Table
      of Contents


**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 September 30, 2007**





**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 333-128885













**DESERT
      CAPITAL REIT, INC.**


(Exact
      Name of Registrant as specified in its charter)




Maryland
            20-0495883(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer
              Identification
                No.)




**1291
      Galleria Drive, Suite 200, Henderson, NV 89014**


(Address
      of principal executive office)


(Zip
      Code)





Registrant's
      telephone number, including area code: **(800)
      419-2855**





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 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 þ 
No
o





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 Exchange Act.  (Check
      one)


Large
      Accelerated Filer o Accelerated Filer
      o 
Non-Accelerated
      Filer þ





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act.)


Yes
o No
þ





The
      number of shares of the registrant's common stock, par value $0.01 per share,
      outstanding as of November 12, 2007 was­­­­
16,880,056.







Table
          of Contents


**DESERT
      CAPITAL REIT, INC.**


**FORM
      10-Q**


**For
      the Quarter Ended September 30, 2007**




**INDEX**







**Page**Part
                I.
                Financial Information
            
            1Item
                1. Financial Statements
            
            1a)Consolidated
                Balance Sheets as of September 30, 2007 (unaudited) and December
                31,
                2006
            
            1b)Consolidated
                Statements of Operations for the three and nine months ended September
                30,
                2007 and 2006(unaudited)
            
            2c)Consolidated
                Statements of Cash Flows for
                the  nine months ended September 30, 2007 and 2006
            
            3d)Consolidated
                Statements of Changes in Stockholders'
                Equity for the nine months ended September 30, 2007
                (unaudited)
            
            4e)Notes
                to
                Consolidated Financial Statements (unaudited)
            
            5Item
                2.
                Management's Discussion and Analysis of Financial Condition and Results
                of
                Operations
            
            12Item
                3.
                Quantitative and Qualitative Disclosures About Market
                Risk
            
            16Item
                4. Controls
                and Procedures
            
            17Part
                II. Other
                Information
            
            17Item
                1.
                Legal Proceedings
            
            17Item
                1A.
                Risk Factors
            
            17Item
                2.
                Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            17Item
                3.
                Defaults Upon Senior Securities
            
            18Item
                4.
                Submission of Matters to a Vote of Security
                Holders
            
            18Item
                5.
                Other Information
            
            18Item
                6.
                Exhibits
            
            18Signatures
            
            19Certification
                of CEO Pursuant to Section
                302Certification
                of CFO Pursuant to Section
                302Certification
                of CEO and CFO Pursuant to Section
                906






Table
          of Contents





**Part
                I. Financial
                Information****Item
                1. Financial Statements****DESERT
                CAPITAL REIT, INC.****Consolidated
                Balance Sheets**September
                30,
            
            
            December
                31,2007
            
            
            2006(unaudited)ASSETSMortgage
                investments - net
            
            $
            151,057,633
            
            
            $
            149,588,926Loans
                held-for-sale
            
            
            5,562,000
            
            
            
            7,430,000Real
                estate held-for-sale - net
            
            
            11,284,182
            
            
            
            -Goodwill
            
            
            13,388,555
            
            
            
            13,388,555Building
                and equipment - net
            
            
            8,160,236
            
            
            
            8,549,506Land
            
            
            1,820,000
            
            
            
            1,820,000Cash
                and cash equivalents
            
            
            6,944,325
            
            
            
            2,434,948Interest
                receivable
            
            
            1,488,099
            
            
            
            1,661,370Deferred
                financing costs
            
            
            983,608
            
            
            
            1,009,301Investment
                in equity affiliates
            
            
            1,928,000
            
            
            
            928,000Other
            
            
            627,544
            
            
            
            220,028Total
                assets
            
            $
            203,244,182
            
            
            $
            187,030,634LIABILITIES
                AND STOCKHOLDERS' EQUITYCredit
                facility
            
            $
            5,562,000
            
            
            $
            7,430,000Mortgage
                payable
            
            
            6,489,993
            
            
            
            6,541,112Junior
                subordinated notes
            
            
            30,928,000
            
            
            
            30,928,000Dividends
                payable
            
            
            1,695,609
            
            
            
            1,498,633Accounts
                payable and accrued expenses
            
            
            1,221,132
            
            
            
            2,184,237Total
                liabilities
            
            
            45,896,734
            
            
            
            48,581,982Preferred
                stock, $0.01 par value: 15,000,000 sharesauthorized,
                none outstanding
            
            
            -
            
            
            
            -Common
                stock, $0.01 par value: 100,000,000 shares authorized; 16,769,163
                and
                15,061,896shares
                issued and outstanding on September 30, 2007, and December 31, 2006,
                respectfully
            
            
            167,692
            
            
            
            150,619Additional
                paid-in capital
            
            
            164,760,791
            
            
            
            140,441,542Accumulated
                deficit
            
            
            (7,581,035
            )
            
            
            (2,143,509
            )Total
                stockholders' equity
            
            
            157,347,448
            
            
            
            138,448,652Total
                liabilities and stockholders' equity
            
            $
            203,244,182
            
            
            $
            187,030,634The
                accompanying notes are an integral part of these consolidated financial
                statements.







1
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**DESERT
                CAPITAL REIT, INC.****Consolidated
                Statements of Operations****(unaudited)**Three
                Months
            
            
            Nine
                MonthsEnded
                September 30,
            
            
            Ended
                September 30,2007
            
            
            2006
            
            
            2007
            
            
            2006INTEREST
                INCOME:Mortgage
                investments
            
            $
            4,410,062
            
            
            $
            5,139,279
            
            
            $
            15,488,818
            
            
            $
            12,012,474Other
                interest
            
            
            170,633
            
            
            
            235,576
            
            
            
            478,800
            
            
            
            552,515Total
                interest income
            
            
            4,580,695
            
            
            
            5,374,855
            
            
            
            15,967,618
            
            
            
            12,564,989INTEREST
                EXPENSE:Interest
                expense
            
            
            1,032,804
            
            
            
            963,772
            
            
            
            3,043,706
            
            
            
            1,650,748Total
                interest expense
            
            
            1,032,804
            
            
            
            963,772
            
            
            
            3,043,706
            
            
            
            1,650,748Net
                interest income
            
            
            3,547,891
            
            
            
            4,411,083
            
            
            
            12,923,912
            
            
            
            10,914,241Provision
                for loan losses
            
            
            1,585,080
            
            
            
            75,452
            
            
            
            1,798,431
            
            
            
            201,201Net
                interest income after provision for loan loss
            
            
            1,962,811
            
            
            
            4,335,631
            
            
            
            11,125,481
            
            
            
            10,713,040NON-INTEREST
                INCOME:Loan
                brokerage fees
            
            
            1,223,177
            
            
            
            1,615,538
            
            
            
            5,696,746
            
            
            
            6,062,631Service
                and other loan fees
            
            
            231,893
            
            
            
            339,565
            
            
            
            1,017,923
            
            
            
            1,352,636Other
            
            
            342,198
            
            
            
            175,734
            
            
            
            794,441
            
            
            
            458,662Total
                non-interest income
            
            
            1,797,268
            
            
            
            2,130,837
            
            
            
            7,509,110
            
            
            
            7,873,929NON-INTEREST
                EXPENSE:Compensation
            
            
            705,443
            
            
            
            557,464
            
            
            
            1,924,877
            
            
            
            1,578,260Management
                fees
            
            
            505,986
            
            
            
            1,199,717
            
            
            
            3,286,149
            
            
            
            3,509,225Professional
                fees
            
            
            502,819
            
            
            
            373,135
            
            
            
            1,380,165
            
            
            
            1,248,099Insurance
            
            
            116,039
            
            
            
            104,849
            
            
            
            323,328
            
            
            
            318,907Depreciation
            
            
            195,641
            
            
            
            108,159
            
            
            
            586,923
            
            
            
            323,125Advertising
            
            
            350,453
            
            
            
            128,121
            
            
            
            691,313
            
            
            
            552,268Other
            
            
            273,215
            
            
            
