**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 March 31, 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 May 11, 2007 was 16,112,440.







Table
          of Contents




**DESERT
      CAPITAL REIT, INC.**


**FORM
      10-Q**


**For
      the Quarter Ended March 31, 2007**




**INDEX**







******Page**Part
                I. Financial Information
            
            1Item
                1. Consolidated Financial Statements(unaudited)
            
            1a)Consolidated
                Balance Sheets as of March 31, 2007 and
                December 31, 2006
            
            1b)Consolidated
                Statements of Operations for the three months
                ended March 31, 2007 and 2006
            
            2c)Consolidated
                Statements of Cash Flows for the three
                months ended March 31, 2007 and 2006
            
            3d)Consolidated
                Statements of Changes in Stockholders' Equity for the three months
                endedMarch
                31, 2007
            
            4e)Notes
                to Consolidated Financial Statements
                (unaudited)
            
            5Item
                2. Management's Discussion and Analysis of Financial
                Condition and Results of Operations
            
            13Item
                3. Quantitative and Qualitative Disclosures About
                Market Risk
            
            16Item
                4. Controls and Procedures
            
            16Part
                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.Consolidated Financial Statements
                  (Unaudited)****DESERT
                  CAPITAL REIT, INC.****Consolidated
                  Balance Sheets**March
                  31,
              
              
              
              
              
              December 31,2007
              
              
              
              
              
              2006ASSETSMortgage
                  investments - net
              
              
              
              
              $
              158,980,121
              
              
              
              
              $
              149,588,926Loans
                  held-for-sale
              
              
              
              
              
              7,474,700
              
              
              
              
              
              7,430,000Goodwill
              
              
              
              
              
              13,388,555
              
              
              
              
              
              13,388,555Building
                  and equipment - net
              
              
              
              
              
              8,386,515
              
              
              
              
              
              8,549,506Land
              
              
              
              
              
              1,820,000
              
              
              
              
              
              1,820,000Cash
              
              
              
              
              
              1,398,872
              
              
              
              
              
              2,434,948Interest
                  receivable
              
              
              
              
              
              1,227,918
              
              
              
              
              
              1,661,370Deferred
                  financing costs
              
              
              
              
              
              1,000,736
              
              
              
              
              
              1,009,301Investment
                  in equity affiliates
              
              
              
              
              
              1,928,000
              
              
              
              
              
              928,000Other
              
              
              
              
              
              246,626
              
              
              
              
              
              220,028Total
                  assets
              
              
              
              
              $
              195,852,043
              
              
              
              
              $
              187,030,634LIABILITIES
                  AND STOCKHOLDERS' EQUITYNotes
                  payable
              
              
              
              
              $
              14,000,609
              
              
              
              
              $
              13,971,112Junior
                  subordinated notes
              
              
              
              
              
              30,928,000
              
              
              
              
              
              30,928,000Dividends
                  payable
              
              
              
              
              
              1,559,681
              
              
              
              
              
              1,498,633Accounts
                  payable and accrued expenses
              
              
              
              
              
              1,736,208
              
              
              
              
              
              2,184,237Total
                  liabilities
              
              
              
              
              
              48,224,498
              
              
              
              
              
              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; 15,768,538
                  and
                  15,061,896shares
                  issued and outstanding on March 31, 2007, and December 31, 2006,
                  respectfully
              
              
              157,685
              
              
              
              
              
              150,619Additional
                  paid-in capital
              
              
              
              
              
              150,270,266
              
              
              
              
              
              140,441,542Accumulated
                  deficit
              
              
              
              
              
              (2,800,406
              )
              
              
              
              
              (2,143,509
              )Total
                  stockholders' equity
              
              
              
              
              
              147,627,545
              
              
              
              
              
              138,448,652Total
                  liabilities and stockholders' equity
              
              
              
              
              $
              195,852,043
              
              
              
              
              $
              187,030,634See
                  accompanying notes to financial statements.


