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 June 30, 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 333-128885







**DESERT
      CAPITAL REIT, INC.** (Exact
        Name of Registrant as specified in its charter)




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




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


(Address
      of principal executive office)


(Zip
      Code)





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





Indicate
      by check mark whether the registrant (1) has filed all reports
      required to be filed by Section 13 or 15(d) of the Securities Exchange Act
      of
      1934 during the past 12 months (or for such shorter period that the registrant
      was required to file such reports), and (2) has been subject to such filing
      requirements for the past 90 days.


Yes þ No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of "accelerated
      filer and large accelerated filer" in Rule 12b-2 of Exchange Act.  (Check
      one)


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





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


Yes o No þ





The
      number of shares of the registrant's common stock, par value $0.01 per share,
      outstanding as of August 10, 2006, was 14,130,856.9199.







Table
          of Contents








**DESERT
      CAPITAL REIT, INC.**


**FORM
      10-Q**


**For
      the Quarter Ended June 30, 2006**




**INDEX**







**Page**Part
              I. Financial Information
            
            1Item
                1. Consolidated Financial
                Statements
            
            1a)Consolidated
                Balance Sheets as of June 30, 2006 (unaudited)
                and December 31, 2005
            
            1b)Consolidated
                Statements of Operations for the three and six
                months ended June 30, 2006 and 2005 (unaudited)
            
            2c)Consolidated
                Statements of Cash Flows for the six
                months ended June 30, 2006 and 2005 (unaudited)
            
            3d)Consolidated
                Statements of Changes in Stockholders'
                Equity for the six months ended June 30, 2006
                (unaudited)
            
            4e)Notes
                to Consolidated Financial Statements
                (unaudited)
            
            5Item
                2. Management's Discussion and Analysis of Financial
                Condition and Results of Operations
            
            9Item
                3. Quantitative and Qualitative Disclosures About
                Market Risk
            
            11Item
                4. Controls and Procedures
            
            11Part
              II. Other Information
            
            11Item
                1A. Risk Factors
            
            11Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            11Item
                5. Other Information
            
            12Item
                6. Exhibits
            
            12Signatures
            
            13Junior
              Subordinated IndentureAmended
              and Restated Trust AgreementCertification
              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**


June
                30,
            
            
            
            
            
            December
                31,2006
            
            
            
            
            
            2005(Unaudited)ASSETSMortgage investments - net
            
            $
            134,425,908
            
            
            
            
            $
            67,649,251Loans held-for-sale
            
            
            4,868,181
            
            
            
            
            
            1,461,147Goodwill
            
            
            13,388,555
            
            
            
            
            
            13,388,555Building and equipment - net
            
            
            7,857,936
            
            
            
            
            
            8,029,250Land
            
            
            1,820,000
            
            
            
            
            
            1,820,000Cash and cash equivalents
            
            
            2,841,891
            
            
            
            
            
            4,459,289Interest receivable
            
            
            1,260,472
            
            
            
            
            
            572,944Deferred financing costs
            
            
            993,545
            
            
            
            
            
            -Investment in equity affiliates
            
            
            928,000
            
            
            
            
            
            -Other
            
            
            323,258
            
            
            
            
            
            145,356Total assets
            
            $
            168,707,746
            
            
            
            
            $
            97,525,792LIABILITIES
                AND STOCKHOLDERS' EQUITYNotes payable
            
            $
            10,068,148
            
            
            
            
            $
            12,112,386Junior subordinated notes
            
            
            30,928,000
            
            
            
            
            
            -Dividends payable
            
            
            1,428,679
            
            
            
            
            
            880,633Deferred income taxes
            
            
            60,215
            
            
            
            
            
            -Accounts payable and accrued expenses
            
            
            908,241
            
            
            
            
            
            1,708,444Total liabilities
            
            
            43,393,283
            
            
            
            
            
            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; 14,037,465
                and 9,388,994shares issued and outstanding on June 30, 2006 and December 31, 2005,
                respectively
            
            
            140,375
            
            
            
            
            
            93,890Additional paid-in capital
            
            
            126,401,263
            
            
            
            
            
            83,005,684Retained earnings
            
            
            (1,227,175
            )
            
            
            
            
            (275,245
            )Total stockholders' equity
            
            
            125,314,463
            
            
            
            
            
            82,824,329Total liabilities and stockholders' equity
            
            $
            168,707,746
            
            
            
            
            $
            97,525,792See
                accompanying notes to financial statements.