            264,701
            
            
            
            837,627
            
            
            
            786,483Total
                non-interest expense
            
            
            2,649,596
            
            
            
            2,736,146
            
            
            
            9,030,382
            
            
            
            8,316,367Net
                income before taxes
            
            
            1,110,483
            
            
            
            3,730,322
            
            
            
            9,604,209
            
            
            
            10,270,602Income
                tax expense
            
            
            369,915
            
            
            
            95,310
            
            
            
            567,103
            
            
            
            155,524Net
                income
            
            $
            740,568
            
            
            $
            3,635,012
            
            
            $
            9,037,106
            
            
            $
            10,115,078Earnings
                per share - basic
            
            $
            0.04
            
            
            $
            0.26
            
            
            $
            0.56
            
            
            $
            0.78Earnings
                per share - diluted
            
            $
            0.04
            
            
            $
            0.26
            
            
            $
            0.56
            
            
            $
            0.78Weighted
                average outstanding shares - basic
            
            
            16,707,393
            
            
            
            14,160,322
            
            
            
            16,053,992
            
            
            
            12,975,033Weighted
                average outstanding shares - diluted
            
            
            16,747,103
            
            
            
            14,191,771
            
            
            
            16,087,252
            
            
            
            13,004,410The
                accompanying notes are an integral part of these consolidated financial
                statements.








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**DESERT
                CAPITAL REIT, INC.****Consolidated
                Statements of Cash Flows****(unaudited)**Nine
                MonthsEnded
                September 30,2007
            
            
            2006OPERATING
                ACTIVITIESNet
                income
            
            $
            9,037,106
            
            
            $
            10,115,078Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            612,616
            
            
            
            323,125Stock
                based compensation
            
            
            200,000
            
            
            
            108,333Provision
                for loan loss
            
            
            1,798,431
            
            
            
            201,201Mortgage
                loans originated for sale
            
            
            (35,177,750
            )
            
            
            (34,271,400
            )Mortgage
                loan sales
            
            
            37,045,750
            
            
            
            31,469,973Net
                change in:Interest
                receivable
            
            
            173,271
            
            
            
            (937,150
            )Other
                assets
            
            
            (407,516
            )
            
            
            (6,219
            )Deferred
                origination fees
            
            
            (281,545
            )
            
            
            817,841Accounts
                payable
            
            
            (936,997
            )
            
            
            (137,885
            )Net
                cash provided by operating activities
            
            
            12,063,366
            
            
            
            7,682,897INVESTING
                ACTIVITIESInvestment
                in equity affiliates
            
            
            (1,000,000
            )
            
            
            (928,000
            )Mortgage
                loans originated, net
            
            
            (14,269,775
            )
            
            
            (71,737,670
            )Acquisition
                of building and equipment
            
            
            (197,653
            )
            
            
            (465,416
            )Net
                cash used by investing activities
            
            
            (15,467,428
            )
            
            
            (73,131,086
            )FINANCING
                ACTIVITIES(Repayments)
                proceeds on credit facilities on mortgage loans held for sale,
                net
            
            
            (1,868,000
            )
            
            
            2,120,300Repayments
                on credit facilities on mortgage investments, net
            
            
            -
            
            
            
            (5,000,000
            )Principal
                repayments of mortgage loan
            
            
            (51,119
            )
            
            
            (71,690
            )Proceeds
                on junior subordinated notes
            
            
            -
            
            
            
            30,928,000Deferred
                financing costs
            
            
            -
            
            
            
            (1,017,865
            )Issuance
                of common stock
            
            
            26,601,286
            
            
            
            51,890,394Dividends
                on common stock
            
            
            (10,485,194
            )
            
            
            (7,756,427
            )Offering
                costs paid
            
            
            (2,851,759
            )
            
            
            (4,745,287
            )Shares
                redeemed and retired
            
            
            (3,431,775
            )
            
            
            (2,035,307
            )Net
                cash provided by financing activities
            
            
            7,913,439
            
            
            
            64,312,118Net
                increase (decrease) in cash and cash equivalents
            
            
            4,509,377
            
            
            
            (1,136,071
            )Cash
                and cash equivalents at beginning of period
            
            
            2,434,948
            
            
            
            4,459,289Cash
                and cash equivalents at end of period
            
            $
            6,944,325
            
            
            $
            3,323,218Supplemental
                disclosure of cash flow information:Cash
                paid for interest
            
            $
            3,040,757
            
            
            $
            1,068,169Cash
                paid for taxes
            
            
            668,824
            
            
            
            870,000Common
                stock issued for dividend reinvestment program
            
            
            3,792,461
            
            
            
            3,379,187Common
                stock dividends declared but not paid
            
            
            1,695,609
            
            
            
            1,435,060Foreclosed
                assets acquired in exchange for loans
            
            
            12,596,559
            
            
            
            -Offering
                costs incurred but not paid
            
            $
            16,464
            
            
            $
            59,000The
                accompanying notes are an integral part of these consolidated financial
                statements.








3
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**DESERT
                CAPITAL REIT, INC.****Consolidated
                Statements of Changes in Stockholders' Equity****For
                the nine months ended September 30, 2007****(unaudited)****Common
                Stock**
              **Number
                of Shares**
            
            **Common
                Stock**
              **Par
                Value**
            
            **Additional
                Paid - in Capital**
            
            **Accumulated
                Deficit**
            
            
            **Total****Balance
                at December 31, 2006**
            **15,061,896**
            
            **$**
            **150,619**
            
            
            **$**
            **140,441,542**
            
            
            **$**
            **(2,143,509)**
            
            
            **$**
            **138,448,652**Issuance
                of common stock
            2,026,504
            
            
            20,265
            
            
            
            30,373,482
            
            
            
            -
            
            
            
            30,393,747Offering
                costs
            
            -
            
            
            -
            
            
            
            (2,825,850)
            
            
            
            -
            
            
            
            (2,825,850)Stock
                based compensation
            20,000
            
            
            200
            
            
            
            200,000
            
            
            
            -
            
            
            
            200,200Stock
                redeemed & retired
            
            (339,237)
            
            
            (3,392)
            
            
            
            (3,428,383)
            
            
            
            -
            
            
            
            (3,431,775)Dividends
                on common stock
            -
            
            
            -
            
            
            
            -
            
            
            
            (14,474,632)
            
            
            
            (14,474,632)Net
                income
            
            -
            
            
            -
            
            
            
            -
            
            
            
            9,037,106
            
            
            
            9,037,106**Balance
                at September 30, 2007**
            **16,769,163**
            
            **$**
            **167,692**
            
            
            **$**
            **164,760,791**
            
            
            **$**
            **(7,581,035)**
            
            
            **$**
            **157,347,448**The
                accompanying notes are an integral part of these consolidated financial
                statements.




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**Desert
      CapitalREIT, INC.**


**Notes
      to Consolidated Financial Statements**


**September
      30, 2007**


**(Unaudited)**


**Note
      1 - Organization**





References
      herein to “we,” “us” “our” or the “Company” refer to Desert Capital REIT, Inc.
      and its subsidiaries unless the context specifically requires
      otherwise.




We
      are a
      Maryland corporation formed in December 2003 as a real estate investment trust
      ("REIT") that specializes in the origination and financing of short-term
      mortgage loans. We generally invest in 12 to 18 month, first and second lien
      mortgage loans, consisting of acquisition and development loans and construction
      loans to developers and builders of residential and commercial property. We
      derive our revenues primarily from interest payments received from mortgage
      investments funded 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. This spread, net of
      operating expenses, provides both operating capital and distributable income.
      Our business depends 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 also depends
      on our ability to locate suitable investments to keep our capital fully deployed
      at favorable rates. We are externally managed and advised by Burton Management
      Company, Ltd. (“Burton”), a related party (see Note 12).





