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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-Q (Mark one) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2005 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ___ to ___   Commission File Number 333-111643 DESERT CAPITAL REIT, INC.  Maryland
(State or other jurisdiction of
incorporation or organization)
    
    20-0495883
(I.R.S. Employer
Identification No.)
 2357 Renaissance Drive, Suite A, Las Vegas, Nevada 89119
(Address of principal executive office)
(Zip Code) Registrants telephone number, including area code: (800) 419-2855 Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ     No o The number of shares of the registrants common stock, par value $0.01 per share, outstanding as of
May 10, 2005 was 3,209,320.




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DESERT CAPITAL REIT, INC. FORM 10-Q For the Quarter Ended March 31, 2005 INDEX Part I. Financial InformationItem 1.
    
    
    
    Consolidated Financial Statements (Unaudited)
    
    
    2a)
    
    Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 and December 31, 2003
    
    
    3b)
    
    Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004
    
    
    3c)
    
    Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 ended June 30, 2004
    
    
    4d)
    
    Consolidated Statements of Changes in Stockholders Equity for the three months ended March 31, 2005
    
    
    5e)
    
    Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2.
    
    
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4.
    
    
    
    Controls and Procedures
    
    
    18Part II Other InformationItem 2.
    
    
    
    Unregistered sales of Equity Securities and Use of Proceeds
    
    
    18Item 5.
    
    
    
    Other Information
    
    
    18Item 6.
    
    
    
    Exhibits
    
    
    18Signatures
    
    
    
    
    20Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO & CFO Pursuant to Section 906




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Item 1. Consolidated Financial Statements DESERT CAPITAL REIT, INC. 
 Consolidated Balance Sheets
 March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSMortgage notes receivable (net)
    
    $
    22,519,608
    
    
    $
    17,217,116Office Building
    
    
    6,437,442
    
    
    
    180,000Investment in subsidiary
    
    
    6,780,114
    
    
    
    3,501,047Prepaid insurance
    
    
    75,333
    
    
    
    71,833Interest receivable
    
    
    146,206
    
    
    
    131,300Accounts receivable
    
    
    809
    
    
    
    78,749Cash
    
    
    4,369,657
    
    
    
    2,375,309Total assets
    
    $
    40,329,168
    
    
    $
    23,555,354LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
    
    $
    234,012
    
    
    $
    203,219Sales commissions payable
    
    
    274,027
    
    
    
    43,551Interest payable
    
    
    33,274
    
    
    
    48,103Dividends payable
    
    
    210,500
    
    
    
    126,270Taxes payable
    
    
    168,736
    
    
    
    29,085Notes payable
    
    
    13,095,000
    
    
    
    6,322,139Total liabilities
    
    
    14,015,550
    
    
    
    6,772,366Preferred stock, $0.01 par value: 15,000,000 shares
authorized, none outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value: 100,000,000 shares authorized; 3,005,487, and 20,000
shares issued and outstanding on March, 31 2005, and March 31, 2004, respectfully
    
    
    30,055
    
    
    
    19,964Additional paid-in capital
    
    
    26,169,440
    
    
    
    16,782,200Retained earnings
    
    
    114,123
    
    
    
    (19,176
    )Total stockholders equity
    
    
    26,313,618
    
    
    
    16,782,988Total liabilities and stockholders equity
    
    $
    40,329,168
    
    
    $
    23,555,354
 See accompanying notes to financial statements. 2




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DESERT CAPITAL REIT, INC. 
 Consolidated Statements of Operations
  For the Three MonthsEnded March 31,2005
    
    
    2004INTEREST INCOME:Mortgage notes receivable
    
    $
    592,473
    
    
    $
    Other interest
    
    
    997
    
    
    
    Total interest income
    
    
    593,470
    
    
    
    INTEREST EXPENSE:Mortgage borrowings
    
    
    91,818
    
    
    
    Other borrowings
    
    
    7,345
    
    
    
    Total interest expense
    
    
    99,164
    
    
    
    Net interest income
    
    
    494,306
    
    
    
    Provision for loan losses
    
    
    19,016
    
    
    
    Net interest income after provision for loan loss
    
    
    475,291
    
    
    
    NON-INTEREST INCOME:Income from investment in subsidiary
    
    
    748,519
    
    
    
    Other Income
    
    
    2,584
    
    
    