1
 Table
          of Contents




**DESERT
                CAPITAL REIT, INC.****Consolidated
                Statements of Operations**Three
                MonthsEnded
                March 31,2007
            
            
            2006INTEREST
                INCOME:Mortgage
                notes receivable
            
            $
            5,570,878
            
            $
            2,853,948Other
                interest
            
            
            139,405
            
            
            156,343Total
                interest income
            
            
            5,710,283
            
            
            3,010,291INTEREST
                EXPENSE:Interest
                expense
            
            
            992,982
            
            
            297,894Total
                interest expense
            
            
            992,982
            
            
            297,894Net
                interest income
            
            
            4,717,301
            
            
            2,712,397Provision
                for loan losses
            
            
            104,402
            
            
            47,603Net
                interest income after provision for loan loss
            
            
            4,612,899
            
            
            2,664,794NON-INTEREST
                INCOME:Loan
                brokerage fees
            
            
            1,574,713
            
            
            2,265,087Service
                and other loan fees
            
            
            446,836
            
            
            570,335Other
            
            
            185,823
            
            
            192,856Total
                non-interest income
            
            
            2,207,372
            
            
            3,028,278NON-INTEREST
                EXPENSE:Compensation
            
            
            600,709
            
            
            466,457Management
                fees
            
            
            1,278,542
            
            
            1,104,804Professional
                fees
            
            
            280,137
            
            
            425,074Insurance
            
            
            107,339
            
            
            107,248Depreciation
            
            
            195,641
            
            
            107,028Advertising
            
            
            147,627
            
            
            245,672Other
            
            
            193,747
            
            
            300,007Total
                non-interest expense
            
            
            2,803,742
            
            
            2,756,290Net
                income before taxes
            
            
            4,016,529
            
            
            2,936,782Income
                tax expense
            
            
            70,177
            
            
            -Net
                income
            
            $
            3,946,352
            
            $
            2,936,782Earnings
                per share - basic
            
            
            0.26
            
            
            0.27Earnings
                per share - diluted
            
            
            0.26
            
            
            0.27Weighted
                average outstanding shares - basic
            
            
            15,311,504
            
            
            10,853,888Weighted
                average outstanding shares - diluted
            
            
            15,344,856
            
            
            10,883,888See
                accompanying notes to financial statements.





2
 Table
          of Contents




**DESERT
                  CAPITAL REIT, INC.****Consolidated
                  Statements of Cash Flows**Three
                  MonthsEnded
                  March 31,2007
              
              
              2006OPERATING
                  ACTIVITIESNet
                  income (loss)
              
              $
              3,946,352
              
              $
              2,936,782Adjustments
                  to reconcile net income (loss) to net cashDepreciation
                  and amortization
              
              
              204,205
              
              
              107,028Stock
                  based compensation
              
              
              58,333
              
              
              33,333Provision
                  for loan loss
              
              
              104,402
              
              
              47,603Mortgage
                  loans originated for sale
              
              
              (14,239,100
              )
              
              (14,606,200
              )Mortgage
                  loan sales
              
              
              14,194,400
              
              
              10,709,800Net
                  change inInterest
                  receivable
              
              
              433,452
              
              
              (405,592
              )Other
                  assets
              
              
              (26,598
              )
              
              (87,837
              )Deferred
                  origination fees
              
              
              (45,004
              )
              
              -Accounts
                  payable
              
              
              (421,620
              )
              
              125,723Net
                  cash provided by operating activities
              
              
              4,208,822
              
              
              (1,139,360
              )INVESTING
                  ACTIVITIESInvestment
                  in equity affiliates
              
              
              (1,000,000
              )
              
              -Mortgage
                  loans originated, net
              
              
              (9,450,593
              )
              
              (33,668,000
              )Acquisition
                  of building and equipment
              
              
              (32,650
              )
              
              (29,188
              )Net
                  cash used by investing activities
              
              
              (10,483,243
              )
              
              (33,697,188
              )FINANCING
                  ACTIVITIESProceeds
                  (repayments) on credit facilities on mortgage loans held for sale,
                  net
              
              
              44,700
              
              
              3,896,400Proceeds
                  (repayments) on credit facilities on mortgage investments,
                  net
              
              
              -
              
              
              (1,608,700
              )Principal
                  repayments of mortgage loan
              
              
              (15,203
              )
              
              (28,486
              )Issuance
                  of common stock
              
              
              9,915,423
              
              
              44,687,822Dividends
                  on common stock
              
              
              (3,306,547
              )
              
              (1,901,095
              )Offering
                  costs paid
              
              
              (1,019,009
              )
              
              (4,007,095
              )Shares
                  redeemed and retired
              
              
              (381,019
              )
              
              (279,633
              )Net
                  cash provided by financing activities
              
              
              5,238,345
              
              
              40,759,213Net
                  increase in cash
              
              
              (1,036,076
              )
              