Substantially
      all of the loan origination and loan servicing is conducted through our wholly
      owned subsidiary, Consolidated Mortgage LLC. In addition to originating and
      servicing loans for us, Consolidated Mortgage also originates, brokers, and
      services mortgage loans to private investors. Consolidated Mortgage generates
      brokerage and other fees from the loans funded by its private investor-clients
      which provide additional cash flow to us. Due to the high amount and type of
      fees generated by Consolidated Mortgage it has been structured as a taxable
      REIT
      subsidiary (“TRS”) resulting in its income being subject to federal income and
      applicable state taxes at C corporation rates.  Consolidated Mortgage
      has 26 employees.





We
      qualified as a REIT under the Internal Revenue Code commencing with our taxable
      year ended December 31, 2004 and expect to continue to qualify for the current
      fiscal year. To maintain our tax status as a REIT, we plan to continue to
      distribute at least 90% of our taxable income to stockholders.





**Basis
      of Presentation**


The
      accompanying unaudited consolidated 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 and Rule 10-01 of Regulation S-X. 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. The
      accompanying unaudited consolidated interim financial statements should be
      read
      in conjunction with the financial statements and the related management's
      discussion and analysis of financial condition and results of operations filed
      on Form 10-K for the fiscal year ended December 31, 2006. In our opinion, all
      adjustments (consisting only of normal recurring accruals) considered necessary
      for a fair presentation have been included. The results of operations for the
      three and nine months ended September 30, 2007 and 2006 are not necessarily
      indicative of results that may be expected for the entire year ending December
      31, 2007.




**Note
      2 - Summary of Significant Accounting Policies**





**Principles
      of Consolidation**


The
      consolidated financial statements include our accounts and those of the our
      subsidiaries, which are wholly-owned or controlled by us or entities which
      are
      variable interest entities (“VIE”) in which the Company is the primary
      beneficiary under Financial Accounting Standards Board (“FASB”) Interpretation
      No. 46R “Consolidation of Variable Interest Entities” (“FIN 46R”). All
      significant intercompany transactions and balances have been eliminated in
      consolidation.  Our interest in Desert Capital TRS Statutory Trust I
      (see Note 11) is accounted for using the equity method and the assets and
      liabilities are not consolidated into our financial statements due to our
      determination that Desert Capital TRS Statutory Trust I is a variable interest
      entity in which we are not the primary beneficiary under FIN 46R.




**Reclassifications**


Certain
      reclassifications have been made in the presentation of the 2006 consolidated
      financial statements to conform to the 2007 presentation.




5
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**Use
      of Estimates**


The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States 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 materially differ from those
      estimates. Estimates and assumptions are reviewed periodically and the effects
      of revisions are reflected in the periods they are determined to be
      necessary.




**Revenue
      Recognition**


Interest
      income on our mortgage investments is recognized over the life of the investment
      and recorded on the accrual basis. Loan origination fees and certain direct
      origination costs associated with mortgage investments funded by us, are
      deferred and recognized as an adjustment to yield over the lives of the related
      loans using the straight-line method. Income recognition is generally suspended
      for loans at the earlier of the date at which payments become 90 days past
      due
      or when, in the opinion of management, a full recovery of income and principal
      becomes doubtful. Income recognition is resumed when the loan becomes
      contractually current and performance is demonstrated to be
      resumed.





Loan
      brokerage fees are nonrefundable fees for brokering loans to third party
      investors. Loan brokerage fees are recognized once the loans associated with
      the
      fees are funded and recorded.





We
      also
      charge fees to service loans brokered to third party investors as well as other
      miscellaneous fees during the loan term. These service and other loan fees
      are
      recognized throughout the life of the loan as they are earned.




**Offering
      Costs**


Costs
      attributable to securities offerings are charged against the proceeds of the
      offerings 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 broker commissions paid to a related party
      (see
      Note 12).




**Mortgage
      Investments and Loans Held-for-Sale**


Mortgage
      investments are intended to be held to maturity and, accordingly are carried
      at
      cost, net of any unamortized deferred fees and costs, and any allowance for
      loan
      losses. Loans held-for-sale are carried at the lower of cost or market
      value.





**Real
      Estate Held-for-Sale**


Real
      estate held for sale includes real estate, which previously collateralized
      our
      loans that went into default, acquired through foreclosure or deed in lieu
      of
      foreclosure.  It will be carried at the lower of the original loan
      amount (which represents the cost of the property), inclusive of any senior
      indebtedness, or the property's estimated fair value, less estimated costs
      to
      sell, with fair value based on appraisals and knowledge of local market
      conditions. While pursuing foreclosure actions, we seek to identify potential
      purchasers of such property. It is not our intent to invest in or own real
      estate as a long-term investment, we seek to sell properties acquired through
      foreclosure as quickly as circumstances permit. The carrying values of real
      estate held for sale are assessed on a regular basis from updated appraisals,
      comparable sales values or purchase offers.





**Allowance
      for Loan Losses**


Management
      monitors the delinquencies and defaults on the underlying mortgages and, if
      an
      impairment of the related mortgage loan is deemed to be other than temporary,
      the carrying value of the related mortgage loan will be reduced to fair value
      through a charge to the allowance for loan losses. An allowance for loan loss
      is
      reflected in our financial statements based upon an evaluation of known and
      inherent risks in our mortgage loans. The allowance is based on our assessment
      of numerous factors affecting our portfolio of mortgage assets including, but
      not limited to, current and projected economic conditions, delinquency status,
      credit losses to date on underlying mortgages and any remaining credit
      protection. Loan loss estimates are reviewed periodically and adjustments are
      reported in earnings when they become known. Actual losses, if any, could differ
      materially from these estimates.





**Impairment
      Policy**


We
      have
      adopted FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
      Assets” (FAS No. 144). Impairment is measured on a loan-by-loan basis on the
      fair value of the related collateral since all loans subject to this measurement
      are collateral dependent.




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**Recent
      Accounting Developments**


In
      February 2007, the Financial Accounting Standards Board (the “FASB”) issued
      Statement of Financial Accounting Standards No. 159 (“FAS No. 159”),
“The Fair Value Option for Financial Assets and Financial Liabilities.”
FAS No. 159 provides entities with an irrevocable option to choose to
      measure most financial instruments, and certain other items at fair value with
      subsequent changes reported in earnings. FAS No. 159 is effective for
      fiscal years beginning after November 15, 2007. We are currently evaluating
      the effect, if any; the adoption of FAS No. 159 may have on our
      Consolidated Financial Statements.




In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
        value, establishes a framework for measuring fair value and expands disclosures
        about fair value measurements.  SFAS 157 applies under other accounting
        pronouncements that require or permit fair value measurements.
 Accordingly, SFAS 157 does not require any new fair value measurements.
        SFAS 157 is effective for fiscal years beginning after November 15, 2007,
        and
        interim periods within those fiscal years. We do not believe that this Statement
        will have a material effect on our financial condition or results of
        operations.




**Note
      3 - Mortgage Investments**


Mortgage
      investments represent first and second lien positions on acquisition and
      development, construction and commercial property loans.  The
      following table provides additional detail of our mortgage
      investments:





September
                30,
            
            
            December
                31,2007
            
            
            2006Acquisition
                  and development loans
            
            $
            111,475,562
            
            
            $
            128,214,695Construction
                  loans
            
            
            21,929,620
            
            
            
            22,553,595Commercial
                  property (completed buildings)
            
            
            18,212,800
            
            
            
            -Unamortized
                  deferred fees and costs
            
            
            (450,854
            )
            
            
            (732,399
            )Allowance
                  for loan losses
            
            
            (109,495
            )
            
            
            (446,965
            )Mortgage
                  investments - net
            
            $
            151,057,633
            
            
            $
            149,588,926





As
      of
      September 30, 2007 and December 31, 2006, approximately 18% and 22%,
      respectively, of the principal balance of the outstanding mortgage notes were
      secured by second liens. As of September 30, 2007 and December 31, 2006 the
      portfolio had a weighted average interest rate of 14% and 13.5%,
      respectively.