1
 Table
          of Contents




**DESERT
      CAPITAL REIT, INC.**


**Consolidated
      Statement of Operations**





Three
                  Months
              
              
              Six
                  MonthsEnded
                  June 30,
              
              
              Ended
                  June 30,2006
              
              
              2005
              
              
              2006
              
              
              2005INTEREST
                  INCOME:Mortgage
                  investments
              
              $
              4,019,247
              
              $
              863,445
              
              $
              6,873,195
              
              $
              1,544,381Other
                  interest
              
              
              160,597
              
              
              40,228
              
              
              316,940
              
              
              73,803Total
                  interest income
              
              
              4,179,844
              
              
              903,673
              
              
              7,190,135
              
              
              1,618,184INTEREST
                  EXPENSE:Interest
                  expense
              
              
              387,794
              
              
              262,417
              
              
              685,688
              
              
              501,306Total
                  interest expense
              
              
              387,794
              
              
              262,417
              
              
              685,688
              
              
              501,306Net
                  interest income
              
              
              3,792,050
              
              
              641,256
              
              
              6,504,447
              
              
              1,116,878Provision
                  for loan losses
              
              
              78,146
              
              
              8,590
              
              
              125,749
              
              
              27,606Net
                  interest income after provision for loan loss
              
              
              3,713,904
              
              
              632,666
              
              
              6,378,698
              
              
              1,089,272NON-INTEREST
                  INCOME:Loan
                  brokerage fees
              
              
              2,182,006
              
              
              2,554,319
              
              
              4,447,093
              
              
              5,419,450Service
                  and other loan fees
              
              
              442,736
              
              
              812,178
              
              
              1,013,071
              
              
              1,364,803Other
              
              
              91,058
              
              
              64,834
              
              
              283,914
              
              
              66,631Total
                  non-interest income
              
              
              2,715,800
              
              
              3,431,331
              
              
              5,744,078
              
              
              6,850,884NON-INTEREST
                  EXPENSE:Compensation
              
              
              554,339
              
              
              530,565
              
              
              1,020,796
              
              
              937,454Management
                  fees
              
              
              1,204,704
              
              
              888,741
              
              
              2,309,508
              
              
              1,745,774Professional
                  fees
              
              
              449,890
              
              
              511,990
              
              
              874,964
              
              
              984,804Insurance
              
              
              106,811
              
              
              116,146
              
              
              214,059
              
              
              229,131Depreciation
              
              
              107,938
              
              
              15,849
              
              
              214,966
              
              
              32,758Other
              
              
              402,523
              
              
              259,155
              
              
              948,202
              
              
              591,076Total
                  non-interest expense
              
              
              2,826,205
              
              
              2,322,446
              
              
              5,582,495
              
              
              4,520,997Net
                  income before taxes
              
              
              3,603,499
              
              
              1,741,551
              
              
              6,540,281
              
              
              3,419,159Income
                  tax expense
              
              
              60,215
              
              
              193,279
              
              
              60,215
              
              
              362,016Income
                  before minority interest
              
              
              3,543,284
              
              
              1,548,272
              
              
              6,480,066
              
              
              3,057,143Income
                  allocated to minority interest
              
              
              -
              
              
              624,461
              
              
              -
              
              
              1,435,357Net
                  income
              
              $
              3,543,284
              
              $
              923,811
              
              $
              6,480,066
              
              $
              1,621,786Earnings
                  per share - basic and diluted
              
              
              0.25
              
              
              0.27
              
              
              0.52
              
              
              0.54Weighted
                  average outstanding shares
              
              
              13,901,221
              
              
              3,475,763
              
              
              12,400,890
              
              
              3,011,479See
                  accompanying notes to financial statements.