    Total non-interest income
    
    
    751,103
    
    
    
    NON-INTEREST EXPENSE:Management fees
    
    
    77,259
    
    
    
    Compensation expense
    
    
    63,167
    
    
    
    Insurance expense
    
    
    76,500
    
    
    
    Professional fees
    
    
    116,934Other
    
    
    25,822
    
    
    
    Total non-interest expense
    
    
    359,681
    
    
    
    Net income before taxes
    
    
    866,712
    
    
    
    Federal income tax expense for taxable REIT subsidiary
    
    
    168,736
    
    
    
    Net income (loss)
    
    $
    697,976
    
    
    $
    Net earnings (loss) per share  basic and diluted
    
    
    0.27
    
    
    
    
 See accompanying notes to financial statements. 3




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DESERT CAPITAL REIT, INC. 
 Consolidated Statements of Cash Flows
  For the Three MonthsEnded March 31,2005
    
    
    2004OPERATING ACTIVITIESNet income (loss)
    
    $
    697,976
    
    
    $
    Adjustments to reconcile net income (loss) to net cashStock based compensation
    
    
    16,667
    
    
    
    Provision for loan losses
    
    
    19,016
    
    
    
    Income from interest in subsidiary
    
    
    (748,519
    )
    
    
    Net change inInterest receivable
    
    
    (14,906
    )
    
    
    Accounts receivable
    
    
    77,940
    
    
    
    Prepaid insurance
    
    
    (3,500
    )
    
    
    Accounts payable
    
    
    12,420
    
    
    
    (3,980
    )Taxes payable
    
    
    139,652
    
    
    
    Interest payable
    
    
    (14,829
    )
    
    
    Net cash provided by operating activities
    
    
    181,916
    
    
    
    (3,980
    )INVESTING ACTIVITIESIncrease in mortgage notes receivable
    
    
    (5,321,508
    )
    
    
    Cash distribution received from subsidiary
    
    
    594,452Increase in investment in subsidiary
    
    
    (2,000,000
    )Increase in property, plant, and equipment
    
    
    (6,257,442
    )
    
    
    Net cash used by investing activities
    
    
    (12,984,497
    )
    
    
    FINANCING ACTIVITIESProceeds from notes payable
    
    
    8,095,000
    
    
    
    2,000Issuance of common stock
    
    
    7,448,731
    
    
    
    Payment of common stock dividends
    
    
    (285,304
    )
    
    
    Offering costs paid
    
    
    (461,498
    )
    
    
    (127,256
    )Net cash provided by financing activities
    
    
    14,796,929
    
    
    
    (125,256
    )Net increase in cash
    
    
    1,994,348
    
    
    
    (129,236
    )Cash at beginning of period
    
    
    2,375,309
    
    
    
    182,202Cash at end of period
    
    $
    4,369,657
    
    
    $
    52,966Cash paid for interest
    
    $
    84,469
    
    
    $
    Cash paid for income taxes
    
    
    29,085
    
    
    
    Capitalized interest
    
    
    15,015
    
    
    
    Supplemental schedule of non-cash investing and financingCommon stock issued in exchange for interest in subsidiary
    
    $
    1,125,000
    
    
    $
    Common stock issued as repayment of indebtedness
    
    
    1,322,139Common stock issued for dividend reinvestment program
    
    
    195,142Common stock dividends declared but not paid
    
    
    210,500
    
    
    
    Offering costs incurred but not paid
    
    $
    307,550
    
    
    $
    
 See accompanying notes to financial statements. 4




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DESERT CAPITAL REIT, INC. 
 Consolidated Statements of Changes in Stockholders Equity
  Common
    
    
    Common Stock
    
    
    Additional Paid - in
    
    
    RetainedStock Shares
    
    
    Par Value
    
    
    Capital
    
    
    Earnings
    
    
    TotalBalance at December 31, 2004
    
    
    1,996,386
    
    
    $
    19,964
    
    
    $
    16,782,200
    
    
    $
    (19,176
    )
    
    $
    16,782,988Issuance of common stock
    
    
    1,009,101
    
    
    
    10,091
    
    
    
    10,080,919
    
    
    
    
    
    
    
    10,091,010Stock based compensation
    
    
    
    
    
    
    
    
    
    
    16,667
    
    
    
    
    
    
    