              5,922,665Cash
                  at beginning of period
              
              
              2,434,948
              
              
              4,459,289Cash
                  at end of period
              
              $
              1,398,872
              
              $
              10,381,954Cash
                  paid for interest
              
              $
              1,004,931
              
              $
              1,035,544Cash
                  paid for taxes
              
              
              250,000
              
              
              670,000Supplemental
                  schedule of non-cash investing and financingCommon
                  stock issued for dividend reinvestment program
              
              
              1,235,653
              
              
              994,322Common
                  stock dividends declared but not paid
              
              
              1,559,681
              
              
              1,246,820Offering
                  costs incurred but not paid
              
              $
              15,964
              
              $
              58,273See
                  accompanying notes to financial statements.
 
 3
 Table
            of Contents




**DESERT
                  CAPITAL REIT, INC.****Consolidated
                  Statements of Changes in Stockholders' Equity**Common
                  Stock 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
              
              
              743,545
              
              
              7,435
              
              
              11,143,641
              
              
              -
              
              
              11,151,076-Stock
                  based compensation
              
              
              -
              
              
              -
              
              
              58,333
              
              
              -
              
              
              58,333-Stock
                  redeemed & retired
              
              
              (36,903
              )
              
              (369
              )
              
              (380,650
              )
              
              
              
              
              (381,019
              )-Dividends
                  on common stock
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,603,249
              )
              
              (4,603,249
              )-Offering
                  costs
              
              
              -
              
              
              -
              
              
              (992,600
              )
              
              -
              
              
              (992,600
              )-Net
                  income (loss)
              
              
              -
              
              
              -
              
              
              -
              
              
              3,946,352
              
              
              3,946,352**Balance
                  at March 31, 2007**
              
              
              **15,768,538**
              
              
              **157,685**
              
              
              **150,270,266**
              
              
              **(2,800,406**
              **)**
              
              **147,627,545**
   4
 Table
            of Contents




**Desert
      Capital REIT, INC.**


**Notes
      to Consolidated Financial Statements**


**March
      31, 2007**


**(Unaudited)**


**Note
      1 - Organization**





References
      herein to “we,” “us” or “our” 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 (“Burton”).





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 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 taxes at C corporation rates.





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 months ended March 31, 2007 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
      accompanying consolidated financial statements include, on a consolidated basis,
      our accounts, the accounts of our wholly-owned subsidiaries and our interests
      in
      variable interest entities in which we are the primary beneficiary. All
      significant intercompany balances and transactions have been eliminated in
      consolidation. Our interest in Desert Capital TRS Statutory Trust I (see Note
      13) 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 Financial Accounting Standards Board
      Interpretation No. 46R (“FIN46”).





**Reclassifications**


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




**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 may ultimately differ from those
      estimates.


5
 Table
          of Contents





**Cash
      and Cash Equivalents**


We
      consider all highly liquid investments with original maturities of three months
      or less to be cash equivalents. We place our cash and cash equivalents in high
      quality financial institutions. The consolidated account balances at each
      institution periodically exceeds FDIC insurance coverage.





Restricted
      cash of $113,480 is on deposit with our bank and will be used for tenant
      improvements on the remaining vacant space in our office building in Henderson,
      NV.




**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.





**Advertising**


We
      expense advertising and related costs as incurred.




**Building
      and Equipment**


Building,
      equipment, furniture and fixtures are stated at cost, net of any accumulated
      depreciation. Depreciation is recorded using the straight-line method over
      the
      estimated useful lives of the individual assets, which range from three to
      thirty years.




**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.





**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
      ultimately differ 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. There
      were
      no impairment losses recognized for the three months ended March 31, 2007 or
      2006.





**Goodwill**


We
      have
      adopted Statement of Financial Accounting Standards No. 142 “Goodwill and Other
      Intangible Assets” (SFAS 142), which requires that goodwill be tested for
      impairment at least annually. The Company has determined that goodwill was
      not
      impaired as of December 31, 2006.


6
 Table
          of Contents





**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
      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.




**Stock
      Compensation**


We
      account for stock-based compensation issued to employees and non-employees
      using
      the fair value recognition provisions of SFAS Statement No. 123 (R) “Share-based
      payment”. The total value of the restricted stock is determined on the grant
      date, and this amount is expensed over the vesting period using the
      straight-line method.