2
 Table
          of Contents




**DESERT
      CAPITAL REIT, INC.**


**Consolidated
      Statements of Cashflows**





Six
                MonthsEnded
                June 30,2006
            
            
            2005OPERATING
                ACTIVITIESNet
                income
            
            $
            6,480,066
            
            $
            1,621,786Adjustments
                to reconcile net income to net cash:Depreciation
            
            
            214,966
            
            
            32,758Minority
                interest
            
            
            -
            
            
            1,435,357Stock
                based compensation
            
            
            66,667
            
            
            33,334Provision
                for loan loss
            
            
            125,749
            
            
            27,606Deferred
                income taxes
            
            
            60,215
            
            
            -Net
                change in:Interest
                receivable
            
            
            (687,528
            )
            
            (63,568
            )Other
                assets
            
            
            (177,901
            )
            
            (55,850
            )Deferred
                origination fees
            
            
            1,022,233
            
            
            -Accounts
                payable
            
            
            (754,329
            )
            
            (12,959
            )Net
                cash provided by operating activities
            
            
            6,350,138
            
            
            3,018,464INVESTING
                ACTIVITIESInvestment
                in subsidiary
            
            
            -
            
            
            (2,460,093
            )Investment
                in equity affiliate
            
            
            (928,000
            )
            
            -Investment
                in mortgage investments
            
            
            (67,924,638
            )
            
            (7,721,912
            )Purchase
                of loans held-for-sale
            
            
            (3,407,034
            )
            
            -Purchase
                of land
            
            
            -
            
            
            (1,820,000
            )Acquisition
                of building and equipment
            
            
            (43,652
            )
            
            (7,175,725
            )Net
                cash used by investing activities
            
            
            (72,303,324
            )
            
            (19,177,730
            )FINANCING
                ACTIVITIESNet
                payments on lines of credit
            
            
            (1,988,600
            )
            
            9,012,859Repayments
                of mortgage loan
            
            
            (55,638
            )
            
            -Proceeds
                from junior subordinated notes
            
            
            30,928,000
            
            
            -Issuance
                of common stock
            
            
            47,295,877
            
            
            19,618,702Deferred
                financing costs
            
            
            (993,545
            )
            
            -Dividends
                on common stock
            
            
            (4,728,524
            )
            
            (826,566
            )Dividends
                to minority interest
            
            
            -
            
            
            (1,440,893
            )Offering
                costs paid
            
            
            (4,314,893
            )
            
            (2,480,541
            )Shares
                redeemed and retired
            
            
            (1,806,889
            )
            
            -Net
                cash provided by financing activities
            
            
            64,335,788
            
            
            23,883,561Net
                (decrease) increase in cash
            
            
            (1,617,398
            )
            
            7,724,295Cash
                at beginning of period
            
            
            4,459,289
            
            
            2,375,309Cash
                at end of period
            
            $
            2,841,891
            
            $
            10,099,604Cash
                paid for interest
            
            $
            500,322
            
            $
            579,535Cash
                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
            
            
            2,155,428
            
            
            499,925Common
                stock dividends declared but not paid
            
            
            1,428,679
            
            
            387,528Offering
                costs incurred but not paid
            
            
            45,058
            
            
            388,850See
                accompanying notes to financial statements.






3
 Table
          of Contents




**DESERT
      CAPITAL REIT, INC.**


**Consolidated
      Statements of Changes in Stockholders' Equity**





**Common
                Stock Shares**
            
            
            **Common
                Stock Par Value**
            
            
            **Additional
                Paid - in Capital**
            
            
            **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
            
            
            4,829,340
            
            
            48,292
            
            
            49,403,014
            
            
            -
            
            
            49,451,306Stock
                based compensation
            
            
            -
            
            
            -
            
            
            66,667
            
            
            -
            
            
            66,667Stock
                redeemed and retired
            
            
            (180,689
            )
            
            (1,807
            )
            
            (1,805,083
            )
            
            
            
            
            (1,806,890
            )Dividends
                on common stock
            
            
            -
            
            
            -
            
            
            -
            
            
            (7,431,996
            )
            
            (7,431,996
            )Offering
                costs
            
            
            -
            
            
            -
            
            
            (4,269,019
            )
            
            -
            
            
            (4,269,019
            )Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            6,480,066
            
            
            6,480,066**Balance
                at June 30, 2006**
            
            
            **14,037,645**
            
            **$**
            **140,375**
            
            **$**
            **126,401,263**
            
            **$**
            **(1,227,175**
            **)**
            **$**
            **125,314,463**See
                accompanying notes to financial statements.