    16,667Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    (564,677
    )
    
    
    (564,677
    )Offering costs
    
    
    
    
    
    
    
    
    
    
    (710,345
    )
    
    
    
    
    
    
    (710,345
    )Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    697,976
    
    
    
    697,976Balance at March 31, 2005
    
    
    3,005,487
    
    
    $
    30,055
    
    
    $
    26,169,440
    
    
    $
    114,123
    
    
    $
    26,313,618
 See accompanying notes to financial statements. 5




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Desert Capital REIT, INC. 
 Notes to Consolidated Financial Statements
 March 31, 2005
 (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 being effective, but principal business
activity did not begin until July 16, 2004. The Company is a mortgage real estate investment trust and the principal business activity is
the financing of and investment in mortgage loans, including acquisition and development loans,
construction loans, commercial property loans, and residential loans. The financing will be
provided through equity capital and leverage. Certain portions of our
operations are conducted through taxable REIT subsidiaries (TRS). 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. On
November 10, 2004, the Company entered into an agreement to
acquire Consolidated Mortgage LLC. The acquisition was structured as
an installment sale, and as of March 31, 2005, the Company owned
48% of the equity of Consolidated Mortgage. Consolidated Mortgage is a
mortgage banking concern whose principal business activity is the
origination and servicing of 12- to 18-month mortgage loans for us and
over 3,000 private investors. Consolidated Mortgage generates
origination and servicing fees on its portfolio of approximately
$350 million in loans funded by its investor-clients. The consolidated financial statements include the amounts 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, 2005
are not necessarily indicative of results that may be expected for the entire year ending December
31, 2005. Note 2  Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. Cash 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. 6




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Revenue Recognition Interest is accrued monthly on outstanding principal balances unless our Advisor 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 place 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. Organization Expenses Organization expenses were expensed as incurred. 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 underwriting
commissions. Property Plant and Equipment Property, plant, and equipment are stated at cost. Depreciation is recorded using the
straight-line method over the estimated useful lives of the individual assets. There has been no
depreciation recorded as of March 31, 2005 because the office building has not been placed into
service. Investment in Non-Consolidated Affiliates Through Desert Capital TRS, a wholly owned subsidiary of the Company, we exchanged 450,000
shares of the Companys common stock, par value $0.01 per share and $2,000,000 in cash for a 48%
interest in Consolidated Mortgage, the operations of which are accounted for using the equity
method. Consolidated Mortgage is a mortgage banking concern whose principal business activity is the origination and servicing of 12- to 18-month mortgage loans for us and over 3,000 private investors. Consolidated Mortgage generates origination and servicing fees on its portfolio of approximately $350 million in loans funded by its investor-clients. Due to the short-term nature of these loans, the portfolio turns over every 12- to 18-months as loans are constantly being repaid and new loans are
funded thus generating a significant amount of fee income. Investors typically reinvest their proceeds from loan repayments into new loans. Loans The Company generally invests in 12- to 18-month mortgage loans to borrowers. Loans are stated
at unpaid principal balances, less the allowance for loan losses. A substantial portion of the
loan portfolio is represented by mortgage loans throughout Southern Nevada. The ability of the
Companys borrowers to honor their contracts is dependent upon the real estate and general economic
conditions in this area. 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, 2005. Income Taxes 7