**Recent
      Accounting Developments**


In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and
      Financial Liabilities.” SFAS 159 permits entities to choose to measure many
      financial instruments, and certain other items at fair value. SFAS 159 is
      effective for fiscal years beginning after November 15, 2007. We are
      currently evaluating the effect, if any; the adoption of SFAS 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.




On
      March
      17, 2006, the Financial Accounting Standards Board (the "FASB") issued SFAS
      No.
      156, Accounting for Servicing of Financial Assets ("SFAS 156"), which amends
      SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
      Extinguishments of Liabilities ("SFAS 140"). SFAS 156 (1) requires an entity
      to
      recognize a servicing asset or liability each time it undertakes an obligation
      to service a financial asset by entering into a servicing contract in specified
      situations, (2) requires all separately recognized servicing assets and
      liabilities to be initially measured at fair value, (3) for subsequent
      measurement of each class of separately recognized servicing assets and
      liabilities, an entity can elect either the amortization or fair value
      measurement method, (4) permits a one-time reclassification of
      available-for-sale ("AFS") securities to trading securities by an entity with
      recognized servicing rights, without calling into question the treatment of
      other AFS securities, provided the AFS securities are identified in some manner
      as offsetting the entity's exposure to changes in fair value of servicing assets
      or liabilities that a servicer elects to subsequently measure at fair value,
      and
      (5) requires separate presentation of servicing assets and liabilities measured
      at fair value in the statement of financial position and also requires
      additional disclosures. The initial measurement requirements of this Statement
      should be applied prospectively to all transactions entered into after the
      fiscal year beginning after September 15, 2006. The election related to the
      subsequent measurement of servicing assets and liabilities is also effective
      the
      first fiscal year beginning after September 15, 2006. We do not believe that
      this Statement will have a material effect on our financial condition or results
      of operations.




On
      February 16, 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
      Financial Instruments ("SFAS 155"), which amends SFAS No. 133, Accounting for
      Derivative Instruments and Hedging Activities ("SFAS 133") and SFAS 140. SFAS
      155 (1) permits fair value remeasurement for any hybrid financial instrument
      that contains an embedded derivative that otherwise would require bifurcation,
      (2) clarifies which interest-only and principal-only strips are not subject
      to
      the requirements of SFAS 133, (3) establishes a requirement to evaluate
      interests in securitized financial assets to identify interests that are
      freestanding derivatives or that are hybrid financial instruments that contain
      an embedded derivative requiring bifurcation, (4) clarifies that concentrations
      of credit risk in the form of subordination are not embedded derivatives, and
      (5) amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose
      entity from holding a derivative financial instrument that pertains to a
      beneficial interest other than another derivative financial instrument. This
      Statement is effective for all financial instruments acquired or issued after
      the beginning of an entity's fiscal year that begins after September 15, 2006.
      At adoption, the fair value election may also be applied to hybrid financial
      instruments that have been bifurcated under SFAS 133 prior to adoption of this
      Statement. Any changes resulting from the adoption of this Statement should
      be
      recognized as a cumulative effect adjustment to beginning retained earnings. We
      do not
      believe that this Statement will have a material effect on our financial
      condition or results of operations.


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In
      June
      2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes - an
      Interpretation of FASB Statement No. 109,” which clarifies the accounting for
      uncertainty in tax positions. FIN 48 requires we recognize in our financial
      statements the impact of a tax position, if the position is more likely than
      not
      of being sustained on audit, based on the technical merits of the position.
       FIN 48 is effective for fiscal years beginning after December 15,
      2006.  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.





March
                31,
            
            
            December
                31,2007
            
            
            2006Acquisition
                and development loans
            
            $
            129,178,408
            
            $
            128,214,695Construction
                loans
            
            
            19,241,575
            
            
            22,553,595Commercial
                property
            
            
            11,798,900
            
            
            -Unamortized
                deferred fees and costs
            
            
            (687,395
            )
            
            (732,399
            )Allowance
                for loan losses
            
            
            (551,367
            )
            
            (446,965
            )Mortgage
                investments - net
            
            $
            158,980,121
            
            $
            149,588,926





As
      of
      March 31, 2007 and December 31, 2006, approximately 21% and 22%, respectively,
      of the principal balance of the outstanding mortgage notes were secured by
      second liens. As of March 31, 2007, the portfolio had a weighted average
      interest rate of 14%.





