended December 31, 2006, 2005 and 2004,
                respectively). 
 **(b)**
            The
                weighted average term of our outstanding loans includes
                extensions. 
 The
        information in this table should be read in conjunction with the accompanying
        audited consolidated financial statements and notes to the consolidated
        financial statements included elsewhere in this document.
 
 **ITEM
        7.**  **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 each of the three years ended December 31, 2006,
        2005,
        and 2004. This discussion should be read in conjunction with our consolidated
        financial statements and accompanying notes and other detailed information
        regarding us appearing elsewhere in this Form 10-K and our reports on Form
        10-Q,
        Item 2 *Management’s
        Discussion and Analysis of Financial Conditions and Results of
        Operations* for the
        quarters ended March 31, 2006, June 30, 2006 and September 30,
        2006.
 
 **FORWARD-LOOKING
        STATEMENTS**
 
 Certain
        statements in this report, including, without limitation, matters discussed
        under this Item 7, “Management’s Discussion and Analysis of Financial Condition
        and Results of Operations,” should be read in conjunction with the consolidated
        financial statements, related notes, and other detailed information included
        elsewhere in this Annual Report on Form 10-K. We are including this cautionary
        statement to make applicable and take advantage of the safe harbor provisions
        of
        the Private Securities Litigation Reform Act of 1995. Statements that are
        not
        historical fact are forward-looking statements. Certain of these forward-looking
        statements can be identified by the use of words such as “believes,”
“anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,”
“assumes,” “may,” “should,” “will,” or other similar expressions. Such
        forward-looking statements involve known and unknown risks, uncertainties
        and
        other important factors, which could cause actual results, performance or
        achievements to differ materially from future results, performance or
        achievements. These forward-looking statements are based on our current beliefs,
        intentions and expectations. These statements are not guarantees or indicative
        of future performance. Important assumptions and other important factors
        that
        could cause actual results to differ materially from those forward-looking
        statements include, but are not limited to, those factors, risks and
        uncertainties described in Part I Item 1A *Risk
        Factors* of this
        Annual Report on Form 10-K and in our other securities filings with the SEC.
        Our
        future financial condition and results of operations, as well as any
        forward-looking statements, are subject to change and involve inherent risks
        and
        uncertainties. The forward-looking statements contained in this report are
        made
        only as of the date hereof. We undertake no obligation to update or revise
        information contained herein to reflect events or circumstances after the
        date
        hereof or to reflect the occurrence of unanticipated events.
 
 **RESULTS
        OF OPERATIONS**
 
 **OVERVIEW**
 
 Our
        primary business objective is to generate income by investing in real estate
        loans. We believe there is a significant market opportunity to make real
        estate
        loans to owners and developers of real property whose financing needs are
        not
        met by traditional real estate lenders. The loan underwriting standards utilized
        by our manager and Vestin Originations 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 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.
 
  -
            26
            -
 *Table
            of Contents*
  Prior
        to
        March 5, 2007, our real estate program objective was to invest in
        income-producing multifamily residential units, assisted living facilities,
        office buildings, industrial and retail properties and other income-producing
        real property, such as hotels and resorts, restaurants, parking lots and
        amusement parks. We disposed of our only investment in real estate in November
        2006 and on March 5, 2007, our members voted to amend our operating agreement
        so
        that in the future we will only invest in loans secured by mortgages on real
        estate.
 
 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. At December 31, 2006, the following loans were non-performing
        (based on current information and events, it is probable that we will be
        unable
        to collect all amounts due according to the contractual terms of the loan
        agreement or when the payment of interest is 90 days past due); Monterrey
        Associates LP, Forest Development LLC and Babuski LLC. These loans are currently
        carried on our books at a value of approximately $1.6 million. These loans
        have
        been placed on non-accrual of interest status and are the subject of pending
        foreclosure proceedings. For additional information see “Specific Loan
        Allowance” in Note D - *Investments
        In Real Estate Loans* of the
        Notes to the Consolidated Financial Statements included in Part IV, Item
        15 *Exhibits
        and Financial Statement Schedules* of this
        report Form 10-K. Non-performing assets totaled approximately $2.2 million
        or
        6.2% of our total assets as of December 31, 2006 as compared to none as of
        December 31, 2005. At December 31, 2006, non-performing assets consisted
        of
        approximately $0.6 million of real estate held for sale and approximately
        $1.6
        million of non-performing loans. During the year ended December 31, 2006,
        we
        completed the following transaction related to our real estate held for
        sale:
 
 ·
            During
                November 2006, we, VRM I and VRM II acquired 480 residential building
                lots
                and two single family dwellings in Rio Vista Village Subdivision
                in
                Cathedral City, CA, through foreclosure. Our portion of the defaulted
                loan
                was approximately $0.6 million. Our manager has evaluated the carrying
                value of the property and based on its estimate, no valuation allowance
                was deemed necessary as of December 31, 2006. The property is currently
                the subject of a purchase agreement for a total sales price of
                approximately $29.9 million, of which our portion will be approximately
                $0.6 million. 
 The
        increase in non-performing assets may reflect the continuing weakness in
        certain
        sectors of the economy and the risk inherent in our business strategy, which
        entails more lenient underwriting standards and expedited loan approval
        procedures. If the economy weakens and our borrowers who develop and sell
        commercial real estate projects are unable to complete their projects or
        obtain
        takeout financing or are otherwise adversely impacted, we may experience
        an
        increase in loan defaults, which may reduce the amount of funds we have to
        pay
        dividends to our stockholders. Such conditions may also require us to
        restructure loans. The weighted average term of our outstanding loans, including
        extensions, as of December 31, 2006 and December 31, 2005 was 14 months and
        17
        months, respectively.
 
 Uncertain
        economic conditions during the next year could have a material impact on
        the
        collectibility of our loans. A downturn in the real estate markets where
        we
        conduct business might increase defaults on our loans and might require us
        to
        record additional reserves with respect to non-performing loans. Recognizing
        the
        risk, we seek to maintain an adequate loan-to-value ratio which, as of December
        31, 2006, was 65.06% on a weighted average basis, as compared to 60.16% as
        of
        December 31, 2005. We generally use appraisals prepared on an “as-if developed”
basis in connection with the loan origination. We hope to retain sufficient
        cushion in the underlying equity position to protect the value of our loans
        in
        the event of a default. Nevertheless, no assurances can be given that a marked
        increase in loan defaults accompanied by a rapid decline in real estate values
        will not have a material adverse effect upon our financial condition and
        operating results.
 
 From
        time
        to time, we may acquire or sell investments in real estate loans from/to
        our
        manager or other related parties pursuant to the terms of our Operating
        Agreement provided the price does not exceed the par value of the loan. No
        gain
        or loss is recorded on these transactions, as it is not our intent to make
        a
        profit on the purchase or sale of such investments. The purpose is generally
        to
        diversify our portfolio by syndicating loans, thereby providing us with
        additional capital to make additional loans. For further information regarding
        related party transitions, refer to Item 13. *Certain
        Relationships and Related Transactions, and Director
        Independence* in Part
        III of this report Form 10-K.
 
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            of Contents*
  As
        of
        December 31, 2006, our loans were in the following states: Arizona, California,
        Nevada, Oklahoma, Oregon, Texas and Washington.
 
 **SUMMARY
        OF FINANCIAL RESULTS**
 
 **The
        Year Ended December 31, 2006 Compared To the Year Ended December 31,
        2005**
 
 *Total
        Revenues:* Revenues
        for the year ended December 31, 2006 decreased compared to the same period
        in
        2005, by $121,000 or 3.4%, notwithstanding an increase in the total amount
        of
        outstanding loans and an increase in the weighted average interest rate on
        our
        loans from 10.38% to 11.31%. The decrease in revenues was primarily due to
        the
        following factors:
 
 ·
            Rental
                income declined by $96,000 due to the sale of an office building
                which we
                owned during November 2006. In the future, we will no longer earn
                rental
                income because, at a Special Meeting of our members held on March
                5, 2007,
                amendments to our Operating Agreement were approved, limiting the
                Company’s investment objectives to investment in real estate loans. 
 ·
            Interest
                income from investments in real estate loans declined by $91,000.
                Our
                revenue is dependent upon the balance of our investment in real estate
                loans and the interest earned on these loans. As of December 31,
                2006, our
                investment in real estate loans was approximately $27.0 million with
                a
                weighted average interest rate of 11.31%. As of December 31, 2005,
                our
                investment in real estate loans was approximately $23.0 million with
                a
                weighted average interest rate of 10.38%. However, during the first
                three
                quarters of 2006, our investment in real estate loans decreased by
                approximately $2.2 million, attributable in part to the reduction
                in
                capital, resulting from membership unit redemptions, we had available
                for
                investments. Our capital was reduced by redemption of membership
                units of
                approximately $2.9 million during the year ended December 31,
                2006. 
 In
        addition, our interest income was affected by the performances of our loans.
        During the year ended December 31, 2006, four loans totaling approximately
        $2.2
        million became non-performing. One of the non-performing loans, with a balance
        of approximately $0.6 million was foreclosed upon and reclassified to real
        estate held for sale. For additional information see Note D - *Investment
        Real Estate Loans* and Note
        H - *Real
        Estate Held For Sale* of
        the
        Notes to the Consolidated Financial Statements included in Part IV of this
        Report on Form 10-K.
 
 ·
            We
                recorded dividend income of $47,000 related to our investment in
                VRM II
                for the year ended December 31, 2006, which was purchased in August
                2006. 
 *Total
        Operating Expenses:* For each
        of the years ended December 31, 2006 and 2005, total operating expenses were
        approximately $1.3 million. Expenses were primarily affected by the following
        factors:
 
 ·
            We
                paid management fees to our manager based on 3% of the total rental
                income
                and up to 2.5% of the gross offering proceeds for the period. For
                the year
                ended December 31, 2005, we paid our manager $26,000 for management
                fees
                relating to rental activity and $129,000 for acquisition and advisory
                fees
                pertaining to the gross offering proceeds for a total of $155,000.
                Since
                we are no longer selling our units, excepted as permitted in our
                distribution reinvestment plan, fees related to gross offering proceeds
                during the year ended December 31, 2006, were $20,000 of the total
                $45,000
                management fees. 
 ·
            Expenses
                related to professional fees decreased by $180,000. This was partially
                due
                to a decrease in accounting fees of $162,000 related to the measures
                undertaken by our manager to contain costs, including an enhancement
                of
                its internal accounting capabilities. 
 These
        decreases were offset by the increase in interest expenses, which included
        a
        defeasance fee of $435,000 related to the note payoff on the building that
        was
        sold in November 2006.
 
  -
            28
            -
 *Table
            of Contents*
  *Other
        Income and Expenses:* During
        November 2006, we sold our only investment in real property which consisted
        of
        an approximately 42,000 square foot office building located at 8379 West
        Sunset
        Road in Las Vegas, Nevada for a gain of approximately $2.6 million. We used
        the
        building sales proceeds primarily to invest approximately $8.5 million in
        real
        estate loans. There were no similar transactions during the year ended December
        31, 2005.
 
 *Distributions
        to Members* :
        The
        following is a schedule of distributions made to members for the years ended
        December 31, 2006 and 2005.
 
 **For
                  the Year Ended December 31, 2006**
              
              **For
                  the Year Ended December 31, 2005**Distributions
                  of Net Income Available for Distribution
              
              $
              2,544,000
              
              $
              2,544,000Distributions
                  in Excess of Net Income Available for Distribution Generated During
                  the
                  Period
              
              
              --
              
              
              11,000Total
                  Distributions
              
              $
              2,544,000
              
              $
              2,555,000
 
 Net
        Income Available for Distributions is a non-GAAP financial measure that is
        defined in our Operating Agreement as cash flows from operations, less certain
        reserves, and may exceed net income as calculated in accordance with GAAP.
        We
        have presented net income available for distribution because management believes
        this financial measure is useful and important to members. Although we generally
        do not plan to make distributions in excess of net income available for
        distribution, we may do so from time to time. Any such distribution will
        be
        treated as a return of capital for income tax purposes. In addition, cash
        flows
        from operations, which are the significant component of net income available
        for
        distribution, affect the capital available for investment in new loans. This
        non-GAAP financial measure should not be considered in isolation or as a
        substitute for measures of performance prepared in accordance with GAAP or
        as an
        alternative to cash flows from operating activities as a measure of our
        liquidity. We compensate for these limitations by relying primarily on our
        GAAP
        results and using net income available for distribution only
        supplementally.
 
 The
        most
        directly comparable GAAP measure to net income available for distribution
        is
        cash flows from operating activities. The following table reconciles net
        income
        available for distribution to cash flows from operating activities and presents
        the two other major categories of our statement of cash flows:
 
 **For
                  the Year Ended December 31, 2006**
              
              **For
                  the Year Ended December 31, 2005**Distribution
                  of net income available for distribution
              
              $
              2,544,000
              
              $
              2,544,000Additions
                  to working capital reserves (amount not distributed)
              
              
              2,490,000
              
              
              --Gain
                  on sale of building
              
              
              (2,624,000
              )
              
              --Change
                  in operating assets and liabilities:Interest
                  receivable
              
              
              (76,000
              )
              
              (67,000
              )Deferred
                  rent receivable - related party
              
              
              (123,000
              )
              
              (168,000
              )Accounts
                  payable
              
              
              (63,000
              )
              
              156,000Due
                  from Vestin Originations
              
              
              (10,000
              )
              
              --Due
                  to Manager
              
              
              26,000
              
              
              (130,000
              )Other
                  assets
              
              
              (6,000
              )
              
              --Net
                  cash provided by operating activities
              
              $
              2,158,000
              
              $
              2,335,000Net
                  cash provided (used) by investing activities
              
              $
              6,943,000
              
              $
              (9,431,000
              )Net
                  cash (used) provided by financing activities
              
              $
              (9,449,000
              )
              $
              1,977,000
 
 
  -
            29
            -
 *Table
            of Contents*
  *Stated
        Unit Value Adjustment* :
        Following a periodic review by our manager as required pursuant to the Operating
        Agreement, as a result of the gain on sale of our real estate held for
        investment, effective December 15, 2006 we adjusted the stated unit value
        from
        $10.50 per unit to $11.00 per unit to reflect the estimated net unit value
        of
        each unit at that date. The periodic review of the estimated net unit value
        includes an analysis of unrealized gains that our manager reasonably believes
        exist at the time of the review, but that cannot be added to net asset value
        under GAAP.
 
 *Redemptions* :
        In
        accordance with the terms of our Operating Agreement and Internal Revenue
        Code,
        we may redeem no more than 10% of the aggregate Members’ capital in any calendar
        year. As of December 31, 2006, the total of redemptions made from inception
        was
        approximately $3.2 million. Balances in Members’ capital accounts as of January
        1, 2006 were approximately $29.2 million, which limited redemptions to
        approximately $2.9 million for calendar 2006. Total redemptions during the
        year
        ended December 31, 2006 were approximately $2.9 million. The
        remaining requests to redeem, as of December 31, 2006, were approximately
        $2.9
        million in 2007, $2.5 million in 2008, $1.8 million in 2009 and $47,000 in
        2010
        subject to unit valuation adjustments. On March
        8, 2007, we redeemed 137,766 units totaling approximately $1.5
        million.
 
 **The
        Year Ended December 31, 2005 Compared To the Year Ended December 31,
        2004**
 
 *Total
        Revenues* :
        Revenues for the year ended December 31, 2005 increased approximately $1.3
        million or 53.22% from the prior period in 2004 primarily due to the
        following:
 
 ·
            Interest
                income from real estate loans increased by approximately $1.1 million
                or
                84.48% primarily due to the increase in investment in real estate
                loans
                from approximately $13.6 million as of December 31, 2004 to approximately
                $23.0 million as of December 31, 2005, an increase of $9.4 million.
                This
                increase was offset by the decrease in the weighted average interest
                rate
                on real estate loans from 11.71% at December 31, 2004 to 10.38% at
                December 31, 2005. Additionally, we incurred a decrease of $527,000
                in
                interest income related to secured borrowings, which relates to the
                decrease in assets under secured borrowings of approximately $2.1
                million
                from December 31, 2004 to December 31,
                2005. 
 ·
            Revenues
                derived from income-producing real property increased approximately
                $0.7
                million or 228.08%. Investment in real property consists of a 42,000
                square foot office building located in Las Vegas, Nevada, which we
                acquired in August 2004. As a result, our 2004 results reflected
                four and
                a half months of rental income, as compared to a full year of rental
                income in 2005. The office building is fully leased by Vestin
                Group. 
 *Total
        Expenses:* For
        the
        year ended December 31, 2005, total expenses were approximately $1.3 million
        compared to approximately $1.0 million for the same period in 2004, an increase
        of $0.3 million or 30.71%. Expenses were primarily affected by the
        following:
 
 ·
            Interest
                expenses related to investment in real property increased by $221,000,
                as
                we did not acquire the real property associated with the debt until
                August
                2004. 
 ·
            Expenses
                related to professional fees incurred increased by $345,000 due to
                an
                increase in accounting and legal costs related to the preparation
                of our
                quarterly and annual public filings. 
 ·
            We
                pay management fees to our manager based on 3% of the total rental
                income
                and up to 2.5% of the gross offering proceeds for the period. For
                the year
                ended December 31, 2005, we paid our manager $26,000 for management
                fees
                relating to rental activity and $129,000 for acquisition and advisory
                fees
                pertaining to the gross offering proceeds, for a total of
                $155,000. 
 ·
            Depreciation
                and amortization on our investment in real property increased $141,000
                as
                we did not acquire the property until August
                2004. 
 
  -
            30
            -
 *Table
            of Contents*
  The
        increase in expenses was partially offset by the following
        decreases:
 
 ·
            Interest
                expenses related to secured borrowings decreased by $494,000 due
                to the
                decrease in the amount of loans financed under secured borrowings
                throughout the year. 
 ·
            There
                was no additional provision for loan losses for the year ending December
                31, 2005, as our general allowance for loan losses was generally
                sufficient to cover inherent losses in our loan portfolio. During
                the year
                ending December 31, 2004, we recorded a general allowance of
                $73,000. 
 *Distributions
        to Members* :
        The
        following is a schedule of distributions made to members for the year ended
        December 31, 2005 and 2004.
 
 **For
                  the Year Ended December 31, 2005**
              
              **For
                  the Year Ended December 31, 2004**Distributions
                  of Net Income Available for Distribution
              
              $
              2,544,000
              
              $
              1,350,000Distributions
                  in Excess of Net Income Available for Distribution Generated During
                  the
                  Period
              
              
              11,000
              
              
              --Total
                  Distributions
              
              $
              2,555,000
              
              $
              1,350,000
 
 Net
        Income Available for Distributions is a non-GAAP financial measure that is
        defined in our Operating Agreement as cash flows from operations, less certain
        reserves, and may exceed net income as calculated in accordance with GAAP.
        We
        have presented net income available for distribution because management believes
        this financial measure is useful and important to members. Although we generally
        do not plan to make distributions in excess of net income available for
        distribution, we may do so from time to time. Any such distribution will
        be
        treated as a return of capital for income tax purposes. In addition, cash
        flows
        from operations, which are the significant component of net income available
        for
        distribution, affect the capital available for investment in new loans. This
        non-GAAP financial measure should not be considered in isolation or as a
        substitute for measures of performance prepared in accordance with GAAP or
        as an
        alternative to cash flows from operating activities as a measure of our
        liquidity. We compensate for these limitations by relying primarily on our
        GAAP
        results and using net income available for distribution only
        supplementally.
 
