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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-Q (Mark one) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2004 OR o
    
    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 333-111643 DESERT CAPITAL REIT, INC.  Maryland
    
    20-0495883(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 2357 Renaissance Drive, Suite A, Las Vegas, Nevada 89119
(Address of principal executive office)
(Zip Code) Registrants telephone number, including area code: (800) 419-2855 Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 o The number of shares of the registrants common stock, par value $0.01 per
share, outstanding as of August 13, 2004 was 20,000.




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DESERT CAPITAL REIT, INC. FORM 10-Q For the Quarter Ended June 30, 2004 INDEX Part I. Financial InformationItem 1. Financial Statements (Unaudited)a) Balance Sheets: June 30, 2004 (Unaudited) and December 31, 2003b) Income Statements (Unaudited) for the three and six months ended June 30, 2004c) Statement of Cash Flows (Unaudited) for the three and six months ended June 30, 2004d) Statement of Stockholders Equity (Unaudited) for the six months ended June 30, 2004e) Notes to Condensed Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 2. Changes in Securities and Small Business Issuer Purchases of Equity SecuritiesItem 5. Other InformationItem 6. Exhibit and Reports on Form 8-KSignaturesCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO & CFO Pursuant to Section 906




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Part I. Financial Information 
 Item 1. Financial Statements (Unaudited) 
 BALANCE SHEETS DESERT CAPITAL REIT, INC.
(A Development Stage Company)
BALANCE SHEETS June 30, 2004
    
    December 31, 2003(Unaudited)
    
    (Audited)ASSETS:Cash in bank
    
    $
    50,722
    
    
    $
    182,202Deferred offering costs
    
    
    696,958
    
    
    
    415,778TOTAL ASSETS
    
    $
    747,681
    
    
    $
    597,980LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
    
    $
    
    
    
    $
    3,980Notes payable
    
    
    618,537
    
    
    
    400,000TOTAL LIABILITIES
    
    
    618,537
    
    
    
    403,980Preferred stock, $0.01 par value: 15,000,000 shares
authorized, none outstandingCommon stock, $0.01 par value: 100,000,000 shares authorized;
20,000 shares issued and outstanding
at June 30, 2004 and December 31, 2003
    
    
    200
    
    
    
    200Additional paid in capital
    
    
    199,800
    
    
    
    199,800Deficit
accumulated during the development stage
    
    
    (70,856
    )
    
    
    (6,000
    )TOTAL STOCKHOLDERS EQUITY
    
    
    129,144
    
    
    
    194,000TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    747,681
    
    
    $
    597,980
 The accompanying notes are an integral part of these condensed financial statements




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Income Statements DESERT CAPITAL REIT, INC.
(A Development Stage Company)
Income Statements For the Three Months Ended
    
    For the Six Months EndedJune 30, 2004
    
    June 30, 2004(Unaudited)
    
    (Unaudited)REVENUEInterest income
    
    $
    
    
    
    $
    TOTAL REVENUE
    
    
    
    
    
    
    EXPENSESCompensation expense
    
    
    48,000
    
    
    
    48,000Travel expense
    
    
    14,652
    
    
    
    14,652General and administrative
    
    
    2,204
    
    
    
    2,204TOTAL EXPENSES
    
    
    64,856
    
    
    
    64,856NET INCOME (LOSS)
    
    $
    (64,856
    )
    
    $
    (64,856
    )BASIC EARNINGS PER COMMON SHARE
    
    $
    (3.24
    )
    
    $
    (3.24
    )
 The accompanying notes are an integral part of these condensed financial statements




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Statements of Cash Flows DESERT CAPITAL REIT, INC.
(A Development Stage Company)
Statements of Cash Flows For the Three Months Ended
    
    For the Six Months EndedJune 30, 2004
    
    June 30, 2004(Unaudited)
    
    (Unaudited)OPERATING ACTIVITIESNet income (loss)
    
    $
    (64,856
    )
    