On
      March
      31, 2007 and December 31, 2006 we had a principal balance $7 million and $4.6
      million, respectively of mortgage investments in default and placed on
      nonaccural status. We have started the foreclosure process on these loans and
      intend to sell the property to recover our investment. We believe that all
      principal will be recovered and therefore no losses have been recognized during
      the period. We had no loans greater than 90 days past due and still accruing
      interest on March 31, 2007 or December 31, 2006.





Our
      mortgage portfolio is primarily concentrated in the Southwestern United States.
      Eighty-eight percent 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.





**Note
      4 - Investment in Equity Affiliates**


As
      of
      March 31, 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%, in Teeny
      Development LLC, who is using the proceeds 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 shares
      and preferred securities on a quarterly basis at a variable rate based on LIBOR.




**Note
      5 - Stock Based Compensation**


The
      Board
      of Directors has adopted the 2004 Stock Incentive Plan of Desert Capital REIT,
      Inc. (the “Plan”). Our directors, officers or any affiliate, and individual
      consultants or advisors are eligible for stock based compensation under the
      Plan. We have authorized 1,000,000 shares of common stock under the Plan. As
      of March 31, 2007 we have granted awards for 60,000 restricted shares under
      the Plan. The fair value of the shares on the grant dates were $10 and $15
      per
      share, and the shares vest in three equal annual installments, commencing on
      the
      first anniversary of issuance. Restricted stock expense for the three months
      ended March 31, 2007, and 2006 was $58,333 and $33,333
      respectively.


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**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.




**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
      March 31, 2007, the building was approximately 89% leased.  The accumulated
      depreciation as of March 31, 2007 and December 31 2006 on this building was
      $403,780 and $344,685, respectively.





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




March
                31,
            
            
            December
                31,2007
            
            
            2006Building
            
            $
            7,665,859
            
            $
            7,665,859Equipment
            
            
            126,314
            
            
            126,314Furniture
                and fixtures
            
            
            445,639
            
            
            445,639Software
            
            
            1,057,167
            
            
            1,024,5179,294,979
            
            
            9,262,329Less
                accumulated depreciation
            
            
            (908,464
            )
            
            (712,823
            )$
            8,386,515
            
            $
            8,549,506





**Note
      8 - Leases**


We
      own
      and operate an approximately 40,000 square foot office building in Henderson,
      NV. We currently leases approximately 12,000 square feet of office space to
      related parties and approximately 15,000 square feet to unrelated third parties
      under noncancelable leases with an average term of five years.




**Note
      9 - 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 three months ended March 31, 2007, and 2006 we recorded $70,177, and $0
      respectively, of income tax expense for income attributable to our taxable
      REIT
      subsidiary. For the three months ended March 31, 2007 our provision for income
      tax was comprised of a current provision of $0 and a deferred provision of
      $70,177, using an effective tax rate of 34%. We have recorded a net deferred
      tax
      liability of $176,331.


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**Note
      10 - Earnings per Share**


Earnings
      per share is computed in accordance with SFAS No. 128, Earnings per Share.
      Basic
      earnings per share is calculated by dividing net income by the weighted average
      number of shares of common stock outstanding during each period. Diluted
      earnings per share is calculated by dividing net income by the weighted average
      number of shares outstanding plus the additional dilutive effect of unvested
      restricted stock during each period.





The
      following is a reconciliation of the denominator of the basic and diluted
      earnings per share computations for the three months ended March 31, 2007 and
      2006.





For
                the Three Months Ended
            For
                the Three Months EndedMarch
                31, 2007
            March
                31, 2006Basic
            
            
            Diluted
            
            
            Basic
            
            
            DilutedNet
                income
            
            $
            3,946,352
            
            $
            3,946,352
            
            $
            2,936,782
            
            $
            2,936,782Weighted
                average number of common shares outstanding
            
            
            15,311,504
            
            
            15,311,504
            
            
            10,853,888
            
            
            10,853,888Dilutive
                effect of unvested restricted shares
            
            
            -
            
            
            33,352
            
            
            -
            
            
            30,000Total
                weighted average common shares outstanding
            
            
            15,311,504
            
            
            15,344,856
            
            
            10,853,888
            
            
            10,883,888Earings
                per common share
            
            
            0.26
            
            
            0.26
            
            
            0.27
            
            
            0.27





**Note
      11 - Dividends**


The
      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 three months of 2007 and 2006:




2007
            
            2006January
                31
            
            $
            0.10
            
            $
            0.10February
                28
            
            
            0.10
            
            
            0.10March
                31
            
            
            0.10
            
            
            0.10Total
            
            $
            0.30
            
            $
            0.30




**Note
      12 - Retirement Plan**


We
      offer
      a SIMPLE IRA plan to our employees. We match employee contributions dollar
      for
      dollar up to 3% of the employees’ compensation for the year. The amount matched
      by us is expensed in the same period that the corresponding employee
      contributions are made. We expensed zero and zero for the three months ended
      March 31, 2007, and 2006 respectively.





