Table
      of Contents









**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549


**______________________________________________**





**FORM
      10-Q**





(Mark
      one)


þ
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934




For
      the
      Quarterly Period Ended March 31, 2006





**OR**


o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934





**For
      the Transition Period From ___ to ___**


**____________________**





Commission
      File Number 333-111643







**DESERT
      CAPITAL REIT, INC.**


(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 acclerated filer, or non-acclerated filer.  See
      definition of "accelerated filer and large accelerated filer" in Rule 12b-2
      of
      Exhcange 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 12, 2006, was 13,871,668.0793.


Table
          of Contents


**DESERT
      CAPITAL REIT, INC.**


**FORM
      10-Q**


**For
      the Quarter Ended March 31, 2006**





**INDEX**








**Page**Part
                I.  Financial Information
            
            
            1Item
              1. Consolidated Financial Statements
              (Unaudited)
            
            
            1a)Consolidated
                Balance Sheets as of March 31, 2006 and December 31,
                2005
            
            
            1b)Consolidated
                Statements of Operationsfor
                the three months endedMarch
                31, 2006 and 2005
            
            
            2c)Consolidated
                Statements of Cash Flows for the three months ended March 31, 2006
                and
                2005
            
            
            3d)Consolidated
                Statements of Changes in Stockholders’ Equity for the three months ended
                March 31, 2006
            
            
            4e)Notes
                to Consolidated Financial Statements (Unaudited)
            
            
            5Item
                2.Management's
                Discussion and Analysis of Financial Condition andResults
                of Operations
            
            
            13Item
                3.Quantitative
                and Qualitative Disclosures About Market Risk
            
            
            19Item
              4. Controls and
              Procedures
            
            
            19Part
                II.  Other Information
            
            
            20Item
              1A. Risk Factors
            
            
            20Item
                2.Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            
            20Item
                5.  Other Information
            
            
            20Item
                6.  Exhibits
            
            
            21SignaturesCertification
              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
                31,2006
            
            
            
            
            2005(Unaudited)ASSETSMortgage investments - net
            $
            100,640,824
            
            
            
            $
            67,649,251Loans held-for-sale
            
            5,357,547
            
            
            
            
            1,461,147Goodwill
            
            13,388,555
            
            
            
            
            13,388,555Building and equipment - net
            
            7,951,410
            
            
            
            
            8,029,250Land
            
            1,820,000
            
            
            
            
            1,820,000Cash
            
            10,381,954
            
            
            
            
            4,459,289Other
            
            1,226,711
            
            
            
            
            718,300Total assets
            $
            140,767,001
            
            
            
            $
            97,525,792LIABILITIES
                AND STOCKHOLDERS' EQUITYNotes payable
            $
            14,371,600
            
            
            
            $
            12,112,386Dividends payable
            
            1,246,820
            
            
            
            
            880,633Accounts payable and accrued expenses
            
            1,172,683
            
            
            
            
            1,708,444Total liabilities
            
            16,791,103
            
            
            
            
            14,701,463Preferred stock, $0.01 par value: 15,000,000 sharesauthorized, none outstanding
            
            -
            
            
            
            
            -Common stock, $0.01 par value: 100,000,000 shares authorized; 13,936,353,
                and 9,388,994shares issued and outstanding on March 31, 2006, and December 31,
                2005,
                respectfully
            
            139,364
            
            
            
            
            93,890Additional paid-in capital
            
            124,436,601
            
            
            
            
            83,005,684Retained earnings
            
            (600,067
            )
            
            
            
            (275,245
            )Total stockholders' equity
            
            123,975,898
            
            
            
            
            82,824,329Total liabilities and stockholders' equity
            $
            140,767,001
            
            
            
            $
            97,525,792See
                accompanying notes to financial statements.





1
 Table
          of Contents


**DESERTCAPITAL
                  REIT, INC.****Consolidated
                  Statements of Operations**Three
                  MonthsEnded
                  March 31,2006
              
              
              2005INTEREST
                  INCOME:Mortgage
                  investments
              
              $
              2,853,948
              
              $
              592,473Other
                  interest
              
              
              156,343
              
              
              997Total
                  interest income
              
              
              3,010,291
              
              
              593,470INTEREST
                  EXPENSE:Interest
                  expense
              
              
              297,894
              
              
              99,164Total
                  interest expense
              
              
              297,894
              
              
              99,164Net
                  interest income
              
              
              2,712,397
              
              
              494,306Provision
                  for
                  loan losses
              
              
              47,603
              
              
              19,016Net
                  interest income after provision for loan loss
              
              
              2,664,794
              
              
              475,290NON-INTEREST
                  INCOME:Loan
                  brokerage fees
              
              
              2,265,087
              
              
              -Service
                  and other loan fees
              
              
              570,335
              
              
              -Income
                  from investment in subsidiary
              
              
              -
              
              
              748,519Other
              
              
              192,856
              
              
              2,584Total
                  non-interest income
              
              
              3,028,278
              
              
              751,103NON-INTEREST
                  EXPENSE:Compensation
              
              
              466,457
              
              
              63,167Management
                  fees
              
              
              1,104,804
              
              
              77,259Professional
                  fees
              
              
              425,074
              
              
              116,934Insurance
              
              
              107,248
              
              
              76,500Other
              
              
              652,707
              
              
              25,822Total
                  non-interest expense
              
              
              2,756,290
              
              
              359,682Net
                  income before taxes
              
              
              2,936,782
              
              
              866,711Income
                  tax expense
              
              
              -
              
              
              168,736Net
                  income
              
              $
              2,936,782
              
              $
              697,975Net
                  earnings (loss) per share - basic and diluted
              
              
              0.27
              
              
              0.27Funds
                  From Operations
              
              
              0.28
              
              
              0.27Weighted
                  average outstanding shares
              
              
              10,883,888
              
              
              2,547,197See
                  accompanying notes to financial statements.