Our
      mortgage portfolio is primarily concentrated in the Southwestern United States.
      As of September 30, 2007 and December 31, 2006, 88% and 87%, respectively,
      of
      the principal balance of our portfolio was invested throughout Nevada,
      California, and Arizona. Our borrowers’ ability to repay our notes is dependent
      upon the real estate and general economic conditions in this area.





As
      of
      September 30, 2007 we had 44 loans in our portfolio from ten separate borrowers
      that were placed on nonaccrual status.  The aggregate balance of these
      loans was approximately $100.6 million of which our portion was approximately
      $37.4 million, net of allowance for loan losses of approximately $0.1 million,
      and the remaining balance is held by private investors.  Our balance
      on these loans ranges from $4,000 to $6.0 million. Of the 44 loans, 40 are
      first
      lien loans totaling $34.9 million and 4 are second lien loans totaling $2.5
      million.  These loans have been placed on non-accrual of interest
      status and are the subject of pending foreclosure proceedings.  See
      subsequent event footnote (Note 13).





**Note
      4 – Real Estate Held-for-sale**


At
      September 30, 2007, we held three properties that we acquired through
      foreclosure, or deed in lieu of foreclosure.  These properties have a
      combined carrying balance of $29.1 million, of which our portion is
      approximately $11.3 million, net of write downs of approximately $1.3
      million.  The remaining carrying balance of these properties is held by
      private investors.  One property, which represents $10.7 million of the
      total balance in real estate held-for-sale, was acquired by deed in lieu of
      foreclosure from CM Land LLC, a related party (see Note 12 of the financial
      statements).  These investments in real estate held-for-sale are accounted
      for at the lower of cost or fair value less costs to sell with fair value based
      on appraisals and knowledge of local market conditions.  We seek to sell
      properties acquired through foreclosure as quickly as circumstances
      permit.  Sales on all three of the properties are currently being
      negotiated.


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**Note
      5 - Investment in Equity Affiliates**


As
      of
      September 30, 2007 and December 31, 2006 we had $1,928,000 and $928,000 in
      investments in equity affiliates, respectively. In March 2007, we invested
      $1,000,000, representing equity and profits interest of 1.5%, to develop a
      resort community near Lincoln City, OR. This investment is being accounted
      for
      under the cost method.




In
      June 2006, we invested $928,000 for 100% of the common shares of an
      affiliate entity which was formed to facilitate the issuance of $30,928,000
      of
      junior subordinate notes. This entity pays dividends on both the common and
      preferred securities on a quarterly basis at a variable rate based on
      LIBOR.




**Note
      6 - Share Repurchase Plan**


We
      have
      adopted a share repurchase plan where we may, at our option, repurchase the
      common stock presented for cash to the extent we have sufficient available
      proceeds from our DRIP to do so. For purposes of funding the Repurchase Plan,
      all proceeds from the DRIP for the applicable calendar quarter will be used
      by
      the reinvestment agent on our behalf to repurchase shares of our common stock
      pursuant to the terms of the Repurchase Plan. In addition, we may, at our
      discretion, use up to $100,000 per calendar quarter of the proceeds of the
      Offering for repurchases under the Repurchase Plan. However, at no time during
      any consecutive 12-month period would the number of shares repurchased by us
      under the Repurchase Plan exceed 5% of the number of outstanding shares of
      our
      common stock at the beginning of that 12-month period.  For the nine
      months ended September 30, 2007 and 2006 we had repurchased $3,431,775 and
      $2,035,307 of common stock, respectively.




**Note
      7 - Building and Equipment**


We
      own an
      office building in Henderson, NV, which serves as our corporate headquarters.
      Any space that is not utilized by us is leased to other companies. The total
      square footage of the building is approximately 40,000 square feet, and as
      of
      September 30, 2007, the building was approximately 89% leased.  The
      accumulated depreciation as of September 30, 2007 and December 31 2006 on this
      building was $521,969 and $285,591, respectively.





Building
      and equipment as of September 30, 2007 and December 31, 2006 are as
      follows:




September
                30,
            
            
            December
                31,2007
            
            
            2006Building
            
            $
            7,680,852
            
            
            $
            7,665,859Equipment
            
            
            126,314
            
            
            
            126,314Furniture
                  and fixtures
            
            
            445,639
            
            
            
            445,639Software
            
            
            1,207,177
            
            
            
            1,024,5179,458,982
            
            
            
            9,262,329Less
                  accumulated depreciation
            
            
            (1,299,746
            )
            
            
            (712,823
            )$
            8,160,236
            
            
            $
            8,549,506




**Note
      8 - Income taxes**


We
      elected to be taxed as a REIT, under Sections 856 through 860 of the Internal
      Revenue Code, beginning with our taxable year ended December 31, 2004. To
      qualify as a REIT, we must meet certain organizational and operational
      requirements, including a requirement to distribute at least 90% of our ordinary
      taxable income to stockholders. As a REIT, we generally are not subject to
      federal income tax on taxable income that we distribute to our stockholders.
      If
      we failed to qualify as a REIT in any taxable year, we would then be subject
      to
      federal income taxes on our taxable income at regular corporate rates and we
      would not be permitted to qualify for treatment as a REIT for federal income
      tax
      purposes for four years following the year during which qualification was lost
      unless the Internal Revenue Service granted us relief under certain statutory
      provisions. Such an event could materially adversely affect our net income
      and
      net cash available for distributions to stockholders. However, we intend to
      continue to operate in the foreseeable future in such a manner so that we will
      qualify as a REIT for federal income tax purposes.




Our
      taxable REIT subsidiaries are subject to federal, state, and local taxes. For
      the nine months ended September, 2007 and 2006 we recorded $567,103, and
      $155,524 respectively, of income tax expense for income attributable to our
      taxable REIT subsidiary. For the nine months ended September 30, 2007 our
      provision for income tax was comprised of a current provision of $333,469 and
      a
      deferred provision of $233,634, using an effective tax rate of 34%. We have
      recorded a net deferred tax liability of $339,788.





**Note
      9 - Earnings per Share**




Basic
      earnings per share are calculated by dividing net income by the weighted average
      number of shares of common stock outstanding during each period. In accordance
      with FAS No. 128 “Earnings Per Share,” certain shares of nonvested
      restricted stock are not included in the calculation of basic EPS (even though
      shares of nonvested restricted stock are legally outstanding). Diluted earnings
      per share takes into account the effect of dilutive instruments, such as shares
      of unvested restricted common stock.




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The
      following is a reconciliation of the denominator of the basic and diluted
      earnings per share computations for the three months ended September 30, 2007
      and 2006.





For
                the Three Months
                Ended
            
            
            For
                the Three Months EndedSeptember
                30,
                2007
            
            
            September
                30, 2006Basic
            
            
            Diluted
            
            
            Basic
            
            
            DilutedNet
                  income
            
            $
            740,568
            
            
            $
            740,568
            
            
            $
            3,635,012
            
            
            $
            3,635,012Weighted
                  average number of common shares outstanding
            
            
            16,707,393
            
            
            
            16,707,393
            
            
            
            14,160,322
            
            
            
            14,160,322Dilutive
                  effect of unvested restricted shares
            
            
            -
            
            
            
            39,710
            
            
            
            -
            
            
            
            31,449Total
                  weighted average common shares outstanding
            
            
            16,707,393
            
            
            
            16,747,103
            
            
            
            14,160,322
            
            
            
            14,191,771Earnings
                  per common share
            
            
            0.04
            
            
            
            0.04
            
            
            
            0.26
            
            
            
            0.26





The
      following is a reconciliation of the denominator of the basic and diluted
      earnings per share computations for the nine months ended September 30, 2007
      and
      2006.