 The
        most
        directly comparable GAAP measure to net income available for distribution
        is
        cash flows from operating activities. The following table reconciles net
        income
        available for distribution to cash flows from operating activities and presents
        the two other major categories of our statement of cash flows:
 
 **For
                  the Year Ended**
                **December
                  31, 2005**
              
              **For
                  the Year Ended**
                **December
                  31, 2004**Distribution
                  of Net Income Available for Distribution
              
              $
              2,544,000
              
              $
              1,350,000Addition
                  to working capital reserves (Amount not distributed)
              
              
              --
              
              
              173,000Change
                  in Operating Assets and Liabilities:Deferred
                  rent receivable
              
              
              (168,000
              )
              
              --Interest
                  receivable
              
              
              (67,000
              )
              
              (127,000
              )Capitalized
                  loan fees
              
              
              --
              
              
              (115,000
              )Accounts
                  payable
              
              
              156,000
              
              
              --Due
                  to Manager
              
              
              (130,000
              )
              
              162,000Net
                  Cash Provided by Operating Activities
              
              $
              2,335,000
              
              $
              1,443,000Net
                  Cash (Used) by Investing Activities
              
              $
              (9,431,000
              )
              
              (18,533,000
              )Net
                  Cash Provided in Financing Activities
              
              $
              1,977,000
              
              $
              23,371,000
 
  -
            31
            -
 *Table
            of Contents*
  *Stated
        Unit Value Adjustment* :
        Following a periodic review by our manager as required pursuant to the Operating
        Agreement, as a result of the increase in the estimated fair value of real
        estate held for investment, effective December 15, 2005 we adjusted the stated
        unit value from $10.30 per unit to $10.50 per unit to reflect the estimated
        net
        unit value of each unit at that date. The periodic review of the estimated
        net
        unit value includes an analysis of unrealized gains that our manager reasonably
        believes exist at the time of the review, but that cannot be added to net
        asset
        value under GAAP.
 
 *Redemptions* :
        In
        order to comply with our Operating Agreement and Internal Revenue Code, we
        may
        redeem no more than 10% of the aggregate members’ capital in any calendar year.
        As of December 31, 2005, the total of redemptions made from inception was
        $341,000. Balances in members’ capital accounts as of January 1, 2005 were
        approximately $24.8 million, which limited redemptions to approximately $2.5
        million for the calendar year 2005. Total redemptions during the year ended
        December 31, 2005, were $330,000.
 
 **CAPITAL
        AND LIQUIDITY**
 
 Liquidity
        is a measure of a company’s ability to meet potential cash requirements,
        including ongoing commitments to fund investing activities and for general
        operating purposes. Subject to an approximate 3% reserve, we seek to use
        most of
        our available funds to invest in real estate loans. Distributable cash flow
        generated from such investments is paid out to our members unless they have
        elected to reinvest their distributions. We do not anticipate the need for
        hiring any employees, acquiring fixed assets such as office equipment or
        furniture, or incurring material office expenses during the next twelve months
        because Vestin Mortgage will manage our affairs.
 
 During
        the year ended December 31, 2006, cash flows provided by our operating
        activities were approximately $2.2 million. Our investing activities for
        the
        year ended December 31, 2006 consisted of cash used from the purchase of
        new
        investments in loans secured by real estate in the amount of approximately
        $29.4
        million and cash proceeds from sales and payments on investments in real
        estate
        loans were approximately $24.8 million. Cash proceeds from sale of investment
        in
        real property totaled approximately $13.4 million. In addition, we purchased
        $0.8 million in marketable securities - related party. Our financing activities
        primarily consisted of cash used for members’ distributions, net of
        reinvestments, of approximately $1.7 million, members’ redemptions of
        approximately $2.9 million and full payment of approximately $4.8 million
        on a
        note payable related to the building we sold.
 
 Since
        we
        distribute most or all of our operating income, our sources of liquidity
        include: repayments of outstanding loans, distribution reinvestments by our
        members and arrangements with third parties to participate in our loans.
        Effective November 7, 2005, we discontinued the offering of our Units, except
        for Units sold through our Distribution Reinvestment Plan.
 
 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 totaled approximately $2.2 million or 6.2% of
        our
        total assets as of December 31, 2006 as compared to none as of December 31,
        2005. Our non-performing assets, at December 31, 2006, consisted of
        approximately $0.6 million of real estate held for sale and approximately
        $1.6
        million of non-performing loans. 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.
 
  -
            32
            -
 *Table
            of Contents*
  In
        addition, any significant level of redemptions by our members would reduce
        the
        capital we have available for investment. In order to comply with our Operating
        Agreement and Internal Revenue Code, we may redeem no more than 10% of the
        aggregate Members’ capital in any calendar year. As of December 31, 2006, the
        total of redemptions made from inception was approximately $3.2 million.
        Balances in Members’ capital accounts as of January 1, 2006 were approximately
        $29.2 million, which limited redemptions to approximately $2.9 million for
        calendar 2006. Total redemptions during the year ended December 31, 2006
        were
        approximately $2.9 million. The
        remaining requests to redeem, as of December 31, 2006, were approximately
        $2.9
        million in 2007, $2.5 million in 2008, $1.8 million in 2009 and $47,000 in
        2010
        subject to unit valuation adjustments. On March
        8, 2007, we redeemed 137,766 units totaling approximately $1.5
        million.
 
 Approximately
        44% of our members, holding approximately 29% of our outstanding units,
        currently reinvest their distributions. The level of reinvested distributions
        is
        likely to be affected by our operating performance. If our performance does
        not
        meet the expectations of our members, the level of reinvestment may
        decline.
 
 Loans
        in
        which unaffiliated investors have participated through inter-creditor agreements
        (“Inter-creditor Agreements”) are accounted for as secured borrowings in
        accordance with Statement of Financial Accounting Standards (“FAS”) 140 - *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities* (“FAS
        140”). The Inter-creditor Agreements provide us additional funding sources for
        real estate loans whereby an unaffiliated investor (the “Investor”) may
        participate on a non-pari passu basis in certain real estate loans with us
        and/or VRM I and/or VRM II (collectively, the “Lead Lenders”). In the event of
        borrower non- performance, the Inter-creditor Agreements generally provide
        that
        the Lead Lenders must repay the Investor’s loan amount either by (i) continuing
        to remit to the Investor the interest due on the participated loan amount;
        (ii)
        substituting an alternative loan acceptable to the Investor; or (iii)
        repurchasing the participation from the Investor for the outstanding balance
        plus accrued interest.
 
 During
        October 2006, we, our manager, Vestin Origination, Inc., VRM I and VRM II
        entered into an intercreditor agreement with an unrelated third party related
        to
        the funding of a construction real estate loan. (See exhibit 10.10 Intercreditor
        Agreement under the Exhibit Index included in Part IV, Item 15 Exhibits and
        Financial Statement Schedules of this Report Form 10-K). The secured borrowing
        will be recognized pro rata between us, VRM I and VRM II for the amount each
        entity has funded for the loan. As of December 31, 2006, approximately $24.3
        million has been funded on this loan, of which our portion was approximately
        $1.4 million. As of December 31, 2006, this secured borrowing totaled
        approximately $18.5 million, of which our portion was approximately $4.4
        million. In the event VRM I and VRM II were unable to pay their pro rata
        share
        of the secured borrowing, we would be liable for the full outstanding balance.
        As of December
        31, 2005, we had $527,000 in funds being used under Inter-creditor
        Agreements.
 
 At
        December 31, 2006 we had restricted cash totaling $985,000, which relates
        to a
        cash deposit held as collateral by a banking institution to support rent
        payments on the property we sold during November 2006. The requirement for
        the
        deposit expires in November 2007, which may be extended for an additional
        year.
 
 We
        maintain working capital reserves of approximately 3% of aggregate members’
capital accounts in cash, cash equivalents and investments in marketable
        securities. This reserve is available to pay expenses in excess of revenues,
        satisfy obligations of underlying secured properties, expend money to satisfy
        our unforeseen obligations and for other permitted uses of the working capital.
        At December 31, 2006, we had approximately $0.8 million in cash, $0.8 million
        invested in marketable securities - related party and approximately $34.9
        million in total assets.
 
 We
        may
        seek to expand our capital resources through borrowings from institutional
        lenders or through securitization of our loan portfolio or similar arrangements.
        We currently do not have in place any commitments to borrow any funds or
        securitize any of our assets. No assurance can be given that, if we should
        seek
        to borrow funds or to securitize our assets we would be able to do so on
        commercially attractive terms. Our ability to expand our capital resources
        in
        this manner is subject to many factors, some of which are beyond our control,
        including the state of the economy, the state of the capital markets and
        the
        perceived quality of our loan portfolio.
 
  -
            33
            -
 *Table
            of Contents*
  **Investments
        in Real Estate Loans Secured by Real Estate Portfolio**
 
 We
        offer
        five real estate loan products consisting of commercial, construction,
        acquisition and development, land, and residential loans. The effective interest
        rates on all product categories range from 9% to 13%. Revenue by product
        will
        fluctuate based upon relative balances during the period. We had investments
        in
        27 real estate loans as of December 31, 2006, with a balance of approximately
        $27.1 million as compared to investments in 20 real estate loans as of December
        31, 2005, with a balance of approximately $23.0 million.
 
 At
        December 31, 2006, the following loans were non-performing (based on current
        information and events, it is probable that we will be unable to collect
        all
        amounts due according to the contractual terms of the loan agreement or when
        the
        payment of interest is 90 days past due); Monterrey Associates LP, Forest
        Development LLC and Babuski LLC. These loans are currently carried on our
        books
        at a value of approximately $1.6 million. These loans have been placed on
        non-accrual of interest status and are the subject of pending foreclosure
        proceedings.
 
 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 December 31, 2006, we have provided a general reserve of $73,000. Our
        manager
        evaluated the loans and concluded that the remaining underlying collateral
        was
        sufficient to protect us against further losses of principal or interest.
        Our
        manager will continue to evaluate these loans in order to determine if any
        other
        allowance for loan losses should be recorded. For additional information
        on our
        investments in real estate loans, refer to Note D - *Investments
        In Real Estate Loans* of the
        Notes to the Consolidated Financial Statements included in Part IV, Item *15
        Exhibits and Financial Statement Schedules* of this
        Annual Report Form 10-K.
 
 **Investment
        in Real Property**
 
 As
        of
        December 31, 2006, we had no investments in real property. During November
        2006,
        we sold our only investment in real property which consisted of an approximately
        42,000 square foot office building located at 8379 West Sunset Road in Las
        Vegas, Nevada for a gain of approximately $2.6 million. Since the sale of
        the
        building, we no longer recognize rental income related to the building. For
        additional information on our investments in real property, refer to Note
        E - *Investments
        In Real Property,* Note
        F - *Leasing
        Activity* and
        Note
        Q - *Segment
        Information* of
        the
        Notes to the Consolidated Financial Statements included in Part I, Item
        1 *Financial Statements* of this
        Interim Report Form 10-Q.
 
 **Asset
        Quality and Loan Reserves**
 
 Losses
        may occur from investing in real estate loans. The amounts of losses will
        vary
        as the loan portfolio is affected by changing economic conditions and the
        financial condition of borrowers.
 
 The
        conclusion that a real estate loan is uncollectible or that collectibility
        is
        doubtful is a matter of judgment. On a quarterly basis, the manager evaluates
        our real estate loan portfolio for impairment. The fact that a loan is
        temporarily past due does not necessarily mean that the loan is impaired.
        Rather, all relevant circumstances are considered by our manager to determine
        impairment and the need for specific reserves. Such evaluation, which includes
        a
        review of all loans on which full collectibility may not be reasonably assured,
        considers among other matters:
 
 ·
            Prevailing
                economic conditions; 
 ·
            Historical
                experience; 
 -
            34
            -
 *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 real
                estate loan amount. 
 Based
        upon this evaluation, a determination is made as to whether the allowance
        for
        loan losses is adequate to cover any potential losses. Additions to the
        allowance for loan losses are made by charges to the provision for loan losses.
        Recoveries of previously charged off amounts would be credited to the provision
        for loan losses or included in income. For
        additional information on asset quality and loan reserve, refer to *Investments
        In Real Estate Loans* of the
        Notes to the Consolidated Financial Statements included in Part IV, Item *15
        Exhibits and Financial Statement Schedules* of this
        Annual Report Form 10-K.
 
 **Segment
        Information**
 
 Operating
        segments are components of an enterprise about which separate financial
        information is available that is regularly reviewed by the chief operating
        decision makers in assessing performance and deciding how to allocate resources.
        Reportable segments consist of one or more operating segments with similar
        economic characteristics, products and services, production processes, type
        of
        customer, distribution system and regulatory environment.
 
 The
        information provided for Segment Reporting is based on internal reports utilized
        by management. The presentation and allocation of overhead and the net
        contribution for the operating segments may not reflect the actual economic
        costs, contribution or results of operations of the segments as stand-alone
        businesses. If a different basis of allocation were utilized, the relative
        contributions of the segments might differ but the relative trends in segments
        would, in management’s view, likely not be impacted. For additional information
        on our investments in real property, refer to Note Q - *Segment
        Information* of
        the
        Notes to the Consolidated Financial Statements included in Part IV, Item *15
        Exhibits and Financial Statement Schedules* of this
        Annual Report Form 10-K.
 
 **OFF-BALANCE
        SHEET ARRANGEMENTS**
 
 We
        do not
        have any interests in off-balance sheet special purpose entities nor do we
        have
        any interests in non-exchange traded commodity contracts.
 
 **CONTRACTUAL
        OBLIGATIONS**
 
 The
        following summarizes our contractual obligations at December 31,
        2006:
 
 **Contractual
                  Obligation**
              
              **Total**
              
              **Less
                  Than 1 Year**
              
              **1-3
                  Years**
              
              **3-5
                  Years**
              
              **More
                  Than**
                **5
                  Years**Secured
                  borrowings (1)
              
              $
              4,430,000
              
              $
              4,430,000
              
              $
              --
              
              $
              --
              
              $
              --Total
              
              $
              4,430,000
              
              $
              4,430,000
              
              $
              --
              
              $
              --
              
              $
              --
 (1) In
          the event VRM I and VRM II were
          unable to pay their pro rata share of the secured borrowings, we would
          be liable
          for the full outstanding balance, which was approximately $18.5 million
          as of
          December 31, 2006.
  -
            35
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 *Table
            of Contents*
  **CRITICAL
        ACCOUNTING ESTIMATES**
 
 **Revenue
        Recognition**
 
 Interest
        income on loans is accrued by the effective interest method. We do not recognize
        interest income from loans once they are determined to be impaired. A loan
        is
        impaired when, based on current information and events, it is probable that
        we
        will be unable to collect all amounts due according to the contractual terms
        of
        the loan agreement or when the payment of interest is 90 days past
        due.
 
 The
        following table presents a sensitivity analysis to show the impact on our
        financial condition at December 31, 2006 from fluctuations in weighted average
        interest rate charged on loans as a percentage of the loan
        portfolio:
 
 **Changed
                  Assumption**
              
              **Increase
                  (Decrease) in Interest Income**Weighted
                  average interest rate assumption increased by 1.0% or 100 basis
                  points
              
              $
              201,000Weighted
                  average interest rate assumption increased by 5.0% or 500 basis
                  points
              
              $
              1,004,000Weighted
                  average interest rate assumption decreased by 1.0% or 100 basis
                  points
              
              $
              (201,000
              )Weighted
                  average interest rate assumption decreased by 5.0% or 500 basis
                  points
              
              $
              (1,004,000
              )
 
 The
        purpose of this analysis is to provide an indication of the impact that the
        weighted average interest rate fluctuations would have on our financial results.
        It is not intended to imply our expectation of future revenues or to estimate
        earnings. We believe that the assumptions used above are appropriate to
        illustrate the possible material impact on the consolidated financial
        statements.
 
 **Allowance
        for Loan Losses**
 
 We
        maintain an allowance for loan losses on our investments in real estate loans
        for estimated credit impairment in our investment in real estate loans
        portfolio. 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 December 31, 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
              
              $
              271,000Allowance
                  for loan losses assumption increased by 5.0% of loan
                  portfolio
              
              $
              1,354,000Allowance
                  for loan losses assumption decreased by 0.3% of loan
                  portfolio
              
              $
              (73,000
              )
 
 Estimating
        allowances for loan losses requires significant judgment about the underlying
        collateral, including liquidation value, condition of the collateral, competency
        and cooperation of the related borrower and specific legal issues that affect
        loan collections or taking possession of the property. As a non-conventional
        lender willing to invest in loans to borrowers who may not meet the credit
        standards of conventional lenders, the default rate on our loans could be
        higher
        than those generally experienced in the mortgage lending industry. We, our
        manager and Vestin Originations generally approves loans more quickly than
        other
        real estate lenders and, due to our expedited underwriting process, there
        is a
        risk that the credit inquiry we perform will not reveal all material facts
        pertaining to a borrower and the security.
 
  -
            36
            -
 *Table
            of Contents*
  We
        may
        discover additional facts and circumstances as we continue our efforts in
        the
        collection and foreclosure processes. This additional information often causes
        management to reassess its estimates. Circumstances that may cause significant
        changes in our estimated allowance include, but not limited to:
 
 ·
            Declines
                in real estate market conditions that can cause a decrease in expected
                market value; 
 ·
            Discovery
                of undisclosed liens for community improvement bonds, easements and
                delinquent property taxes; 
 ·
            Lack
                of progress on real estate developments after we advance funds. We
                customarily utilize disbursement agents to monitor the progress of
                real
                estate developments and approve loan advances. After further inspection
                of
                the related property, progress on construction occasionally does
                not
                substantiate an increase in value to support the related loan
                advances; 
 ·
            Unanticipated
                legal or business issues that may arise subsequent to loan origination
                or
                upon the sale of foreclosed upon property;
                and 
 ·
            Appraisals,
                which are only opinions of value at the time of the appraisal, may
                not
                accurately reflect the value of the
                property. 
 **Real
        Estate Held For Sale**
 
 Real
        estate held for sale includes real estate acquired through foreclosure and
        will
        be carried at the lower of the recorded amount, inclusive of any senior
        indebtedness, or the property's estimated fair value, less estimated costs
        to
        sell, with fair value based on appraisals and knowledge of local market
        conditions. While pursuing foreclosure actions, 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. 
 **ITEM
        7A.**  **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.
 
 
  -
            37
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 *Table
            of Contents*
  Most
        of
        our assets consisted of investments in real estate loans, which from time
        to
        time include those that are financed under Inter-creditor Agreements. At
        December 31, 2006, our aggregate investment in real estate loans was
        approximately $27.1 million, net of allowance, with a weighted average effective
        interest rate of 11.31%. We had one loan financed under an Inter-creditor
        Agreement at December 31, 2006, which was classified as assets under secured
        borrowing totaling approximately $4.4 million. Most of the real estate loans
        had
        an initial term of 12 months. The weighted average term of outstanding loans,
        including extensions, at December 31, 2006 was 14 months. All but one of
        the
        outstanding real estate loans at December 31, 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 had prepayment penalties and nine had an exit fee.
 
 Market
        fluctuations in interest rates generally do not affect the carrying value
        of our
        investment in real estate loans. However, significant and sustained changes
        in
        interest rates could affect our operating results. If interest rates decline
        significantly, some of the borrowers could prepay their loans with the proceeds
        of a refinancing at lower interest rates. This would reduce our earnings
        and
        funds available for distribution to members. On the other hand, a significant
        increase in interest rates could result in a slowdown in real estate development
        activity that would reduce the demand for commercial real estate loans. As
        a
        result, we might encounter greater difficulty in identifying appropriate
        borrowers. We are not in a position to quantify the potential impact on our
        operating results from a material change in interest rates.
 
 The
        following table contains information about the investment in real estate
        loans
        held in our portfolio as of December 31, 2006. The presentation aggregates
        the
        investment in real estate loans by their maturity dates for maturities occurring
        in each of the years 2007 through 2010 and thereafter and separately aggregates
        the information for all maturities arising after 2010. The carrying values
        of
        these assets approximate their fair value as of December 31, 2006.
 
 **Interest
                  Earning Assets**
                **Aggregated
                  by Maturity at December 31, 2006****Interest
                  Earning Assets**
              
              **2007**
              
              **2008**
              
              **2009**
              
              **2010**
              
              **Thereafter**
              
              **Total**Investments
                  In Real Estate Loans
              
              $
              27,072,000
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              27,072,000Weighted
                  Average Interest Rates
              
              
              11.31%
              
              
              --%
              
              
              --%
              
              
              --%
              
              
              --%
              
              
              11.31%
 
 At
        December 31, 2006, we also had approximately $1.6 million invested in cash,
        cash
        equivalents and marketable securities - related party (VRM II). Approximately
        3%
        of our aggregate members capital accounts 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
        8.**  **FINANCIAL
        STATEMENTS AND SUPPLEMENTARY DATA**
 
 The
        consolidated financial statements and supplementary data are indexed in Part
        IV,
        Item 15 *Exhibits
        and Financial Statement Schedules* of this
        Report Form 10-K.
 