2
 Table
          of Contents









**DESERT
                CAPITAL REIT, INC.****Consolidated
                Statements of Cash Flows**Three
                MonthsEnded
                March 31,2006
            
            
            2005OPERATING
                ACTIVITIESNet
                income (loss)
            
            $
            2,936,782
            
            $
            697,975Adjustments
                to
                reconcile net income (loss) to net cashDepreciation
            
            
            107,028
            
            
            -Minority
                interest
            
            
            -
            
            
            (748,519
            )Stock
                based compensation
            
            
            33,333
            
            
            16,667Provision
                for
                loan loss
            
            
            47,603
            
            
            19,016Net
                change inOther
                assets
            
            
            (493,430
            )
            
            59,534Accounts
                payable
            
            
            125,723
            
            
            137,243Net
                cash provided by operating activities
            
            
            2,757,040
            
            
            181,916INVESTING
                ACTIVITIESInvestment
                in
                subsidiary (net of cash received of $1,039,908)
            
            
            -
            
            
            (2,000,000
            )Cash
                distribution received from subsidiary
            
            
            -
            
            
            594,452Net
                increase in mortgage investments
            
            
            (33,668,000
            )
            
            (5,321,508
            )Net
                increase in loans held-for-sale
            
            
            (3,896,400
            )
            
            -Increase
                in
                land
            
            
            -
            
            
            (1,820,000
            )Acquisition
                of
                building and equipment
            
            
            (29,188
            )
            
            (4,437,442
            )Net
                cash used by investing activities
            
            
            (37,593,588
            )
            
            (12,984,498
            )FINANCING
                ACTIVITIESNet
                increase in borrowings
            
            
            2,287,700
            
            
            8,095,000Principal
              payments on mortgage
            
            
            (28,486
            )
            
            -Issuance
                of
                common stock
            
            
            44,687,822
            
            
            7,448,731Dividends
                on
                common stock
            
            
            (1,901,095
            )
            
            (285,304
            )Offering
                costs
                paid
            
            
            (4,007,095
            )
            
            (461,498
            )Shares
                redeemed
            
            
            (279,633
            )
            
            -Net
                cash provided by financing activities
            
            
            40,759,213
            
            
            14,796,929Net
                increase in cash
            
            
            5,922,665
            
            
            1,994,347Cash
                at
                beginning of period
            
            
            4,459,289
            
            
            2,375,309Cash
                at
                end of period
            
            $
            10,381,954
            
            $
            4,369,656Cash
                paid for interest
            
            $
            1,035,544
            
            $
            84,469Cash
                paid for taxes
            
            
            670,000
            
            
            29,085Capitalized
                interest
            
            
            -
            
            
            15,015Supplemental
                schedule of non-cash investing and financingCommon
                stock issued in exchange for interest in subsidiary
            
            
            -
            
            
            1,125,000Common
                stock issued as repayment of indebtedness
            
            
            -
            
            
            1,322,139Common
                stock issued for dividend reinvestment program
            
            
            994,322
            
            
            195,142Common
                stock dividends declared but not paid
            
            
            1,246,820
            
            
            210,500Offering
                costs
                incurred but not paid
            
            $
            58,273
            
            $
            307,550See
                accompanying notes to financial statements.




3
  Table
          of Contents


**DESERT
                  CAPITALREIT, INC.****Consolidated
                  Statements of Changes in Stockholders' Equity****Common
                  Stock Shares**
              
              
              **Common
                  Stock Par Value**
              
              
              **Additional**
                **Paid
                  - in Capital**
              
              
              **Retained
                  Earnings**
              
              
              **Total****Balance
                  at December 31, 2005**
              
              
              **9,388,994**
              
              **$**
              **93,890**
              
              **$**
              **83,005,684**
              
              **$**
              **(275,245**
              **)**
              **$**
              **82,824,329**Issuance
                  of common stock
              
              
              4,575,322
              
              
              45,753
              
              
              45,651,372
              
              
              -
              
              
              45,697,125Stock
                  based compensation
              
              
              -
              
              
              -
              
              
              33,333
              
              
              -
              
              
              33,333Stock
                  redemed
              
              
              (27,963
              )
              
              (280
              )
              
              (279,353
              )
              
              
              
              
              (279,633
              )Dividends
                  on common stock
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,261,604
              )
              
              (3,261,604
              )Offering
                  costs
              
              
              -
              
              
              -
              
              
              (3,974,435
              )
              
              -
              
              
              (3,974,435
              )Net
                  income (loss)
              
              
              -
              
              
              -
              
              
              -
              
              
              2,936,782
              
              
              2,936,782**Balance
                  at March 31, 2006**
              
              
              **13,936,353**
              
              **$**
              **139,364**
              
              **$**
              **124,436,601**
              
              **$**
              **(600,067**
              **)**
              **$**
              **123,975,898**See
                  accompanying notes to financial statements.