For
                the Nine Months
                Ended
            
            
            For
                the Nine Months EndedSeptember
                30,
                2007
            
            
            September
                30, 2006Basic
            
            
            Diluted
            
            
            Basic
            
            
            DilutedNet
                  income
            
            $
            9,037,106
            
            
            $
            9,037,106
            
            
            $
            10,115,078
            
            
            $
            10,115,078Weighted
                  average number of common shares outstanding
            
            
            16,053,992
            
            
            
            16,053,992
            
            
            
            12,975,033
            
            
            
            12,975,033Dilutive
                  effect of unvested restricted shares
            
            
            -
            
            
            
            33,260
            
            
            
            -
            
            
            
            29,377Total
                  weighted average common shares outstanding
            
            
            16,053,992
            
            
            
            16,087,252
            
            
            
            12,975,033
            
            
            
            13,004,410Earnings
                  per common share
            
            
            0.56
            
            
            
            0.56
            
            
            
            0.78
            
            
            
            0.78





**Note
      10 - Dividends**


Our
      Board
      of Directors declares dividends payable monthly to stockholders of record at
      the
      close of business on the last day of each month, prorated to the date admitted
      as a stockholder. The following table lists the declaration dates and per share
      amounts for the first nine months of 2007 and 2006:




2007
            
            
            2006January
                  31
            
            $
            0.10
            
            
            $
            0.10February
                  28
            
            
            0.10
            
            
            
            0.10March
                  31
            
            
            0.10
            
            
            
            0.10April
                  30
            
            
            0.10
            
            
            
            0.10May
                  31
            
            
            0.10
            
            
            
            0.10June
                  30
            
            
            0.10
            
            
            
            0.10July
                  31
            
            
            0.10
            
            
            
            0.10August
                  31
            
            
            0.10
            
            
            
            0.10September
                  30
            
            
            0.10
            
            
            
            0.10Total
            
            $
            0.90
            
            
            $
            0.90




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**Note
      11 - Debt**


**Credit
      Facility**


Through
      Consolidated Mortgage, we have a $7.5 million secured revolving credit facility
      with Bank of Nevada that expires in November.The facility is drawn upon for
      short term funding requirements. Amounts drawn under this facility bear interest
      at a rate equal to prime plus 75 basis points and must be repaid within 90
      days.  Amounts drawn under this facility generally are secured by the
      corresponding loan that is being funded. The interest rate on this facility
      at
      September 30, 2007 was 8.50%. At September 30, 2007 we had $5.56 million
      outstanding and $1.94 million available under this facility. The principal
      amount of loans pledged as collateral for this facility on September 30, 2007
      was $5.56 million. We were in compliance with all financial covenants related
      to
      this credit facility as of September 30, 2007.




**Mortgage
      Loan Payable**


We
      have
      one mortgage loan payable to a bank, with an outstanding principal balance
      of
      $6.5 million and a variable rate of interest equal to prime that is being fully
      amortized and matures in 2026. The prime interest rate on September 30, 2007
      was
      7.75%. The mortgage was used to finance the acquisition and construction of
      our
      office building in Henderson, NV. Our office building, which had a carrying
      amount on September 30, 2007 of $6.9 million, serves as collateral for this
      mortgage. We were in compliance with all financial covenants related to
      this mortgage as of September 30, 2007.





**Junior
      Subordinated Notes**


In
      June,
      2006 we completed the issuance of $30 million in unsecured trust preferred
      securities through a newly formed Delaware statutory trust, Desert Capital
      TRS Statutory Trust I, which is our wholly owned subsidiary.  The
      securities bear interest at a floating rate based on the three-month LIBOR
      plus
      400 basis points, which was 9.36% on September 30, 2007.




The
      trust
      preferred securities require quarterly interest distributions. The trust
      preferred securities mature in July 2036 and are redeemable, at our option,
      in
      whole or in part, with no prepayment premium any time after July 30,
      2011.





Desert
      Capital TRS Statutory Trust I issued $928,000 aggregate liquidation amount
      of
      common securities, representing 100% of the voting common stock of Desert
      Capital TRS Statutory Trust I to us. Desert Capital TRS Statutory Trust I used
      the proceeds from the sale of the trust preferred securities and the common
      securities to purchase our junior subordinated notes.  The terms of the
      junior subordinated notes match the terms of the trust preferred
      securities.  The notes are subordinate and junior in right of payment to
      all present and future senior indebtedness and certain other of our financial
      obligations.




Our
      interest in Desert Capital TRS Statutory Trust I is accounted for using the
      equity method and the assets and liabilities of Desert Capital TRS Statutory
      Trust I are not consolidated into our financial statements.  Interest on
      the junior subordinated notes is included in interest expense on our
      consolidated income statements while the junior subordinated notes are presented
      as a separate item in our consolidated balance sheet. We were in compliance
      with
      all financial covenants related to the junior subordinated notes as of September
      30, 2007.





**Note
      12 - Commitments and Related Parties**


We
      have
      contracted with Burton to serve as advisor for the Company. Burton oversees
      the
      day-to-day operations including asset, liability and capital management. In
      lieu
      of paying salaries to our officers, we compensate Burton pursuant to an advisory
      agreement that entitles Burton to a base management fee, incentive compensation
      and reimbursement of expenses. The officers and owners of Burton are also our
      executive officers. The annual base management compensation is 1% of the first
      $200 million of average invested assets plus 0.8% of the average invested assets
      in excess of $200 million to be paid quarterly. The base management fee for
      the
      three and nine months ended September 30, 2007 was $416,162 and $1,197,268,
      respectively, and for the three and nine months ended September 30, 2006 was
      $343,861 and $818,786, respectively, and $277,679 and $115,758 remained payable
      on September 30, 2007 and 2006, respectively. 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 million
      of
      average invested assets and 10% of the excess over $200 million of average
      invested assets. The incentive compensation is calculated quarterly and any
      positive quarterly incentive amount shall be paid by us, along with the base
      management compensation, within 15 days of receipt of the computations.
      Incentive compensation for the three and nine months ended September 30, 2007
      was $(69,494) and $616,563, respectively, and for the three and nine months
      ended September 30, 2006 was $331,792 and $974,344,  respectively, and
      $69,494 remained receivable on September 30, 2007 and $118,761 remained payable
      on September 30, 2006.




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Consolidated
      Mortgage has a management agreement in place with ARJ Management (“ARJ”), a
      company of which Todd Parriott is president, director and controlling
      shareholder, pursuant to which ARJ is paid a management fee equal to 33% of
      Consolidated Mortgage's pre-tax net income. The fee is calculated and paid
      monthly. The management fee, calculated before consolidation, for the three
      and
      nine months ended September 30, 2007 was $19,431 and $1,375,957, respectively,
      and after consolidation was $156,805 and $1,469,805,
      respectively.  The management fee, calculated before consolidation for
      the three and nine months ended September 30, 2006 was $455,933 and $1,988,709,
      respectively, and after consolidation was $524,063 and $1,716,095,
      respectively.  $4,109 and $69,226 remained payable on September 30,
      2007 and 2006.





The
      dealer-manager of our offering of common stock, CMC Financial Services, Inc.
      (“CMCFS”) directs and oversees the sale of our equity securities. CMCFS receives
      a marketing support fee and sales commissions based on the number of shares
      of
      common stock sold. CMCFS contracts with third party broker-dealers to have
      a
      larger sales distribution of equity securities, and compensates them out of
      the
      sales commissions and marketing support fees received from us. The
      dealer-manager is an affiliate of both Burton and us, because the owners of
      CMCFS are also our executive officers. CMCFS earned gross sales commissions
      and
      marketing support fees for the three and nine months ended September 30, 2007
      of
      $594,521 and $2,523,238, respectively, and for the three and nine months ended
      September 30, 2006 was $436,258 and $4,649,608, respectively, and zero and
      $50,556 remained payable on September 30, 2007 and 2006, respectively. CMCFS
      paid a substantial portion of these fees to third party
      broker-dealers.





CMCFS
      also has an agreement in place with Consolidated Mortgage to provide investors
      for loans brokered and serviced by Consolidated Mortgage for a fee equal to
      25
      basis points of every dollar raised. The fee is calculated and paid monthly.
      The
      fee pursuant to this agreement, calculated before consolidation, for the three
      and nine months ended September 30, 2007 was $118,569 and $482,599,
      respectively, and after consolidation was $110,248 and $366,691,
      respectively.  The fee calculated before consolidation, for the three
      and nine months ended September 30, 2006 was $157,410 and $667,114,
      respectively, and after consolidation was $132,900 and $469,485, respectively.
      Zero and $17,825 remained payable on September 30, 2007 and 2006,
      respectively.