    $
    (64,856
    )Stock based compensation
    
    
    
    
    
    
    Provision for loan losses
    
    
    
    
    
    
    Interest receivable
    
    
    
    
    
    
    Prepaid insurance
    
    
    
    
    
    
    Accounts payable
    
    
    
    
    
    
    Interest payable
    
    
    
    
    
    
    Net cash used by operating activities
    
    
    (64,856
    )
    
    
    (64,856
    )INVESTING ACTIVITIESPurchase of mortgage notes receivable
    
    
    
    
    
    
    Net cash used by investing activities
    
    
    
    
    
    
    FINANCING ACTIVITIESProceeds from notes payable
    
    
    216,536
    
    
    
    214,557Issuance of common stock
    
    
    
    
    
    
    Offering costs paid
    
    
    (151,880
    )
    
    
    (281,180
    )Net cash provided by financing activities
    
    
    64,656
    
    
    
    (66,624
    )Net increase in cash
    
    
    (200
    )
    
    
    (131,480
    )Cash at beginning of period
    
    
    50,922
    
    
    
    182,202Cash at end of period
    
    $
    50,722
    
    
    $
    50,722Cash paid for interest
    
    $
    
    
    
    $
    
 The accompanying notes are an integral part of these condensed financial statements




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Statement of Stockholders Equity DESERT CAPITAL REIT, INC.
(A Development Stage Company)
Statement of Stockholders Equity For the Six Months Ended
June 30, 2004
(Unaudited) Common
    
    CommonStock
    
    Stock Par
    
    Additional Paid -
    
    Deficit AccumulatedShares
    
    Value
    
    in Capital
    
    During the Development
Stage
    
    TotalBalance at
January 1, 2004
    
    
    20,000
    
    
    $
    200
    
    
    $
    199,800
    
    
    $
    (6,000
    )
    
    $
    194,000Issuance of
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distributions
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Offering costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,856
    )
    
    
    (64,856
    )Balance  June 30, 2004
    
    
    20,000
    
    
    $
    200
    
    
    $
    199,800
    
    
    $
    (70,856
    )
    
    $
    129,144
 The accompanying notes are an integral part of these condensed financial statements




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Notes to Financial Statements Desert Capital REIT, INC.
Notes to Financial Statements
June 30, 2004 (UNAUDITED) Note 1  Description of Business and Basis of Presentation Desert Capital REIT, Inc. (the Company), was organized and incorporated
under the laws of the state of Maryland in December 2003. The principal
business activity is the financing of and investment in mortgage loans,
including acquisition and development loans, construction loans, commercial
property loans, and residential loans. The financing will be provided through
equity capital and leverage. The accompanying unaudited interim financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements, although management believes that the
disclosures presented herin are adequate to make the information presented not
misleading. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. The Company's primary activity to date has been
organizational activities and the registration of the offering of its
common stock with the
SEC. The results of operations for the three months ended June 30,
2004 are not necessarily indicative of results that may be expected for the
entire year ending December 31, 2004. Note 2  Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates. Cash The Company places its temporary excess cash with high quality financial
institutions. Such deposits may exceed the FDIC insurance limits. Income Taxes The Company intends at all times to qualify as a real estate investment
trust (REIT) for federal income tax purposes, under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended and applicable Treasury
Regulations. Therefore, the Company generally will not be subject to federal
corporate income taxes if the Company distributes at least 90% of its taxable
income to its stockholders. To qualify as a REIT, the Company must elect to be
so treated and must meet on a continuing basis certain requirements relating to
the Companys organization, sources of income, nature of assets, and
distribution of income to stockholders. The Company must also maintain certain
records and request certain information from its stockholders designed to
disclose actual ownership of its stock in order to maintain REIT status. In addition the Company must satisfy certain gross income requirements
annually and certain asset tests at the close of each quarter of its taxable
year. If the trust fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to
tax on its taxable income at regular corporate rates. Distributions to
stockholders in any year in which the Company fails to qualify will not be
deductible by the Company nor will they be required to be made. Unless
entitled to relief under specific statutory provisions, the Company will also
be disqualified from taxation as a REIT for the four taxable years following
the year during which qualification was lost. Based on the Companys belief that it has operated in a manner so as to
allow it to be taxed as a REIT since inception, no provision for federal income
taxes has been made in the financial statements.