4
 Table
          of Contents


**Desert
        CapitalREIT, INC.**
 **Notes
        to Consolidated Financial Statements**
 **March
        31, 2006**
 **(Unaudited)**
  **Note
        1 -** **Description
        of Business and Basis of Presentation**
  Desert
        Capital REIT, Inc. (the “Company”), was organized and incorporated under the
        laws of the state of Maryland in December 2003. The Securities and Exchange
        Commission (“SEC”) declared the Company’s Registration Statement on Form S-11
        effective on July 16, 2004. The Company incurred organizational costs prior
        to
        the registration statement becoming effective; however, principal business
        activity did not begin until July 16, 2004.
  The
        Company is a mortgage real estate investment trust ("REIT"), and its principal
        business activity is financing and investing in mortgage loans, including
        acquisition and development loans, construction loans, commercial property
        loans, and residential loans. The Company funds these investments through
        equity
        capital and leverage. Certain portions of our operations are conducted through
        our taxable REIT subsidiary (TRS). Income generated by our TRS is subject
        to
        federal income taxes at C corporation rates. Distributions made to stockholders
        from TRS generated income that has previously been taxed will receive
“qualified” dividend treatment and be taxable to the stockholders at the current
        15% rate.
  On
        November 10, 2004, the Company entered into an agreement to acquire Consolidated
        Mortgage LLC for $13.5 million, consisting of 450,000 shares of the Company’s
        common stock and $9 million in cash. The acquisition was structured as an
        installment sale, and as of October 5, 2005, the Company owned 100% of the
        equity of Consolidated Mortgage. Consolidated Mortgage is a mortgage broker
        whose principal business activity is the origination and servicing of 12-
        to
        18-month mortgage loans for us and over 4,000 private investors. Consolidated
        Mortgage generates origination and servicing fees on the approximately $376
        million of loans funded by its investor-clients. The Company believes that
        ownership of the loan origination and servicing company will supply it with
        adequate loans to continually invest capital as well as a strong cash flow.
        The
        purchase price results in recognition of goodwill because Consolidated Mortgage
        generates substantial earnings from a relatively small amount of assets,
        and the
        purchase price was derived from the earnings stream. The results of operations
        of Consolidated Mortgage are included in the consolidated statement of
        operations of the Company as of January 1, 2005.
  The
        consolidated financial statements presented in this Form 10-Q include the
        accounts of the Company, and its wholly or majority owned subsidiaries. All
        significant intercompany accounts and transactions have been eliminated in
        consolidation.
  The
        accompanying unaudited interim financial statements have been prepared in
        accordance with accounting principles generally accepted in the United States
        for interim financial information and with the instructions to Form 10-Q.
        Accordingly, they do not include all of the information and footnotes required
        by accounting principles generally accepted in the United States for complete
        financial statements, although management believes that the disclosures
        presented herein are adequate to make the information presented not misleading.
        In the opinion of management, all adjustments (consisting only of normal
        recurring accruals) considered necessary for a fair presentation have been
        included. The results of operations for the quarter ended March 31, 2006
        are not
        necessarily indicative of results that may be expected for the entire year
        ending December 31, 2006. These financial statements should be read in
        conjunction with the financial statements and notes included in the Company’s
        financial statements for the year ended December 31, 2005, as filed in Form
        10-K.
  **Note
        2 -** **Summary
        of Significant Accounting Policies**
  **Use
        of Estimates**
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the amounts reported in the financial
        statements and accompanying notes. Actual results could differ from those
        estimates.
  5
 Table
            of Contents
 **Cash
        and Cash Equivalents**
  All
        highly liquid investments with original maturities of three months or less
        are
        considered to be cash equivalents. The Company places its cash and cash
        equivalents in high quality financial institutions. The consolidated account
        balances at each institution periodically exceeds FDIC insurance coverage
        and
        the Company believes that this risk is not significant. On
        March
        31, 2006, the Company had $472,395 in restricted cash. The usage of the cash
        is
        restricted to tenant improvements on the remaining vacant space of our office
        building in Henderson, NV.
  **Revenue
        Recognition**
  Interest
        is accrued monthly on outstanding principal balances unless the Company
        considers the collection of interest to be uncertain. The Company generally
        considers the collection of interest to be uncertain when loans are
        contractually past due 90 days or more. Past due status is based on contractual
        terms of the loan. In all cases, loans are placed on nonaccrual or charged
        off
        at an earlier date if collection of principal or interest is considered
        doubtful. All interest accrued but not collected for loans that are placed
        on
        nonaccrual or charged off are reversed against interest income. The interest
        on
        these loans is accounted for on the cash-basis or cost-recovery method until
        qualifying for return to accrual.
  Loan
        origination fees and certain direct origination costs are deferred and
        recognized as adjustments to income over the lives of the related loans using
        level interest method. Loan brokerage fees are recognized as income upon
        funding
        of the loans. Service and other loan fees are recognized upon
        collection.
  **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. Depreciation is recorded
        using the straight-line method over the estimated useful lives of the individual
        assets.
  **Loans**
  The
        Company generally invests in 12- to 18-month mortgage loans to borrowers.
        Loans
        are stated at unpaid principal balances, net of any unamortized deferred
        fees
        and costs on originated loans, and any allowance for loan losses. 83.2% of
        the
        loan portfolio consists of mortgage loans throughout Nevada, 6.7% consists
        of
        loans throughout Arizona, 5.2% consists of loans in Texas, 4.4% consists
        of
        loans in Missouri and the remaining 0.5% consists of loans in Utah. The
        ability of the Company’s borrowers to pay the notes is dependent upon the real
        estate and general economic conditions in these areas.
  **Allowance
        for Loan Losses**
  The
        Company provides a loan allowance related to certain of our mortgage loans.
        Management monitors the delinquencies and defaults on the underlying mortgages
        and, if an impairment of the related mortgage security is deemed to be other
        than temporary, the carrying value of the related mortgage security will
        be
        reduced to fair value. The loan loss provision 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 provision estimates are reviewed periodically and
        adjustments are reported in earnings when they become known.
  **Impairment
        Policy**
  The
        Company has 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,
        2006 or 2005.
  6
 Table
            of Contents
 **Goodwill**
  The
        Company has 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 on March 31, 2006 or 2005.
  **Income
          Taxes**
  The
        Company currently qualifies, and intends at all times in the future to qualify,
        as a REIT for federal income tax purposes, under Sections 856 through 860
        of the
        Internal Revenue Code of 1986, as amended and applicable Treasury Regulations.
        Therefore, the Company generally is not subject to federal corporate income
        taxes to the extent of distributions if the Company distributes at least
        90% of
        its taxable income to its stockholders. To qualify as a REIT, the Company
        must
        elect to be so treated and must meet on a continuing basis certain requirements
        relating to the Company’s organization, sources of income, nature of assets, and
        distribution of income to stockholders. The Company also maintains certain
        records and may request certain information from its stockholders designed
        to
        disclose actual ownership of its stock in order to maintain REIT
        status.
  In
        addition, the Company must satisfy certain gross income requirements annually
        and certain asset tests at the close of each quarter of its taxable year.
        If the
        Company fails to qualify for taxation as a REIT in any taxable year, and
        the
        relief provisions do not apply, the Company will be subject to tax on its
        taxable income at regular corporate rates. Distributions to stockholders
        in any
        year in which the Company fails to qualify will not be deductible by the
        Company
        nor will they be required to be made. Unless entitled to relief under specific
        statutory provisions, the Company will also be disqualified from taxation
        as a
        REIT for the four taxable years following the year during which it failed
        to
        qualify.
  Certain
        portions of our operations are conducted through our taxable REIT
        subsidiaries ("TRS").  Income generated from TRS is subject to federal
        income taxes at C corporation rates.  Distributions made to stockholders
        from income that has previously been taxed will receive "qualified" dividend
        treatment and be taxable to the stockholders at the current 15%
        rate.
  **Stock
        Compensation**
  The
        Company accounts for stock-based compensation issued to employees and
 non-employees using the fair value recognition provisions of SFAS
        Statement No. 123 (R) “Share-based payments”. 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**
  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"). This Statement (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.
  7
 Table
            of Contents
 On
        February 16, 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
        Financial Instruments - an amendment of FASB Statements No. 133 and 140 ("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.
  **Note
        3 - Mortgage Investments**
  Mortgage
        investments represent acquisition and development and construction loans.
        The Company is subject to the risks inherent in finance lending, including
        the
        risk of borrower default and bankruptcy. The Company also invests in
        subordinated or second lien, mortgage loans. As of March 31, 2006 and 2005,
        approximately 19% and 13.4% respectively, of the principal balance of the
        outstanding mortgage notes was secured by second liens.
  Mortgage
        investments are stated at the principal outstanding, less the allowance for
        loan
        losses. Mortgage notes receivable are generally single-pay notes with interest
        due monthly, and have an average term of 12- to 18-months.
  March
                  31,
              