 **ITEM
        9.**  **CHANGES
        IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**
 
 None
  -
            38
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 *Table
            of Contents*
  
 **ITEM
        9A.**  **CONTROLS
        AND PROCEDURES**
 
 **Evaluation
        of Disclosure Controls and Procedures**
 
 We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed in our reports under the Exchange Act
        is
        recorded, processed, summarized and reported within the time periods specified
        in the SEC's rules and forms, and that such information is accumulated and
        communicated to our management, including our manager’s Chief Executive Officer
        (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely
        decisions regarding required financial disclosure. In connection with the
        preparation of this Report on Form 10-K, our manager carried out an evaluation,
        under the supervision and with the participation of our manager’s CEO and CFO,
        as of December 31, 2006, of the effectiveness of the design and operation
        of our
        disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
        under the Exchange Act. Based upon this evaluation, our manager’s CEO and CFO
        believe that these controls and procedures are adequate to ensure we are
        able to
        collect, process and disclose the information we are required to disclose
        in the
        reports it files with the SEC within the required time periods.
 
 The
        certifications of the our managers Chief Executive Officer and Chief Financial
        Officer required under Section 302 of the Sarbanes-Oxley Act have been filed
        as
        Exhibits 31.1 and 31.2 to this report.
 
 **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. In addition, 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. Therefore,
        even those systems determined to be effective can provide only reasonable
        assurance with respect to financial statement preparation and
        presentation.
 
 Management
        is conducting an assessment, including testing, of the effectiveness of our
        internal control over financial reporting as of December 31, 2006. In making
        this assessment of internal control over financial reporting, management
        is
        using the criteria in *Internal Control -- Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission
        (“COSO”). Management, with the participation of the Chief Executive and Chief
        Financial Officers, believes that, as of December 31, 2006, the Company’s
        internal control over financial reporting requires continued testing in order
        to
        conclude on the effectiveness of the controls
 
 **Changes
        in Internal Control Over Financial Reporting**
 
 Our
        management has not identified any changes in our internal controls over
        financial reporting during the Quarter ended December 31, 2006, that have
        materially affected, or are reasonably likely to materially affect, our internal
        controls over financial reporting, except as discussed below.
 
 During
        January 2007, to consolidate the duplicate functions held by the manager
        and the
        audit committee, we eliminated the role of the audit committee.
 
  -
            39
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 *Table
            of Contents*
  Because
        of the inherent limitations in all control systems, no evaluation of controls
        can provide absolute assurance that all control issues within our company
        have
        been or will be detected. Even effective internal control over financial
        reporting can only provide reasonable assurance with respect to financial
        statement preparation. Furthermore, because of changes in conditions, the
        effectiveness of internal control over financial reporting may vary over
        time.
        Our management, including our Chief Executive Officer and Chief Financial
        Officer, does not expect that our controls and procedures will prevent all
        errors.
 
 **ITEM
        9B.**  **OTHER
        INFORMATION**
 
 None.
 
 **PART
        III**
 
 **ITEM
        10.**  **DIRECTORS,
        EXECUTIVE OFFICERS** **AND
        CORPORATE GOVERNANCE**
 
 We
        do not
        have any directors or officers. We are managed on a day-to-day basis by Vestin
        Mortgage, a privately held company wholly owned by Vestin Group, Inc. Vestin
        Group, Inc. was previously a publicly held company and maintained an audit
        committee consisting of independent directors. The Vestin Group audit committee
        previously functioned as the equivalent of our audit committee. Since May
        2005,
        Vestin Group has been a privately held company and since March 2006 it no
        longer
        has any independent directors. Michael Shustek, the principal executive officer
        of our manager, is the sole director of Vestin Group, Inc. Our Manager currently
        functions as the equivalent of our audit committee. Our units are not listed
        on
        any exchange and we are not required to have an audit committee which consists
        of independent directors and meets the other requirements of Section 10A(m)
        of
        the Securities Exchange Act of 1934 and the rules promulgated
        thereunder.
 
 The
        following table sets forth the names, ages as of March 21, 2007 and positions
        of
        the individuals who serve as directors and executive officers of Vestin Mortgage
        (our manager), Vestin Group, Vestin Originations or our affiliates:
 
 **Name**
              **Age**
              **Title**Michael
                  V. Shustek
              48
              President,
                  Chief Executive Officer and ChairmanRocio
                  Revollo
              45
              Chief
                  Financial OfficerJames
                  M. Townsend
              37
              Chief
                  Operating OfficerMichael
                  J. Whiteaker
              57
              Vice
                  President of Regulatory AffairsDaniel
                  B. Stubbs
              45
              Senior
                  Vice President
 
 **Directors
        and Executive Officers of Vestin Mortgage (our manager), Vestin Group, Vestin
        Originations or our affiliates**
 
 *Michael
        V. Shustek* has been
        a director of our manager and Chairman of the Board of Directors, Chief
        Executive Officer and a director of Vestin Group since April 1999. In addition,
        Mr. Shustek has been a Director and the CEO of VRM I and VRM II since January
        2006. In February 2004, Mr. Shustek became the President of Vestin Group.
        Mr.
        Shustek also serves on the loan committee of our manager and its affiliates.
        In
        2003, Mr. Shustek became the Chief Executive Officer of our manager. In 1995,
        Mr. Shustek founded Del Mar Mortgage, and has been involved in various aspects
        of the real estate industry in Nevada since 1990. In 1993, he founded
        Foreclosures of Nevada, Inc., a company specializing in non-judicial
        foreclosures. In 1993, Mr. Shustek also started Shustek Investments, a company
        that originally specialized in property valuations for third-party lenders
        or
        investors and which continues today as the primary vehicle for his private
        investment portfolio. In 1997, Mr. Shustek was involved in the initial founding
        of Nevada First Bank, with the largest initial capital base of any new state
        charter in Nevada’s history. Mr. Shustek has co-authored two books, entitled
“Trust Deed Investments,” on the topic of private mortgage lending, and “If I
        Can Do It, So Can You.” Mr. Shustek is a guest lecturer at the University of
        Nevada, Las Vegas, where he also has taught a course in Real Estate Law and
        Ethics. Mr. Shustek received a Bachelor of Science degree in Finance at the
        University of Nevada, Las Vegas. See Item 3 *Legal
        Proceedings* ,
        regarding legal matters involving our manager and Mr. Shustek.
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            40
            -
 *Table
            of Contents*
  *Rocio
        Revollo* has
        served as the Chief Financial Officer of Vestin Group since March 21, 2007,
        prior to that Ms. Revollo was the Corporate Controller of Vestin Group from
        June
        2005 to March 2007. Ms. Revollo previously served as Corporate Controller
        for
        Sobel Westex from January 2002 through May 2005. From April 1999 to December
        2001, Ms. Revollo was a financial consultant for Re:Source Connections. Ms.
        Revollo is a Certified Public Accountant and worked for the accounting firm
        of
        KPMG LLP. She received a Bachelor of Business Administration degree in
        Accounting and a Bachelor of Arts degree in Communication Studies from the
        University of Nevada, Las Vegas.
 
 *James
        M. Townsend* has
        served as the Chief Operating Officer of Vestin Group since January 2007.
        Mr.
        Townsend also serves on the loan committee of Vestin Mortgage and its
        affiliates. Mr. Townsend has over 15 years of experience in the securities
        industry. From February 2004 to September 2006, Mr. Townsend was the National
        Sales Manager of Samco Financial Services, Inc. From November 2003 to February
        2004, Mr. Townsend was employed by Vestin Group as Manager of the Wholesale
        Division. From September 2002 to October of 2004, Mr. Townsend was National
        Sales Manager of Samco Financial Services, Inc. From February 1997 to July
        2002,
        Mr. Townsend was employed by Donald & Co. Securities, Inc., as both a Sales
        Manager and the National Sales Manager. Mr. Townsend received a Bachelor
        of
        Science degree in Business Administration from The University of Texas at
        Dallas.
 
 *Michael
        J. Whiteaker* has been
        Vice President of Regulatory Affairs of our manager and Vestin Group since
        May
        1999. Mr. Whiteaker is experienced in the banking and finance regulatory
        fields,
        having most recently served with the State of Nevada, Financial Institution
        Division from 1982 to 1999 as its Supervisory Examiner, responsible for the
        financial and regulatory compliance audits of all financial institutions
        in
        Nevada. Mr. Whiteaker has worked extensively on matters pertaining to both
        state
        and federal statutes, examination procedures, policy determination and credit
        administration for commercial and real estate loans. From 1973 to 1982, Mr.
        Whiteaker was Assistant Vice President of Nevada National Bank, responsible
        for
        a variety of matters including loan review.
 
 *Daniel
        B. Stubbs* has been
        the Senior Vice President of Underwriting and Secretary of our manager from
        January 2000 to July 2006, and has continued in that capacity in Vestin
        Originations since July 2006. Mr. Stubbs heads the loan department for our
        manager’s affiliates and is responsible for reviewing loan requests and performs
        due diligence necessary for risk analysis in connection with the underwriting
        process. In addition, Mr. Stubbs serves on the loan committee and acts as
        liaison for our manager and its affiliates with the various commercial loan
        participants. Mr. Stubbs has 15 years experience in the title insurance industry
        and has received a Bachelor of Arts degree in Communication Studies from
        the
        University of Nevada, Las Vegas.
 
 **Code
        of Ethics**
 
 As
        we do
        not have any executive officers we have not adopted a Code of Ethics. However,
        each of the executive officers of Vestin Mortgage, our manager, are under
        an
        obligation to follow the Code of Ethics of Vestin Group that has been filed
        as
        Exhibit 14.1 to Vestin Group’s Form 10-KSB for the year ended December 31, 2003.
        If our manager or Vestin Group makes any substantive amendments to the Code
        of
        Ethics or if our manager grants any waiver, including any implicit waiver,
        from
        a provision of the Code of Ethics to its chief executive officer, chief
        financial officer or chief accounting officer, we will disclose the nature
        of
        such amendment or waiver on our website or in a Report on Form 8-K or quarterly
        or annual report under the Securities and Exchange Act of 1934.
 
 **ITEM
        11.**  **EXECUTIVE
        COMPENSATION**
 
 Not
        Applicable.
 **ITEM
        12.**  **SECURITY
        OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT** **AND RELATED STOCKHOLDERMATTERS**
 
 As
        of
        March 28, 2007, one member owned more than 5% of our 2,653,601 membership
        units
        as noted below.
 
 The
        following table sets forth the total number and percentage of our membership
        units beneficially owned as of March 5, 2007 by:
 
  -
            41
            -
 *Table
            of Contents*
  
 ·
            each
                of our manager’s directors; 
 ·
            our
                manager’s chief executive officer and other executive officers;
                and 
 ·
            all
                of our manager’s executive officers and directors as a
                group. 
 Unless
        otherwise noted, the percentage ownership is calculated based on 2,653,601
        shares of our total outstanding membership units as of March
        28,
        2007.
 
 **Membership
                  Units Beneficially Owned****Beneficial
                  Owner**
              
              **Number**
              
              **Percent**Michael
                  V. Shustek (1)
              
              
              187,407
              
              
              7.06
              %All
                  directors and executive officers as a group
              
              
              187,407
              
              
              7.06
              %
 
 **
        Less
        than one percent of our total outstanding membership units.
 
 (1)
            Includes
                54,862 units held by our manager and 132,545 units held by Michael
                Shustek. Mr. Shustek is the Chairman, President and Chief Executive
                Officer of Vestin Mortgage and indirectly owns all of the capital
                stock of
                our manager through Vestin Group. Mr. Shustek has sole voting and
                investment power in all these units. 
 **ITEM
        13.**  **CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS** **,
        AND DIRECTOR INDEPENDENCE**
 
 From
        time
        to time we may acquire or sell investments in real estate loans from/to our
        manager or other related parties pursuant to the terms of our Operating
        Agreement provided the price does not exceed the par value. No gain or loss
        is
        recorded on these transactions, as it is not our intent to make a profit
        on the
        purchase or sale of such investments. The purpose is generally to diversify
        our
        portfolio by syndicating loans, thereby providing us with additional capital
        to
        make additional loans.
 
 **Transactions
        with the Manager**
 
 Our
        manager is entitled to receive from us a management (acquisition and advisory)
        fee up to 2.5% of the gross offering proceeds and up to 3% of our rental
        income.
        For the year ended December 31, 2006 and 2005, we recorded fees to our manager
        of $45,000 and $155,000 respectively. During April 2006, we recognized a
        capital
        contribution from our Manager related to a forgiveness of management fee
        incurred in the amount of $64,000.
 
 We
        sold a
        portion of a loan to our manager for $700,000 and repurchased the same portion
        for $700,000 during November 2006. No gain or loss was recognized on this
        transaction.
 
 Our
        manager was reimbursed for out of pocket offering expenses in an amount not
        to
        exceed 2% of the gross proceeds of the offering of our units. As of December
        31,
        2005, offering costs of $565,000 were incurred by us and paid by our manager
        on
        our behalf. These deferred offerings costs, which are primarily legal,
        accounting and registration fees, were converted to 54,862 membership units
        at a
        price equal to the then effective unit value. The additional costs above
        the 2%
        of the gross proceeds of the offering were absorbed by our manager.
 
 During
        the years ended December 31, 2006 and 2005 we paid pro rata distributions
        owed
        to our manager of $48,000 and $82,000, respectively based upon 54,862 units
        owned by our manager.
 
 We
        recognized approximately $0.9 million and $1.0 million in rental income for
        the
        years ended December 31, 2006 and 2005, respectively, from Vestin Group related
        to an office building located in Las Vegas, Nevada. This building was sold
        to an
        unrelated third party during November 2006.
 
  -
            42
            -
 *Table
            of Contents*
  In
        November 2006, we sold the building to an unrelated third party for a cash
        sales
        price of $14,250,000 and recognized a gain of approximately $2.6 million,
        net of
        sales expenses, which included a 3.0% sales commission to our manager of
        $428,000.
 
 **Transactions
        with Other Related Parties**
 
 During
        the year ended December 31, 2006 and 2005, we sold $4.9 million and $500,000,
        respectively, in real estate loans to VRM II. In addition, during the year
        ended
        December 31, 2006, we bought $6.0 million in real estate loans from VRM II.
        There was no gain or loss associated with such transactions.
 
 As
        of
        December 31, 2006, we owned 158,191 of VRM II’s common shares. For the year
        ended December 31, 2006, we recorded $47,000 in dividend income based on
        the
        number of shares we held on the dividend record dates.
 
 During
        the years ended December 31, 2006 and 2005 we paid pro rata distributions
        owed
        to inVestin of $31,000 and $16,000 respectively, based upon 34,856 units
        owned
        by inVestin.
 
 During
        the year ended December 31, 2006 and 2005, we incurred expenses of $20,000
        and
        $10,000 respectively, for legal fees to the law firm of Levine, Garfinkel
&
Katz. The Secretary of Vestin Group has an equity ownership interest in the
        law
        firm.
 
 **ITEM
        14.**  **PRINCIPAL
        ACCOUNTING FEES AND SERVICES**
 
 During
        the fiscal year ended December 31, 2006 and 2005, Moore Stephens Wurth Frazer
        and Torbet, LLP (“Moore Stephens”) provided various audit, audit related and
        non-audit services to us as follows:
 
 **December
                  31, 2006**
              
              **December
                  31, 2005**Audit
                  Fees
              
              $
              138,000
              
              $
              112,000Audit
                  Related Fees
              
              $
              --
              
              $
              --Tax
                  Fees
              
              $
              --
              
              $
              --All
                  Other Fees
              
              $
              --
              
              $
              --
 
 Mr.
        Shustek, the sole director of Vestin Group, has considered whether provision
        of
        the services described regarding audit related fees, tax fees and all other
        fees
        above were compatible with maintaining the independent accountant’s independence
        and has determined that such services did not adversely affect Moore Stephens’
independence.
 
 Mr.
        Shustek has direct responsibility to review and approve the engagement of
        the
        independent auditors to perform audit services or any permissible non-audit
        services. All audit and non-audit services to be provided by the independent
        auditors must be approved in advance by Mr. Shustek. He may not engage the
        independent auditors to perform specific non-audit services proscribed by
        law or
        regulation. All services performed by independent auditors under engagements
        entered into on or after January 21, 2005, were approved by Mr. Shustek pursuant
        to his pre-approval policy, and none was approved pursuant to the *de
        minimus* exception
        to the rules and regulations of the Securities Exchange Act of 1934, Section
        10A(i)(1)(B), on pre-approval.
 
 **PART
        IV**
 **ITEM
        15.**  **EXHIBITS,
        FINANCIAL STATEMENT SCHEDULES**
  (a)
        1. Financial
        Statements
  The
        consolidated financial statement are contained on Pages F-2 through F-24
        on this
        Annual Report on Form 10-K, and the list of the consolidated financial
        statements contained herein is set forth on page F-1, which is hereby
        incorporated by reference.
 
 (a)
        2. Financial
        Statement Schedules
 
 
  -
            43
            -
 *Table
            of Contents*
  
 **EXHIBITINDEX**
 
 **Exhibit****No.**
              
              **Description
                  of Exhibits**3.1(1)
              
              Articles
                  of Organization3.2(2)
              
              Certificate
                  of Amendment to Articles of Organization3.3(3)
              
              Amended
                  and Restated Operating Agreement (included as Exhibit A to the
                  prospectus)4(4)
              
              Distribution
                  Reinvestment Plan10.7
                  (5)
              
              Purchase
                  and Sale Agreement, dated August 1, 2004, by and between Luke Properties,
                  LLC and Vestin Fund III, LLC10.8
                  (5)
              
              Assignment
                  and Assumption Agreement dated August 16, 2004 by and between Vestin
                  Fund
                  III, LLC and VF III HQ, LLC10.9(6)
              
              Office
                  lease agreement dated March 31, 2003 by and between Luke Properties,
                  LLC
                  and Vestin Group, Inc.10.10(7)
              
              Intercreditor
                  Agreement, dated October 13, 2006, by and between Vestin Originations,
                  Inc., Vestin Mortgage, Inc. Vestin Realty Mortgage I, Inc., Vestin
                  Realty
                  Mortgage II, Inc., Vestin Fund III, LLC, Owens Financial Group,
                  Inc. and
                  Owens Mortgage Investment Fund31.1
              
              Section
                  302 Certification of Michael V.
                  Shustek31.2
              
              Section
                  302 Certification of Rocio
                  Revollo32
              
              Certification
                  Pursuant to U.S.C. 18 Section
                  1350
 
 (1)
              
              Incorporated
                  herein by reference to our Pre-Effective Amendment No. 3 to Form
                  S-11
                  Registration Statement filed on September 2, 2003, File No.
                  333-105017.(2)
              
              Incorporated
                  herein by reference to our Form 10-Q filed on August 16, 2004,
                  File No.
                  333-105017.(3)
              
              Incorporated
                  herein by reference to our Post-Effective Amendment No. 1 to Form
                  S-11
                  Registration Statement filed on April 29, 2004, File No.
                  333-105017.(4)
              
              Incorporated
                  herein by reference to Exhibit 4.4 of our Post-Effective Amendment
                  No. 5
                  to Form S-11 Registration Statement filed on April 28, 2006, File
                  No.
                  333-105017.(5)
              
              Incorporated
                  herein by reference to our Form 10-Q filed on November 15, 2004,
                  File No.
                  333-105017.(6)
              
              Incorporated
                  herein by reference to our Form 10-KSB filed on March 30, 2005,
                  File No.
                  333-105017.(7)
              
              Incorporated
                  herein by reference to the Quarterly Report on Form 10-Q for the
                  three
                  months ended September 30, 2006 filed on November 8, 2006 (File
                  No.
                  000-51301)
 
 
  -
            44
            -
 *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
                  Fund III, LLCBy:
              
              Vestin
                  Mortgage, Inc., its sole ManagerBy:
              
              */s/
                  Michael V. Shustek*Michael
                  V. ShustekChief
                  Executive Officer and Sole Director of the Manager(Principal
                  Executive Officer of Manager)By:
              
              */s/**Rocio Revollo*Rocio
                  RevolloChief
                  Financial Officer of the Manager(Principal
                  Financial and Accounting Officer of the
                  Manager)
 
 Dated:
        March 29, 2007
 
 
  -
            45
            -
 *Table
            of Contents*
 
  **INDEX
        TO** **CONSOLIDATED** **FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION**
 
 **Page**REPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
                  FIRM
              F-2CONSOLIDATED
                  FINANCIAL STATEMENTSConsolidated
                  Balance Sheets
              F-3Consolidated
                  Statements of Income
              F-4Consolidated
                  Statements of Members’ Equity and Other
                  Comprehensive Income
              F-5Consolidated
                  Statements of Cash Flows
              F-6Notes
                  to the Consolidated Financial
                  Statements
              F-8SUPPLEMENTARY
                  INFORMATIONInvestments
                  in Real Estate Loans:Real
                  Estate Loan Roll Forward
              F-32Real
                  Estate Loans by Type of Property
              F-33Real
                  Estate Loans by Lien Position
              F-33Real
                  Estate Loans that Exceed Three Percent of the
                  Portfolio
              F-34
 
  The
            accompanying notes are an integral part of these consolidated
            statements.
 F
            -
            1
 *Table
            of Contents*
  
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
        FIRM**
 
 
 To
        the
        Members
 Vestin
        Fund III, LLC
 Las
        Vegas, Nevada
 
 We
        have
        audited the accompanying consolidated balance sheets of Vestin Fund III,
        LLC and
        subsidiary (the “Company”) as of December 31, 2006 and 2005, and the related
        consolidated statements of income, members’ equity and other comprehensive
        income, and cash flows for each of the three years in the period ended December
        31, 2006. These consolidated financial statements are the responsibility
        of the
        Company’s management. Our responsibility is to express an opinion on these
        consolidated financial statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. The Company is not
        required to have, nor were we engaged to perform, an audit of its internal
        control over financial reporting. Our audit included consideration of internal
        control over financial reporting as a basis for designing audit procedures
        that
        are appropriate in the circumstances, but not for the purpose of expressing
        an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of Vestin Fund
        III, LLC and subsidiary as of December 31, 2006 and 2005, and the consolidated
        results of their operations and their consolidated cash flows for each of
        the
        three years in the period ended December 31, 2006, in conformity with U.S.
        generally accepted accounting principles.
 