4
 Table
          of Contents


**Desert
      CapitalREIT, INC.**


**Notes
      to Consolidated Financial Statements**


**June
      30, 2006**


**(Unaudited)**




**Note
      1 - Organization**





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




We
      are a
      Maryland corporation formed in December 2003 as a real estate investment trust
      ("REIT") that specializes in the origination and financing of short-term
      mortgage loans. We generally invest in 12- to 18- month, first and second lien
      mortgage loans, consisting of acquisition and development loans and construction
      loans to developers and builders of residential and commercial property. The
      loans are primarily sub-prime and have a fixed rate of interest. We derive
      our
      revenues primarily from interest payments received from mortgage investments
      funded with our equity capital and borrowed funds. Our principal business
      objective is to generate net income for distribution to our stockholders from
      the spread between interest income on our mortgage assets and the costs of
      financing the acquisition of these assets. This spread, net of operating
      expenses, provides both operating capital and distributable income. Our business
      depends on our access to external sources of financing at a cost we can absorb
      while still generating an attractive risk-adjusted return on the loans we
      acquire using the proceeds of our financings. Our business also depends on
      our
      ability to locate suitable investments to keep our capital fully deployed at
      favorable rates. We are externally managed and advised by Burton Management
      Company (“Burton”).





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





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





**Basis
      of Presentation**


The
      accompanying unaudited consolidated interim financial statements have been
      prepared in accordance with accounting principles generally accepted in the
      United States for interim financial information and with the instructions to
      Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
      all
      of the information and footnotes required by accounting principles generally
      accepted in the United States for complete financial statements. The
      accompanying unaudited consolidated interim financial statements should be
      read
      in conjunction with the financial statements and the related management's
      discussion and analysis of financial condition and results of operations filed
      on Form 10-K for the fiscal year ended December 31, 2005. In our opinion, all
      adjustments (consisting only of normal recurring accruals) considered necessary
      for a fair presentation have been included. The results of operations for the
      three and six months ended June 30, 2006 are not necessarily indicative of
      results that may be expected for the entire year ending December 31,
      2006.




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





**Principles
      of Consolidation**


The
      accompanying unaudited consolidated interim financial statements include, on
      a
      consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries
      and our interests in variable interest entities in which we are the primary
      beneficiary. All significant intercompany balances and transactions have been
      eliminated in consolidation. Our interest in Desert Capital TRS Statutory Trust
      I (see Note 11) is accounted for using the equity method and the assets and
      liabilities are not consolidated into our financial statements due to our
      determination that Desert Capital TRS Statutory Trust I is a variable interest
      entity in which we are not the primary beneficiary under Financial Accounting
      Standards Board Interpretation No. 46R (“FIN46”).





**Use
      of Estimates**


The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the consolidated
      financial statements and the reported amounts of revenues and expenses during
      the reporting period. Actual results may ultimately differ from those
      estimates.





**Cash
      and Cash Equivalents**


We
      consider all highly liquid investments with original maturities of three months
      or less to be cash equivalents.





Restricted
      cash of $472,395 is on deposit with our bank and will be used for tenant
      improvements on the remaining vacant space in our office building in Henderson,
      NV.




**Revenue
      Recognition**


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





Loan
      brokerage fees for loans brokered to private investors are recognized as income
      upon the recording of the loans. Servicing and other loan fee income related
      to
      the third party portfolio of loans is recognized when the services have been
      performed.




**Offering
      Costs**


Costs
      attributable to securities offerings are charged against the proceeds of the
      offerings as a reduction to equity capital. These costs include legal and
      accounting fees to prepare the securities filing as well as the fees incurred
      in
      selling the securities, such as broker commissions.




**Building
      and Equipment**


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




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


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





**Allowance
      for Loan Losses**


Management
      monitors the delinquencies and defaults on the underlying mortgages and, if
      an
      impairment of the related mortgage loan is deemed to be other than temporary,
      the carrying value of the related mortgage loan will be reduced to fair value
      through a charge to the allowance for loan losses.





5
 Table
          of Contents


An
      allowance for loan loss is reflected in our financial statements based upon
      an
      evaluation of known and inherent risks in our mortgage loans. The allowance
      is
      based on our assessment of numerous factors affecting our portfolio of mortgage
      assets including, but not limited to, current and projected economic conditions,
      delinquency status, credit losses to date on underlying mortgages and any
      remaining credit protection. Loan loss estimates are reviewed periodically
      and
      adjustments are reported in earnings when they become known. Actual losses,
      if
      any, could ultimately differ from these estimates.