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The Company currently does, and intends at all times in the future to qualify as a real estate
investment trust (REIT) for federal income tax purposes, under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended and applicable Treasury Regulations. Therefore, the
Company generally is not subject to federal corporate income taxes if the Company distributes at
least 90% of its taxable income to its stockholders. To qualify as a REIT, the Company must elect
to be so treated and must meet on a continuing basis certain requirements relating to the Companys
organization, sources of income, nature of assets, and distribution of income to stockholders. The
Company also maintains certain records and request certain information from its stockholders
designed to disclose actual ownership of its stock in order to maintain REIT status. In addition, the Company must satisfy certain gross income requirements annually and certain
asset tests at the close of each quarter of its taxable year. If the 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 qualification was lost. 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. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax base. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date. 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. 148 Accounting for Stock-Based
CompensationTransition and DisclosureAn Amendment to FASB Statement No. 123 (FAS 148). The
total value of the restricted stock is determined on the grant date, and this amount is expensed
over the vesting period using the straight-line method. Recent Accounting Developments In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. The statement specifies the accounting for certain employee termination
benefits, contract termination costs and costs to consolidate facilities or relocate employees and
is effective for exit and disposal activities initiated after December 31, 2002. The Company does
not expect the statement to have a material effect on our financial condition or results of
operations. In November 2002, the FASB issued FASB Interpretation (FIN) No. 45 Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.
FIN No. 45 specifies the disclosures to be made about obligations under certain issued guarantees
and requires a liability to be recognized for the fair value of a guarantee obligation. The
recognition and measurement provisions of the interpretation apply prospectively to guarantees
issued after September 30, 2002. The Company does not expect the recognition and measurement
provisions to have a material effect on our financial condition or results of operations. In January 2003, the FASB issued FASB Interpretation (FIN) No. 46 Consolidation of Variable
Interest Entities. FIN No. 46 requires a company to consolidate a variable interest entity (VIE)
if the company has variable interests that give it a majority of the expected losses or a majority
of the expected residual returns of the entity. Prior to FIN No. 46, VIEs were commonly referred
to as SPEs. FIN No. 46 is effective immediately for VIEs created after January 31, 2003. The
Company does not expect the interpretation to have a material effect on our financial condition or
results of operations. In May 2003, the FASB issued SFAS No. 150, Accounting for certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS No. 150, which is effective at the beginning
of the first interim period beginning after June 15, 2003, must be implemented by reporting the
cumulative effect of a change in 8




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accounting principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the interim period of adoption. The statement
requires that a financial instrument which falls within the scope of the statement to be classified
and measured as a liability. The following financial instruments are required to be classified as
liabilities: (1) shares that are mandatorily redeemable, (2) an obligation to repurchase the
issuers equity shares or one indexed to such an obligation and that requires or may require
settlement by transferring assets and (3) the embodiment of an unconditional obligation that the
issuer may or may not settle by issuing a variable number of equity shares if, at inception, the
monetary value of the obligation is based on certain measurements defined in the statement. The
Company does not expect the statement to have a material effect on our financial condition or
results of operations. Note 3  Mortgage Notes Receivable Mortgage notes receivable represent acquisition and development, construction, commercial
property, and residential 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, 2005, approximately 13.4% of the mortgage notes
outstanding balance was second lien mortgages. Mortgage notes receivable 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. Acquisition & development loans
    
    $
    11,492,728Construction loans
    
    
    10,567,800Commercial property loans
    
    
    500,000Allowance for loan loss
    
    
    (40,920
    )Mortgage notes receivable (net)
    
    $
    22,519,608
 Note 4  Allowance for Loan Losses Management reviews its 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 inherent in the loan
portfolio. The Companys actual losses may differ from the estimate. As of March 31, 2005 the
Company did not have any past due loans or loans in default. A reconciliation of the Companys allowance for loan losses follows: Balance, beginning of period
    
    $
    21,904Provision for loan loss
    
    
    19,016Balance, end of period
    
    $
    40,920
 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, 2005, the Company has
granted 20,000 restricted share awards under the Plan. The restricted share awards were granted on
September 1, 2004, and there was no stock compensation awarded prior to this date. The fair value
of the shares on the grant date were $10 per share, and the shares vest in three equal annual
installments. For the three months ended March 31, 2005, $16,667 has been expensed due to stock
based compensation. 9




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Note 6  Income taxes Certain
portions of our operations are conducted through taxable REIT
subsidiaries (TRS). 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. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax base. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date. Effective income taxes differ from the amount determined by applying the statutory Federal
rate of 35% for the period indicated as follows: For the three months endedMarch 31, 2005Income taxed at Federal tax rate
    
    $
    Income taxes computed on income of taxable REIT subsidiaries
    
    
    168,736Total income taxes
    
    $
    168,736
 As of March 31, 2005, Desert Capital REIT had estimated federal net operating loss tax
carry-forwards of approximately $47,730, which expire in the year
2024. At March 31, 2005, the Company had no deferred income tax assets or liabilities. Note 7  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, 2005. Therefore, diluted earnings per share are not presented. For the three months endedMarch 31, 2005Net income
    