 The
        supplemental schedules are presented for purposes of additional analysis
        and are
        not a required part of the consolidated financial statements. Such information
        has been subjected to the auditing procedures applied in our audits of the
        consolidated financial statements and, in our opinion, is fairly stated in
        all
        material respects in relation to the consolidated financial statements taken
        as
        a whole.
 
 
 /s/ MOORE
        STEPHENS WURTH FRAZER AND TORBET, LLP
 
 
 March
        28,
        2007
 Orange,
        California
 
 
 
 
  The
            accompanying notes are an integral part of these consolidated
            statements.
 F
            -
            2
 *Table
            of Contents*
  **CONSOLIDATED
        FINANCIAL STATEMENTS**
 
 **VESTIN
                  FUNDIII, LLC****CONSOLIDATED
                  BALANCE SHEETS****ASSETS****December
                  31, 2006**
              
              **December
                  31, 2005**AssetsCash
                  and cash equivalents
              
              $
              819,000
              
              $
              1,167,000Cash
                  - restricted
              
              
              985,000
              
              
              --Marketable
                  securities - related party
              
              
              831,000
              
              
              --Interest
                  and other receivables
              
              
              270,000
              
              
              194,000Real
                  estate held for sale
              
              
              575,000
              
              
              --Investment
                  in real estate loans, net of allowance for loan losses of $73,000
                  at
                  December 31, 2006 and 2005
              
              
              26,999,000
              
              
              22,964,000Investment
                  in real property, net of accumulated depreciation of $287,000 at
                  December
                  31, 2005
              
              
              --
              
              
              9,591,000Capitalized
                  loan fees, net of amortization of $16,000 at December 31,
                  2005
              
              
              --
              
              
              99,000Assets
                  under secured borrowings
              
              
              4,430,000
              
              
              527,000Due
                  from Vestin Originations
              
              
              10,000
              
              
              --Deferred
                  rent receivable - related party
              
              
              --
              
              
              168,000Other
                  assets
              
              
              6,000
              
              
              --Total
                  assets
              
              $
              34,925,000
              
              $
              34,710,000**LIABILITIES
                  AND MEMBERS' EQUITY**LiabilitiesAccounts
                  payable and accrued liabilities
              
              $
              93,000
              
              $
              156,000Due
                  to Manager
              
              
              --
              
              
              38,000Secured
                  borrowings
              
              
              4,430,000
              
              
              527,000Note
                  payable
              
              
              --
              
              
              4,830,000Deferred
                  income
              
              
              985,000
              
              
              --Total
                  liabilities
              
              
              5,508,000
              
              
              5,551,000Commitments
                  and ContingenciesMembers'
                  equity - authorized 10,000,000 units, 2,775,376 units and 2,974,419
                  units
                  issued and outstanding at December 31, 2006 and December 31, 2005
                  respectively
              
              
              29,434,000
              
              
              29,159,000Accumulated
                  other comprehensive loss
              
              
              (17,000
              )
              
              --Total
                  members' equity
              
              
              29,417,000
              
              
              29,159,000Total
                  liabilities and members' equity
              
              $
              34,925,000
              
              $
              34,710,000
 
 
  The
            accompanying notes are an integral part of these consolidated
            statements.
 F
            -
            3
 *Table
            of Contents*
  
 **VESTIN
                  FUNDIII, LLC****CONSOLIDATED
                  STATEMENTS OF INCOME****For
                  the Years Ended**
                **December
                  31,****2006**
              
              **2005**
              
              **2004****Revenues**Interest
                  income from investment in real estate loans
              
              $
              2,410,000
              
              $
              2,501,000
              
              $
              1,956,000Rental
                  income - related party
              
              
              944,000
              
              
              1,040,000
              
              
              317,000Dividend
                  income - related party
              
              
              47,000
              
              
              --
              
              
              --Other
              
              
              94,000
              
              
              75,000
              
              
              87,000Total
                  revenues
              
              
              3,495,000
              
              
              3,616,000
              
              
              2,360,000**Operating
                  expenses**Management
                  fees - related party
              
              
              45,000
              
              
              155,000
              
              
              36,000Interest
                  expense related to secured borrowings
              
              
              116,000
              
              
              136,000
              
              
              630,000Interest
                  expense related to investment in real estate
              
              
              661,000
              
              
              301,000
              
              
              80,000Provision
                  for loan loss
              
              
              --
              
              
              --
              
              
              73,000Depreciation
                  and amortization
              
              
              204,000
              
              
              222,000
              
              
              81,000Professional
                  fees
              
              
              207,000
              
              
              314,000
              
              
              62,000Professional
                  fees - related party
              
              
              20,000
              
              
              93,000
              
              
              --Other
              
              
              24,000
              
              
              73,000
              
              
              28,000Total
                  operating expenses
              
              
              1,277,000
              
              
              1,294,000
              
              
              990,000**Income
                  from operations**
              
              $
              2,218,000
              
              $
              2,322,000
              
              $
              1,370,000**Other
                  income and expenses**Gain
                  on sale of building
              
              
              2,624,000
              
              
              --
              
              
              --Expenses
                  related to real estate held for sale
              
              
              (12,000
              )
              
              --
              
              
              --Total
                  other income and expenses
              
              
              2,612,000
              
              
              --
              
              
              --**NET
                  INCOME**
              
              $
              4,830,000
              
              $
              2,322,000
              
              $
              1,370,000Net
                  income allocated to members
              
              $
              4,830,000
              
              $
              2,322,000
              
              $
              1,370,000Net
                  income allocated to members per weighted average membership
                  units
              
              $
              1.67
              
              $
              0.82
              
              $
              0.78Weighted
                  average membership units
              
              
              2,896,025
              
              
              2,816,468
              
              
              1,751,700
 
 
  The
            accompanying notes are an integral part of these consolidated
            statements.
 F
            -
            4
 *Table
            of Contents*
  
 **VESTIN
                  FUNDIII, LLC****CONSOLIDATED
                  STATEMENTS OF MEMBERS' EQUITY****AND
                  OTHER COMPREHENSIVE INCOME****FOR
                  THE YEAR ENDED DECEMBER 31, 2006****Units**
              
              **Amount**Members'
                  equity at December 31, 2003
              
              
              
              
              $
              (1,000
              )Issuance
                  of units
              
              
              2,425,244
              
              
              24,278,000Net
                  income
              
              
              
              
              
              1,370,000Distributions
              
              
              
              
              
              (1,350,000
              )Reinvestments
                  of distributions
              
              
              47,462
              
              
              476,000Members'
                  redemptions
              
              
              (1,048
              )
              
              (11,000
              )Members'
                  equity at December 31, 2004
              
              
              2,471,658
              
              $
              24,762,000Issuance
                  of units, including 54,862 units issued in lieu of payment of deferred
                  offering costs
              
              
              440,677
              
              
              3,976,000Net
                  income
              
              
              
              
              
              2,322,000Distributions
              
              
              
              
              
              (2,555,000
              )Reinvestments
                  of distributions
              
              
              96,451
              
              
              984,000Members'
                  redemptions
              
              
              (34,367
              )
              
              (330,000
              )Members'
                  equity at December 31, 2005
              
              
              2,974,419
              
              $
              29,159,000Comprehensive
                  income:Net
                  income
              
              
              
              
              
              4,830,000Unrealized
                  loss on marketable securities
              
              
              
              
              
              (17,000
              )Total
                  comprehensive income
              
              
              
              
              
              4,813,000Distributions
              
              
              
              
              
              (2,544,000
              )Reinvestments
                  of distributions
              
              
              77,730
              
              
              816,000Members'
                  redemptions
              
              
              (276,773
              )
              
              (2,891,000
              )Capital
                  contribution by manager for forgiveness of debt
              
              
              
              
              
              64,000Members'
                  equity at December 31, 2006
              
              
              2,775,376
              
              $
              29,417,000
 
  The
            accompanying notes are an integral part of these consolidated
            statements.
 F
            -
            5
 *Table
            of Contents*
  
 **VESTIN
                  FUNDIII, LLC****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****For
                  the Years Ended**
                **December
                  31,****2006**
              
              **2005**
              
              **2004****Cash
                  flows from operating activities:**Net
                  income
              
              $
              4,830,000
              
              $
              2,322,000
              
              $
              1,370,000Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
              
              
              193,000
              
              
              210,000
              
              
              76,000Amortization
                  of capitalized loan fees
              
              
              11,000
              
              
              12,000
              
              
              4,000Provision
                  for loan loss
              
              
              --
              
              
              --
              
              
              73,000Gain
                  on sale of building
              
              
              (2,624,000
              )
              
              --
              
              
              --Change
                  in operating assets and liabilities:Interest
                  receivable
              
              
              (76,000
              )
              
              (67,000
              )
              
              (127,000
              )Deferred
                  rent receivable
              
              
              (123,000
              )
              
              (168,000
              )
              
              --Capitalized
                  loan fees
              
              
              --
              
              
              --
              
              
              (115,000
              )Accounts
                  payable
              
              
              (63,000
              )
              
              156,000
              
              
              --Due
                  from Vestin Originations
              
              
              (10,000
              )
              
              --
              
              
              --Due
                  to manager
              
              
              26,000
              
              
              (130,000
              )
              
              162,000Other
                  assets
              
              
              (6,000
              )
              
              --
              
              
              --Net
                  cash provided by operating activities
              
              
              2,158,000
              
              
              2,335,000
              
              
              1,443,000**Cash
                  flows from investing activities:**Investments
                  in real estate loans
              
              
              (22,695,000
              )
              
              (16,976,000
              )
              
              (20,442,000
              )Purchase
                  of investments in real estate loans from:VRM
                  II
              
              
              (6,000,000
              )
              
              --
              
              
              (10,000,000
              )Our
                  manager
              
              
              (700,000
              )
              
              --
              
              
              --Proceeds
                  from loan payoff
              
              
              19,183,000
              
              
              7,032,000
              
              
              9,736,000Sale
                  of investments in real estate loans from:VRM
                  II
              
              
              4,900,000
              
              
              500,000
              
              
              5,000,000Our
                  manager
              
              
              700,000
              
              
              --
              
              
              --Third
                  party
              
              
              --
              
              
              --
              
              
              2,114,000Purchase
                  of marketable securities - related party
              
              
              (848,000
              )
              
              --
              
              
              --Proceeds
                  from investment in real estate held for sale
              
              
              2,000
              
              
              --
              
              
              --Proceeds
                  from title settlement on investment in real property
              
              
              --
              
              
              13,000
              
              
              --Purchase
                  of investment in real property
              
              
              --
              
              
              --
              
              
              (4,941,000
              )Sale
                  of investment in real property
              
              
              13,386,000
              
              
              --
              
              
              --Cash
                  - restricted
              
              
              (985,000
              )
              
              --
              
              
              --Net
                  cash provided (used) by investing activities
              
              $
              6,943,000
              
              $
              (9,431,000
              )
              $
              (18,533,000
              )
 
 
 
  The
            accompanying notes are an integral part of these consolidated
            statements.
 F
            -
            6
 *Table
            of Contents*
  
 **VESTIN
                  FUND III, LLC****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****For
                  the Years Ended**
                **December
                  31,****2006**
              
              **2005**
              
              **2004****Cash
                  flows from financing activities:**Proceeds
                  from issuance of member units
              
              $
              --
              
              $
              3,976,000
              
              $
              24,278,000Payments
                  on notes payable
              
              
              (4,830,000
              )
              
              (98,000
              )
              
              (22,000
              )Members'
                  redemptions
              
              
              (2,891,000
              )
              
              (330,000
              )
              
              (11,000
              )Members'
                  distributions, net of reinvestments
              
              
              (1,669,000
              )
              
              (1,571,000
              )
              
              (874,000
              )Members'
                  distributions - related party
              
              
              (59,000
              )
              
              --
              
              
              --Net
                  cash provided (used) in financing activities
              
              
              (9,449,000
              )
              
              1,977,000
              
              
              23,371,000**NET
                  CHANGE IN CASH**
              
              
              (348,000
              )
              
              (5,119,000
              )
              
              6,281,000**Cash
                  and cash equivalents, beginning of period**
              
              
              1,167,000
              
              
              6,286,000
              
              
              5,000**Cash
                  and cash equivalents, end of period**
              
              $
              819,000
              
              $
              1,167,000
              
              $
              6,286,000**Supplemental
                  disclosures of cash flows information:**Interest
                  paid during the period
              
              $
              343,000
              
              $
              437,000
              
              $
              710,000Non-cash
                  investing and financing activities:Unrealized
                  loss on marketable securities - related party
              
              $
              17,000
              
              $
              --
              
              $
              --Loans
                  funded through secured borrowings
              
              $
              5,841,000
              
              $
              340,000
              
              $
              10,176,000Loan
                  payoffs of loans funded through secured borrowings
              
              $
              1,938,000
              
              $
              2,403,000
              
              $
              7,586,000Capital
                  contribution by Manager through forgiveness of liability
              
              $
              64,000
              
              $
              --
              
              $
              --Note
                  payable related to acquisition of investment in real
                  property
              
              $
              --
              
              $
              --
              
              $
              4,950,000Reimbursements
                  of offering costs paid by Vestin Mortgage converted to 54,862 membership
                  units
              
              $
              --
              
              $
              565,000
              
              $
              --Offering
                  costs paid by our manager, recorded as deferred offering costs
                  and due to
                  manager
              
              $
              --
              
              $
              455,000
              
              $
              259,000Real
                  estate held for sale acquired through foreclosure
              
              $
              577,000
              
              $
              --
              
              $
              --Recapture
                  of accumulated depreciation due to sale of building
              
              $
              480,000
              
              $
              --
              
              $
              --Recapture
                  of capitalized loan fees due to sale of building
              
              $
              115,000
              
              $
              --
              
              $
              --Recapture
                  of amortized closing costs due to sale of building
              
              $
              27,000
              
              $
              --
              
              $
              --Recapture
                  of deferred rent receivable due to sale of building
              
              $
              291,000
              
              $
              --
              
              $
              --Deferred
                  income related to sale of building
              
              $
              985,000
              
              $
              --
              
              $
              --
 
 
 
 The
            accompanying notes are an integral part of these consolidated
            statements.
 F
            -
            7
 *Table
            of Contents*
 
  
 **VESTIN
        FUNDIII, LLC**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
        A — ORGANIZATION**
 
 Vestin
        Fund III, LLC was organized in April 2003 as a Nevada limited liability company
        for the purpose of investing in real estate loans and income-producing real
        property. On March 5, 2007, a majority of our members approved the Third
        Amended
        and Restated Operating Agreement, which limits the Company’s investment
        objectives to investments in real estate loans. Prior to adopting this
        amendment, we also invested in revenue-generating commercial real estate.
        We
        sold our last real estate investment in November 2006. In this report, we
        refer
        to Vestin Fund III, LLC as “the Company”, “our Company”, the “Fund”, “we”, “us”,
        or “our”.
 
 We
        invest
        in loans secured by real estate through deeds of trust or mortgages (hereafter
        referred to collectively as “deeds of trust” and as defined in our Operating
        Agreement as “Mortgage Assets”). We commenced operations in February 2004. We
        will continue our operations until December 2023 unless dissolved prior thereto
        or extended by vote of the members under the provisions of our Operating
        Agreement.
 
 We
        are
        not a mutual fund or an investment company within the meaning of the Investment
        Company Act of 1940, nor are we subject to any regulation thereunder. As
        a
        company investing in real estate loans, investments in real estate, prior
        to
        March 5, 2007, and raising funds through our Distribution Reinvestment Plan,
        we
        are subject to the North American Securities Administration Act Mortgage
        Program
        Guidelines and Real Estate Guidelines (collectively, the “NASAA Guidelines”)
        promulgated by the state securities administrators.
 
 On
        November 7, 2003, our Registration Statement as filed with the United States
        Securities and Exchange Commission (SEC) became effective for the initial
        public
        offering of up to 10,000,000 units at $10 per unit (“unit”). On November 7,
        2005, we discontinued the offering of our units; however, members may continue
        to purchase additional Units through our Distribution Reinvestment Plan whereby
        the members’ distributions may be used to purchase additional units at the
        current value. As of December 31, 2006, we had sold approximately 3,087,564
        units, which includes 221,643 units purchased through our Distribution
        Reinvestment Plan.
 
 Our
        manager is Vestin Mortgage, Inc. (the “manager” or “Vestin Mortgage”), a Nevada
        corporation, which is a wholly owned subsidiary of Vestin Group, Inc. (“Vestin
        Group”), a Delaware corporation. Michael Shustek, the CEO and director of our
        manager, wholly owns Vestin Group, Inc., which is engaged in asset management,
        real estate lending and other financial services though its subsidiaries.
        Our
        manager, prior to June 30, 2006, also operated as a licensed Nevada mortgage
        broker and was engaged in the business of brokerage, placement and servicing
        of
        commercial loans secured by real property. On July 1, 2006, the mortgage
        broker
        license was issued to an affiliated company, Vestin Originations, Inc. that
        has
        continued the business of brokerage, placement and servicing of commercial
        real
        estate loans. Vestin Originations, Inc. is a wholly owned subsidiary of Vestin
        Group.
 
 Pursuant
        to our Operating Agreement, our manager controls the daily operating activities
        of the Company, including the power to assign duties, to determine how to
        invest
        our assets, to sign bills of sale, title documents, leases, notes, security
        agreements, real estate loan investments and contracts, and to direct our
        business operations. Consequently, our operating results are dependent on
        our
        manager’s ability and intent to continue to service the Company’s assets. The
        Operating Agreement also provides that the members have certain rights,
        including the right to terminate our manager subject to a majority vote of
        the
        members.
 