              
              December
                  31,2006
              
              
              2005Acquisition
                  and development loans
              
              $
              83,219,400
              
              $
              44,522,500Construction
                  loans
              
              
              18,175,580
              
              
              23,204,480Unamortized
                  deferred fees and costs
              
              
              (628,824)
              
              
              -Allowance
                  for loan losses
              
              
              (125,332
              )
              
              (77,729
              )Mortgage
                  investments - net
              
              $
              100,640,824
              
              $
              67,649,251
  **Note
        4 - Allowance for Loan Losses**
  Management
        reviews the Company's allowance for loan loss provision periodically, and
        the
        Company maintains an allowance for loan losses on its mortgage notes receivable
        at an amount that management believes is sufficient to protect against potential
        losses in the loan portfolio. The Company’s actual losses may differ from the
        estimate. As of March 31, 2006 and 2005, approximately 0.2% and 0% respectively,
        of the aggregate principal balance of the Company’s mortgage investments was in
        default. Management believes that all principal will be recovered on the
        defaulted amounts and, therefore, no losses have been recognized in the
        period.
  A
        reconciliation of the Company’s allowance for loan losses follows:
  Balance,
                  December 31, 2005
              
              $
              77,729Provision
                  for loan loss
              
              
              47,603Balance
                  March 31, 2006
              
              $
              125,332
  The
        provision for loan loss was $47,603 and $19,016 for the three months ended
        March
        31, 2006 and 2005, respectively.
 8
 Table
            of Contents
 **Note
        5 - Stock Based Compensation**
  The
        Board
        of Directors has adopted the 2004 Stock Incentive Plan of Desert Capital
        REIT,
        Inc. (the “Plan”). Directors, officers of the Company or any affiliate of the
        Company, and individual consultants or advisors are eligible for stock based
        compensation under the Plan. The Company has authorized 1,000,000 shares
        of
        common stock under the Plan. As of March 31, 2006 the Company has granted
        awards for 40,000 restricted shares under the Plan. The fair value of the
        shares
        on the grant date was $10 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, 2006 and 2005 was $33,333 and
        $16,667, respectively.
  **Note
        6 - Building and Equipment**
  The
        Company purchased an office building located in Henderson, NV, in February
        2005.
        The building serves as the corporate headquarters of the Company and any
        space
        not utilized by the Company is leased to third parties .
        The
        total square footage of the building is approximately 40,000 square feet,
        and as
        of March 31, 2006, the building was approximately 76% occupied. The
        building is generating positive cash flow to the Company at this level of
        occupancy.
  Building
        and equipment as of March 31, 2006 are as follows:
  March
                  31, 2006Building
              
              $
              7,294,147Equipment
              
              
              126,314Furniture
                  and fixtures
              
              
              415,370Software
              
              
              500,7628,336,593Less
                  accumulated depreciation
              
              
              (385,183
              )$
              7,951,410
  Depreciation
        expense was $107,028 and $0 for the three months ended March 31, 2006 and
        2005,
        respectively.
  **Note
        7 - Leases**
  The
        Company owns and operates an approximately 40,000 square foot office building
        in
        Henderson, NV. The Company currently leases approximately 20,000 square feet
        to
        related parties and approximately 10,000 square feet to third parties under
        noncancelable leases with an average term of five years. The future
        minimum receipts for each of the next five years are as
        follows:
 
 Twelve
                  months ending March 31,2006
              
              $
              457,7492007
              
              
              457,7492008
              
              
              457,7492009
              
              
              457,7492010
              
              
              457,749Total
              
              $
              2,288,745
 
 9
 Table
            of Contents
 **Note
        8 - Income taxes**
  Certain
        portions of our operations are conducted through our taxable REIT
        subsidiary ("TRS").  Income generated from TRS is subject to federal
        income taxes at C corporation rates.  Distributions made to stockholders
        from income that has previously been taxed will receive "qualified" dividend
        treatment and be taxable to the stockholders at the current 15%
        rate.
  Three months
                  ended
              
              
              Three
                  months endedMarch
                  31, 2006
              
              
              March
                  31, 2005REIT
                  taxable income
              
              $
              2,812,769
              
              $
              444,401Income
                  tax computed on REIT income
              
              
              -
              
              
              -Taxable
                  REIT subsidiary income
              
              
              (50,139)
              
              
              496,282Income
                  tax computed on taxable REIT subsidiary income
              
              
              -
              
              
              168,736Total
                  income taxes
              
              $
              -
              
              $
              168,736
  10
 Table
            of Contents
 **Note
        9 - 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, inclusive
        of
        unvested restricted stock which participates fully in dividends. The Company
        does not have any potentially dilutive instruments outstanding as of March
        31,
        2006 or 2005. Therefore, diluted earnings per share are not
        presented.
  Three
                  months ended
              
              
              Three
                  months endedMarch
                  31, 2006
              
              
              March
                  31, 2005Net
                  income
              
              $
              2,936,782
              
              $
              697,976Weighted
                  average shares outstanding
              
              
              10,883,888
              
              
              2,547,197Earnings
                  per share
              
              $
              0.27
              
              $
              0.27
  **Note
        10 - Dividends**
  The
        Board
        of Directors declared monthly dividends on the last day of each month, payable
        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 quarter of 2006
        and
        2005:
  2006
              
              
              2005January
                  31
              
              $
              0.10
              
              $
              0.075February
                  28
              
              
              0.10
              
              
              0.075March
                  31
              
              
              0.10
              
              
              0.075Total
              
              $
              0.30
              
              $
              0.225
  **Note
        11 - Retirement Plan**
  The
        Company offers a SIMPLE IRA plan to its employees. The Company matches employee
        contributions dollar for dollar up to 3% of the employees’ compensation for the
        year. The amount matched by the Company is expensed in the same period that
        the
        corresponding employee contributions are made.
  **Note
        12 - Notes Payable**
  As
        of
        March 31, 2006 and 2005, the Company had outstanding principal balances of
        $3.25
        million and $9 million, respectively from Beresford Bancorporation, Inc,
        under a
        $15 million credit facility which is secured by the Company’s notes receivable.
        The interest rate on an outstanding balance of $5 million or less is the
        10-year
        treasury yield on the last day of the month, plus 3.00%. The interest rate
        on
        any outstanding balance greater the $5 million is a constant 13%. Interest
        is
        payable monthly. The loan had a maturity of February 2006, which was
        subsequently extended to July 2006. Interest expense for the three months
        ended
        March 31, 2006 and 2005 was $83,800 and $91,818 respectively.
  In
        October 2005, the Company negotiated a $5 million revolving credit facility
        with
        Bank West of Nevada. The facility is drawn on to close loans when we have
        not
        received all investors’ funds in house and we have a funding deadline. Once the
        investors’ funds are received the facility is repaid. The facility is secured by
        the corresponding notes. The interest rate on the facility is prime plus
        three
        quarters of one percent, which was 8.5% on March 31, 2006. The outstanding
        balance on March 31, 2006 was $4,522,400 and interest expense for the three
        months ended March 31, 2006 was $44,329.
  11
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 The
        Company has a mortgage of $6,599,200 from Bank West of Nevada on an office
        building in Henderson, NV. The building serves as corporate headquarters
        for the
        Company. The loan has a variable interest rate set at prime, which was 7.75%
        on
        December 31, 2005 and is being amortized over twenty-one years. Interest
        expense
        on this mortgage for the three months ended March 31, 2006 was $121,281.
        The
        maturities for the next five years on this mortgage loan are as
        follows:
  Twelve
                  months ending March 31,2006
              