    $
    697,976Weighted average number of
common shares outstanding
    
    
    2,547,197Basic earnings per share
    
    $
    0.27
 Note 8  Dividends The Company declared monthly dividends of $0.075 per share of common stock for January,
February, and March, payable to stockholders of record at the close of business on the last day of
each month, prorated to the date admitted as a shareholder. Dividends were paid during the quarter
on the 14th of January, and the 15th of February and March which totaled
$480,446 for the three months ended March 31, 2005. Total dividends declared for the period
amounted to $564,677, of that amount $210,500 remained payable on March 31, 2005. 10




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Note 9  Notes Payable As of March 31, 2005, the Company had borrowed $9,000,000 from Beresford Bancorporation, Inc,
under a credit facility, up to a maximum of $10,000,000 with notes receivable pledged as collateral
against advances. The interest rate on an outstanding balance of $5,000,000 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 $5,000,000 is a constant 13%. Interest is payable monthly. The note matures
February 1, 2006. The interest rate applicable for the month of March was 7.25%. Interest expense
for the quarter and interest payable as of March 31, 2005, were $91,818 and $33,274, respectively. The Company borrowed $4,095,000 from Bank West of Nevada in February, 2005, to purchase an
office building in Henderson, NV. Once improvements are completed on the building it will serve as
the corporate headquarters for the Company. Any space that is not utilized by the company will be
leased to third parties. The loan has a variable interest rate set at Prime. Prime interest rate as of March 31, 2005 was 5.75%. A construction loan for improvements on
the building is also being provided by Bank West of Nevada. Once construction is complete, the
two loans will be paid off by a permanent financing loan from Bank West of Nevada. As of December 31, 2004, 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 10  Commitments and Related Parties The Company has contracted with Burton to serve as Advisor for the Company. Burton oversees
the day-to-day operations including asset, liability and capital management. Burton is compensated
based upon the advisory agreement that entitles Burton to a base management fee, incentive
compensation and reimbursement of expenses. The President and owner of Burton is also the President
and Chief Executive Officer of the Company. The annual base management compensation is 1% of the
first $200,000,000 of average invested assets plus 0.8% of the average invested assets in excess of
$200,000,000, to be paid quarterly. The base management fee expense for the three months ended
March 31, 2005 is $48,236 and the base management fee payable to the Burton as of March 31, 2005,
is $83,752. 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, 2005 is $29,023. The Company has entered into a three-year agreement with Consolidated Mortgage, Inc., which
provides for the right of first offer to purchase all residential mortgage and commercial bridge
loans originated by Consolidated Mortgage. The officers of the Company were formerly officers with
Consolidated Mortgage. The dealer-manager, CMC Financial Services, Inc., directs and oversees the sale of the
Companys equity securities. CMC Financial receives a sales commission and other fees based on the
sale of these securities. The dealer-manager is an affiliate of both the Company and Burton, as the
president and owner of CMC Financial 11




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Services, Inc. is also the President and Chief Executive Officer of the Company. CMC Financial
Services earned sales commissions and marketing support fees of $484,172 and $186,229 respectively
for the three months ended March 31, 2005. Of the previous amounts, $197,909 and $76,119 were
still payable as of March 31, 2005. Through Desert Capital TRS, a wholly owned subsidiary, we entered into an agreement to acquire
Consolidated Mortgage on November 10, 2004. The transaction was structured as an installment sale
pursuant to which we will acquire the outstanding equity securities of Consolidated Mortgage over
time so as to comply with applicable Internal Revenue Code provisions. The initial closing of 25%
of the outstanding equity of Consolidated Mortgage occurred on December 7, 2004, following the
receipt of certain regulatory approvals from the State of Nevada. We expects to complete the
acquisition of all of the equity securities of Consolidated Mortgage by the end of 2005. The
purchase price to be paid for Consolidated Mortgage consists of $9,000,000 in cash and 450,000
shares of Desert Capitals common stock. 
 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;
    Our Advisors motivation to recommend riskier investments in an effort to
maximize its incentive compensation under the advisory agreement; and
    Although we believe our proposed method of operations will be in conformity with
the requirements for qualification as a REIT, we cannot assure you that we will
qualify as a REIT or, if so qualified, will continue to qualify as a REIT. Our
failure to qualify or remain qualified as a REIT could have material adverse effect
on our performance and your investment. We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the events described by our forward-looking events might not occur.
We qualify any and all of our forward-looking 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 Las Vegas, 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 under loans acquired with our equity capital and
borrowed funds. Our principal business objective is to generate net income for distribution to our
stockholders from the spread between interest income on our mortgage assets and the costs of
financing the acquisition of these assets. We believe that this spread, net of operating expenses,
will provide both operating capital and distributable income. Our business depends on our 12