 Vestin
        Mortgage, Inc. is also the manager of Vestin Realty Mortgage I, Inc., as
        the
        successor by merger to Vestin Fund I, LLC, (“VRM I”), Vestin Realty Mortgage II,
        Inc, as the successor by merger to Vestin Fund II, LLC, (“VRM II) and inVestin
        Nevada, Inc., (“inVestin”) a company wholly owned by our manager’s CEO. These
        entities also invest in commercial real estate loans.
 
  F
            -
            8
 *Table
            of Contents*
  
 The
        consolidated financial statements include the accounts of the Company and
        its
        wholly owned subsidiary, VF III HQ, LLC. All significant inter-company
        transactions and balances have been eliminated in consolidation. During December
        2006, VF III HQ, LLC was dissolved.
 
 **NOTE
        B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 **Management
        Estimates**
 
 The
        preparation of the consolidated financial statements in conformity with
        accounting principles generally accepted in the United States of America
        (“GAAP”) requires management to make estimates and assumptions that affect the
        reported amounts of assets and liabilities and disclosure of contingent assets
        and liabilities at the date of the consolidated financial statements and
        the
        reported amounts of revenues and expenses during the reporting period. Actual
        results could differ from those estimates.
 
 **Cash
        and Cash Equivalents**
 
 Cash
        and
        cash equivalents include interest-bearing and non-interest-bearing bank
        deposits, money market accounts, short-term certificates of deposit with
        original maturities of three months or less, and short-term instruments with
        a
        liquidation provision of one month or less.
 
 **Restricted
        Cash**
 
 We
        have
        restricted cash, which relates to a cash deposit held as collateral by a
        banking
        institution to support rent payments on the property we sold during November
        2006. The requirement for the deposit expires in November 2007, which may
        be
        extended for an additional year.
 
 **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
        our manager or other related parties pursuant to the terms of our Operating
        Agreement provided the price does not exceed the par value of the loan. The
        primary purpose is to either free up capital to provide liquidity for various
        reasons, such as loan diversification, or place excess capital in investments
        to
        maximize the use of our capital. Selling or buying loans allows us to diversify
        our loan portfolio within these parameters. Due to the short-term nature
        of the
        loans we make and the similarity of interest rates in loans we normally would
        invest in, the fair value of a loan typically approximates its carrying value.
        Accordingly, discounts or premiums typically do not apply upon sales of loans
        and therefore, generally no gain or loss is recorded on these transactions,
        regardless of whether to a related or unrelated party.
 
  F
            -
            9
 *Table
            of Contents*
  Investments
        in real estate loans are secured by deeds of trust or mortgages (hereafter
        referred to as “deeds of trust”). Generally, our real estate loans require
        interest only payments with a balloon payment of the principal at maturity.
        We
        have both the intent and ability to hold real estate loans until maturity
        and
        therefore, real estate loans are classified and accounted for as held for
        investment and are carried at amortized cost. Loans sold to or purchased
        from
        affiliates are accounted for at the principal balance and no gain or loss
        is
        recognized by us or any affiliate. Loan to value ratios are based on appraisals
        obtained at the time of loan origination and may not reflect subsequent changes
        in value estimates. Such appraisals are generally dated within 12 months
        of the
        date of loan origination and may be commissioned by the borrower. The appraisals
        may be for the current estimate of the “as-if developed” value of the property,
        which approximates the post-construction value of the collateralized property
        assuming that such property is developed. “As-if developed” values on raw land
        loans or acquisition and development loans often dramatically exceed the
        immediate sales value and may include anticipated zoning changes and timely
        successful development by the purchaser. As most of the appraisals will be
        prepared on an “as-if developed” basis, if a loan goes into default prior to any
        development of a project, the market value of the property may be substantially
        less than the appraised value. As a result, there may be less security than
        anticipated at the time the loan was originally made. If there is less security
        and a default occurs, we may not recover the full amount of the
        loan.
 
 As
        of
        December 31, 2006, all of our loans provided for payments of interest only
        with
        a “balloon” payment of principal payable in full at the end of the term.
 
 In
        addition, we invest in real estate loans that require borrowers to maintain
        interest reserves funded from the principal amount of the loan for a period
        of
        time. At December 31, 2006, we had approximately $12.3 million in investments
        in
        real estate loans that had interest reserves where the total outstanding
        principal due to us and our co-lenders was approximately $120.3 million.
        These
        loans had interest reserves of approximately $5.6 million, of which our portion
        was approximately $0.6 million. At December 31, 2005, we had approximately
        $3.9
        million in investments in real estate loans that had interest reserves where
        the
        total outstanding principal due to us and our co-lenders was approximately
        $53.2
        million. These loans had interest reserves of approximately $2.4 million,
        of
        which our portion was approximately $0.7 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,
        our
        manager and Vestin Originations generally approves loans more quickly than
        other
        real estate lenders and, due to our expedited underwriting process, there
        is a
        risk that the credit inquiry we perform will not reveal all material facts
        pertaining to a borrower and the security.
 
 Additional
        facts and circumstances are discovered as we continue our efforts in the
        collection and foreclosure processes. This additional information often causes
        management to reassess its estimates. Circumstances that may cause significant
        changes in our estimated allowance include, but are not limited to:
 
  F
            -
            10
 *Table
            of Contents*
  
 ·
            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. 
 **Investments
        in Real Property**
 
 Real
        property is stated at cost, less accumulated depreciation. Amounts capitalized
        as investments in real property consist of the cost of acquisition or
        construction and any tenant improvements or major improvements that extend
        the
        useful life of the related asset. All repairs and maintenance are expensed
        as
        incurred. Upon acquisition, the purchase price of the property is allocated
        to
        land, building and improvements and other intangible assets and associated
        liabilities as required by FAS 141 - *Business
        Combinations* (“FAS
        141”). The allocation to land is based on an estimate of its fair value based
        on
        available information, including appraisals. The allocation to other intangible
        assets represents the value associated with the in-place leases, including
        leasing commissions, legal and other related costs.
 
 Real
        property is depreciated using the straight-line method over the useful lives
        of
        the assets by class generally as follows:
 
 Land
              
              Not
                  DepreciatedBuilding
              
              40
                  YearsBuilding
                  Improvements
              
              10-25
                  YearsLand
                  Improvements
              
              20-25
                  YearsTenant
                  Improvements
              
              Lease
                  TermIntangible
                  Lease Assets including capitalized loan fees
              
              Lease
                  Term
 
 Our
        manager continually monitors events and changes in circumstances that could
        indicate carrying amounts of real estate and related intangible assets may
        not
        be recoverable. When indicators of potential impairment are present, our
        manager
        assesses the recoverability of the assets by determining whether the carrying
        value of the real estate and related intangible assets will be recovered
        through
        the undiscounted future cash flows expected from the use and eventual
        disposition of the asset. In the event the expected undiscounted future cash
        flows do not exceed the carrying value, we adjust the real estate and intangible
        assets to their fair value and recognize an impairment loss.
 
 As
        of
        December 31, 2006, we had no investments in real property. A Special Meeting
        of
        our members was held on March 5, 2007 to vote on approval of the Third Amended
        and Restated Operating Agreement, which limits the Company’s investment
        objectives to investment in real estate loans. A majority of our members
        approved the Third Amended and Restated Operating Agreement.
 
  F
            -
            11
 *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 hold real estate that has been acquired through foreclosure 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. 
 **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 related to real estate held for sale are
        separately identified in the accompanying consolidated statements of
        income.
 
 **Secured
        Borrowings**
 
 Secured
        borrowings provide an additional source of capital for our lending activity.
        Secured borrowings allow us to increase the diversification of our loan
        portfolio and to invest in loans that we might not otherwise invest in. We
        do
        not receive any fees for entering into secured borrowing arrangements; however,
        we may receive revenue in any differential of the interest spread. Loans
        in
        which unaffiliated investors have participated through inter-creditor agreements
        (“Inter-creditor Agreements”) are accounted for as secured borrowings in
        accordance with Statement of Financial Accounting Standards (“FAS”) 140 - *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities* (“FAS
        140”). The Inter-creditor Agreements provide us additional funding sources for
        real estate loans whereby an unaffiliated investor (the “Investor”) may
        participate on a non-pari passu basis in certain real estate loans with us
        and/or VRM I and/or VRM II (collectively, the “Lead Lenders”). In the event of
        borrower non-performance, the Inter-creditor Agreements generally provide
        that
        the Lead Lenders must repay the Investor’s loan amount either by (i) continuing
        to remit to the Investor the interest due on the participated loan amount;
        (ii)
        substituting an alternative loan acceptable to the Investor; or (iii)
        repurchasing the participation from the Investor for the outstanding balance
        plus accrued interest.
 
  F
            -
            12
 *Table
            of Contents*
  Additionally,
        an Investor may participate in certain loans with the Lead Lenders through
        Participation Agreements. In the event of borrower non-performance, the
        Participation Agreement may allow the Investor to be repaid up to the amount
        of
        the Investor’s investment prior to the Lead Lender being repaid. Real estate
        loan financing under the Participation Agreements are also accounted for
        as a
        secured borrowing in accordance with FAS 140. We do not receive any revenues
        for
        entering into secured borrowing arrangements. As of December 31, 2006, we
        had
        approximately $4.4 million in outstanding secured borrowing
        arrangements.
 
 **Investment
        in Marketable Securities - Related Party**
 
 Investment
        in marketable securities - related party consists of stock in VRM II. The
        securities are stated at fair value as determined by the market price as
        of
        December 31, 2006. All securities are classified as available-for-sale under
        the
        provisions of FAS 115 *Accounting
        for Certain Investments in Debt and Equity Securities* .
 
 **Fair
        Value of Financial Instruments**
 
 FAS
        107 - *Disclosures
        about Fair Value of Financial Instruments* (“FAS
        107”), requires the determination of fair value of 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
        December 31, 2006 and 2005, the estimated fair values of the real estate
        loans
        were approximately $27.0 million and $23.0 million, respectively. At December
        31, 2006 and 2005, we had approximately $4.4 million and $0.5 million,
        respectively, in 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
        Income Allocated to Members Per Weighted Average Membership
        Unit**
 
 Net
        income allocated to members per weighted average membership unit is computed
        by
        dividing net income calculated in accordance with GAAP by the weighted average
        number of membership units outstanding for the period.
 
 **Income
        Taxes**
 
 Income
        tax effects resulting from our operations pass through to our members
        individually and, accordingly, no provision for income taxes is included
        in the
        consolidated financial statements.
 
 **Reclassifications**
 
 Certain
        reclassifications have been made to the prior periods’ financial statements to
        conform to the current period presentation.
 
  F
            -
            13
 *Table
            of Contents*
  **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 December 31, 2006 and December 31, 2005, we had approximately $1.9
        million
        and $1.2 million, respectively, in excess of the federally insured
        limits.
 
 As
        of
        December 31, 2006, 43.5%, 16.2%, 12.0% and 10.8% of our loans were in Nevada,
        Arizona, California and Oregon, respectively, compared to 18.2%, 25.2%, 23.8%
        and 5.9% at December 31, 2005, respectively. As a result of this geographical
        concentration of our real estate loans, a downturn in the local real estate
        markets in these states could have a material adverse effect on us.
 
 At
        December 31, 2006, the aggregate amount of loans to our three largest borrowers
        represented 17.48% of our total investment in real estate loans. These real
        estate loans consisted of commercial and construction loans, located in Nevada,
        Oregon, and Washington with first lien positions earning between 9% and 12%,
        with an aggregate outstanding balance of approximately $4.7 million. At December
        31, 2005, the aggregate amount of loans to our three largest borrowers
        represented 41% of our total investment in real estate loans. These real
        estate
        loans consisted of commercial and land loans, located in Arizona, California
        and
        Nevada, with a first lien position, earning between 10% and 12%, with an
        aggregate outstanding balance of approximately $9.2 million. Because we have
        a
        significant concentration of credit risk with our three largest borrowers,
        a
        default by any of such borrowers could have a material adverse effect on
        us.
 
 As
        of
        December 31, 2006, all of our loans provided for payments of interest only
        with
        a “balloon” payment of principal payable in full at the end of the term. The
        success of a borrower’s ability to repay its real estate loan obligation in a
        large lump-sum payment may be dependent upon the borrower’s ability to refinance
        the obligation or otherwise raise a substantial amount of cash. An increase
        in
        interest rates over the loan rate applicable at origination of the loan may
        have
        an adverse effect on the borrower’s ability to refinance.
 
 **NOTE
        D — INVESTMENTS IN REAL ESTATE LOANS**
 
 As
        of
        December 31, 2006 and 2005, we had four real estate loan products consisting
        of
        commercial, construction, acquisition and development and land loans. The
        effective interest rates on all product categories range from 9% to 13%.
        Revenue
        by product will fluctuate based upon relative balances during the
        period.
 
 Investments
        in real estate loans as of December 31, 2006 were as follows:
 
 **Loan
                  Type**
              
              **Number
                  Of Loans**
              
              **Fund
                  Balance (2)**
              
              **Weighted
                  Average Interest Rate**
              
              **Portfolio
                  Percentage**
              
              **Weighted
                  Average Loan To Value (1)**Acquisition
                  and development
              
              
              4
              
              $
              3,408,000
              
              
              12.08%
              
              
              12.59%
              
              
              62.78%Commercial
              
              
              9
              
              
              8,420,000
              
              
              10.39%
              
              
              31.10%
              
              
              72.51%Construction
              
              
              5
              
              
              5,843,000
              
              
              11.38%
              
              
              21.58%
              
              
              70.26%Land
              
              
              9
              
              
              9,401,000
              
              
              11.81%
              
              
              34.73%
              
              
              55.98%27
              
              $
              27,072,000
              
              
              11.31%
              
              
              100.00%
              
              
              65.06%
 
  F
            -
            14
 *Table
            of Contents*
  Investments
        in real estate loans as of December 31, 2005 were as follows:
 
 **Loan
                  Type**
              
              **Number
                  Of Loans**
              
              **Fund
                  Balance (2)**
              
              **Weighted
                  Average Interest Rate**
              
              **Portfolio
                  Percentage**
              
              **Weighted
                  Average Loan To Value (1)**Acquisition
                  and development
              
              
              3
              
              $
              3,806,000
              
              
              11.30%
              
              
              16.52%
              
              
              47.74%Commercial
              
              
              12
              
              
              12,244,000
              
              
              9.63%
              
              
              53.15%
              
              
              65.33%Construction
              
              
              2
              
              
              1,231,000
              
              
              12.00%
              
              
              5.34%
              
              
              64.50%Land
              
              
              3
              
              
              5,756,000
              
              
              11.01%
              
              
              24.99%
              
              
              56.44%20
              
              $
              23,037,000
              
              
              10.38%
              
              
              100.00%
              
              
              60.16%
 
 (1)
            Loan
                to value ratios are based on the most recent appraisals and may not
                reflect subsequent changes in value estimates. Such appraisals, which
                may
                be commissioned by the borrower, are generally dated no greater than
                12
                months prior to the date of loan origination. The appraisals may
                be for
                the current estimate of the “as-if developed” value of the property, which
                approximates the post-construction value of the collateralized property
                assuming that such property is developed. “As-if developed” values on raw
                land loans or acquisition and development loans often dramatically
                exceed
                the immediate sales value and may include anticipated zoning changes,
                and
                successful development by the purchaser; upon which development is
                dependent on availability of financing. As most of the appraisals
                will be
                prepared on an “as-if developed” basis, if a loan goes into default prior
                to completion of the development of the project, the market value
                of the
                property may be substantially less than the appraised value. As a
                result,
                there may be less security than anticipated at the time the loan
                was
                originally made. If there is less security and a default occurs,
                we may
                not recover the full amount of the loan. 
 (2)
            The
                following table reconciles the balance of the loan portfolio to the
                amount
                shown on the accompanying Consolidated Balance
                Sheets: 
 **December
                  31, 2006 Balance**
              
              **December
                  31, 2005 Balance**Balance
                  Per Loan Portfolio
              
              $
              27,072,000
              
              $
              23,037,000Less:Allowance
                  for Loan Losses
              
              
              (73,000
              )
              
              (73,000
              )Balance
                  per Balance Sheet
              
              $
              26,999,000
              
              $
              22,964,000
 
 The
        following is a schedule of priority of real estate loans as of December 31,
        2006
        and 2005.
 
 **Loan
                  Type**
              
              **Number
                  of Loans**
              
              **December
                  31, 2006**
                **Balance***
              
              **Portfolio**
                **Percentage**
              
              **Number
                  of Loans**
              
              **December
                  31, 2005**
                **Balance***
              
              **Portfolio**
                **Percentage**First
                  Deeds of Trust
              
              
              26
              
              $
              26,772,000
              
              
              98.89%
              
              
              18
              
              $
              21,527,000
              
              
              93.45%Second
                  Deeds of Trust**
              
              
              1
              
              
              300,000
              
              
              1.11%
              
              
              2
              
              
              1,510,000
              
              
              6.55%27
              
              $
              27,072,000
              
              
              100.00%
              
              
              20
              
              $
              23,037,000
              
              
              100.00%
 
 *
        Please
        see (2) above
 **
        Generally, our second trust deeds are junior to first trust deed positions
        held
        by either us or our manager.
 
  F
            -
            15
 *Table
            of Contents*
  The
        following is a schedule of contractual maturities of investments in real
        estate
        loans as of December 31, 2006:
 
 January
                  2007 - March 2007
              
              $
              5,016,000April
                  2007 - June 2007
              
              
              9,371,000July
                  2007 - September 2007
              
              
              8,082,000October
                  2007 - December 2007
              
              
              4,603,000Thereafter
              
              
              --Total
              
              $
              27,072,000
 
 The
        following is a schedule by geographic location of investments in real estate
        loans as of December 31, 2006 and 2005:
 
 **December
                  31, 2006 Balance***
              
              **Portfolio
                  Percentage**
              
              **December
                  31, 2005 Balance***
              
              **Portfolio
                  Percentage**Arizona
              
              $
              4,390,000
              
              
              16.22%
              
              $
              5,807,000
              
              
              25.21%California
              
              
              3,240,000
              
              
              11.97%
              
              
              5,490,000
              
              
              23.83%Nevada
              
              
              11,766,000
              
              
              43.46%
              
              
              4,194,000
              
              
              18.21%North
                  Carolina
              
              
              --
              
              
              --%
              
              
              102,000
              
              
              0.44%Oklahoma
              
              
              1,000,000
              
              
              3.69%
              
              
              1,000,000
              
              
              4.34%Oregon
              
              
              2,933,000
              
              
              10.83%
              
              
              1,356,000
              
              
              5.89%Texas
              
              
              2,330,000
              
              
              8.61%
              
              
              2,525,000
              
              
              10.96%Washington
              
              
              1,413,000
              
              
              5.22%
              
              
              1,360,000
              
              
              5.90%Wisconsin
              
              
              --
              
              
              -%-
              
              
              1,203,000
              
              
              5.22%Total
              
              $
              27,072,000
              
              
              100.00%
              
              $
              23,037,000
              
              
              100.00%
 
 *
        Please
        see (2) above
 
 At
        December 31, 2006, the following loans were non-performing (based on current
        information and events, it is probable that we will be unable to collect
        all
        amounts due according to the contractual terms of the loan agreement or when
        the
        payment of interest is 90 days past due); Monterrey Associates LP, Forest
        Development LLC and Babuski LLC. These loans are currently carried on our
        books
        at a value of approximately $1.6 million. These loans have been placed on
        non-accrual of interest status and are the subject of pending foreclosure
        proceedings.
 