**Note
      13 - Debt**


**Credit
      Facility**


We
      have a
      $7.5 million secured revolving credit facility with a term of one year that
      expires in August 2007.  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 March 31, 2007 was 9.00%.
      At March 31, 2007 we had $7.47 million outstanding and $30,000 available under
      this facility. The principal amount of loans pledged as collateral for this
      facility on March 31, 2007 was $7.47 million. We were in compliance with all
      debt covenants related to this credit facility as of March 31, 2007.




**Mortgage
      Loan Payable**


We
      have
      one mortgage loan 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 March 31, 2007 was 8.25%. 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
      March 31, 2007 of $7.1 million, serves as collateral for this mortgage. We
      were in compliance with all debt covenants related to this mortgage as of March
      31, 2007.


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**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 March 31, 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 debt covenants related to the junior subordinated notes as of March 31,
      2007.





**Note
      14 - Fair Value of Financial Instruments**


SFAS
      No.
      107 requires disclosure of the estimated fair value of an entity’s assets and
      liabilities considered to be financial instruments. The following table
      summarizes the carrying values and the estimated fair values of financial
      instruments as of March 31, 2007 and December 31, 2006. Fair value estimates
      are
      dependent upon subjective assumptions and involve significant uncertainties
      resulting in variability in estimates with changes in assumptions.







March
                31,2007
            December
                31, 2006Carrying
                Value
            
            
            Estimated
                Fair Value
            
            
            Carrying
                Value
            
            
            Estimated
                Fair ValueFinancial
                assets:Cash
            
            $
            1,398,872
            
            $
            1,398,872
            
            $
            2,434,948
            
            $
            2,434,948Interest
                receivable
            
            
            1,227,918
            
            
            1,227,918
            
            
            1,661,370
            
            
            1,661,370Investment
                in equity affiliates
            
            
            1,928,000
            
            
            1,928,000
            
            
            928,000
            
            
            928,000Mortgage
                investments-net
            
            
            158,980,121
            
            
            158,980,121
            
            
            149,588,926
            
            
            149,588,926Loans
                held-for-sale
            
            
            7,474,700
            
            
            7,474,700
            
            
            7,430,000
            
            
            7,430,000Financial
                liabilities:Interest
                payable
            
            
            523,783
            
            
            523,783
            
            
            535,732
            
            
            535,732Notes
                payable
            
            
            14,000,609
            
            
            14,000,609
            
            
            13,971,112
            
            
            13,971,112Junior
                subordinated notes
            
            $
            30,928,000
            
            $
            30,928,000
            
            $
            30,928,000
            
            $
            30,928,000







We
      used
      the following methods and assumptions in estimating the fair value of each
      class
      of financial instrument:




*Cash:* Fair
      values approximate the carrying values reported on the balance
      sheet.




*Interest
      receivable:* Fair
      values approximate the carrying values reported on the balance
      sheet.




*Investment
      in equity affiliate:* Fair
      values approximate the carrying values reported on the balance
      sheet.




*Mortgage
      investments-net* :
      Fair
      values of mortgage investments with no significant change in credit risk are
      based on carrying values. Fair values of other mortgage investments are
      estimated using discounted cash flow methodology, using discount rates, which,
      in the opinion of management, best reflect current market interest rates that
      would be offered for loans with similar characteristics and credit
      quality.




*Loans
      held-for-sale* :
      Fair
      values of mortgage investments with no significant change in credit risk are
      based on carrying values. Fair values of other mortgage investments are
      estimated using discounted cash flow methodology, using discount rates, which,
      in the opinion of management, best reflect current market interest rates that
      would be offered for loans with similar characteristics and credit
      quality.


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*Interest
      payable:* Fair
      values approximate the carrying values reported on the balance
      sheet.




*Notes
      payable* :
      Fair
      values approximate the carrying values reported on the balance
      sheet.