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access to external sources of financing at a cost we can absorb while still generating an
attractive risk-adjusted return on the loans we acquire using the proceeds of our financings. Our
business also depends on our ability to locate suitable investments to keep our capital fully
deployed at favorable rates. We are currently in the process of purchasing Consolidated Mortgage LLC via our TRS. As of March 31, 2005,
we owned 48% of its outstanding equity. Consolidated Mortgage is a mortgage banking concern whose
principal business activity is the origination and servicing of 12- to 18-month mortgage loans for
us and over 3,000 private investors. Consolidated Mortgage generates origination and servicing fees on its portfolio of approximately
$350 million in loans funded by its investor-clients. Due to the short-term nature of these loans,
the portfolio turns over every 12 to 18 months as loans are constantly being repaid and new loans are funded, thus generating a significant amount of fee income. Investors typically reinvest their proceeds from loan repayments into new loans. 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 are 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 and the Offering commenced on July 22,
2004. As of March 31, 2005, we had sold approximately 3,005,487 shares of our common stock
(Shares) for aggregate gross proceeds before Offering costs and selling commissions of
approximately $24,035,730. Of these amounts, 20,000 shares or $200,000 of our common stock were
sold to our Advisor. In connection with the Offering, we incurred approximately $710,345 of costs related to the
issuance and distribution of the Shares through the three months ended March 31, 2005. We will
continue to incur similar costs in the future as additional shares are sold. Critical Accounting Policies and Management Estimates Our financial statements are prepared in accordance with GAAP. The application of these
accounting policies requires 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. Use of Estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. Cash 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 13




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consolidated account balances at each institution periodically exceeds FDIC insurance coverage
and the Company believes that this risk is not significant. Revenue Recognition Interest is accrued monthly on outstanding principal balances unless our Advisor 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 place 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. Organization Expenses Organization expenses were expensed as incurred. 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 underwriting
commissions. Property Plant and Equipment Property, plant, and equipment are stated at cost. Depreciation is recorded using the
straight-line method over the estimated useful lives of the individual assets. There has been no
depreciation recorded as of March 31, 2005 because the office building has not been placed into
service. Investment in Non-Consolidated Affiliates Through Desert Capital TRS, a wholly owned subsidiary of the Company, we exchanged 450,000
shares of the Companys common stock, par value $0.01 per share and $2,000,000 in cash for a 48%
interest in Consolidated Mortgage, the operations of which are accounted for using the equity
method. Consolidated Mortgage is a mortgage banking concern whose
principal business activity is the origination and servicing of 12- to
18-month mortgage loans for us and over 3,000 private investors.
Consolidated Mortgage generates origination and servicing fees on its
portfolio of approximately $350 million in loans funded by its
investor-clients. Due to the short-term nature of these loans, the
portfolio turns over every 12- to 18-months as loans are constantly
being repaid and new loans are funded, thus generating a significant amount of fee income. Investors typically reinvest their proceeds from loan repayments into new loans. Loans The
Company generally invests in 12- to 18-month mortgage loans to borrowers. Loans are stated
at unpaid principal balances, less the allowance for loan losses. A substantial portion of the
loan portfolio is represented by mortgage loans throughout Southern Nevada. The ability of the
Companys borrowers to honor their contracts is dependent upon the real estate and general economic
conditions in this area. 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, 2005. 14