**Income
      Taxes**


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




Our
      taxable REIT subsidiaries are subject to federal, state, and local taxes.




**Stock
      Compensation**


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





**Recent
      Accounting Developments**




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




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




In
      June
      2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes - an
      Interpretation of FASB Statement No. 109,” which clarifies the accounting for
      uncertainty in tax positions. FIN 48 requires we recognize in our financial
      statements the impact of a tax position, if the position is more likely than
      not
      of being sustained on audit, based on the technical merits of the position.
       FIN 48 is effective for fiscal years beginning after December 15,
      2006.  We are in the process of assessing the impact of FIN 48 and have not
      determined what impact, if any, our adoption of FIN 48 will have on our
      financial position, results of operations or cash flows.




**Note
      3 - Mortgage Investments**


Mortgage
      investments represent first and second lien positions on acquisition and
      development and construction loans.





June
                30,
            
            
            December
                31,2006
            
            
            2005Acquisition
                and development loans
            
            $
            112,020,538
            
            $
            44,522,500Construction
                loans
            
            
            23,631,080
            
            
            23,204,480Unamortized
                deferred fees and costs
            
            
            (1,022,233)
            
            
            -Allowance
                for loan losses
            
            
            (203,477)
            
            
            (77,729)Mortgage
                investments - net
            
            $
            134,425,908
            
            $
            67,649,251





As
      of
      June 30, 2006 and December 31, 2005, approximately 17% and 19% respectively,
      of
      the principal balance of the outstanding mortgage notes were secured by second
      liens. As of June 30, 2006 the portfolio had a weighted average interest rate
      of
      13.4%.





As
      of
      June 30, 2006, our mortgage investment portfolio was concentrated in the
      Southwestern United States. Eighty-eight percent of the principal balance of
      our
      portfolio was invested throughout Nevada, California, Arizona, and Utah. Our
      borrowers’ ability to repay our notes is dependent upon the real estate and
      general economic conditions in this area.




**Note
      4 - Stock Based Compensation**


The
      Board
      of Directors has adopted the 2004 Stock Incentive Plan of Desert Capital REIT,
      Inc. (the “Plan”). Our Directors, officers or any affiliate of the Company, and
      individual consultants or advisors are eligible for stock based compensation
      under the Plan. We have authorized 1,000,000 shares of common stock under the
      Plan. As of June 30, 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 and six months ended June 30, 2006 was $33,333 and $66,667,
      respectively.




6
 Table
          of Contents


**Note
      5 - Building and Equipment**


We
      own an
      office building in Henderson, NV, which serves as our corporate
      headquarters. Any
      space that is not utilized by us is leased to other companies. The total square
      footage of the building is approximately 40,000 square feet, and as of June
      30,
      2006, the building was approximately 89% leased.




Building
      and equipment as of June 30, 2006 and December 31, 2005 are as
      follows:




June
                30,
            
            
            December
                31,2006
            
            
            2005Building
            $
            7,294,147
            
            $
            7,294,147Equipment
            
            126,314
            
            
            126,314Furniture
                and fixtures
            
            429,294
            
            
            411,346Software
            
            501,302
            
            
            475,5988,351,057
            
            
            8,307,405Less
                accumulated depreciation
            
            (493,121)
            
            
            (278,155)$
            7,857,936
            
            $
            8,029,250





**Note
      6 - Leases**


We
      currently lease approximately 12,020 square feet of office space (see Note
      5) to
      related parties and approximately 15,000 square feet to unrelated third parties
      under noncancelable leases with an average term of five years.





**Note
      7 - Income taxes**


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




Our
      taxable REIT subsidiaries are subject to federal, state, and local taxes. For
      the six months ended June 30, 2006, we recorded $60,215 of income tax expense
      for income attributable to our wholly-owned taxable REIT subsidiary. We have
      assumed an effective tax rate for the six months ended June 30, 2006 of 34%
      taking into consideration the anticipated applicable U.S. federal statutory
      tax
      rate at June 30, 2006 of 34%. We have recorded a deferred tax liability due
      to
      differences between financial and taxable income attributable to timing
      differences in the recognition of depreciation and amortization.