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Organization Expenses Organization expenses are expensed as incurred. Deferred Offering Costs The costs attributable to the securities offering will be charged against
the proceeds of the offering as a reduction to equity capital. Those costs
include legal and accounting fees to prepare the securities filing. The Company
will incur fees in selling the securities, which will also be charged against
the proceeds of the offering. Note 3  Stock The Company has been initially capitalized by issuing 20,000 shares of its
common stock for $200,000. Note 4  Basic Earnings Per Common Share Earnings per share is computed in accordance with SFAS No. 128, Earnings
Per Share. Basic earnings per share is calculated by dividing net income by
the weighted average number of shares of common stock outstanding during each
period. For the Three Months Ended
    
    For the Six Months EndedJune 30, 2004
    
    June 30, 2004Net income
    
    $
    (64,856
    )
    
    $
    (64,856
    )Weighted average number of
common shares outstanding
    
    
    20,000
    
    
    
    20,000Basic earnings per common share
    
    $
    (3.24
    )
    
    $
    (3.24
    )
 Note 5  Notes Payable As of June 30, 2004, the Company has borrowed $618,537 from its advisor,
Burton Management Company, Ltd., (Burton), a related party. Note 6  Commitments and Related Parties The Company has contracted with Burton to serve as Advisor for the
Company. Burton oversees the day-to-day operations including asset, liability
and capital management. Burton is compensated based upon the advisory agreement
that entitles Burton to a base management fee, incentive compensation and
reimbursement of expenses. The president and owner of Burton is also the
president and chief executive officer of the Company. The annual base
management compensation is 1% of the first $200,000,000 of average invested
assets plus 0.8% of the average invested assets in excess of $200,000,000, to
be paid quarterly. The incentive compensation is a tiered percentage of the amount of our net
income (taxable income) excluding capital losses, before deducting incentive
compensation less a threshold return, which is the net income that would
produce an annualized return on our average invested assets equal to the 10
year U.S. Treasury rate plus 1.0%. The tiered percentage is the weighted
average of 20% of the first $200,000,000 of average invested assets and 10% of
the excess over $200,000,000 of average invested assets. The incentive
compensation will be calculated quarterly and any positive quarterly incentive
amount shall be paid by the Company, along with the base management
compensation, within 15 days of receipt of the computations. At the end of the
fiscal year, the incentive compensation shall be calculated based upon the net
income for the year. If the quarterly payments are less than the annual
incentive amount, the Company shall pay Burton the difference. If the quarterly
payments were to exceed the annual incentive compensation, Burton will refund
the excess to the Company, which will reduce the previously recorded incentive
fee expense. Should the Company not have sufficient cash available to pay the
quarterly or