 ·
            Monterrey
                Associates, L.P., a loan secured by a 248 Unit apartment complex
                in
                Oklahoma City, OK, along with other real estate collateral, with
                an
                outstanding balance of approximately $4.4 million of which our portion
                is
                $1.0 million. The loan is four months in arrears in payments of interest.
                Our manager has commenced foreclosure proceedings and is filing litigation
                to enforce the personal guarantee on the loan. Our manager has evaluated
                this loan and concluded that the value of the underlying collateral
                is
                sufficient to protect us from loss of principal. No specific allowance
                was
                deemed necessary. In addition, our manager commenced foreclosure
                proceedings on a second mortgage on a 233 unit apartment complex
                that was
                additional collateral for the loan. Subsequent to December 31, 2006,
                we
                completed the foreclosure of the second mortgage and took title to
                the
                property subject to a non-recourse first mortgage, which is held
                by an
                unrelated third party. We sold this property to an unrelated third
                party
                who will assume the non-recourse first mortgage. This transaction
                did not
                result in any gain or loss. 
 ·
            Forest
                Development, LLC , a loan secured by two 4,000 square foot single
                family
                residences, together with the four remaining lots in the subdivision,
                located in Mt. Charleston, NV with an outstanding balance of approximately
                $2.6 million of which our portion is $301,000. The loan is two months
                in
                arrears in payment of interest. Our manager has commenced foreclosure
                proceedings and is filing litigation to enforce the personal guarantee
                on
                the loan. Our manager has evaluated this loan and concluded that
                the value
                of the underlying collateral is sufficient to protect us from loss
                of
                principal. No specific allowance was deemed
                necessary. 
  F
            -
            16
 *Table
            of Contents*
  
 ·
            Babuski,
                LLC, a loan secured by 9.23 +/- acres of land at the northeast corner
                of
                the I-215 and Russell Road in Las Vegas, NV, with an outstanding
                balance
                of approximately $9.5 million of which our portion is $293,000. The
                loan
                is one month in arrears in payments of interest. Our manager has
                commenced
                foreclosure proceedings and is filing litigation to enforce the personal
                guarantee on the loan. Our manager has evaluated this loan and concluded
                that the value of the underlying collateral is sufficient to protect
                us
                from loss of principal. No specific allowance was deemed
                necessary. 
 The
        following schedule summarizes the non-performing loans:
 
 **Description
                  of Collateral**
              
              **Balance**
                **December
                  31, 2006**
              
              **Maturity
                  Date**
              
              **Number
                  of Months Non-Performing**
              
              **Percentage
                  of Total Loan Balance**248-unit
                  apartment complex in Oklahoma City, OK
              
              $
              1,000,000
              
              
              9/1/2006
              
              
              4
              
              
              23%2
                  building with 6 units each and 4 lots in Mt. Charleston,
                  NV
              
              
              301,000
              
              
              10/27/2006
              
              
              2
              
              
              12%9.23
                  +- acres of land in Las Vegas, NV
              
              
              293,000
              
              
              3/17/2007
              
              
              1
              
              
              3%$
              1,594,000
 
 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 December 31, 2006, we have provided a general allowance for loan losses
        of
        $73,000. As of December 31, 2006, approximately $1.6 million in non-performing
        loans had no specific allowance for loan losses; there were no non-performing
        loan as of December 31, 2005. Our manager evaluated the loans and concluded
        that
        the underlying collateral was sufficient to protect us against further losses
        of
        principal. Our manager will continue to evaluate these loans in order to
        determine if any other allowance for loan losses should be
        recorded.
 
 Because
        any decision regarding the allowance for loan losses reflects a judgment
        about
        the probability of future events, there is an inherent risk that such judgments
        will prove incorrect. In such event, actual losses may exceed (or be less
        than)
        the amount of any reserve. To the extent that we experience losses greater
        than
        the amount of our reserves, we may incur a charge to our earnings that will
        adversely affect our operating results and the amount of any distributions
        payable to our members.
 
 The
        following is a roll-forward of the allowance for loan losses for the year
        ended
        December 31, 2006:
 
 **Description**
              
              **Balance
                  at December 31, 2005**
              
              **Provisions**
              
              **Deductions**
              
              **Balance
                  at**
                **December
                  31, 2006**Valuation
                  Allowance
              
              $
              73,000
              
              
              --
              
              
              --
              
              $
              73,000
 
 In
        addition, our manager had granted extensions on six 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 December 31, 2006 was approximately $4.7 million. Our
        manager concluded that no allowance for loan loss was necessary with respect
        to
        these loans as of December 31, 2006.
 
  F
            -
            17
 *Table
            of Contents*
  **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, our manager evaluates
        our real estate loan portfolio for impairment. The fact that a loan is
        temporarily past due does not necessarily mean that the loan is impaired.
        Rather, all relevant circumstances are considered by our manager to determine
        impairment and the need for specific reserves. Such evaluation, which includes
        a
        review of all loans on which full collectibility may not be reasonably assured,
        considers among other matters:
 
 ·
            Prevailing
                economic conditions; 
 ·
            Historical
                experience; 
 ·
            The
                nature and volume of the loan portfolio; 
 ·
            The
                borrowers’ financial condition and adverse situations that may affect the
                borrowers’ ability to pay; 
 ·
            Evaluation
                of industry trends; and 
 ·
            Estimated
                net realizable value of any underlying collateral in relation to
                the loan
                amount. 
 **NOTE
        E — INVESTMENT IN REAL PROPERTY**
 
 Investment
        in real property at December 31, 2005, consisted of an approximately 42,000
        square foot office building located at 8379 West Sunset Road, Las Vegas,
        Nevada.
        The purchase price, related closing costs and tenant improvements totaled
        $9,887,000. We provided $4,850,000 of the purchase price from our capital
        and
        borrowed $4,950,000. The building was leased to Vestin Group, earning us
        monthly
        rent revenue of $87,000. Vestin Group sub-leased office space in the building
        as
        permitted by the lease agreement at rental rates equal to or less than the
        rental rate we receive.
 
 In
        November 2006, we sold the building to an unrelated third party for a cash
        sales
        price of $14,250,000 and recognized a gain of approximately $2.6 million,
        net of
        sales expenses, which included a 3.0% sales commission to our manager of
        $428,000.
 
 As
        of
        December 31, 2006, we had no investments in real property. As of March 5,
        2007,
        a majority of our members approved the Third Amended and Restated Operating
        Agreement, which limits the Company’s investment objectives to investments in
        real estate loans.
 
 As
        further discussed in Note Q - *Segment
        Information* below,
        net income on this segment of our business was $4,058,000, which represents
        twelve months of operating activity. The following represents our estimated
        yield on this investment from a cash flow perspective.
 
  F
            -
            18
 *Table
            of Contents*
  
 **For
                  the Years Ended****December
                  31, 2006**
              
              **December
                  31, 2005**
              
              **December
                  31, 2004**Net
                  Income From Real Estate Segment
              
              $
              2,639,000
              
              $
              322,000
              
              $
              92,000Less
                  Principal Payments
              
              
              (4,830,000
              )
              
              (98,000
              )
              
              --Less
                  Deferred Rent Receivable - related party
              
              
              --
              
              
              (168,000
              )
              
              --Book
                  value of property sold
              
              
              9,878,000
              
              
              --
              
              
              --Add
                  Back Depreciation and Amortization
              
              
              204,000
              
              
              222,000
              
              
              81,000Yield
              
              $
              7,891,000
              
              $
              278,000
              
              $
              173,000Investment
                  Provided from Capital
              
              $
              4,850,000
              
              $
              4,850,000
              
              $
              4,850,000Months
                  of Operation
              
              
              11
              
              
              12
              
              
              4.5Annualized
                  Yield on Real Estate Segment
              
              
              177.49%
              
              
              5.73%
              
              
              9.51%
 
 Annualized
        yield on real estate segment is a non-GAAP measure. We have presented this
        annualized yield on real estate segment because management believes this
        information is useful and important to members. This non-GAAP financial measure
        should not be considered in isolation or as a substitute for measures of
        performance prepared in accordance with GAAP or as an alternative to cash
        flows
        from operating activities as a measure of our liquidity.
 
 **NOTE
        F — LEASING ACTIVITY**
 
 Prior
        to
        selling the facility described in Note E- *Investment in Real Property* above,
        we
        leased the facility to Vestin Group under a 10-year non-cancelable lease
        agreement, expiring March 2014, with two, five-year optional extensions.
        The
        agreement called for an annual base rent of $894,000, plus a 4% annual increase.
        Rental income recognized for the leased facility was recognized on a
        straight-line basis over the term of the lease. For the years ended December
        31,
        2006, 2005 and 2004, rental income totaled $944,000, $1,040,000 and $317,000,
        respectively. The lease agreement expiring March 2014 was transferred to
        the
        purchasers of the building. As part of the sales agreement, we were obligated
        to
        hold funds at a banking institution to support future rent payments, which
        are
        classified as “Cash - restricted” on the consolidated balance sheet. The amount
        of restricted cash at December 31, 2006 was $985,000 and the requirement
        to hold
        these funds expires in November 2007, which may be extended for an additional
        year.
 
 **NOTE
        G — INVESTMENT IN MARKETABLE SECURITIES - RELATED PARTY**
 
 During
        the year ended December 31, 2006, we purchased 158,191 shares of VRM II’s common
        stock, representing approximately 0.41% of their total outstanding common
        stock.
 
 **NOTE
        H — REAL ESTATE HELD FOR SALE**
 
 At
        December 31, 2006, we
        held
        one property with a total carrying value of approximately $0.6 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. Our investments
        in real estate held for sale are accounted for at the lower of cost or fair
        value less costs to sell with fair value based on appraisals and knowledge
        of
        local market conditions. It is not our intent to invest in or own real estate
        as
        a long-term investment. We seek to sell properties acquired through foreclosure
        as quickly as circumstances permit. The following is a roll-forward of
        investments in real estate held for sale during the year ended December 31,
        2006:
 
  F
            -
            19
 *Table
            of Contents*
  
 **Description**
              
              **Date
                  Acquired**
              
              **Percentage
                  of Ownership**
              
              **Balance
                  at January 1, 2006**
              
              **Acquisitions
                  (Reductions)**
              
              **Sales**
              
              **Gain
                  (Loss) on Sale of Real Estate**
              
              **Balance
                  at**
                **December
                  31, 2006**480
                  residential building lots in Rio Vista Master Planned Community
                  in
                  Cathedral City, CA**(1)**
              
              
              12/21/2006
              
              
              2%
              
              
              --
              
              $
              575,000
              
              $
              --
              
              $
              --
              
              $
              575,000$
              --
              
              $
              575,000
              
              $
              --
              
              $
              --
              
              $
              575,000
 
 **(1)**
            **Acquisitions
                of Real Estate Held for Sale for the Year Ended December 31,
                2006:** 
 During
        November 2006, we, VRM I and VRM II acquired the collateral of a loan, 480
        residential building lots and two single family dwellings in Rio Vista Village
        Subdivision in Cathedral City, CA, through foreclosure. Our manager has
        evaluated the carrying value of the property and based on its estimate, no
        valuation allowance was deemed necessary as of December 31, 2006. The property
        is currently under a purchase agreement for a total sales price of approximately
        $29.9 million, of which our portion will be approximately $0.6
        million.
 
 **NOTE
        I — RELATED PARTY TRANSACTIONS**
 
 From
        time
        to time we may acquire or sell investments in real estate loans from/to our
        manager or other related parties pursuant to the terms of our Operating
        Agreement provided the price does not exceed the par value. No gain or loss
        is
        recorded on these transactions, as it is not our intent to make a profit
        on the
        purchase or sale of such investments. The purpose is generally to diversify
        our
        portfolio by syndicating loans, thereby providing us with additional capital
        to
        make additional loans.
 
 **Transactions
        with the Manager**
 
 Our
        manager is entitled to receive from us a management (acquisition and advisory)
        fee up to 2.5% of the gross offering proceeds and up to 3% of our rental
        income.
        For the year ended December 31, 2006, 2005 and 2004, we recorded fees to
        our
        manager of $45,000, $155,000 and $36,000, respectively. During April 2006,
        we
        recognized a capital contribution from our Manager related to a forgiveness
        of
        management fee incurred in the amount of $64,000.
 
 We
        sold a
        portion of a loan to our manager for $700,000 and repurchased the same portion
        for $700,000 during November 2006. No gain or loss was recognized on this
        transaction.
 
 Our
        manager was reimbursed for out of pocket offering expenses in an amount not
        to
        exceed 2% of the gross proceeds of the offering of our units. As of December
        31,
        2005, offering costs of $565,000 were incurred by us and paid by our manager
        on
        our behalf. These deferred offerings costs, which are primarily legal,
        accounting and registration fees, were converted to 54,862 membership units
        at a
        price equal to the then effective unit value. The additional costs above
        the 2%
        of the gross proceeds of the offering were absorbed by our manager.
 
 During
        the years ended December 31, 2006, 2005 and 2004 we paid pro rata distributions
        owed to our manager of $48,000, $82,000 and $0, respectively based upon 54,862
        units owned by our manager.
 
 We
        recognized approximately $0.9 million, $1.0 million and $0.3 million in rental
        income for the years ended December 31, 2006, 2005 and 2004, respectively,
        from
        Vestin Group related to an office building located in Las Vegas, Nevada.
        This
        building was sold to an unrelated third party during November 2006.
 
 In
        November 2006, we sold the building to an unrelated third party for a cash
        sales
        price of $14,250,000 and recognized a gain of approximately $2.6 million,
        net of
        sales expenses, which included a 3.0% sales commission to our manager of
        $428,000.
 
  F
            -
            20
 *Table
            of Contents*
  **Transactions
        with Other Related Parties**
 
 During
        the year ended December 31, 2006 and 2005, we sold $4.9 million and $500,000,
        respectively, in real estate loans to VRM II. In addition, during the year
        ended
        December 31, 2006, we bought $6.0 million in real estate loans from VRM II.
        There was no gain or loss associated with such transactions.
 
 As
        of
        December 31, 2006, we owned 158,191 of VRM II’s common shares. For the year
        ended December 31, 2006, we recorded $47,000 in dividend income based on
        the
        number of shares we held on the dividend record dates.
 
 During
        the years ended December 31, 2006 and 2005 we paid pro rata distributions
        owed
        to inVestin of $31,000 and $16,000 respectively, based upon 34,856 units
        owned
        by inVestin.
 
 During
        the year ended December 31, 2006 and 2005, we incurred expenses of $20,000,
        $10,000 and $0, respectively, for legal fees to the law firm of Levine,
        Garfinkel & Katz. The Secretary of Vestin Group has an equity ownership
        interest in the law firm.
 
 **NOTE
        J — SECURED BORROWINGS**
 
 Secured
        borrowings provide an additional source of capital for our lending activity.
        Secured borrowings allow us to increase the diversification of our loan
        portfolio and to invest in loans that we might not otherwise invest in. We
        do
        not receive any fees for entering into secured borrowing arrangements; however,
        we may receive revenue in any differential of the interest spread. Loans
        in
        which unaffiliated investors have participated through inter-creditor agreements
        (“Inter-creditor Agreements”) are accounted for as secured borrowings in
        accordance with Statement of Financial Accounting Standards (“FAS”) 140 - *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities* (“FAS
        140”). The Inter-creditor Agreements provide us additional funding sources for
        real estate loans whereby an unaffiliated investor (the “Investor”) may
        participate on a non-pari passu basis in certain real estate loans with us
        and/or VRM I and/or VRM II (collectively, the “Lead Lenders”). In the event of
        borrower non- performance, the Inter-creditor Agreements generally provide
        that
        the Lead Lenders must repay the Investor’s loan amount either by (i) continuing
        to remit to the Investor the interest due on the participated loan amount;
        (ii)
        substituting an alternative loan acceptable to the Investor; or (iii)
        repurchasing the participation from the Investor for the outstanding balance
        plus accrued interest.
 
 Additionally,
        an Investor may participate in certain loans with the Lead Lenders through
        Participation Agreements. In the event of borrower non-performance, the
        Participation Agreement may allow the Investor to be repaid up to the amount
        of
        the Investor’s investment prior to the Lead Lender being repaid. Real estate
        loan financing under the Participation Agreements are also accounted for
        as a
        secured borrowing in accordance with FAS 140. The Company does not receive
        any
        revenues for entering into secured borrowings arrangements.
 
 During
        October 2006, we, our manager, Vestin Origination, Inc., VRM I and VRM II
        entered into an intercreditor agreement with an unrelated third party related
        to
        the funding of a construction real estate loan. (See exhibit 10.10 Intercreditor
        Agreement under the Exhibit Index included in Part IV, Item 15 Exhibits and
        Financial Statement Schedules of this Report Form 10-K). The secured borrowing
        will be recognized pro rata between us, VRM I and VRM II for the amount each
        entity has funded for the loan. As of December 31, 2006, approximately $24.3
        million has been funded on this loan, of which our portion was approximately
        $1.4 million. As of December 31, 2006, this secured borrowing totaled
        approximately $18.5 million, of which our portion was approximately $4.4
        million. In the event VRM I and VRM II were unable to pay their pro rata
        share
        of the secured borrowing, we would be liable for the full outstanding balance.
        As of December
        31, 2005, we had $527,000 in funds being used under Inter-creditor
        Agreements.
 
 **NOTE
        K — NOTE PAYABLE**
 
 During
        the year ended December 31, 2006, our note payable was paid in full. As part
        of
        the full payment on the note, we paid $435,000 in defeasance fees to settle
        the
        note, which were included in interest expense.
 
  F
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 *Table
            of Contents*
  **NOTE
        L** — **MEMBERS’
        EQUITY**
 
 **Membership
        Units**
 
 During
        the year ended December 31, 2006, members received 77,730 units as a result
        of
        reinvestments of distributions.
 
 **Allocations
        and Distributions**
 
 In
        accordance with our Operating Agreement, profits, gains and losses are to
        be
        credited to and charged against each member’s capital account in proportion to
        their respective capital accounts as of the close of business on the last
        day of
        each calendar month.
 
 Distributions
        are paid monthly to members. Members may elect to reinvest their distributions.
        For the year ended December 31, 2006, distributions to members were $1,728,000,
        net of reinvestments of $816,000.
 
 **Working
        Capital Reserves**
 
 We
        are
        required by our Operating Agreement to maintain working capital reserves
        of
        approximately 3% of the aggregate capital accounts of the members. This reserve
        is available to pay any future expenses in excess of revenues, satisfy
        obligations of underlying secured properties, expend money to satisfy our
        unforeseen obligations and other permitted uses of our working capital. Working
        capital reserves up to 3% in cash or cash equivalents are excluded from the
        funds committed to investments in determining what proportion of the offering
        proceeds and reinvested distributions have been invested in real estate loans
        or
        real property.
 
 **Value
        of Members’ Capital Accounts**
 
 In
        accordance with Section 7.8 of our Operating Agreement, our manager reviewed
        the
        value of our assets during the last quarter of fiscal year 2006. Based on
        this
        review, as a result the gain on sale of our real estate held for investment,
        the
        value of members’ capital accounts was adjusted from $10.50 per unit to $11.00
        per unit. As a result, new units sold through our Distribution Reinvestment
        Plan
        and units redeemed on or after December 15, 2006 have been sold or redeemed
        at
        $11.00 per unit. The change in valuation is primarily for tax and capital
        account purposes and does not reflect the change in the value of the units
        calculated in accordance with GAAP. Accordingly, unit prices calculated under
        GAAP may be different than the adjusted price per unit.
 
 **Redemption
        Limitation**
 
 In
        order
        to comply with our Operating Agreement and Internal Revenue Code, we may
        redeem
        no more than 10% of the aggregate Members’ capital in any calendar year. As of
        December 31, 2006, the total of redemptions made from inception was
        approximately $3.2 million. Balances in Members’ capital accounts as of January
        1, 2006 were approximately $29.2 million, which limited redemptions to
        approximately $2.9 million for calendar 2006. Total redemptions during the
        year
        ended December 31, 2006 were approximately $2.9 million. The remaining requests
        to redeem, as of December 31, 2006, were approximately $2.9 million in 2007,
        $2.5 million in 2008, $1.8 million in 2009 and $47,000 in 2010 subject to
        unit
        valuation adjustments. On March 8, 2007, we redeemed 137,766 units totaling
        approximately $1.5 million.
 