              $
              135,0002007
              
              
              145,0002008
              
              
              156,0002009
              
              
              168,0002010
              
              
              181,000Total
              
              $
              785,000
  The
        Company had borrowed approximately $1,322,130 from its advisor, Burton
        Management Company, Ltd., (“Burton”), a related party. On February 6, 2005,
        132,213 shares of the Company’s common stock were issued to Burton as repayment
        of the note in lieu of cash. The interest rate on the note was equal to the
        10-year treasury yield on the last day of the month. Interest expense on
        the
        note from January 1, 2005 to February 6, 2005, the date the note was paid
        off,
        was $5,585.
  **Note
        13 - Commitments and Related Parties**
  The
        Company has contracted with Burton to serve as advisor for the Company. Burton
        oversees the day-to-day operations including asset, liability and capital
        management. The Company has no employees. In lieu of paying salaries to its
        officers, the Company compensates 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 the Company. The annual base management compensation
        is 1%
        of the first $200,000,000 of average invested assets plus 0.8% of the average
        invested assets in excess of $200,000,000, to be paid quarterly. The base
        management fee expense for the three months ended March 31, 2006 and 2005
        was
        $200,884, and $83,752, respectively, and $76,295, and $83,752 remained payable
        on March 31, 2006 and 2005, 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 the Company, along with
        the
        base management compensation, within 15 days of receipt of the
        computations. At the end of the fiscal year, the incentive compensation shall
        be
        calculated based upon the net income for the year. If the quarterly payments
        are
        less than the annual incentive amount, the Company shall pay Burton the
        difference. If the quarterly payments were to exceed the annual incentive
        compensation, Burton will refund the excess to the Company, which will reduce
        the previously recorded incentive fee expense. Should the Company not have
        sufficient cash available to pay the quarterly or annual amounts, the Company
        would either borrow sufficient funds or sell assets to meet these contracted
        obligations. Incentive compensation for the three months ended March 31,
        2006
        and 2005 was $300,977, and $29,023, respectively, and $300,977, and $29,023
        remained payable on March 31, 2006 and 2005, respectively.
  The
        Company had borrowed approximately $1,322,130 from its advisor, Burton. On
        February 6, 2005, 132,213 shares of the Company’s common stock were issued to
        Burton as repayment of the note in lieu of cash. The interest rate on the
        note
        was equal to the 10-year treasury yield on the last day of the month. Interest
        expense on the note from January 1, 2005 to February 6, 2005, the date the
        note
        was paid off, was $5,585.
  At
        the
        time we entered into the agreement to acquire Consolidated Mortgage,
        Consolidated Mortgage had a management agreement in place with 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 for three months ended March 31, 2006 and 2005
        was
        $602,943 and $779,775, respectively, and $312,847 and $260,360 remained payable
        on March 31, 2006 and 2005, respectively.
  12
 Table
            of Contents
 The
        dealer-manager of the Company’s offering of common stock, CMC Financial
        Services, Inc., directs and oversees the sale of the Company’s equity
        securities. CMC Financial receives a marketing support fee and sales commissions
        based on the number of shares of common stock sold. The dealer-manager is
        an
        affiliate of both the Company and Burton, because the owners of CMC Financial
        are also the executive officers of the Company.
  CMC
        Financial earned sales commissions and marketing support fees for the three
        months ended March 31, 2006 and 2005 of $3,967,548, and $670,401, respectively,
        and $43,601, and $274,028 remained payable on March 31, 2006 and 2005,
        respectively.
  CMC
        Financial Services 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 for the three months ended
        March 31, 2006 and 2005 was $139,904 and $288,509, respectively, and $40,612
        and
        $106,327 remained payable on March 31, 2006 and 2005, respectively.
  On
        March
        31, 2006, the Company had outstanding loans of approximately $12.9 million
        to CM
        Land, LLC, a related party. The executive officers of the Company also own
        and
        manage CM Land, LLC. The loans have an average interest rate of 12.8% and
        mature
        between June, 2006 and January, 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 the Company’s funds. The Company paid no
        fees to CM Land in connection with the transaction. The Board has appointed
        an independent committee to review and approve amounts we loan to CM Land,
        LLC.
        The Company has earned interest of $439,840 for the three months ended March
        31,
        2006 for these loans.
  The
        Company also leases office space to Burton, CMC Financial Services, and
        Residential Capital Mortgage Corporation, a company of wich Todd Parriott
        is
        director and controlling shareholder, under noncancelable operating leases
        which expire in July 2010. The total rents received from related parties
        for the
        quarter ended March 31, 2006 was $73,985.
  **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;*
  ·  *Potential
        impacts of our leveraging policies and strategies without notice to you or
        stockholder approval;*
  ·  *Decreases
          in the value of the property underlying our mortgage
          loans;*
  ·  *Our
        Advisor’s motivation to recommend riskier investments in an effort to maximize
        its incentive compensation under the advisory agreement; and*
  ·  *Although
        we believe our 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 remain qualified as a REIT could have material adverse effect on our
        performance and your investment.*
  13
 Table
            of Contents
 We
        undertake no obligation to publicly update or revise any forward-looking
        statements, whether as a result of new information, future events or otherwise.
        In light of these risks, uncertainties and assumptions, the events described
        by
        our forward-looking events might not occur. We qualify any and all of our
        forward-looking 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**
  Desert
        Capital REIT, Inc. is a REIT headquartered in Henderson, Nevada. We are
        externally managed and were formed in December 2003 to invest in mortgage
        loans.
        We derive our revenues primarily from the receipt of interest payments received
        from mortgage loan 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.
        We
        believe that this spread, net of operating expenses, will provide 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.
  In
        2005
        we purchased Consolidated Mortgage, LLC. Consolidated Mortgage generates
        origination and servicing fees on approximately $376 million in loans funded
        by
        its investor-clients. Due to the short-term nature of the loans originated
        by
        Consolidated Mortgage, the portfolio turns over every 12- to 18- months as
        loans
        are repaid and new loans are funded, thus generating recurring fee income.
        Historically, investors have generally reinvested their proceeds from loan
        repayments into new loans. We believe the acquisition of Consolidated Mortgage
        will enhance our ability to pay dividends because of the additional fee revenues
        generated by Consolidated Mortgage.
  We
        are
        organized and conduct our operations to qualify as a REIT for U.S. federal
        income tax purposes, thereby generally avoiding U.S. federal income taxes
        on our
        taxable income that we distribute to our stockholders. Certain portions of
        our
        operations are conducted through taxable REIT subsidiaries. Income generated
        from taxable REIT subsidiaries is subject to federal income taxes. Distributions
        made to stockholders from income that has previously been taxed will receive
        “qualified” dividend treatment and be taxable to the stockholders at the current
        15% rate.
  **Public
        Offering of Equity Securities/Use of Proceeds**
  Pursuant
        to a Registration Statement on Form S-11 under the Securities Act of 1933,
        as
        amended (the “Registration Statement”), we were selling to the public on a
“best efforts” basis up to 20,000,000 shares of our common stock at a price of
        $10 per share (the “Offering”) and up to 2,000,000 additional shares pursuant to
        a dividend reinvestment plan under which our stockholders may elect to have
        dividends reinvested in additional shares at $10 per share. The Registration
        Statement was declared effective by the SEC on July 16, 2004.  The Offering
        commenced on July 22, 2004 and was terminated on March 31, 2006.
 