*Junior
      subordinated notes:* Fair
      values approximate the carrying values reported on the balance
      sheet.








**Note
      15 - 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 its 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 the
      executive officers of us. The annual base management compensation is 1% of
      the
      first $200,000,000 of average invested assets plus 0.8% of the average invested
      assets in excess of $200,000,000, to be paid quarterly. The base management
      fee
      for the three months ended March 31, 2007 and 2006 were $379,240 and $200,884,
      respectively, and $129,374 and $76,295 remained payable on March 31, 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 $200,000,000 of average invested assets
      and 10% of the excess over $200,000,000 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 months ended March 31, 2007 and 2006 were $388,158
      and $300,977 respectively, and $141,790 and $300,977 remained payable on March
      31, 2007 and 2006 respectively.




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
      months ended March 31, 2007 and 2006 was $496,143 and $812,470, respectively,
      and $384,129 and $522,374 remained payable on March 31, 2007 and 2006,
      respectively. Upon consolidation of the financial statements $15,001 was added
      leaving an expense reported in the financial statements of $511,144 for the
      three months ended March 31, 2007 and $209,527 was eliminated leaving expense
      reported in the financial statements of $602,943 for the three months ended
      March 31, 2006 and $399,130 and $312,847 remained payable on March 31, 2007
      and
      2006, respectively.





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 months ended March 31, 2007 and 2006 of
      $940,117 and $3,967,548, respectively, and ($45,999) and $43,601 remained
      payable on March 31, 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
      months ended March 31, 2007 and 2006 was $131,603 and $226,928, respectively.
      Upon consolidation of the financial statements $45,999 and $87,024 was
      eliminated leaving an expense reported in the financial statements of $85,604
      and 139,904, respectively, for the three months ended March 31, 2007 and 2006,
      and ($45,999) and $40,612 remained payable on March 31, 2007 and
      2006




On
      March
      31, 2007 and December 31, 2006 we had outstanding loans of approximately $14.9
      million, and $15.2 million, respectively to CM Land, LLC, a related party.
      Our
      executive officers also own and manage CM Land, LLC. The loans have an average
      interest rate of 13.4% and mature between May, 2007 and October, 2007. CM Land,
      LLC, used these funds, in addition to funds provided by unaffiliated third
      party
      lenders, to acquire approximately $80 million of unimproved real estate from
      an
      unaffiliated third party. The Company’s loan is evidenced by a mortgage note and
      is secured by a deed of trust on the land acquired with our funds. We paid
      no
      fees to CM Land in connection with the transaction. The Board of Directors
      has appointed an independent committee to review and approve amounts that we
      loan to CM Land, LLC. We have earned interest of $506,526 and $439,840 for
      the
      three months ended March 31, 2007 and 2006, respectively for these
      loans.




We
      lease
      office space to Burton, CMCFS, and Residential Capital Mortgage under
      noncancelable operating leases which expire in July 2010. The total rents
      received from related parties for the three months ended March 31, 2007 and
      2006
      was $80,371 and $79,985, respectively.


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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 (“Burton”).





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 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 it being
      subject to federal corporate income taxes on its earnings.





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.





**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


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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:




**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 may ultimately differ from those
      estimates.





**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.





**Building
      and Equipment**


Building,
      equipment, furniture and fixtures are stated at cost, net of any accumulated
      depreciation. Depreciation is recorded using the straight-line method over
      the
      estimated useful lives of the individual assets, which range from three to
      thirty years.




**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.





**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
      ultimately differ 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. There
      were
      no impairment losses recognized for the three months ended March 31, 2007 or
      2006.





**Goodwill**


We
      have
      adopted Statement of Financial Accounting Standards No. 142 “Goodwill and Other
      Intangible Assets” (SFAS 142), which requires that goodwill be tested for
      impairment at least annually. The Company has determined that goodwill was
      not
      impaired as of December 31, 2006.





**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


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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 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.





**Results
      of Operations**





***Comparison
      of the three months ended March 31, 2007 compared to three months ended March
      31, 2006.***





***Revenues***




Interest
      income increased $2.7 million, or 90%, to $5.7 million in the first quarter
      of
      2007 from $3.0 million for the three months ended March 31, 2006. This increase
      was due to a 90% increase in the average balance of the loan portfolio from
      $79.5 million for the quarter ended March 31, 2006 to $151.0 million in the
      same
      period in 2007. 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 40 basis points
      to
      13.1% for the quarter ended March 31, 2007 from 13.5% in the same period in
      2006.