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annual amounts, the Company would either borrow sufficient funds or sell
assets to meet these contracted obligations. The Company has entered into a three year agreement with Consolidated
Mortgage, Inc., which will provide for the right of first offer to purchase all
residential mortgage and commercial bridge loans originated by Consolidated
Mortgage. The officers of the Company were formerly officers with Consolidated
Mortgage. The dealer-manager, CMC Financial Services, Inc., directs and oversees the
sale of the Companys equity securities. CMC Financial receives a sales
commission and other fees based on the sale of these securities. The
dealer-manager is an affiliate of both the Company and Burton, as the president
and owner of CMC Financial Services, Inc. is also the president and chief
executive officer of the Company. Note 7  Subsequent Event The Securities and Exchange Commission (SEC) declared the Companys
Registration Statement on Form S-11 effective on July 16, 2004. The Company
incurred organizational costs prior to receiving SEC approval, but principal
business activity did not begin until July 16, 2004. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and
notes to those statements included elsewhere in this document. This discussion
may contain certain forward-looking statements. Forwarding-looking statements
are those that are not historical in nature. They can often be identified by
their inclusion of words such as will, anticipate, estimate, should,
expect, believe, intend and similar expressions. Any projection of
revenues, earnings or losses, capital expenditures, distributions, capital
structure or other financial terms is a forward-looking statement. Our forward-looking statements are based upon our managements beliefs,
assumptions and expectations of our future operations and economic performance,
taking into account the information currently available to us. Forward-looking
statements involve risks and uncertainties, some of which are not currently
known to us, that might cause our actual results, performance or financial
condition to be materially different from the expectations of future results,
performance or financial condition we express or imply in any forward-looking
statements. Some of the important factors that could cause our actual results,
performance or financial condition to differ materially from expectations are:  
    
    Our limited operating history and the lack of
experience of our Advisor, Burton Management Company, Ltd., in
managing a REIT;
    
    Changes in interest rates;
    
    Potential impacts of our leveraging policies and
strategies without notice to you or stockholder approval;
    
    Our Advisors motivation to recommend riskier
investments in an effort to maximize its incentive compensation
under the advisory agreement; and
    
    Although we believe our proposed method of operations
will be in conformity with the requirements for qualification as
a REIT, we cannot assure you that we will qualify as a REIT or,
if so qualified, will continue to qualify as a REIT. Our failure
to qualify or remain qualified as a REIT could have material
adverse effect on our performance and your investment. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions,
the events described by our forward-looking events might not occur. We qualify
any and all of our forward-looking




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statements by these cautionary factors. In addition, you should carefully
review the risk factors describe in other documents we file from time to time
with the Securities and Exchange Commission. General Desert Capital REIT, Inc. is a REIT headquartered in Las Vegas, Nevada.
We are externally managed and were formed in December 2003 to invest in
mortgage loans. We expect to derive our revenues primarily from the receipt of
interest and principal payments under loans acquired with our equity capital
and borrowed funds. Our principal business objective is to generate net income
for distribution to our stockholders from the spread between interest income on
our mortgage assets and the costs of financing the acquisition of these assets.
We expect that this spread, net of operating expenses, will provide both
operating capital and distributable income. Our business will depend on our
access to external sources of financing at a cost we can absorb while still
generating an attractive risk-adjusted return on the loans we acquire using the
proceeds of our financings. Our business will also depend on our ability to
locate suitable investments to keep our capital fully deployed at favorable
rates. We intend to elect to be taxed as a REIT for U.S. federal income tax
purposes commencing with our taxable year ending December 31, 2004, thereby
generally avoiding U.S. federal income taxes on our taxable income that we
distribute currently to our stockholders. Risks Factors Investment in our common stock involves a high degree of risk. The risk
factors that should be considered when making an investment in our common stock
include, but are not limited to, those described in the following paragraphs
and more fully described in our Registration Statement. There are a number of risks associated with ownership of our common stock,
including, but not limited to, reliance on our Advisor, potential conflicts of
interest and investment in a development stage enterprise. We are totally
reliant on our Advisor, which is an affiliate of several of our officers and
directors, to manage our business and assets. Certain of our officers and
directors will be subject to substantial conflicts of interest. We may incur
substantial debt, which could hinder our ability to pay dividends to our
stockholders. We may not be able to invest in a diverse portfolio of loans and
the value of our shares would then fluctuate with the performance of specific
loans. We are evaluating the market of available loans and will acquire or fund
loans that meet our investment criteria. Each of the types of loans we expect
to acquire are subject to risks: balloon loan payments are risky because
repayment depends on the borrowers ability to refinance the loan or sell the
property, commercial loans are risky partly due to the fact that they generally
have higher loan balances than our other categories of loans, .and subordinated
loans are subject to a greater risk of loss than loans secured by first liens.
If we cannot fund loan acquisitions on favorable terms to meet financial
expectations, our earnings could be adversely affected. Public Offering of Equity Securities/Use of Proceeds We are currently in the process of responding to comments on our
Registration Statement on Form S-11 under the Securities Act of 1933, as
amended, by the SEC, with the goal of having the Registration Statement
declared effective. Therefore we have not yet commenced a public offering of
equity securities. As of June 30, 2004, we had sold 20,000 shares of our common stock
(Shares) to our Advisor for aggregate gross proceeds before Offering costs
and selling commissions of $200,000. In connection with the Offering, we incurred approximately $696,958 of
costs related to the issuance and distribution of the Shares through the
quarter ended June 30, 2004. We will continue to incur similar costs in the
future as additional shares are sold.