**Note
      8 - 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. We did not
      have
      any potentially dilutive instruments outstanding as of June 30, 2006 or
      2005.




Three
                months ended
              June
                30,
            
            
            Six
                months ended
              June
                30,2006
            
            
            2005
            
            
            2006
            
            
            2005Net
                income
            $
            3,543,284
            
            $
            923,811
            
            $
            6,480,066
            
            $
            1,621,786Weighted
                average shares outstanding
            
            13,901,221
            
            
            3,475,763
            
            
            12,400,890
            
            
            3,011,479Earnings
                per share
            $
            0.25
            
            $
            0.27
            
            $
            0.52
            
            $
            0.54




**Note
      9 - Dividends**


The
      Board
      of Directors declares 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 six months of 2006
      and
      2005:




2006
            
            
            2005January
                31
            
            $
            0.10
            
            $
            0.075February
                28
            
            
            0.10
            
            
            0.075March
                31
            
            
            0.10
            
            
            0.075April
                30
            
            
            0.10
            
            
            0.10May
                31
            
            
            0.10
            
            
            0.10June
                30
            
            
            0.10
            
            
            0.10Total
            
            $
            0.60
            
            $
            0.525




**Note
      10 - Retirement Plan**


We
      offer
      a SIMPLE IRA plan to its employees. We match employee contributions dollar
      for
      dollar up to 3% of the employees’ compensation for the year. The amount matched
      by the us is expensed in the same period that the corresponding employee
      contributions are made.




7
 Table
          of Contents


**Note
      11 - Debt**





**Credit
      Facility**


We
      have a
      $5 million secured revolving credit facility with a term of one year that
      expires in October 2006.  The facility is drawn upon for short term funding
      requirements. Amounts drawn under this facility bear interest at a rate equal
      to
      prime plus 75 basis points and must be repaid within 45 days.  Amounts
      drawn under this facility generally are secured by the corresponding loan that
      is being funded. The interest rate on this facility at June 30, 2006 was 9.00%.
      At June 30, 2006 we had $3,496,100 outstanding and $1,503,900 available under
      this facility. We
      intend
      to renew this credit facility under similar terms when it matures in October
      2006.




**Mortgage
      Loan Payable**


We
      have
      one mortgage loan with an outstanding principal balance of $6,572,048 and a
      variable rate of interest equal to prime that is being fully amortized and
      matures in 2026. The prime interest rate on June 30, 2006 was 8.25%. The
      mortgage was used to finance the acquisition and construction of our office
      building in Henderson, NV.




**Junior
      Subordinated Notes**


In
      June,
      2006 we completed the issuance of $30 million in unsecured trust preferred
      securities through a newly formed Delaware statutory trust, Desert Capital
      TRS Statutory Trust I, which is our wholly owned subsidiary.  The
      securities bear interest at a floating rate based on the three-month LIBOR
      plus
      400 basis points, which was 9.48% on June 30, 2006.




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




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




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





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


Considerable
      judgment is necessary to interpret market data and develop estimated fair value.
      Accordingly, fair values are not necessarily indicative of the amounts we could
      realize on disposition of the financial instruments. The use of different market
      assumptions and/or estimation methodologies may have a material effect on
      estimated fair value amounts.





Cash
      equivalents, accrued interest, and accounts payable balances reasonably
      approximate their fair values due to the short maturities of these items. The
      carrying value of our credit facility, mortgage loan payable, and junior
      subordinated notes approximate fair value because they bear interest at floating
      rates, which reasonably approximate market rates. Mortgage investments and
      loans
      held-for-sale are carried at amounts which we have determined reasonably
      approximate their fair value based upon their relatively short term maturities
      and the amount at which similarly issued instruments have been
      valued.