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Income Taxes The Company currently does, and intends at all times in the future to qualify as a real estate
investment trust (REIT) for federal income tax purposes, under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended and applicable Treasury Regulations. Therefore, the
Company generally is not subject to federal corporate income taxes if the Company distributes at
least 90% of its taxable income to its stockholders. To qualify as a REIT, the Company must elect
to be so treated and must meet on a continuing basis certain requirements relating to the Companys
organization, sources of income, nature of assets, and distribution of income to stockholders. The
Company also maintains certain records and request certain information from its stockholders
designed to disclose actual ownership of its stock in order to maintain REIT status. In addition, the Company must satisfy certain gross income requirements annually and certain
asset tests at the close of each quarter of its taxable year. If the 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 qualification was lost. Certain
portions of our operations are conducted through taxable REIT
subsidiaries (TRS). 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.
Deferred tax assets and liabilities are recognized for the future tax consequences to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax base. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date. 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. 148 Accounting for Stock-Based
CompensationTransition and DisclosureAn Amendment to FASB Statement No. 123 (FAS 148). 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. Results of Operations For the three months ended March 31, 2005, net income was $697,976 or $0.27 per weighted
average share outstanding (basic and diluted). For the same period, interest income was
approximately $593,470, and was primarily earned from investments in loans secured by real estate.
Interest expense on borrowings was $99,164. On July 16, 2004, we commenced a public offering of
20,000,000 shares of common stock. Because we continue to raise equity through our ongoing
offering, operating results for the three months ended March 31, 2005 are not indicative of future
operating results. Operating expenses for the three months ended March 31, 2005 were $359,681. Base and incentive advisory fees to the Advisor under the advisory agreement, which were
$77,259 for the three months ended March 31, 2005, are based on a percentage of our average
invested assets. Average invested assets, for these purposes, are calculated monthly and are the
average of the aggregate book value of our assets invested, directly or indirectly, in equity
interests and in loans secured by real estate, before certain reserves. Other expenses for the three months ended March 31, 2005 included $63,167 in expense related
to the compensation of our board of directors, $76,500 of insurance expense, consisting of
directors and officers indemnification insurance premiums, and a $19,016 provision for losses to
protect against potential losses inherent in our loan portfolio. 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, 2005: 15




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GAAP net income (loss)
    
    $
    697,976Adjustments to GAAP net income:Provision for loan loss
    
    
    19,016Net adjustment for TRS income
    
    
    (272,591
    )REIT taxable net income (loss)
    
    $
    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. Liquidity and Capital Resources At March 31, 2005, we had $4,369,657 of cash to meet our immediate short-term liquidity
requirements. We expect that future short-term liquidity requirements will be financed by net cash
flow from operations and existing working capital. Operating cash flows are expected to increase
as additional loans are added to our portfolio. Cash and cash equivalents increased since December
31, 2004 principally as a result of the increase in net proceeds from the Offering. We anticipate that adequate cash will be generated from operations to fund our operating and
administrative expenses, continuing debt service obligations, and the payment of dividends in the
foreseeable future. We paid cash dividends on the 14th of January, and the 15th of February
and March which totaled $480,446 for the three months ended March 31, 2005. A dividend in the
amount of $0.075 per share of our common stock ($210,500 in the aggregate) was paid on April 15,
2005, to stockholders of record as of March 31, 2005, prorated to the date admitted as a
shareholder. In April 2005, Our board of directors approved an increase in the monthly dividend to
$0.10 per month which equates to an annual 12% dividend yield on our current offering price of $10
per share. For the three months ended March 31, 2005, we had accrued total distributions of
$210,500. Dividends are determined by our board of directors and are dependent on a number of
factors, including the amount of funds available for distribution, our financial condition, any
decision by our board of directors to reinvest funds rather than to distribute the funds, the
annual distribution required to meet REIT status under the Internal Revenue Code and other factors
our Board of Directors may deem relevant. Cash Flows from Operating Activities.Net cash provided by operating activities was $181,916,
which was primarily generated from interest on our mortgage notes receivable. We expect cash flows
from operating activities to increase as we continue to invest proceeds from the Offering into
mortgage loans. Cash Flows used in Investing Activities.Net cash used in investing activities amounted to
$12,984,497 relating to the acquisition of new mortgage loans, an office building, and Consolidated
Mortgage. Cash Flows from Financing Activities.Cash provided by financing activities amounted to
$14,796,929 for the three months ended March 31, 2005, consisting of $6,987,223 raised through the
Offering (net of offering costs) during the three months ended March 31, 2005, and $8,095,000 in
borrowings. For the three months ended March 31, 2005, we paid Offering costs, including selling
commissions, investor marketing and due diligence costs and other offering expenses, totaling
$461,498. We will continue to incur similar costs in the future as additional shares are sold. 16