In
      September 2005, a third-party borrower asked the Company to enter into
      a land banking transaction, meaning that the Company would purchase a tract
      of
      land, and simultaneously enter into an option contract with the borrower,
      pursuant to which the borrower would purchase smaller parcels of the initial
      tract from us over time at a specified price, until it had purchased the entire
      initial tract.   Due to the rules with which we must comply
      to maintain our REIT status, actual title to that land had to be owned
      by a separate entity and could not be held by the Company. As an
      accommodation to the Company and the third-party borrower, our Chairman and
      CEO
      and CFO formed a company called CM Land, LLC for the specific purpose
      of holding title to that land. We initially funded $10.2 million of the
      purchase price of approximately $80 million via a loan to CM Land, LLC secured
      by the property. At September 30, 2007, and December 31, 2006 the outstanding
      loans had a remaining balance of approximately $0 and $15.2 million,
      respectively, with an average interest rate of 15.5%.  No fees were paid to
      CM Land, LLC or its principals in connection with this transaction and it was
      reviewed and approved by an independent committee of the board of
      directors.





In
      May
      2007, the borrower did not exercise its option under the contract to
      purchase the remaining portion of the land. As a result, we took title to the
      property directly and have recorded the remaining carrying balance as Real
      Estate Held for Sale. The property is currently under contract for resale
      and the sale is scheduled to close in December 2007, but there is no
      assurance that this sale will be consummated.




We
      lease
      office space to Burton, CMCFS, and Residential Capital Mortgage, another
      affiliated entity, under noncancelable operating leases which expire in July
      2010. The total rents received from related parties for the three and nine
      months ended September 30, 2007 and 2006 was $80,592 and $241,335, $80,114
      and
      $240,084, respectively.





**Note
      13 – Subsequent Events**


Subsequent
      to the end of the quarter we have entered into sales contracts and received
      nonrefundable earnest money deposits on 19 loans with a carrying value of $6.4
      million.  These sales are scheduled to close before the end of
      November.  $2 million of the $6.4 million is being sold to an entity
      managed by our Advisor.




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**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:*





·                 *Changes
      in interest
      rates;*





·                 *Decreases
      in the value of the
      property underlying our mortgage loans;*





·                 *Burton’s
      motivation to recommend
      riskier investments in an effort to maximize its incentive compensation under
      the advisory agreement; and*





·                 *Although
      we believe our method of
      operations is in conformity with the requirements for qualification as a REIT,
      we cannot assure you that we 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 statements might not occur. We qualify any and all of our
      forward-looking statements by these cautionary factors. In addition, you should
      carefully review the risk factors described in other documents we file from
      time
      to time with the Securities and Exchange Commission.




**General**


We
      are a
      Maryland corporation formed in December 2003 as a real estate investment trust
      ("REIT") that specializes in the origination and financing of short-term
      mortgage loans. We generally invest in 12 to 18 month, first and second lien
      mortgage loans, consisting of acquisition and development loans and construction
      loans to developers and builders of residential and commercial property. We
      derive our revenues primarily from interest payments received from mortgage
      investments funded 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. This spread, net of
      operating expenses, provides both operating capital and distributable income.
      Our business depends 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 also depends
      on our ability to locate suitable investments to keep our capital fully deployed
      at favorable rates. We are externally managed and advised by Burton Management
      Company, Ltd. (“Burton”), a related party (see Note 12 of the financial
      statements).





Substantially
      all of the loan origination and loan servicing is conducted through our wholly
      owned subsidiary, Consolidated Mortgage LLC. In addition to originating and
      servicing loans for us, Consolidated Mortgage also originates, brokers, and
      services mortgage loans for private investors. Consolidated Mortgage generates
      brokerage and other fees from the loans funded by its private investor-clients
      which provides additional cash flow to us. Due to the high amount and type
      of
      fees generated by Consolidated Mortgage it has been structured as a taxable
      REIT
      subsidiary (“TRS”) resulting in its income being subject to federal income and
      applicable state taxes at C corporation rates.  Consolidated Mortgage
      has 26 employees.





We
      qualified as a REIT under the Internal Revenue Code commencing with our taxable
      year ended December 31, 2004 and expect to continue to qualify for the current
      fiscal year. To maintain our tax status as a REIT, we plan to continue to
      distribute at least 90% of our taxable income to stockholders.




12
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**Outlook**


Our
      business strategy of originating and holding commercial mortgages is affected
      by
      the commercial real estate fundamentals and the overall U.S. economic
      environment. Further, our strategy is influenced by the specific characteristics
      of the underlying real estate assets that serve as collateral for our loans.
      We
      have designed our strategy to be flexible so that we can adjust our portfolio
      weightings given changes in the U.S. commercial real estate market and the
      U.S.
      economy.




The
      deterioration of the market for home loans has had a detrimental effect on
      the
      ability of our borrowers to sell homes securing some of our loans.  As
      a result we have seen an increase in the number of loans in
      default.  As of September 30, 2007 we have foreclosed on or take title
      to properties through deeds in lieu of foreclosure with a carrying balance
      of
      $11.3 million, including $10.7 million of property remaining on our loan to
      CM
      Land LLC, a related party (see Note 12 of the financial
      statements).  The deterioration of the credit markets affects our
      borrowers’ ability to service their loans, but does not affect our ability to
      continue to fund our loans.  These defaults present challenges
      and will require time to resolve.  Uncertainty in the credit markets has
      made it difficult for borrowers to obtain loans from banks and other traditional
      lending sources.  As a result, we have attracted loan requests from new
      borrowers with strong financial profiles, and have the ability to increase
      the
      interest rates we are able to charge on new loans.  Loan originations from
      our private investors through Consolidated Mortgage are expected to continue
      to
      be below average until a greater sense of stability returns to the mortgage
      and
      credit markets.


During
      the first nine months of 2007 we have increased the amount of commercial
      property loans in our portfolio from $0 on December 31, 2006 to approximately
      $18.2 million on September 30, 2007.  We believe that the commercial
      property market is currently stronger than the residential home market and
      have
      adjusted our portfolio accordingly. We will continue to analyze the market
      in
      the future and adjust the type of loans that we fund as circumstances
      change.




The
      following discussion related to our consolidated financial statements should
      be
      read in conjunction with the financial statements appearing in Item 1 of
      this Quarterly Report on Form 10-Q.








**Results
      of Operations**





***Comparison
      of the three months ended September 30, 2007 compared to three months ended
      September 30, 2006.***





***Revenues***




Interest
      income decreased $0.8 million, or 15%, to $4.6 million in the third quarter
      of
      2007 from $5.4 million for the three months ended September 30, 2006. This
      decrease in interest income was due to an increase in the balance of
      nonperforming loans from zero at September 30, 2006 to approximately $50.1
      million on September 30, 2007.  This increase in nonperforming loans
      was a result of deteriorating conditions in the real estate and liquidity
      markets in the second and third quarters of 2007, making it difficult for our
      borrowers to sell or refinance their properties.  The average yield on
      mortgage investments decreased to 9.1% for the quarter ended September 30,
      2007
      from 13.5% in the same period in 2006.  This decrease in yield was a
      result of a $50.1 million increase in the balance of nonperforming loans to
      $50.1 million at September 30, 2007 compared to zero at September 30,
      2006.




Non-interest
      income decreased $0.3 million, or 14%, to $1.8 million in the third quarter
      of
      2007 from $2.1 million for the same period in 2006. This decrease was primarily
      due to a decrease in the principal amount of loans brokered and extension fees
      collected in the third quarter of 2007.