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Critical Accounting Policies and Management Estimates Our financial statements are prepared in accordance with GAAP. The
application of these accounting policies will require our management to make
certain judgments and estimates that directly affect our financial reporting
results. We consider the policies discussed below to be critical to an
understanding of our financial statements. Specific risks for these critical
accounting policies are described in the following paragraphs. In regard to
these policies, we caution you that we have no operating history and future
events rarely develop exactly as forecasted, and the best estimates of our
management will likely require adjustment. See Note 2  Summary of
Significant Accounting Policies to our financial statements for a more
complete description of these policies. Basis of Accounting and Presentation.The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Management believes that the estimates and assumptions utilized in preparing
our financial statements and accompanying notes are reasonable and prudent.
Actual results could differ from those estimates. Organization Expenses.Organization expenses are expensed as incurred. Deferred Offering Costs.Costs attributable to the securities offering
are charged against the proceeds of the offering as a reduction to equity
capital. These costs include legal and accounting fees to prepare the
securities filing as well as the fees incurred in selling the securities, such
as underwriting commissions. Income Taxes.For our taxable year ending December 31, 2004, we intend to
elect to be taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code and, upon the election being made, we will be taxed as such
beginning with our taxable year ending December 31, 2004. To qualify as a
REIT, we must meet certain organizational and operational requirements,
including a requirement to currently distribute at least 90% of our REIT
taxable income to stockholders. As a REIT, we generally will not be subject to
U.S. federal income tax on taxable income that we distribute to our
stockholders. If we fail to qualify as a REIT in any taxable year, we will
then be subject to U.S. federal income taxes on our taxable income at regular
corporate rates starting with that year and will not be permitted to qualify
for treatment as a REIT for U.S. federal income tax purpose for four years
following the year during which qualification is lost unless the IRS were to
grant us relief under certain statutory provisions. Such an event could have a
material adverse effect on our net income and net cash available for
distribution to stockholders. However, we believe that we will be organized
and operate in such a manner as to qualify for treatment as a REIT and we
intend to operate in the foreseeable future in such a manner so that we will
qualify as a REIT for U.S. federal income tax purposes. Recent Accounting Developments In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The statement specifies the
accounting for certain employee termination benefits, contract termination
costs and costs to consolidate facilities or relocate employees and is
effective for exit and disposal activities initiated after December 31, 2002.
We do not expect the statement to have a material effect on our financial
condition or results of operations. In November 2002, the FASB issued FASB Interpretation (FIN) No. 45
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN No. 45 specifies the
disclosures to be made about obligations under certain issued guarantees and
requires a liability to be recognized for the fair value of a guarantee
obligation. The recognition and measurement provisions of the interpretation
apply prospectively to guarantees issued after September 30, 2002. We do not
expect the recognition and measurement provisions to have a material effect on
our financial condition or results of operations. In January 2003, the FASB issued FASB Interpretation (FIN) No. 46
Consolidation of Variable Interest Entities. FIN No. 46 requires a company
to consolidate a variable interest entity (VIE) if the company has variable
interests that give it a majority of the expected losses or a majority of the
expected residual returns of the entity. Prior to FIN No. 46, VIEs were
commonly referred to as SPEs. FIN No. 46 is effective immediately for VIEs