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We currently have a $10,000,000 credit facility that matures in February 2006. Borrowings
under our credit facility bear interest at the 10-year Treasury Rate plus 3% for outstanding
balances of $5,000,000 of less and 13% for outstanding balances greater than $5,000,000. 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, 2005 we were in compliance with all the covenants
under our credit facility. 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 this 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 will primarily be the net proceeds from this
offering, operating cash flows and borrowings. Operating cash flows will consist of interest
received on and maturities of mortgage loans and investments. Liquidity will also be generated
through lines of credit with commercial banks. We believe that we will 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 will be sufficient to satisfy our immediate
liquidity requirements, and we do not anticipate a need to raise funds from other than these
sources within the next 12 months. Our income calculated for tax purposes differs from income calculated in accordance with
GAAP. The primary reason for the difference is because the financial statements of the REIT and its
taxable REIT subsidiaries are consolidated for GAAP purposes while they are not consolidated for
tax purposes. The distinction between taxable income and GAAP income is important to our
stockholders because distributions are declared on the basis of REIT taxable income. While we
generally will not be required to pay income taxes on our REIT taxable income as long as we satisfy
the REIT provisions on the Internal Revenue Code, each year we will be required to complete a U.S.
federal income tax return wherein taxable income is calculated. This taxable income level will
determine the minimum level of distribution we must pay to our stockholders. Our advisory agreement with our Advisor requires us to pay incentive compensation on a
quarterly basis to our Advisor based on the application of the incentive compensation formula at
the end of each quarter. Because we will be paying out at least 90% of our REIT taxable income to
stockholders on a quarterly basis, we may not have sufficient cash at the end of a particular
quarter to pay the incentive fee, which would require us to borrow under our credit facility, if
any, or sell assets to meet the contractual obligation. In addition, it is possible that our
liquidity may be further impaired if we generate substantial net income in the first three quarters
of a fiscal year and have a significant drop off in the fourth quarter because will not be
reimbursed for the over payment to our Advisor until year-end. Nevertheless, our total annual
operating expenses, including the incentive compensation payable to the Advisor, will not exceed
the greater of 2% of average invested assets or 25% of our net income, unless specifically approved
by our independent directors. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk refers to the risk of loss from adverse changes in the level of one or more market
prices, rate indices or other market factors. We are exposed to market risk primarily from changes
in interest rates that are very sensitive to a variety of factors including political, economic and
other factors outside of our control. Interest rate risk arises primarily as a result of our core business activities of acquiring
mortgage loans and funding a portion of the purchases with borrowings and the associated asset and
liability management required to match maturities of loans to funding sources. The principal
objective of our asset and liability management is to maximize net interest income while operating
within acceptable limits established for interest rate risk and maintaining adequate levels of
liquidity. 17




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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 the Company management, including
the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures pursuant to Securities
Exchange Act Rule 13a-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. 
 Part II. Other Information 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On January 1, 2005, the Company issued 112,500 shares of its common stock to Second James Inc.
in exchange for 8.3% of the outstanding equity of Consolidated Mortgage. On February 6, 2005, the
Company issued 132,213 shares of its common stock to Burton Management, Our Advisor, to pay off a
loan. These preceding two transactions are exempt under section 4(2) of the Securities Act, as a
transaction not involving a public offering. 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 is a best efforts offering, and as of the date of the filing of this Form 10-Q, the
offering is continuing. The dealer-manager for the offering is CMC Financial Services, Inc. The
offering price is $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 May 10, 2005, Desert Capital has sold 3,209,320 shares with an aggregate
offering price of $26,071,070. From January 1, 2005 through March 31, 2005, Desert Capital has incurred offering costs of
$710,347, consisting of $670,392 in commissions to CMC Financial Services, Inc., the
dealer-manager, and $39,956 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, 2005 are $20,627,385. 
 Item 5. Other Information None. 
 Item 6. Exhibits a) Exhibits 31.1  Certification of Chief Executive Officer, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002* 18




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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 19




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. DESERT CAPITAL REIT, INC.May 16, 2005
    
    /s/ TODD B. PARRIOTTTodd B. Parriott,Chairman of the Board, Chief ExecutiveOfficer, President and Chief InvestmentOfficer(Principal Executive Officer)May 16, 2005
    
    /s/ JONATHAN G. ARENSJonathan G. Arens,Chief Financial Officer(Principal Accounting Officer)
 20




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EXHIBIT INDEX Exhibit Number
    
    Description31.1 
    
    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