 As
        of
        March 31, 2006 we had sold approximately 13.7 million shares of our common
        stock
        (“Shares”) for aggregate gross proceeds before Offering costs and selling
        commissions of approximately $137 million and issued approximately 280,000
        shares pursuant to the dividend reinvestment plan. As part of our formation
        prior to the offering, 20,000 shares or $200,000 of our common stock were
        sold
        to our Advisor.
  In
        connection with the Offering, we incurred approximately $14.2 million of
        costs
        related to the issuance and distribution of the Shares through March 31,
        2006.
  The
        Company has commenced our second public offering of shares of our common
        stock.
        We are selling to the public on a “best efforts” basis up to 15,000,000 shares
        of our common stock at a price of $15 per share (the “Second Offering”) and up
        to 1,500,000 additional shares pursuant to a dividend reinvestment plan under
        which our stockholders may elect to have dividends reinvested in additional
        shares at $15 per share. The Second Registration Statement was declared
        effective by the SEC on March 22, 2006.
  14
 Table
            of Contents
 **Critical
        Accounting Policies and Management Estimates**
  Our
        financial statements are prepared in accordance with GAAP. The application
        of
        these accounting policies will require our management to make certain judgments
        and estimates that directly affect our financial reporting results. We consider
        the policies discussed below to be critical to an understanding of our financial
        statements. Specific risks for these critical accounting policies are described
        in the following paragraphs. In regard to these policies, we caution you
        that we
        have limited operating history and future events rarely develop exactly as
        forecasted, and the best estimates of our management will likely require
        adjustment. See “Note 2 - Summary of Significant Accounting Policies” to our
        financial statements for a more complete description of these
        policies.
  **Revenue
        Recognition**
  Interest
        is accrued monthly on outstanding principal balances unless we consider the
        collection of interest to be uncertain. We generally considers the
        collection of interest to be uncertain when loans are contractually past
        due 90
        days or more. Past due status is based on contractual terms of the loan.
        In all
        cases, loans are placed on nonaccrual or charged off at an earlier date if
        collection of principal or interest is considered doubtful. All interest
        accrued
        but not collected for loans that are placed on nonaccrual or charged off
        are
        reversed against interest income. The interest on these loans is accounted
        for
        on the cash-basis or cost-recovery method until qualifying for return to
        accrual.
  Loan
        origination fees and certain direct origination costs are deferred and
        recognized as adjustments to income over the lives of the related loans using
        level interest method. Loan brokerage fees are recognized as income upon
        funding
        of the loans. Service and other loan fees are recognized upon
        collection.
  **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.
  **Loans**
  We generally
        invest in 12- to 18-month mortgage loans to borrowers. Loans are stated at
        unpaid principal balances, net of any unamortized deferred fees and costs
        on
        originated loans, and any allowance for loan losses. 83.2% of the loan portfolio
        consists of mortgage loans throughout Nevada, 6.7% consists of loans throughout
        Arizona, 5.2% consists of loans in Texas, 4.4% consists of loans in Missouri
        and
        the remaining 0.5% consists of loans in Utah. The ability of our borrowers
        to pay the notes is dependent upon the real estate and general economic
        conditions in these areas.
  **Allowance
        for Loan Losses**
  We
        provide a loan allowance related to certain of our mortgage loans. Management
        monitors the delinquencies and defaults on the underlying mortgages and,
        if an
        impairment of the related mortgage security is deemed to be other than
        temporary, the carrying value of the related mortgage security will be reduced
        to fair value. The loan loss provision 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
        provision estimates are reviewed periodically and adjustments are reported
        in
        earnings when they become known.
  **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, 2006
        or
        2005.
  15
 Table
            of Contents
 **Income
        Taxes**
  We
        currently qualify, and intend at all times in the future to qualify, as a
        REIT
        for federal income tax purposes, under Sections 856 through 860 of the Internal
        Revenue Code of 1986, as amended, and applicable Treasury Regulations.
        Therefore, we generally are not subject to federal corporate income taxes
        to the extent of distributions if we distribute at least 90% of its taxable
        income to its stockholders. To qualify as a REIT, the Company must elect
        to be
        so treated and must meet on a continuing basis certain requirements relating
        to
        the our organization, sources of income, nature of assets, and distribution
        of income to stockholders.  We also maintain certain records and may
        request certain information from our stockholders designed to disclose
        actual ownership of our stock in order to maintain REIT
        status.
  In
        addition, we must satisfy certain gross income requirements annually and
        certain
        asset tests at the close of each quarter of our taxable year. If we fail to
        qualify for taxation as a REIT in any taxable year, and the relief provisions
        do
        not apply, we will be subject to tax on its taxable income at regular corporate
        rates. Distributions to stockholders in any year in which we fail to qualify
        will not be deductible by us nor will they be required to be made. Unless
        entitled to relief under specific statutory provisions, we will also be
        disqualified from taxation as a REIT for the four taxable years following
        the
        year during which we failed to qualify.
  Certain
        portions of our operations are conducted through our taxable REIT
        subsidiary ("TRS").  Income generated from TRS is subject to federal
        income taxes at C corporation rates.  Distributions made to stockholders
        from income that has previously been taxed will receive "qualified" dividend
        treatment and be taxable to the stockholders at the current 15%
        rate.
  **Results
        of Operations - Three months ended March 31, 2006 compared to three months
        ended
        March 31, 2005.**
  ***Revenues***
  Interest
        income increased $2.4 million, or 407%, to $3.0 million in the first quarter
        of
        2006 from $600,000 for the three months ended March 31, 2005. This increase
        was
        due to a 309% increase in the average balance of the loan portfolio from
        $19.4
        million for the quarter ended March 31, 2005 to $79.4 million in the same
        period
        in 2006 due to increased loan originations as a result of the ongoing sale
        of
        our equity securities. The average yield on the mortgage investments increased
        10.9% to 13.52% for the quarter ended March 31, 2006 from 12.19% in the same
        period in 2005, as a result of increased market rate of interest as well
        as an
        18.5% increase in the average amount of second deeds of trust outstanding
        in the
        first quarter of 2006 as compared to the first quarter of 2005.
  Non-interest
        income increased $2.3 million, or 303%, to $3.0 million in the first quarter
        of
        2006 from $750,000 for the same period in 2005. This increase was primarily
        due
        to the purchase of Consolidated Mortgage. Consolidated Mortgage generates
        its
        revenues from loan origination and servicing fees from borrowers. In the
        first
        quarter of 2006, Consolidated Mortgage originated loans with aggregate principal
        amount of $90 million and average origination fees amounted to 2.6% of principal
        funded. Management believes that it will continue to generate similar returns
        in
        the future.
  ***Expenses***
  Interest
        expense increased $199,000, or 200%, to $298,000 in the first quarter of
        2006
        from $100,000 for the same period in 2005. This increase was due to a 102%
        increase in the average debt financing on or loan portfolio from $6.7 million
        for the quarter ended March 31, 2005 to $13.5 million for the same period
        in
        2006 due to increased loan originations, as well as a 48% increase in the
        average cost of these borrowings from 5.95% to 8.84% as a result of increased
        market rates of interest and principal amounts of borrowings.
  Non-interest
        expenses increased $2.4 million, or 666%, to $2.75 million in the first quarter
        of 2006 from $360,000 for the same period in 2005. This increase was primarily
        due to the purchase of Consolidated Mortgage and the operating expenses that
        are
        associated with it. Management believes that it will continue to incur similar
        costs in the future.
  16
 Table
            of Contents
 **Taxable
        income**
  REIT
        taxable net income is calculated according to the requirements of the Internal
        Revenue Code, rather than GAAP. The following table reconciles GAAP net income
        to REIT taxable net income for the three months ended March 31, 2006 and
        2005:
  Three
                  months ended
              