Non-interest
      income decreased $0.8 million, or 27%, to $2.2 million in the first quarter
      of
      2007 from $3.0 million for the same period in 2006. This
      decrease was primarily due to a decrease in the principal amount of loans
      brokered in the first
      quarter of 2007.




***Expenses***




Interest
      expense increased $0.7 million, or 233%, to $1.0 million in the first quarter
      of
      2007 from $0.3 million for the same period in 2006. This increase was due to
      a
      226% increase in the average debt financing on our loan portfolio from $13.5
      million for the quarter ended March 31, 2006 to $44.0 million for the same
      period in 2007. This increase was due to greater borrowing for loan
      originations, as the average yield remained constant at 8.8%.




Non-interest
      expenses increased $50,000, or 1.8%, to $2.8 million in the first quarter of
      2007 from $2.75 for the same period in 2006. This increase was primarily due
      to
      an increase in management fees, an increase in employee and board compensation,
      as well as an increased amount of depreciation for the quarter. However, these
      amounts were partially offset by a decrease in professional fees, such as legal
      and accounting, and a decrease in advertising and other expenses.





**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,
      to
      a lesser extent, 4) the proceeds from 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 three months ended March 31, 2007,
      was
      approximately $4.2 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.





We
      have a
      $7.5 million secured revolving credit facility with a term of one year that
      expires in August 2007.  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 March 31, 2007 was 9.00%. At
      March
      31, 2007 we had $7.47 million outstanding and $30,000 available under this
      facility. We were in compliance with all debt covenants related to this credit
      facility as of March 31, 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 March 31, 2007.


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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 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 March
      31, 2007, we received gross proceeds of $25.6 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.





**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 March 31, 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 $0.45 million. This is due to our fixed rate
      investments and variable rate debt. Based on the loans and liabilities as of
      March 31, 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
      $0.45 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.





**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 the our Chief Executive Officer and Chief Financial Officer, of the
      effectiveness of the design and operation of the Company’s disclosure controls
      and procedures pursuant to Securities Exchange Act Rule 13a-15.


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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.





During
      the last quarter, we revised our disclosure control process with respect to
      the
      review of information required in filings with the Securities and Exchange
      Commission. On a quarterly basis, a detailed checklist for the report with
      respect to the applicable period is completed and reviewed. Other than this
      change, there have been no changes in the internal controls during the period
      covered by this report that materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.







**Part
      II. OtherInformation**





**Item
      1. LegalProceedings**


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. UnregisteredSales 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 March 31, 2007 Desert Capital REIT has sold 1,709,039
      shares, with an aggregate offering price of $25,573,300, and issued 327,641
      shares pursuant to the dividend reinvestment plan.




From
      April 1, 2006 through March 31, 2007, Desert Capital has incurred offering
      expenses of approximately $2,558,861, consisting of $2,420,483 in commissions
      paid to CMC Financial Services, Inc., the dealer-manager, and $138,378 for
      legal, accounting, and filing fees resulting in total expenses of $2,558,861.
      Todd B. Parriott, the Chairman of the Board and Chief Executive Officer of
      Desert Capital 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 March 31, 2007 are $23,014,439.




Of
      the
      $23,014,439 of net proceeds received from sales of Desert Capital REIT’s common
      stock as of March 31, 2007, $23,014,439 has been invested in loans secured
      by
      real estate.


17
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**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**January
                1, 2007 - January 31, 2007
            34,569
            $10
            34,569
            (2)February
                1, 2007 - February 28, 2007
            -
            -
            -
            (2)March
                1, 2007 - March 31, 2007
            2,334
            $15
            2,334
            (2)Total
            36,903
            
            36,903


(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.





**Item
      3. DefaultsUpon Senior Securities**


None.




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


None.





**Item
      5.Other Information**


None.




**Item
      6. Exhibits**


a)
      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
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          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.May
                15, 2007
            /s/
                Todd B. ParriottTodd
                B. Parriott,Chairman
                of the Board, Chief Executive Officer, President and Chief Investment
                Officer
              (Principal
                Executive Officer)








May
                15, 2007
            /s/
                Jonathan G. ArensJonathan
                G. Arens,Chief
                Financial Officer
              (Principal
                Accounting Officer)











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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