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created after January 31, 2003. We do not expect the interpretation to
have a material effect on our financial condition or results of operations. In May 2003, the FASB issued SFAS No. 150, Accounting for certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150, which is effective at the beginning of the first interim period
beginning after June 15, 2003, must be implemented by reporting the cumulative
effect of a change in accounting principle for financial instruments created
before the issuance date of the statement and still existing at the beginning
of the interim period of adoption. The statement requires that a financial
instrument which falls within the scope of the statement to be classified and
measured as a liability. The following financial instruments are required to
be classified as liabilities: (1) shares that are mandatorily redeemable, (2)
an obligation to repurchase the issuers equity shares or one indexed to such
an obligation and that requires or may require settlement by transferring
assets and (3) the embodiment of an unconditional obligation that the issuer
may or may not settle by issuing a variable number of equity shares if, at
inception, the monetary value of the obligation is based on certain
measurements defined in the statement. We do not expect the statement to have
a material effect on our financial condition or results of operations. Results of Operations For the three months ended June 30, 2004, net (loss) was $(64,856) or
$(3.24) per weighted average share outstanding (basic and diluted),. Due to
the fact that we have not yet commenced a public offering or our operations,
operating results for the three months ended June 30, 2004 are not indicative
of future operating results. Operating expenses for the three months ended June 30, 2004, were $64,856. Other expenses for the three months ended June 30, 2004, included $48,000
in compensation expense related to the compensation of our board of directors,
and $14,652 in travel expenses related to the travel and lodging of our board
of directors. Because the Company has yet to commence a public offering of its shares,
the only comparative 2003 financial data presented is the balance sheet as of
December 31, 2003.




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Off-Balance Sheet Arrangements Since inception, we have not maintained any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, established for
the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. Further, we have not guaranteed any
obligations of unconsolidated entities nor do we have any commitment or intent
to provide additional funding to any such entities. Accordingly, we are not
materially exposed to any market, credit, liquidity or financing risk that
could arise if we had engaged in such relationships. Liquidity and Capital Resources At June 30, 2004, we had $50,722 of cash to meet our immediate short-term
liquidity requirements. We expect that future short-term liquidity
requirements will be financed by net cash flow from operations and existing
working capital. Operating cash flows are expected to increase once we begin
to sell shares and add loans to our portfolio. Cash and cash equivalents
decreased since December 31, 2003 principally as a result of the payment of
costs related to the offering. On
July 16, 2004, the SEC declared our Registration Statement on
Form S-11 effective. We anticipate that adequate cash will be generated from operations to fund
our operating and administrative expenses, continuing debt service obligations,
and the payment of dividends in the foreseeable future. We paid no dividends for the six months ended June 30, 2004. Dividends
are determined by our board of directors and are dependent on a number of
factors, including the amount of funds available for distribution, our
financial condition, any decision by our board of directors to reinvest funds
rather than to distribute the funds, the annual distribution required to meet
REIT status under the Internal Revenue Code and other factors our board of
directors may deem relevant. Cash Flows used in Operating Activities.Net cash used by operating
activities was $64,856. We expect cash flows from operating activities to
increase once we begin to sell shares and acquire loans. Cash
Flows used in Investing Activities.We did not engage in any
investing activities for the three months ended June 30, 2004. Cash Flows from Financing Activities. Net cash provided by financing
activities amounted to $64,656 for the three months ended June 30, 2004,
consisting of $151,880 in offering costs during the three-months ended June 30,
2004 and $216,536 in borrowings under our credit facility. For the three
months ended June 30, 2004, we paid offering costs, totaling $151,880. We will continue to incur similar costs in the
future as additional shares are sold. In order to qualify as a REIT and to avoid corporate-level tax on the
income we distribute to our stockholders, we are required to distribute at
least 90% of our REIT taxable income on an annual basis. Therefore, one the
net proceeds we receive from this offering are substantially fully invested, we
will need to borrow in order to grow our business and acquire additional
assets. Our sources of funds will primarily be the net proceeds from
the
offering, operating cash flows and borrowings. Operating cash flows will
consist of interest received on and maturities of mortgage loans and
investments. Liquidity will also be generated through lines of credit with
commercial banks. We believe that we will be able to obtain financing in
amounts and on terms that are acceptable to us and consistent with our business
strategy prior to the closing of the offering. We believe that these cash
resources will be sufficient to satisfy our immediate liquidity requirements,
and we do not anticipate a need to raise funds from other than these sources
within the next 12 months. Our income calculated for tax purposes may differ from income calculated
in accordance with GAAP. For example, we record a reserve for credit losses
for GAAP purposes whereas only actual credit losses are deducted in calculating
taxable income. The distinction between taxable income and GAAP income is
important to our stockholders because distributions are declared on the basis
of taxable income. While we generally will not be required to pay income taxes
as long as we satisfy the REIT provisions on the Internal Revenue Code, each
year we