              
              Three
                  months endedMarch
                  31, 2006
              
              
              March
                  31, 2005GAAP
                  net income
              
              $
              2,936,782
              
              $
              697,976Adjustments
                  to GAAP net income:Provision
                  for
                  loan loss
              
              
              47,603
              
              
              19,016Net
                  adjustment for TRS income
              
              
              (171,616
              )
              
              (272,591
              )REIT
                  taxable net income (loss)
              
              $
              2,812,769
              
              $
              444,401
  We
        believe that the presentation of our REIT taxable net income is useful to
        investors because it is directly related to the distributions we are required
        to
        make in order to retain our REIT status. There are limitations associated
        with
        REIT taxable net income. For example, this measure does not reflect net capital
        losses during the period and, thus, by itself is an incomplete measure of
        our
        financial performance over any period. As a result, our REIT taxable net
        income
        should be considered in addition to, and not as a substitute for, our GAAP-based
        net income as a measure of our financial performance.
  **Funds
        From Operations (“FFO")**
  FFO
        is a
        widely recognized measure of REIT performance. The National Association of
        Real
        Estate Investment Trusts currently defines FFO as net income (computed in
        accordance with GAAP), excluding gains (or losses) from depreciable operating
        property sales, plus real estate depreciation and amortization, and after
        adjustments for unconsolidated partnerships and joint ventures. We present
        FFO
        because we consider it an important supplemental measure of our operating
        performance. We believe that in order to facilitate a clear understanding
        of our
        consolidated historical operating results, FFO should be examined in conjunction
        with net income as presented in the consolidated statements of operations.
  Funds
        from Operations for the three months ended March 31, 2006 and 2005 are as
        follows:
  Three
                  months ended
              