 In
        order
        to satisfy these redemption requests, in the past, we have accumulated a
        cash
        reserve. This is in addition to the 3% reserve we maintained for working
        capital
        purposes. This reserve is generally accumulated by retaining funds received
        upon
        the pay-off of loans and not reinvesting them in new loans or through
        borrowings. This has the effect of reducing the amount of capital we deploy
        in
        real estate loans, which in turn reduces our revenues and distributions to
        members.
 
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 *Table
            of Contents*
  
 **NOTE
        M — RECENT ACCOUNTING PRONOUNCEMENTS**
 
 In
        July
        2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
        in
        Income Taxes" ("FIN 48"). This interpretation, among other things, creates
        a
        two-step approach for evaluating uncertain tax positions. Recognition (step
        one)
        occurs when an enterprise concludes that a tax position, based solely on
        its
        technical merits, is more-likely-than-not to be sustained upon examination.
        Measurement (step two) determines the amount of benefit that
        more-likely-than-not will be realized upon settlement. Derecognition of a
        tax
        position that was previously recognized would occur when a company subsequently
        determines that a tax position no longer meets the more-likely-than-not
        threshold of being sustained. FIN 48 specifically prohibits the use of a
        valuation allowance as a substitute for derecognition of tax positions, and
        it
        has expanded disclosure requirements. FIN 48 is effective for fiscal years
        beginning after December 15, 2006, in which the impact of adoption should
        be
        accounted for as a cumulative - effect adjustment to the beginning balance
        of
        retained earnings. The Company is evaluating FIN 48 and has not yet determined
        the impact the adoption will have on the consolidated financial statements,
        but
        it is not expected to be significant.
 
 On
        September 13, 2006, the SEC issued Staff Accounting Bulletin 108 (“SAB 108”),
“Considering the Effects of Prior Year Misstatements when Qualifying
        Misstatements in Current Year Financial Statements,” which provides interpretive
        guidance on the consideration of the effects of prior year misstatements
        in
        quantifying current year misstatements for the purpose of a materiality
        assessment. SAB 108 is effective for companies with fiscal years ending after
        November 15, 2006 and is required to be adopted by the Company in its fiscal
        year ending December 31, 2006. The adoption of this bulletin did not have
        a
        significant impact on the consolidated financial statements.
 
 In
        September 2006, the Financial
        Accounting Standards Board ( FASB)
        issued FAS 158 - *Employers’
        Accounting for Defined Benefit Pension and Other Postretirement Plans, an
        amendment of FASB Statements No. 87, 88, 106, and 132(R)* .
        FAS 58
        requires an employer to: (a) recognize in its statement of financial position
        the funded status of a benefit plan; (b) measure defined benefit plan assets
        and
        obligations as of the end of the employer’s fiscal year (with limited
        exceptions); and (c) recognize as a component of other comprehensive income,
        net
        of tax, the gains or losses and prior service costs or credits that arise
        but
        are not recognized as components of net periodic benefit costs pursuant to
        prior
        existing guidance. The provisions governing recognition of the funded status
        of
        a defined benefit plan and related disclosures are effective as of the end
        of
        fiscal years ending after December 15, 2006. The requirement to measure plan
        assets and benefit obligations as of the date of the employer’s fiscal year-end
        statement of financial position is effective for fiscal years ending after
        December 15, 2008. Because we currently do not have defined benefit or other
        post retirement plans, the standard will have no effect on us.
 
 In
        September 2006, the FASB issued FAS 157 - *Fair
        Value Measurements* (“FAS
        157”), which defines fair value, establishes a framework for measuring fair
        value in generally accepted accounting principles, and expands disclosures
        about
        fair value measurements. This Statement applies under other accounting
        pronouncements that require or permit fair value measurements, the FASB having
        previously concluded in those accounting pronouncements that fair value is
        the
        relevant measurement attribute. Accordingly, this Statement does not require
        any
        new fair value measurements. FAS 157 is effective for financial statements
        issued for fiscal years beginning after November 15, 2007, and interim periods
        within those fiscal years. This Statement is required to be adopted by the
        Company in the first quarter of its fiscal year 2008. The Company is currently
        assessing the impact of the adoption of this Statement.
 
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            of Contents*
  **NOTE
        N— LEGAL MATTERS INVOLVING THE MANAGER**
 
 The
        United States Securities and Exchange Commission (the “Commission”), conducted
        an investigation of certain matters related to us, our manager, Vestin Capital,
        VRM I and VRM II. We fully cooperated during the course of the investigation.
        On
        September 27, 2006, the investigation was resolved through the entry of an
        Administrative Order by the Commission (the “Order”). Our manager, Vestin
        Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin
        Capital (collectively, the “Respondents”), consented to the entry of the Order
        without admitting or denying the findings therein. In the Order, the Commission
        finds that the Respondents violated Sections 17(a)(2) and 17(a)(3) of the
        Securities Act of 1933 through the use of certain slide presentations in
        connection with the sale of units in us and in VRM II’s predecessor, Vestin Fund
        II, LLC. The Respondents consented to the entry of a cease and desist order,
        the
        payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s suspension from
        association with any broker or dealer for a period of six months, which expires
        in March 2007. In addition, the Respondents agreed to implement certain
        undertakings with respect to future sales of securities. We are not a party
        to
        the Order and we do not expect that the sanctions imposed upon the Respondents
        will have any material affect upon our operations.
 
 Vestin
        Group, Vestin Mortgage, and Del Mar Mortgage, Inc., a company wholly owned
        by
        Michael V. Shustek, the sole stockholder and CEO of Vestin Group, are defendants
        in a civil action entitled Desert Land, LLC et al. v. Owens Financial Group,
        Inc. et al (the “Action”). The Action is based upon allegations that Del Mar
        Mortgage, Inc. and/or Vestin Mortgage charged unlawful fees on various loans
        arranged by them in 1999, prior to the formation of Vestin Fund III, LLC.
        Desert
        Land sought in excess of $10 million in monetary damages. On April 10, 2003,
        the
        United States District Court for the District of Nevada (the “Court”) entered
        judgment jointly and severally in favor of Desert Land against Vestin Group,
        Vestin Mortgage and Del Mar Mortgage, Inc. Judgment was predicated upon the
        Court’s finding that Del Mar Mortgage, Inc. received an unlawful penalty fee
        from the plaintiffs.
 
 The
        defendants subsequently filed a motion for reconsideration. The Court denied
        the
        motion and, on August 13, 2003, held that Vestin Group, Vestin Mortgage,
        and Del
        Mar Mortgage, Inc. were jointly and severally liable for the judgment in
        the
        amount of $5,683,312 (which amount includes prejudgment interest and attorney’s
        fees). On August 27, 2003, the Court stayed execution of the judgment against
        Vestin Group and Vestin Mortgage based upon the posting of a bond in the
        amount
        of $5,830,000. Mr. Shustek personally posted a cash bond without any cost
        or
        obligation to Vestin Group and Vestin Mortgage. Additionally, Del Mar Mortgage,
        Inc. had indemnified Vestin Group and Vestin Mortgage for any losses and
        expenses in connection with the Action, and Mr. Shustek had guaranteed the
        indemnification with his cash bond. On September 12, 2003, all of the defendants
        held liable to Desert Land appealed the judgment to the United States Court
        of
        Appeals for the Ninth Circuit, which heard the case on October 18, 2005.
        On
        November 15, 2005, the Ninth Circuit vacated the judgment of the District
        Court
        and dismissed the state law claims against the defendants without prejudice
        on
        the basis that the District Court lacked subject matter jurisdiction in the
        case. On November 29, 2005, Desert Land petitioned the Ninth Circuit Court
        for
        rehearing with a suggestion that the matter be heard en banc. On December
        16,
        2005, the District Court issued an Order releasing the bond, and on January
        6,
        2006, the Ninth Circuit denied Desert Land’s petition and the matter remains
        dismissed.
 
 On
        or
        about April 6, 2006, Desert Land filed a Writ of Certiorari seeking review
        of
        the 9th Circuit’s decision by the United States Supreme Court. The U.S. Supreme
        Court denied Desert Land’s Writ of Certiorari on June 12, 2006, effectively
        ending this action.
 
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  On
        November 21, 2005, Desert Land filed a complaint in the state courts of Nevada,
        which complaint is substantially similar to the original complaint previously
        filed by Desert Land in the United States District Court, with the exception
        of
        claiming Nevada State Law violations and seeking Nevada State Law remedies
        rather than claiming Federal Law violations and seeking Federal Law remedies.
        On
        March 6, 2006, Desert Land amended the state court complaint to name VRM
        I.
        Desert Land alleges that one or more of the defendants have transferred assets
        to other entities without receiving reasonable value therefore; alleges
        plaintiffs are informed and believe that defendants have made such transfers
        with the actual intent to hinder, delay or defraud Desert Land; that such
        transfers made the transferor insolvent and that sometime between February
        27
        and April 1, 2003, Vestin Group transferred $1.6 million to VRM I for that
        purpose. The state court complaint further alleges that Desert Land is entitled
        to avoid such transfers and that pursuant to NRS 112.20, Desert Land is entitled
        to an injunction to enjoin defendants from further disposition of assets.
        Additionally, Del Mar Mortgage, Inc. has indemnified Vestin Group and Vestin
        Mortgage for any losses and expenses in connection with the Action, and Mr.
        Shustek has guaranteed the indemnification. The Defendants believe that the
        allegations are without merit and that they have adequate defenses. The
        Defendants intend to undertake a vigorous defense.
 
 In
        April
        2006, our manager, Vestin Mortgage Inc., filed suit against the State of
        Hawaii
        listing 26 causes of action, including allegations that the State of Hawaii
        has
        illegally blocked VRM I and VRM II (“the lenders”) right to foreclose and take
        title to its collateral by inappropriately attaching conditions to the granting
        of licenses needed to operate the business, the pre-need trust funds and
        the
        perpetual care trust funds and that the State of Hawaii has attempted to
        force
        the lenders to accept liability for any statutory trust fund deficits while
        no
        such lender liability exists under the laws of the State of Hawaii. The State
        of
        Hawaii responded by filing allegations against Vestin Mortgage, Inc. and
        VRM II
        alleging that these Vestin entities improperly influenced the former RightStar
        trustees to transfer trust funds to VRM II. Our manager believes the State’s
        claims to be without merit and intend to vigorously pursue our remedies while
        defending against any allegations made by the State.
 
 In
        October 2006, a Judge of the Circuit Court of the First Circuit in Hawaii
        imposed new restrictions upon the lenders right to foreclose and denied any
        subsequent owner the licensing necessary to operate the funeral service until
        the alleged pre-need and perpetual care trust funds shortages are cured.
        Our
        manager believes these restrictions are both unauthorized under state law
        and
        unconstitutional under federal law. In January 2007, the lenders filed a
        petition with the Supreme Court of Hawaii seeking mandamus relief from that
        ruling. As of March 28, 2007, the Supreme Court of Hawaii has not ruled on
        the
        lender’s petition, but has requested briefing from the State of Hawaii regarding
        the petition. The outcome of this litigation is unforeseeable at this time.
        Our
        manager cannot estimate when the foreclosure will ultimately be completed
        or
        when the lenders may obtain title to the underlying properties.
 
 VRM
        II,
        Vestin Mortgage, Inc. and Michael V. Shustek (“Defendants”) are defendants in a
        civil action filed by 88 separate plaintiffs (“Plaintiffs”) in Superior Court
        for Clark County, Nevada. The Plaintiffs allege, among other things, that
        Defendants: breached certain alleged contractual obligations owed to Plaintiffs;
        breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented
        or
        omitted material facts regarding the conversion of Fund II into VRM II. The
        Action seeks monetary damages and a rescission of the REIT conversion. The
        Defendants believe that the allegations are without merit and that they have
        adequate defenses. The Defendants intend to undertake a vigorous defense.
        The
        terms of VRM II’s management agreement and Fund II’s operating agreement contain
        indemnity provisions whereby, Vestin Mortgage and Michael V. Shustek may
        be
        eligible for indemnification by the Company with respect to the above actions.
        We are not a party to this action.
 
 VRM
        I and
        Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
        action filed in San Diego Superior Court by certain plaintiffs who allege,
        among
        other things, that they were wrongfully denied appraisal rights in connection
        with the merger of Fund I into Vestin Realty Mortgage I, Inc. The action
        has
        been removed to the United States District Court for the Southern District
        of
        California, but the Company has agreed to stipulate to remand this action
        to San
        Diego Superior Court. The action is being brought as a purported class action
        on
        behalf of all members of Vestin Fund I who did not vote in favor of the merger.
        The Defendants believe that the allegations are without merit and that they
        have
        adequate defenses. The Defendants intend to undertake a vigorous defense.
        The
        terms of VRM I’s management agreement and Fund I’s Operating Agreement contain
        indemnity provisions whereby, Vestin Mortgage and Michael V. Shustek may
        be
        eligible for indemnification by VRM I with respect to the above
        actions.
 
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 *Table
            of Contents*
  VRM
        II
        and Vestin Mortgage, Inc. (“Defendants”) are defendants in a breach of contract
        action filed in San Diego Superior Court by certain plaintiffs who allege,
        among
        other things, that they were wrongfully denied appraisal rights in connection
        with the merger of Fund II into Vestin Realty Mortgage II, Inc. The action
        is
        being brought as a purported class action on behalf of all members of Vestin
        Fund II who did not vote in favor of the merger. The Defendants believe that
        the
        allegations are without merit and that they have adequate defenses. The
        Defendants intend to undertake a vigorous defense. The terms of VRM II’s
        management agreement and Fund II’s Operating Agreement contain indemnity
        provisions whereby, Vestin Mortgage and Michael V. Shustek may be eligible
        for
        indemnification by VRM II with respect to the above actions.
 
 In
        addition to the matters described above, our manager is involved in a number
        of
        legal proceedings concerning matters arising in connection with the conduct
        of
        its business activities. Our manager believes it has meritorious defenses
        to
        each of these actions and intends to defend them vigorously. Other than the
        matters described above, our manager believes that it is not a party to any
        pending legal or arbitration proceedings that would have a material adverse
        effect on our manager’s financial condition or results of operations or cash
        flows, although it is possible that the outcome of any such proceedings could
        have a material impact on our manager’s net income in any particular
        period.
 
 **NOTE
        O — LEGAL MATTERS INVOLVING THE COMPANY**
 
 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
        P — SELECTED QUARTERLY FINANCIAL DATED (UNAUDITED)**
 
 The
        following schedule is a selected quarterly financial data for the fiscal
        year
        ended December 31, 2006:
 
 **First
                  Quarter**
              
              **Second
                  Quarter**
              
              **Third
                  Quarter**
              
              **Fourth
                  Quarter**
              
              **Year**Total
                  Revenues
              
              $
              869,000
              
              $
              843,000
              
              $
              852,000
              
              $
              931,000
              
              $
              3,495,000Total
                  Operating Expenses
              
              
              219,000
              
              
              174,000
              
              
              209,000
              
              
              675,000
              
              
              1,277,000Total
                  Other Income and Expenses
              
              
              --
              
              
              --
              
              
              --
              
              
              2,612,000
              
              
              2,612,000**NET
                  INCOME**
              
              $
              650,000
              
              $
              669,000
              
              $
              643,000
              
              $
              2,868,000
              
              $
              4,830,000Net
                  Income Allocated to Members
              
              $
              650,000
              
              $
              669,000
              
              $
              643,000
              
              $
              2,868,000
              
              $
              4,830,000Net
                  Income Allocated to Members Per Weighted Average Membership
                  Units
              
              $
              0.22
              
              $
              0.23
              
              $
              0.22
              
              $
              1.03
              
              $
              1.67Weighted
                  Average Membership Units
              
              
              2,986,887
              
              
              2,938,692
              
              
              2,878,643
              
              
              2,782,318
              
              
              2,896,025Annualized
                  Rate of Return to Members (a)
              
              
              8.41
              %
              
              8.70
              %
              
              8.44
              %
              
              38.95
              %
              
              15.88
              %Cash
                  Distributions
              
              $
              645,000
              
              $
              647,000
              
              $
              637,000
              
              $
              615,000
              
              $
              2,544,000Cash
                  Distributions Per Weighted Average Membership Units
              
              $
              0.22
              
              $
              0.22
              
              $
              0.22
              
              $
              0.22
              
              $
              0.88Weighted
                  Average Term of Outstanding Loans**(b)**
              
              
              19
                  months
              
              
              16
                  months
              
              
              16
                  months
              
              
              14
                  months
              
              
              14
                  months
 
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 *Table
            of Contents*
  
 **(a)**
            The
                annualized rate of return to members in 2006 is calculated based
                upon the
                net GAAP income allocated to members per weighted average units as
                of
                December 31, 2006 divided by the number of days during the period
                (90, 91,
                92, 92 and 365 for the first quarter, second quarter, third quarter,
                fourth quarter and year, respectively) and multiplied by three hundred
                and
                sixty five (365) days, then divided by $10.50 (the cost per
                unit). 
 **(b)**
            The
                weighted average term of our outstanding loans includes
                extensions. 
 The
        following schedule is a selected quarterly financial data for the fiscal
        year
        ended December 31, 2005:
 
 **First
                  Quarter**
              
              **Second
                  Quarter**
              
              **Third
                  Quarter**
              
              **Fourth
                  Quarter**
              
              **Year**Total
                  Revenues
              
              $
              854,000
              
              $
              898,000
              
              $
              859,000
              
              $
              1,005,000
              
              $
              3,616,000Total
                  Operating Expenses
              
              $
              330,000
              
              $
              333,000
              
              $
              216,000
              
              $
              415,000
              
              $
              1,294,000**NET
                  INCOME**
              
              $
              524,000
              
              $
              565,000
              
              $
              643,000
              
              $
              590,000
              
              $
              2,322,000Net
                  Income Allocated to Members
              
              $
              524,000
              
              $
              565,000
              
              $
              643,000
              
              $
              590,000
              
              $
              2,322,000Net
                  Income Allocated to Members Per Weighted Average Membership
                  Units
              
              $
              0.20
              
              $
              0.20
              
              $
              0.22
              
              $
              0.20
              
              $
              0.82Weighted
                  Average Membership Units
              
              
              2,665,400
              
              
              2,836,033
              
              
              2,865,352
              
              
              2,958,579
              
              
              2,817,055Annualized
                  Rate of Return to Members (a)
              
              
              7.74
              %
              
              7.76
              %
              
              8.64
              %
              
              7.68
              %
              
              8.00
              %Cash
                  Distributions
              
              $
              649,000
              
              $
              697,000
              
              $
              539,000
              
              $
              670,000
              
              $
              2,555,000Cash
                  Distributions Per Weighted Average Membership Units
              
              $
              0.24
              
              $
              0.25
              
              $
              0.19
              
              $
              0.23
              
              $
              0.91Weighted
                  Average Term of Outstanding Loans**(b)**
              
              
              18
                  months
              
              
              17
                  months
              
              
              17
                  months
              
              
              17
                  months
              
              
              17
                  months
 
 **(a)**
            The
                annualized rate of return to members in 2005 is calculated based
                upon the
                net GAAP income allocated to members per weighted average units as
                of
                December 31, 2005 divided by the number of days during the period
                (90, 91,
                92, 92 and 365 for the first quarter, second quarter, third quarter,
                fourth quarter and year, respectively) and multiplied by three hundred
                and
                sixty five (365) days, then divided by $10.30 (the cost per
                unit). 
 **(b)**
            The
                weighted average term of our outstanding loans includes
                extensions. 
 **NOTE
        Q — SEGMENT INFORMATION**
 
 Operating
        segments are components of an enterprise in which separate financial information
        is available that is regularly reviewed by the chief operating decision makers
        in assessing performance and deciding how to allocate resources. Reportable
        segments consist of one or more operating segments with similar economic
        characteristics, products and services, production processes, type of customer,
        distribution system and regulatory environment.
 
  F
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 *Table
            of Contents*
  The
        information provided for Segment Reporting is based on internal reports utilized
        by management. The presentation and allocation of overhead and the net
        contribution for the operating segments may not reflect the actual economic
        costs, contribution or results of operations of the segments as stand-alone
        businesses. If a different basis of allocation were utilized, the relative
        contributions of the segments might differ, but the relative trends in segments
        would, in management’s view, likely not be impacted.
 