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will be required to complete a U.S. federal income tax return wherein
taxable income is calculated. This taxable income level will determine the
minimum level of distribution we must pay to our stockholders. Our advisory agreement with our Advisor requires us to pay incentive
compensation on a quarterly basis to our Advisor based on the application of
the incentive compensation formula at the end of each quarter. Because we will
be paying out at least 90% of our REIT taxable income to stockholders on a
quarterly basis, we may not have sufficient cash at the end of a particular
quarter to pay the incentive fee, which would require us to borrow under our
credit facility, if any, or sell assets to meet the contractual obligation. In
addition, it is possible that our liquidity may be further impaired if we
generate substantial net income in the first three quarters of a fiscal year
and have a significant drop off in the fourth quarter, but our capital
resources may be limited by the fact that we have overpaid our Advisor for the
year (through the first three quarters) will not be reimbursed for the over
payment until year-end. Nevertheless, our total annual operating expenses,
including the incentive compensation payable to the Advisor, will not exceed
the greater of 2% of average invested assets or 25% of our net income, unless
specifically approved by our independent directors. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk refers to the risk of loss from adverse changes in the level of one
or more market prices, rate indices or other market factors. We are exposed to
market risk primarily from changes in interest rates that are very sensitive to
a variety of factors including political, economic and other factors outside of
our control. Interest rate risk arises primarily as a result of our core business activities
of acquiring mortgage loans and funding a portion of the purchases with
borrowings and the associated asset and liability management required to match
maturities of loans to funding sources. The principal objective of our asset
and liability management is to maximize net interest income while operating
within acceptable limits established for interest rate risk and maintaining
adequate levels of liquidity. The primary interest rate exposure to which we are subject relates to our
mortgage loan portfolio. Any change in the general level of interest rates in
the market can affect our net interest income and net income in either a
positive or negative manner. Net interest income is the difference between the
income earned from interest bearing assets less the expense incurred relating
to interest bearing liabilities. Fluctuations in the interest rate environment
can also affect our ability to acquire new loans, the value of our loans for
sale portfolio and our ability to sell the loans held for sale and the related
income associated with a sale. We do not intend to use any derivative instruments to manage our interest rate
exposure. Given the short time horizon of our anticipated investments and our
related borrowings, we do not believe a hedging strategy is necessary. In
addition, our actions are limited by rules with which REITs must comply.




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Item 4. Controls and Procedures As of the end of the period covered by this quarterly report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company management, including the Companys Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
the Companys disclosure controls and procedures pursuant to Securities
Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer
and the Chief Financial Officer have concluded that these disclosure controls
and procedures are effective as of the end of the period covered by this
report. There has been no change in the Companys internal control over
financial reporting that occurred during the period covered by this report that
has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting. 
 Part II. Other Information 
 Item 1. Legal Proceedings None. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities None.