              
              Three
                  months endedMarch
                  31, 2006
              
              
              March
                  31, 2005GAAP
                  net income
              
              $
              2,936,782
              
              $
              697,976Add:Real
                  estate depreciation
              
              
              76,595
              
              
              -Funds
                  from operations
              
              $
              3,013,377
              
              $
              697,976Funds
                  from operations per share
              
              
              0.28
              
              
              0.27
  17
 Table
            of Contents
 **Liquidity
        and Capital Resources**
  Our
        primary sources of funds for liquidity consist of funds raised from our initial
        public equity offering which commenced in August 2004, and our second
        public offering which commenced in April 2006, borrowings under our credit
        arrangements, net cash provided by operating activities, and repayments of
        outstanding loans.
  In
        August
        2004 we commenced a public offering of our common stock. Through March 31,
        2006,
        we received gross proceeds of $137 million. These proceeds were used to invest
        in mortgage loans and pay the offering expenses.
  **** We
        currently have a $15 million credit facility that matures in July 2006.
        Borrowings under our credit facility bear interest at the 10-year Treasury
        Rate
        plus 3% for outstanding balances of $5 million of less and 13% for outstanding
        balances greater than $5 million. Depending on market conditions, we may
        incur
        debt up to 300% of our net assets. We expect to use borrowings under our
        credit
        facility and any future borrowings under other lines of credit with commercial
        banks to fund or acquire loans secured by real estate. The borrowings under
        our
        existing credit facility are, and some or all of our future debt may be,
        secured
        by some or all of our assets. If we default in the payment of interest or
        principal on any such debt, breach any representation or warranty in connection
        with any borrowing or violate any covenant in any loan document, our lender
        may
        accelerate the maturity of such debt requiring us to immediately repay all
        outstanding principal. If we are unable to make such payment, our lender
        could
        foreclose on our assets that are pledged as collateral to that lender. The
        lender could also sue us or force us into bankruptcy. Any of these events
        would
        likely have a material adverse effect on the value of an investment in our
        common stock. At March 31, 2006 we had an outstanding balance of $3.25 million,
        and we were in compliance with all covenants under the credit facility. At
        March
        31, 2006 we had a $11.75 million available under this facility.
  We
        also
        have a $5 million revolving credit facility with Bank West of Nevada that
        matures in October 2006. The facility is drawn on to close loans when we
        have
        not received all investors’ funds in house and we have a funding deadline. Once
        the investors’ funds are received the facility is repaid. The facility is
        secured by the corresponding notes. The interest rate on the facility is
        prime
        plus three quarters of one percent. The outstanding balance on March 31,
        2006
        was $4,522,400. At March 31, 2006 we had $477,600 available under this
        facility.
  Net
        cash
        provided by operating activities for the three months ended March 31, 2006
        was
        approximately $2.8 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 the Second Offering into mortgage loans and generate
        additional origination fees.
  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, and we do not
        anticipate a need to raise funds from other than these sources within the
        next
        12 months.
  Our
        advisory agreement with Burton requires us to pay incentive compensation
        on a
        quarterly basis based on the application of the incentive compensation formula
        at the end of each quarter. Because we will be paying out at least 90% of
        our
        REIT taxable income to stockholders on a quarterly basis, we may not have
        sufficient cash at the end of a particular quarter to pay the incentive fee,
        which would require us to borrow under our credit facility, or sell assets
        to
        meet the contractual obligation. In addition, it is possible that our liquidity
        may be further impaired if we generate substantial net income in the first
        three
        quarters of a fiscal year and have a significant drop off in the fourth quarter
        because will not be reimbursed for the over payment until year-end.
        Nevertheless, our total annual operating expenses, including the incentive
        compensation will not exceed the greater of 2% of average invested assets
        or 25%
        of our net income, unless specifically approved by our independent
        directors.
  18
 Table
            of Contents
 **Item
        3.Quantitative and Qualitative Disclosures about Market
        Risk**
  Market
        risk refers to the risk of loss from adverse changes in the level of one
        or more
        market prices, rate indices or other market factors. We are exposed to market
        risk primarily from changes in interest rates that are very sensitive to
        a
        variety of factors including political, economic and other factors outside
        of
        our control.
  Interest
        rate risk arises primarily as a result of our core business activities of
        acquiring mortgage loans and funding a portion of the purchases with borrowings
        and the associated asset and liability management required to match maturities
        of loans to funding sources. The principal objective of our asset and liability
        management is to maximize net interest income while operating within acceptable
        limits established for interest rate risk and maintaining adequate levels
        of
        liquidity.
  The
        primary interest rate exposure to which we are subject relates to our mortgage
        loan portfolio. Any change in the general level of interest rates in the
        market
        can affect our net interest income and net income in either a positive or
        negative manner. Net interest income is the difference between the income
        earned
        from interest bearing assets less the expense incurred relating to interest
        bearing liabilities. Fluctuations in the interest rate environment can also
        affect our ability to acquire new loans, the value of our loans for sale
        portfolio and our ability to sell the loans held for sale and the related
        income
        associated with a sale.
  We
        do not
        intend to use any derivative instruments to manage our interest rate exposure.
        Given the short time horizon of our anticipated investments and our related
        borrowings, we do not believe a hedging strategy is necessary. In addition,
        our
        actions are limited by rules with which REITs must comply.
  **Item
        4.Controls and Procedures**
  As
        of the
        end of the period covered by this quarterly report, the Company carried out
        an
        evaluation, under the supervision and with the participation of Company
        management, including the Company’s Chief Executive Officer and Chief Financial
        Officer, of the effectiveness of the design and operation of the Company’s
        disclosure controls and procedures pursuant to Securities Exchange Act Rule
        13a-15. Based on that evaluation, the Chief Executive Officer and the Chief
        Financial Officer have concluded that these disclosure controls and procedures
        are effective as of the end of the period covered by this report. There has
        been
        no change in the Company’s internal control over financial reporting identified
        in connection with the evaluation described above that occurred during the
        period covered by this report that has materially affected, or is reasonably
        likely to materially affect, the Company’s internal control over financial
        reporting.
  19
 Table
            of Contents
 **Part
        II.Other Information**
  **Item
        1A. Risk Factors**
  There
        were no material changes to the risk factors discussed in our Annual Report
        on
        Form 10-K for the year ended December 31, 2005.
  Item
        2. Unregistered
        Sales of Equity Securities and Use of Proceeds
 
 Desert
        Capital REIT's Form S-11 Registration Statement, File No. 333-111643,
        registering the sale of up to 22,000,000 shares of Desert Capital's common
        stock, was declared effective by the Securities and Exchange Commission on
        July
        16, 2004.  The offering commenced on July 16, 2004.  The offering was
        a "best efforts" offering, and was terminated as of March 31, 2006.  The
        dealer-manager for the offering was CMC Financial Services, Inc.  The
        offering price was $10.00 per share, with discounts and commissions payable
        to
        the dealer-manager equaling $0.90 per share.  The aggregate price of the
        22,000,000 shares of common stock registered is $220,000,000.  As of the
        termination of the offering on March 31, 2006, Desert Capital had sold
        approximately 13,698,871.8603 shares with an aggregate offering price of
        $136,988,718.60, and issued 279,744.3770 shares pursuant to the dividend
        reinvestment plan.
  From
        July 16, 2004 through March 31, 2006, Desert Capital has incurred offering
        costs
        of $14.2 million consisting of $11.7 million in commissions to CMC Financial
        Services, Inc., the dealer-manager, and $2.5 milliion for legal, accounting,
        and
        filing fees.  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, 2006 are $122.8
        million.
  Issuer
        Purchases of Equity Securities
  **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, 2006 - January 31, 2006
              4,578
              $10
              4,578
              (2)February
                  1, 2006 - February 28, 2006
              885
              $10
              885
              (2)March
                  1, 2006 - March 31, 2006
              22,500
              $10
              22,500
              (2)Total
              27,963
              
              27,963
 (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
        5. Other Information**
  None.
  20
 Table
            of Contents
 **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





21
 Table
          of Contents




**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.













DESERT
                CAPITAL REIT, INC.May
                15, 2006
            /s/
                TODD B. PARRIOTTTodd
                B. Parriott,Chairman
                of the Board, Chief Executive Officer, President and Chief Investment
                Officer
              (Principal
                Executive Officer)








May
                15, 2006
            /s/
                JONATHAN G. ARENSJonathan
                G. Arens,Chief
                Financial Officer
              (Principal
                Accounting Officer)





EXHIBIT
      INDEX








Exhibit
      Number   Description





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