 Our
        two
        reportable segments are investments in real estate loans and investments
        in real
        estate.
 
 Financial
        information concerning our reportable segments is presented as follows for
        the
        years ended December 31, 2006, 2005 and 2004:
 
 **For
                  the Year Ended December 31, 2006**
              
              **Investment
                  in Real Estate Loans**
              
              **Investment
                  in Real Estate****Revenues**Interest
                  income from investments in real estate loans
              
              $
              2,292,000
              
              $
              2,292,000
              
              $
              --Interest
                  income from secured borrowings
              
              
              118,000
              
              
              118,000
              
              
              --Rental
                  income
              
              
              944,000
              
              
              --
              
              
              944,000Gain
                  on sale of building
              
              
              2,624,000
              
              
              --
              
              
              2,624,000Dividend
                  Income
              
              
              47,000
              
              
              47,000
              
              
              --Other
              
              
              94,000
              
              
              94,000
              
              
              --Total
                  revenues
              
              
              6,119,000
              
              
              2,551,000
              
              
              3,568,000**Operating
                  expenses**Management
                  fees
              
              
              45,000
              
              
              34,000
              
              
              11,000Professional
                  fees
              
              
              207,000
              
              
              161,000
              
              
              46,000Professional
                  fees-related party
              
              
              20,000
              
              
              16,000
              
              
              4,000Expenses
                  related to real estate held for sale
              
              
              12,000
              
              
              12,000
              
              
              --Other
              
              
              24,000
              
              
              21,000
              
              
              3,000Total
                  operating expenses
              
              
              308,000
              
              
              244,000
              
              
              64,000**EBITDA***
              
              
              5,811,000
              
              
              2,307,000
              
              
              3,504,000Less:Depreciation
                  and Amortization
              
              
              204,000
              
              
              --
              
              
              204,000Interest
                  expense related to secured borrowings
              
              
              116,000
              
              
              116,000
              
              
              --Interest
                  expense related to investment in real estate
              
              
              661,000
              
              
              --
              
              
              661,000**NET
                  INCOME**
              
              $
              4,830,000
              
              $
              2,191,000
              
              $
              2,639,000
 
  F
            -
            28
 *Table
            of Contents*
  
 **For
                  the Year Ended December 31, 2005**
              
              **Investment
                  in Real Estate Loans**
              
              **Investment
                  in Real Estate****Revenues**Interest
                  income from investments in real estate loans
              
              $
              2,341,000
              
              $
              2,341,000
              
              $
              --Interest
                  income from secured borrowings
              
              
              160,000
              
              
              160,000Rental
                  income
              
              
              1,040,000
              
              
              --
              
              
              1,040,000Gain
                  on sale of building
              
              
              --
              
              
              --
              
              
              --Dividend
                  Income
              
              
              --
              
              
              --
              
              
              --Other
              
              
              75,000
              
              
              75,000
              
              
              --Total
                  revenues
              
              
              3,616,000
              
              
              2,576,000
              
              
              1,040,000**Operating
                  expenses**Management
                  fees
              
              
              155,000
              
              
              112,000
              
              
              43,000Professional
                  fees
              
              
              314,000
              
              
              212,000
              
              
              102,000Professional
                  fees-related party
              
              
              93,000
              
              
              63,000
              
              
              30,000Other
              
              
              73,000
              
              
              53,000
              
              
              20,000Total
                  operating expenses
              
              
              635,000
              
              
              440,000
              
              
              195,000**EBITDA***
              
              
              2,981,000
              
              
              2,136,000
              
              
              845,000Less:Depreciation
                  and Amortization
              
              
              222,000
              
              
              --
              
              
              222,000Interest
                  expense related to secured borrowings
              
              
              136,000
              
              
              136,000
              
              
              --Interest
                  expense related to investment in real estate
              
              
              301,000
              
              
              --
              
              
              301,000**NET
                  INCOME**
              
              $
              2,322,000
              
              $
              2,000,000
              
              $
              322,000
 
  F
            -
            29
 *Table
            of Contents*
  
 **For
                  the Year Ended December 31, 2004**
              
              **Investment
                  in Real Estate Loans**
              
              **Investment
                  in Real Estate****Revenues**Interest
                  income from investments in real estate loans
              
              $
              1,269,000
              
              $
              1,269,000
              
              $
              --Interest
                  income related to secured borrowings
              
              
              687,000
              
              
              687,000
              
              
              --Rental
                  income
              
              
              317,000
              
              
              --
              
              
              317,000Other
              
              
              87,000
              
              
              87,000
              
              
              --Total
                  revenues
              
              
              2,360,000
              
              
              2,043,000
              
              
              317,000**Operating
                  expenses**Management
                  fees
              
              
              36,000
              
              
              21,000
              
              
              15,000Provision
                  for loan losses
              
              
              73,000
              
              
              73,000
              
              
              --Professional
                  fees
              
              
              62,000
              
              
              36,000
              
              
              26,000Other
              
              
              28,000
              
              
              5,000
              
              
              23,000Total
                  operating expenses
              
              
              199,000
              
              
              135,000
              
              
              64,000**EBITDA***
              
              
              2,161,000
              
              
              1,908,000
              
              
              253,000Less:Depreciation
                  and Amortization
              
              
              81,000
              
              
              --
              
              
              81,000Interest
                  expense related to secured borrowings
              
              
              630,000
              
              
              630,000
              
              
              --Interest
                  expense related to investment in real estate
              
              
              80,000
              
              
              --
              
              
              80,000**NET
                  INCOME**
              
              $
              1,370,000
              
              $
              1,278,000
              
              $
              92,000
 
 *EBITDA
        represents Earnings Before Interest, Taxes, Depreciation, and Amortization.
        We
        present EBITDA because we consider it an important supplemental measure of
        our
        performance but it does not represent cash flows. EBITDA is a measure of
        our
        performance that is not required by, or presented in accordance with, GAAP.
        EBITDA is not a measurement of our financial performance under GAAP and should
        not be considered as an alternative to net earnings, operating income or
        any
        other performance measures derived in accordance with GAAP or as an alternative
        to cash flow from operating activities as a measure of our liquidity. We
        compensate for these limitations by relying primarily on our GAAP results
        and
        using EBITDA only supplementally. A reconciliation of EBITDA to net income
        is
        set forth above.
 
 Although
        depreciation and amortization are non-cash charges, the assets being depreciated
        or amortized often will have to be replaced in the future, and EBITDA does
        not
        reflect any cash requirements for such replacements. Other companies in our
        industry may calculate EBITDA differently than we do, limiting its usefulness
        as
        a comparative measure. In addition, EBITDA does not reflect the impact
        of earnings or charges resulting from matters we consider not to be indicative
        of our ongoing operations.
 
 **NOTE
        R — SUBSEQUENT EVENTS**
 
 Our
        manager commenced foreclosure proceedings on a second mortgage on a 233 unit
        apartment complex that was additional collateral for the Monterrey Associates,
        L.P. loan. Subsequent to December 31, 2006, we completed the foreclosure
        of the
        second mortgage and took title to the property subject to a non-recourse
        first
        mortgage, which is held by an unrelated third party. We sold this property
        to an
        unrelated third party who assumed the non-recourse first mortgage. This
        transaction did not result in any gain or loss.
 
 A
        Special
        Meeting of our members was held on March 5, 2007, at which a majority of
        our
        members approved the Third Amended and Restated Operating Agreement, which
        limits the Company’s investment objectives to investment in real estate
        loans.
 
  F
            -
            30
 *Table
            of Contents*
  On
        March
        8, 2007, we redeemed 137,766 units totaling approximately $1.5
        million.
 
 On
        March
        21, 2007, John W. Alderfer resigned as the
        Chief
        Financial Officer of Vestin Group, the
        parent company of our manager . On
        March
        21, 2007, Rocio
        Revollo, was appointed to be the Chief Financial Officer of Vestin Group, the
        parent company of our manager .
        In that
        capacity, she will function as the equivalent of our Chief Financial
        Officer.
  F
            -
            31
 *Table
            of Contents*
  
 **SUPPLEMENTARY
        INFORMATION**
 
 **ScheduleI****VESTIN
                  FUND III, LLC****REAL
                  ESTATE LOANS ON REAL ESTATE****REAL
                  ESTATE LOAN ROLL FORWARD****Balance,**December
                  31, 2003
              
              $
              --Additions
                  during the periodNew
                  mortgage loans
              
              
              20,442,000Mortgage
                  loans bought
              
              
              10,000,000Deductions
                  during the periodCollections
                  of principal
              
              
              (9,736,000
              )Foreclosed
                  loans (real estate held for sale)
              
              
              --Mortgage
                  loans sold
              
              
              (7,113,000
              )Net
                  Change in 2004
              
              
              13,593,000**Balance,**December
                  31, 2004
              
              $
              13,593,000Additions
                  during the periodNew
                  mortgage loans
              
              
              16,976,000Mortgage
                  loans bought
              
              
              --Deductions
                  during the periodCollections
                  of principal
              
              
              (7,032,000
              )Foreclosed
                  loans (real estate held for sale)
              
              
              --Mortgage
                  loans sold
              
              
              (500,000
              )Net
                  Change in 2005
              
              
              9,444,000**Balance,**December
                  31, 2005
              
              $
              23,037,000Additions
                  during the periodNew
                  mortgage loans
              
              
              22,696,000Mortgage
                  loans bought
              
              
              6,700,000Deductions
                  during the periodCollections
                  of principal
              
              
              (19,184,000
              )Foreclosed
                  loans (real estate held for sale)
              
              
              (577,000
              )Mortgage
                  loans sold
              
              
              (5,600,000
              )Net
                  Change in 2006
              
              
              4,035,000**Balance,**December
                  31, 2006
              
              $
              27,072,000
 
 
  F
            -
            32
 *Table
            of Contents*
  
 **ScheduleII****VESTIN
                  FUND III, LLC****REAL
                  ESTATE LOANS ON REAL ESTATE****REAL
                  ESTATE LOANS BY TYPE OF PROPERTY**As
                  of December 31, 2006:**Type
                  of Property**
              
              **Interest
                  Rate**
              
              **Face
                  Amount**
                **of
                  Loan**
              
              **Carrying
                  Amount**
                **of
                  Loan**
              
              **Maturity
                  Date**
              
              **Amount
                  Subject to Delinquency**Commercial
              
              
              9%
                  - 13%
              
              $
              105,081,000
              
              $
              8,420,000
              
              
              09/2006
                  - 12/2007
              
              $
              1,000,000Construction
              
              
              10%
                  - 12%
              
              $
              94,466,000
              
              $
              5,843,000
              
              
              10/2006
                  - 07/2007
              
              $
              301,000Acquisition
                  and Development
              
              
              12%
                  - 13%
              
              $
              18,932,000
              
              $
              3,408,000
              
              
              01/2007
                  - 07/2007
              
              $
              --Land
              
              
              10%
                  - 13%
              
              $
              79,625,000
              
              $
              9,401,000
              
              
              11/2007
                  - 12/2007
              
              $
              293,000$
              27,072,000As
                  of December 31, 2005:**Type
                  of Property**
              
              
              **Interest
                  Rate**
              
              
              **Face
                  Amount**
                **of
                  Loan**
              
              
              **Carrying Amount of****Loan**
              
              
              **Maturity
                  Date**
              
              
              **Amount
                  Subject to Delinquency**Commercial
              
              
              6%
                  - 14%
              
              $
              96,921,000
              
              $
              12,244,000
              
              
              03/2006
                  - 09/2006
              
              $
              --Construction
              
              
              12%
              
              $
              16,050,000
              
              $
              1,231,000
              
              
              03/2006
                  - 07/2006
              
              $
              --Acquisition
                  and Development
              
              
              8%
                  - 12%
              
              $
              75,662,000
              
              $
              3,806,000
              
              
              04/2006
                  - 05/2006
              
              $
              --Land
              
              
              10%
                  - 14%
              
              $
              63,158,000
              
              $
              5,756,000
              
              
              02/2006
                  - 04/2006
              
              $
              --$
              23,037,000
 
 
 **ScheduleIII****Vestin
                  Fund III, LLC****REAL
                  ESTATE LOANS ON REAL ESTATE****REAL
                  ESTATE LOANS BY LIEN POSITION****As
                  of December 31, 2006:****Lien
                  Position**
              
              **Face
                  Amount of**
                **Loan**
              
              **Interest
                  Rate**
              
              **Fund
                  Balance**
              
              **Maturity
                  Date**
              
              **Amount
                  Subject to Delinquency**1st
              
              $
              26,072,000
              
              
              9%
                  - 13%
              
              $
              26,772,000
              
              
              09/2006
                  - 12/2007
              
              $
              1,594,0002nd
              
              $
              1,000,000
              
              
              10.5%
              
              $
              300,000
              
              
              12/2007
              
              $
              --$
              27,072,000**As
                  of December 31, 2005:****Lien
                  Position**
              
              
              **Face
                  Amount of Loan**
              
              
              **Interest
                  Rate**
              
              
              **Fund
                  Balance**
              
              
              **Maturity
                  Date**
              
              
              **Amount
                  Subject to Delinquency**1st
              
              $
              229,459,000
              
              
              6%
                  - 14%
              
              $
              21,527,000
              
              
              03/2006
                  - 09/2006
              
              $
              --2nd
              
              $
              22,332,000
              
              
              14%
              
              $
              1,510,000
              
              
              02/2006
                  - 03/2006
              
              $
              --$
              23,037,000
 
  F
            -
            33
 *Table
            of Contents*
  
 **ScheduleIV****Vestin
                  Fund III, LLC****REAL
                  ESTATE LOANS ON REAL ESTATE****REAL
                  ESTATE LOANS THAT EXCEED THREE PERCENT OF THE
                  PORTFOLIO****As
                  of December 31, 2006:****Description
                  of Loan**
              
              **Interest
                  Rate**
              
              **Maturity
                  Date**
              
              **Extension
                  Date**
              
              **Lien
                  Position**
              
              **Face
                  Amount of Loan**
              
              **Carrying
                  Amount of Loan**
              
              **Amount
                  Subject to Delinquency**A/D
              
              
              12.00%
              
              
              07/17/07
              
              
              
              
              
              1st
              
              $
              5,100,000
              
              $
              1,000,000
              
              $
              --A/D
              
              
              12.00%
              
              
              05/16/07
              
              
              
              
              
              1st
              
              $
              3,900,000
              
              $
              1,387,451
              
              $
              --Commercial
              
              
              12.00%
              
              
              09/01/05
              
              
              09/01/06
              
              
              1st
              
              $
              4,431,000
              
              $
              1,000,000
              
              $
              1,000,000Commercial
              
              
              9.00%
              
              
              07/15/06
              
              
              11/15/06
              
              
              1st
              
              $
              4,600,000
              
              $
              1,156,048
              
              $
              --Commercial
              
              
              10.50%
              
              
              12/14/07
              
              
              
              
              
              1st
              
              $
              8,750,000
              
              $
              1,300,000
              
              $
              --Commercial
              
              
              11.50%
              
              
              10/05/07
              
              
              
              
              
              1st
              
              $
              18,000,000
              
              $
              1,380,623
              
              $
              --Commercial
              
              
              10.00%
              
              
              06/30/07
              
              
              
              
              
              1st
              
              $
              16,000,000
              
              $
              1,400,000
              
              $
              --Commercial
              
              
              9.00%
              
              
              07/12/07
              
              
              
              
              
              1st
              
              $
              23,900,000
              
              $
              1,500,000
              
              $
              --Construction
              
              
              12.00%
              
              
              07/31/06
              
              
              12/28/06
              
              
              1st
              
              $
              12,550,050
              
              $
              929,750
              
              $
              --Construction
              
              
              12.00%
              
              
              07/16/07
              
              
              
              
              
              1st
              
              $
              31,250,000
              
              $
              1,381,629
              
              $
              --Construction
              
              
              12.00%
              
              
              05/16/07
              
              
              
              
              
              1st
              
              $
              26,000,000
              
              $
              1,412,654
              
              $
              --Construction
              
              
              10.00%
              
              
              05/28/07
              
              
              
              
              
              1st
              
              $
              21,166,000
              
              $
              1,818,541
              
              $
              --Land
              
              
              12.00%
              
              
              04/11/07
              
              
              
              
              
              1st
              
              $
              8,400,000
              
              $
              820,000
              
              $
              --Land
              
              
              10.00%
              
              
              11/25/06
              
              
              02/25/07
              
              
              1st
              
              $
              2,000,000
              
              $
              1,066,330
              
              $
              --Land
              
              
              10.50%
              
              
              12/30/07
              
              
              
              
              
              1st
              
              $
              18,000,000
              
              $
              1,181,935
              
              $
              --Land
              
              
              13.00%
              
              
              06/30/07
              
              
              
              
              
              1st
              
              $
              10,000,000
              
              $
              1,400,000
              
              $
              --Land
              
              
              13.00%
              
              
              07/28/07
              
              
              
              
              
              1st
              
              $
              15,000,000
              
              $
              1,400,000
              
              $
              --Land
              
              
              13.00%
              
              
              08/10/07
              
              
              
              
              
              1st
              
              $
              8,500,000
              
              $
              1,400,000
              
              $
              --Land
              
              
              10.50%
              
              
              09/15/07
              
              
              
              
              
              1st
              
              $
              4,725,000
              
              $
              1,400,000
              
              $
              --**As
                  of December 31, 2005:****Description
                  of Loan**
              
              
              **Interest
                  Rate**
              
              
              **Maturity
                  Date**
              
              
              **Extension
                  Date**
              
              
              **Lien
                  Position**
              
              
              **Face
                  Amount of Loan**
              
              
              **Carrying
                  Amount of Loan**
              
              
              **Amount
                  Subject to Delinquency**A/D
              
              
              12.00%
              
              
              01/07/06
              
              
              04/07/06
              
              
              1st
              
              $
              7,662,000
              
              $
              2,420,000
              
              $
              --A/D
              
              
              12.00%
              
              
              05/10/06
              
              
              
              
              
              1st
              
              $
              33,000,000
              
              $
              715,000
              
              $
              --Commercial
              
              
              10.00%
              
              
              04/30/06
              
              
              
              
              
              1st
              
              $
              15,000,000
              
              $
              1,500,000
              
              $
              --Commercial
              
              
              12.00%
              
              
              09/01/05
              
              
              03/01/06
              
              
              1st
              
              $
              4,431,000
              
              $
              1,000,000
              
              $
              --Commercial
              
              
              11.00%
              
              
              01/20/06
              
              
              04/20/06
              
              
              1st
              
              $
              7,000,000
              
              $
              2,500,000
              
              $
              --Commercial
              
              
              6.00%
              
              
              07/15/06
              
              
              
              
              
              1st
              
              $
              4,600,000
              
              $
              1,156,000
              
              $
              --Commercial
              
              
              6.00%
              
              
              07/15/06
              
              
              
              
              
              1st
              
              $
              6,500,000
              
              $
              1,203,000
              
              $
              --Commercial
              
              
              6.00%
              
              
              07/15/06
              
              
              
              
              
              1st
              
              $
              4,320,000
              
              $
              1,360,000
              
              $
              --Commercial
              
              
              10.25%
              
              
              08/18/06
              
              
              
              
              
              1st
              
              $
              24,500,000
              
              $
              950,000
              
              $
              --Commercial
              
              
              13.00%
              
              
              09/30/06
              
              
              
              
              
              1st
              
              $
              19,500,000
              
              $
              1,500,000
              
              $
              --Construction
              
              
              12.00%
              
              
              07/31/06
              
              
              
              
              
              1st
              
              $
              12,550,000
              
              $
              930,000
              
              $
              --Land
              
              
              10.00%
              
              
              03/30/06
              
              
              
              
              
              1st
              
              $
              35,000,000
              
              $
              4,307,000
              
              $
              --Land
              
              
              14.00%
              
              
              02/15/06
              
              
              
              
              
              2nd
              
              $
              21,632,000
              
              $
              832,000
              
              $
              --
 
 
 F
            -
            34