***Expenses***




Interest
      expense increased $0.04 million, or 4%, to $1.0 million in the third quarter
      of
      2007 from $0.96 million for the same period in 2006. This increase was due
      to a
      5% increase in the average debt financing on our loan portfolio from $41.1
      million for the quarter ended September 30, 2006 to $43 million for the same
      period in 2007. This increase was due to greater borrowing for loan originations
      and an increase in the average interest rate from 9% in the third quarter of
      2006 to 9.4% in the same period in 2007.




Non-interest
      expenses decreased $0.1 million, or 4%, to $2.6 million in the third quarter
      of
      2007 from $2.7 million for the same period in 2006. This decrease was primarily
      due to a decrease in the amount of management fees, offset by an increase in
      compensation expense, professional fees, and advertising.




13
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***Comparison
      of the nine months ended September 30, 2007 compared to nine months ended
      September 30, 2006.***





***Revenues***




Interest
      income increased $3.4 million, or 27%, to $16 million in the first nine months
      of 2007 from $12.6 million for the nine months ended September 30, 2006. This
      increase was due to a 48% increase in the average balance of the loan portfolio
      from $108 million for the nine months ended September 30, 2006 to $159 million
      in the same period in 2007, but was partially offset by the increase in
      nonperforming loans. This was a result of increased loan funding as a result
      of
      the ongoing sale of our equity securities and an increase in the amount of
      borrowed funds. The average yield on mortgage investments decreased to 11.4%
      for
      the nine months ended September 30, 2007 from 13.5% in the same period in 2006.
      This decrease in yield was a result of a $50.1 million increase in the balance
      of nonperforming loans to $50.1 million at September 30, 2007 compared to zero
      at September 30, 2006.




Non-interest
      income decreased $0.4 million, or 5% to $7.5 million in the third quarter of
      2007 from $7.9 million for the same period in 2006.  This decrease was
      primarily due to a decrease in the principal amount of loans brokered and
      extension fees collected for the nine months ended September 30,
      2007.




***Expenses***




Interest
      expense increased $1.3 million, or 76%, to $3.0 million in the first nine months
      of 2007 from $1.7 million for the same period in 2006. This increase was due
      to
      a 81% increase in the average debt financing on our loan portfolio from $24.1
      million for the nine months ended September 30, 2006 to $43.6 million for the
      same period in 2007. This increase was due to greater borrowing for loan
      originations and an increase in the average interest rate from 8.5% in the
      first
      nine months of 2006 to 9% in the same period in 2007.




Non-interest
      expenses increased $0.7 million or 8%, to $9.0 million in the first nine months
      of 2007 from $8.3 for the same period in 2006. This increase was primarily
      due
      to an increase in employee and board compensation, as well as an increased
      amount of depreciation and advertising expense.





**Liquidity
      and Capital Resources**


Liquidity
      is a measurement of the ability to meet cash requirements, including ongoing
      commitments to repay borrowings, fund and maintain loans and investments, pay
      dividends and other general business needs. ****We believe
      that our principal sources of working capital and funds for additional
      investments will primarily include: 1) cash flow from operations; 2) borrowings
      under our credit facilities 3) proceeds from our common equity offering
      and  4) the proceeds from net principal payments on our
      investments.  We believe these sources of financing will be sufficient to
      meet our short-term liquidity needs.





Net
      cash
      provided by operating activities for the nine months ended September 30, 2007,
      was approximately $12 million, which was primarily generated from interest
      on
      our mortgage notes receivable and fees generated from originating and servicing
      loans. We expect cash flows from operating activities to increase as we continue
      to invest proceeds from our equity offering into mortgage loans and generate
      additional origination fees.





Through
      Consolidated Mortgage, we have a $7.5 million secured revolving credit facility
      that expires in November 2007.  We are currently negotiating a one year
      renewal with the lender under substantially similar terms and expect to have
      it
      renewed before expiration. The facility is drawn upon for short term funding
      requirements. Amounts drawn under this facility bear interest at a rate equal
      to
      prime plus 75 basis points and must be repaid within 90 days.  Amounts
      drawn under this facility are secured by the corresponding loan that is being
      funded. The interest rate on this facility at September 30, 2007 was 8.50%.
      At
      September 30, 2007 we had $5.56 million outstanding and $1.94 million available
      under this facility. We were in compliance with all debt covenants related
      to
      this credit facility as of September 30, 2007.





In
      June
      2006 we completed the issuance of $30 million in unsecured trust preferred
      securities through a newly formed Delaware statutory trust, Desert Capital
      TRS Statutory Trust I, which is our wholly owned subsidiary.  The
      securities bear interest at a floating rate based on the three-month LIBOR
      plus
      400 basis points, which was 9.36% on September 30, 2007.




The
      trust
      preferred securities require quarterly interest distributions. The trust
      preferred securities mature in July 2036 and are redeemable, at our option,
      in
      whole or in part, with no prepayment premium any time after July 30,
      2011.




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Desert
      Capital TRS Statutory Trust I issued $928,000 aggregate liquidation amount
      of
      common securities, representing 100% of the voting common stock of Desert
      Capital TRS Statutory Trust I to us. Desert Capital TRS Statutory Trust I used
      the proceeds from the sale of the trust preferred securities and the common
      securities to purchase our junior subordinated notes.  The terms of the
      junior subordinated notes match the terms of the trust preferred
      securities.  The notes are subordinate and junior in right of payment to
      all present and future senior indebtedness and certain other of our financial
      obligations.




Our
      interest in Desert Capital TRS Statutory Trust I is accounted for using the
      equity method and the assets and liabilities of Desert Capital TRS Statutory
      Trust I are not consolidated into our financial statements.  Interest on
      the junior subordinated notes is included in interest expense on our
      consolidated income statements while the junior subordinated notes are presented
      as a separate item in our consolidated balance sheet.




In
      April
      2006 we commenced the second public offering of our common stock. Through
      September 30, 2007, we received gross proceeds of $42.3 million. These proceeds
      were used to invest in mortgage loans and pay offering expenses.





In
      order
      to continue 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, once the net proceeds
      we
      receive from the offering are substantially fully invested, we need to continue
      to borrow in order to grow our business and acquire additional assets. Our
      sources of funds are primarily the net proceeds from the offering, operating
      cash flows and borrowings. Operating cash flows consist of fees and interest
      received on mortgage loans and investments. Liquidity is also generated through
      lines of credit with commercial banks. We believe that we will continue to
      be
      able to obtain financing in amounts and on terms that are acceptable to us
      and
      consistent with our business strategy. We believe that these cash resources
      are
      sufficient to satisfy our immediate liquidity requirements. However, we do
      continue to pursue additional capital from the continued sale of our securities
      and leveraging opportunities.





**Critical
      Accounting Policies and Management Estimates**


Our
      discussion and analysis of financial condition and results of operations is
      based on our financial statements, which have been prepared in accordance with
      accounting principles generally accepted in the United States, known as GAAP.
      These accounting principles require us to make some complex and subjective
      decisions and assessments.  Our most critical accounting policies involve
      decisions and assessments, which could significantly affect our reported assets,
      liabilities and contingencies, as well as our reported revenues and
      expenses.  We believe that all of the decisions and assessments upon which
      our financial statements are based were reasonable at the time made based upon
      information available to us at that time.  We evaluate these decisions and
      assessments on an ongoing basis.  Actual results may differ from these
      estimates under different assumptions or conditions.  We have identified
      our most critical accounting policies to be the following:




**Revenue
      Recognition**


Interest
      income on our mortgage investments is recognized over the life of the investment
      and recorded on the accrual basis. Loan origination fees and certain direct
      origination costs associated with mortgage investments funded by us, are
      deferred and recognized as an adjustment to yield over the lives of the related
      loans using the straight-line method. Income recognition is generally suspended
      for loans at the earlier of the date at which payments become 90 days past
      due
      or when, in the opinion of management, a full recovery of income and principal
      becomes doubtful. Income recognition is resumed when the loan becomes
      contractually current and performance is demonstrated to be
      resumed.





Loan
      brokerage fees are nonrefundable fees for brokering loans to third party
      investors. Loan brokerage fees are recognized once the loans associated with
      the
      fees are funded and recorded.