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Item 5. Other Information None. 
 Item 6. Exhibits and Reports on Form 8-K  a)
    
    Exhibits 3.1 
    
    Second Amended and Restated Articles of Incorporation
(included as Exhibit 3.1 to Amendment No. 2 to the Registrants
Registration Statement on Form S-11 (File No. 333-111643) (the
Registration Statement) and incorporated herein by reference)3.2 
    
    Bylaws of the Company (included as Exhibit 3.2 to the
Registration Statement and incorporated herein by reference)4.1 
    
    Form of Common Stock certificate (included as Exhibit 4.1 to
Amendment No. 2 to the Registration Statement and incorporated herein
by reference)10.1 
    
    Form of Advisory Agreement (included as Exhibit 10.1 to
Amendment No. 3 to the Registration Statement and incorporated herein
by reference)10.2 
    
    Form of Strategic Alliance Agreement (included as Exhibit
10.2 to Amendment No. 1 to the Registration Statement and
incorporated herein by reference)10.3 
    
    Form of Indemnity Agreement (included as Exhibit 10.3 to
Amendment No. 6 to the Registration Statement and incorporated herein
by reference)10.4 
    
    Form of Escrow Agreement (included as Exhibit 10.4 to
Amendment No. 4 to the Registration Statement and incorporated herein
by reference)10.5 
    
    Form of Strategic Alliance
Agreement (included as Exhibit 10.2 to Amendment No. 1
to the Registration Statement and incorporated herein by reference)31.1 
    
    Certification of Chief Executive Officer, Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.*31.2 
    
    Certification of Chief Financial Officer, Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.*32.1 
    
    Certification of Chief Executive Officer and Chief Financial
Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
   *
    
    Included herewith  b)
    
    Reports on Form 8-K No reports on Form 8-K were filed during the period covered by this
report.




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SIGNATURES Pursuant to the requirements 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. DESERT CAPITAL REIT, INC.November 29, 2004
    
    /s/ TODD B. PARRIOTTTodd B. Parriott,Chairman of the Board, Chief
Executive Officer,
President and Chief Investment Officer
(Principal Executive Officer)November 29, 2004
    
    /s/ JONATHAN G. ARENSJonathan G. Arens,Chief Financial Officer
(Principal Accounting Officer)




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EXHIBIT INDEX Exhibit Number
    
    Description3.1 
    
    Second Amended and Restated Articles of Incorporation (included as
Exhibit 3.1 to Amendment No. 2 to the Registrants Registration Statement
on Form S-11 (File No. 333-111643) (the Registration Statement) and
incorporated herein by reference)3.2 
    
    Bylaws of the Company (included as Exhibit 3.2 to the Registration
Statement and incorporated herein by reference)4.1 
    
    Form of Common Stock certificate (included as Exhibit 4.1 to Amendment
No. 2 to the Registration Statement and incorporated herein by reference)10.1 
    
    Form of Advisory Agreement (included as Exhibit 10.1 to Amendment No. 3
to the Registration Statement and incorporated herein by reference)10.2 
    
    Form of Strategic Alliance Agreement (included as Exhibit 10.2 to
Amendment No. 1 to the Registration Statement and incorporated herein by
reference)10.3 
    
    Form of Indemnity Agreement (included as Exhibit 10.3 to Amendment No.
6 to the Registration Statement and incorporated herein by reference)10.4 
    
    Form of Escrow Agreement (included as Exhibit 10.4 to Amendment No. 4
to the Registration Statement and incorporated herein by reference)10.5 
    
    Form of Strategic Alliance
Agreement (included as Exhibit 10.2 to
Amendment No. 1 to the Registration Statement and incorporated herein
by reference)31.1 
    
    Certification of Chief Executive Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*31.2 
    
    Certification of Chief Financial Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*32.1 
    
    Certification of Chief Executive Officer and Chief Financial Officer,
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
   *
    
    Included herewith