We
      also
      charge fees to service loans brokered to third party investors as well as other
      miscellaneous fees during the loan term. These service and other loan fees
      are
      recognized throughout the life of the loan as they are earned.





**Mortgage
      Investments and Loans Held-for-Sale**


Mortgage
      investments are intended to be held to maturity and, accordingly are carried
      at
      cost, net of any unamortized deferred fees and costs, and any allowance for
      loan
      losses. Loans held-for-sale are carried at the lower of cost or market
      value.




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          of Contents


**Real
      Estate Held-for-Sale**


Real
      estate held for sale includes real estate, which previously collateralized
      our
      loans that went into default, acquired through foreclosure or deed in lieu
      of
      foreclosure.  It will be carried at the lower of the original loan
      amount (which represents the cost of the property), inclusive of any senior
      indebtedness, or the property's estimated fair value, less estimated costs
      to
      sell, with fair value based on appraisals and knowledge of local market
      conditions. While pursuing foreclosure actions, we seek to identify potential
      purchasers of such property. It is not our intent to invest in or own real
      estate as a long-term investment, we seek to sell properties acquired through
      foreclosure as quickly as circumstances permit. The carrying values of real
      estate held for sale are assessed on a regular basis from updated appraisals,
      comparable sales values or purchase offers.




**Allowance
      for Loan Losses**


Management
      monitors the delinquencies and defaults on the underlying mortgages and, if
      an
      impairment of the related mortgage loan is deemed to be other than temporary,
      the carrying value of the related mortgage loan will be reduced to fair value
      through a charge to the allowance for loan losses. An allowance for loan loss
      is
      reflected in our financial statements based upon an evaluation of known and
      inherent risks in our mortgage loans. The allowance is based on our assessment
      of numerous factors affecting our portfolio of mortgage assets including, but
      not limited to, current and projected economic conditions, delinquency status,
      credit losses to date on underlying mortgages and any remaining credit
      protection. Loan loss estimates are reviewed periodically and adjustments are
      reported in earnings when they become known. Actual losses, if any, could differ
      materially from these estimates.





**Impairment
      Policy**


We
      have
      adopted Statement of Financial Accounting Standards No. 144, “Accounting for the
      Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). Impairment is
      measured on a loan-by-loan basis on the fair value of the related collateral
      since all loans subject to this measurement are collateral
      dependent.





**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. Our entire mortgage loan portfolio is comprised of
      fixed
      rate investments while all of the debt that we have is variable rate
      debt.




Based
      on
      the loans and liabilities as of September 30, 2007, and assuming the balances
      of
      these loans and liabilities remain unchanged for the subsequent twelve months,
      a
      1% increase in interest rates would decrease our annual net income and cash
      flows by approximately $0.43 million. This is due to our fixed rate
      investments and variable rate debt. Based on the loans and liabilities as of
      September 30, 2007, and assuming the balances of these loans and liabilities
      remain unchanged for the subsequent twelve months, a 1% decrease in interest
      rates would increase our annual net income and cash flows by approximately
      $0.43 million. This again is due to our fixed rate investments and variable
      rate debt.




In
      the
      event of a significant rising interest rate environment and/or economic
      downturn, defaults could increase and result in credit losses to us, which
      could
      adversely affect our liquidity and operating results. Further, such
      delinquencies or defaults could have an adverse effect on the spreads between
      interest-earning assets and interest-bearing liabilities.




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.





16
 Table
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**Item
        4. Controls and Procedures**


As
      of the
      end of the period covered by this quarterly report, we carried out an
      evaluation, under the supervision and with the participation of management,
      including our principal executive officer and principal 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-15. 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.





**Part
      II.Other Information**





**Item
      1.Legal Proceedings**


None.





**Item
      1A. Risk Factors**


During
      the periods covered by this report, there were no material changes to the risk
      factors discussed in our Annual Report on Form 10-K for the year ended December
      31, 2006.




**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**


Desert
      Capital REIT’s Form S-11 Registration Statement, File No. 333-128885,
      registering the sale of up to 15,000,000 shares of Desert Capital’s common
      stock, was declared effective by the Securities and Exchange Commission on
      March
      22, 2006. The offering commenced on April 1, 2006. The offering is a “best
      efforts” offering, and as of the date of the filing of this Form 10-Q, the
      offering is continuing. The dealer-manager for the offering is CMC Financial
      Services, Inc. The offering price is $15.00 per share, with discounts and
      commissions payable to the dealer-manager equaling $1.425 per share. The
      aggregate price of the 15,000,000 shares of common stock registered is
      $225,000,000. As of September 30, 2007 Desert Capital REIT has sold 2,821,585
      shares, with an aggregate offering price of $42,259,461, and issued 494,359
      shares pursuant to the dividend reinvestment plan.




From
      April 1, 2006 through September 30, 2007, Desert Capital REIT has incurred
      offering expenses of approximately $4,393,111, consisting of $4,004,604 in
      commissions paid to CMC Financial Services, Inc., the dealer-manager, and
      $388,507 for legal, accounting, and filing fees resulting in total expenses
      of
      $4,393,111. Todd B. Parriott, the Chairman of the Board and Chief Executive
      Officer of Desert Capital REIT is a director and principal of CMC Financial
      Services, Inc. The net offering proceeds to Desert Capital REIT after deducting
      total offering expenses as of September 30, 2007 are $37,866,350.




All
      of
      the $37,866,350 of net proceeds received from sales of Desert Capital REIT’s
      common stock as of September 30, 2007 has been invested in loans secured by
      real
      estate.




**Purchases
      of equity securities by the issuer and affiliated
      purchasers**




**Period**
            **Total
                Number of Shares
                Purchased**
            **Average
                Price Paid Per Share**
            **Total
                Number of Shares Purchased as part of Publicly Announced Plans or
                Programs
                (1)**
            **Maximum
                Number of Shares that May Yet Be Purchased Under the Plans or
                Programs**July
                  1, 2007 - July 30, 2007
            -
            -
            -
            (2)August
                  1, 2007 - August 31, 2007
            -
            -
            -
            (2)September
                  1, 2007 - September 2007
            225,743
            $9.46
            225,743
            (2)Total
            225,743
            
            225,743


(1)
      The
      shares we repurchased were repurchased in connection with our share repurchase
      plan in as disclosed in our Form S-11 registration statement.  Our share
      repurchase plan limits the amount we repurchase in each quarter and is subject
      to certain conditions.




(2)
      We
      may, at our option, repurchase the common stock presented for cash to the extent
      we have sufficient available proceeds from our DRIP to do so.  For purposes
      of funding the Repurchase Plan, all proceeds from the DRIP for the applicable
      calendar quarter will be used by the reinvestment agent on our behalf to
      repurchase shares of our common stock pursuant to the terms of the Repurchase
      Plan.  In addition, we may, at our discretion, use up to $100,000 per
      calendar quarter of the proceeds of the Offering for repurchases under the
      Repurchase Plan.  However, at no time during any consecutive 12-month
      period would the number of shares repurchased by us under the Repurchase Plan
      exceed 5% of the number of outstanding shares of our common stock at the
      beginning of that 12-month period.




17
 Table
          of Contents


**Item
      3.Defaults Upon Senior
      Securities**


None.




**Item
      4. Submission of Matters to a Vote of Security
      Holders**


None.





**Item
      5. Other Information**


None.




**Item
      6. Exhibits**






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**






*Filed
      herewith






**
      Furnished herewith








18
 Table
          of Contents


**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
              14, 2007
            /s/
                Todd B. ParriottTodd
                B. Parriott,Chairman
                of the Board, Chief Executive Officer, President and Chief Investment
                Officer
              (Principal
                Executive Officer)








November
              14, 2007
            /s/
                G. Steven DawsonG.
                Steven Dawson,Chief
                Financial Officer
              (Principal
                Accounting Officer)











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          of Contents




EXHIBIT
      INDEX




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**




*Filed
      herewith




**
      Furnished herewith