**Note
      13 - Commitments and Related Parties**


We
      have
      contracted with Burton to serve as advisor for the Company. Burton oversees
      the
      day-to-day operations including asset, liability and capital management. In
      lieu
      of paying salaries to its officers, we compensate Burton pursuant to an advisory
      agreement that entitles Burton to a base management fee, incentive compensation
      and reimbursement of expenses. The officers and owners of Burton are also the
      executive officers of us. The annual base management compensation is 1% of
      the
      first $200,000,000 of average invested assets plus 0.8% of the average invested
      assets in excess of $200,000,000, to be paid quarterly. The base management
      fee
      for the three and six months ended June 30, 2006 were $274,040, and $474,925,
      respectively, and $100,531 remained payable on June 30, 2006. The incentive
      compensation is a tiered percentage of the amount of our net income (taxable
      income) excluding capital losses, before deducting incentive compensation less
      a
      threshold return, which is the net income that would produce an annualized
      return on our average invested assets equal to the 10-year U.S. Treasury
      rate plus 1.0%. The tiered percentage is the weighted average of 20% of the
      first $200,000,000 of average invested assets and 10% of the excess over
      $200,000,000 of average invested assets. The incentive compensation is
      calculated quarterly and any positive quarterly incentive amount shall be paid
      by us, along with the base management compensation, within 15 days of
      receipt of the computations. 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, we shall pay
      Burton the difference. If the quarterly payments were to exceed the annual
      incentive compensation, Burton will refund the excess to us, which will reduce
      the previously recorded incentive fee expense. Incentive compensation for the
      three and six months ended June 30, 2006 was $341,575, and $642,552,
      respectively, and $82,253 remained payable on June 30, 2006, respectively.




Consolidated
      Mortgage has a management agreement in place with ARJ Management (“ARJ”), a
      company of which Todd Parriott is president, director and controlling
      shareholder, pursuant to which ARJ is paid a management fee equal to 33% of
      Consolidated Mortgage's pre-tax net income. The fee is calculated and paid
      monthly. The management fee for three and six months ended June 30, 2006 was
      $720,306 and $1,532,776, respectively, and $326,599 remained payable on June
      30,
      2006.




The
      dealer-manager of our offering of common stock, CMC Financial Services, Inc.
      (“CMCF”) directs and oversees the sale of our equity securities. CMCFS receives
      a marketing support fee and sales commissions based on the number of shares
      of
      common stock sold. CMCF contracts with third party broker-dealers to have a
      larger sales distribution of equity securities, and compensates them out of
      the
      sales commissions and marketing support fees received from us. The
      dealer-manager is an affiliate of both Burton and us, because the owners of
      CMC
      Financial are also our executive officers. CMC Financial earned gross sales
      commissions and marketing support fees for the three and six months ended June
      30, 2006 of $245,802, and $4,213,350, respectively, and $30,726 remained payable
      on June 30, 2006. CMCFS paid a substantial portion of these fees to third party
      broker-dealers.





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 and six months
      ended June 30, 2006 was $282,776 and $509,704, respectively, and $0 remained
      payable on June 30, 2006.




On
      June
      30, 2006, we had outstanding loans of approximately $12.8 million to CM Land,
      LLC, a related party. Our executive officers also own and manage CM Land, LLC.
      The loans have an average interest rate of 13.25% and mature between October,
      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 our funds. We paid no fees to CM Land in connection
      with the transaction. The Board of Directors has appointed an independent
      committee to review and approve amounts that we loan to CM Land, LLC. We have
      earned interest of $438,630 and $879,031 for the three and six months ended
      June
      30, 2006, respectively for these loans.




We
      also
      lease office space to Burton, CMC Financial Services, and Residential Capital
      Mortgage under noncancelable operating leases which expire in July 2010. The
      total rents received from related parties for the three and six months ended
      June 30, 2006 was $79,985 and $159,970, respectively.




8
 Table
          of Contents


**Item
      2.Management's Discussion and Analysis of Financial
      Condition and Results of Operations**




*The
      following discussion of our financial condition and results of operations should
      be read in conjunction with the financial statements and notes to those
      statements included elsewhere in this document. This discussion may contain
      certain forward-looking statements. Forwarding-looking statements are those
      that
      are not historical in nature. They can often be identified by their inclusion
      of
      words such as “will,” “anticipate,” “estimate,” “should,” “expect,” “believe,”
“intend” and similar expressions. Any projection of revenues, earnings or
      losses, capital expenditures, distributions, capital structure or other
      financial terms is a forward-looking statement. Our forward-looking statements
      are based upon our management’s beliefs, assumptions and expectations of our
      future operations and economic performance, taking into account the information
      currently available to us. Forward-looking statements involve risks and
      uncertainties, some of which are not currently known to us, that might cause
      our
      actual results, performance or financial condition to be materially different
      from the expectations of future results, performance or financial condition
      we
      express or imply in any forward-looking statements. Some of the important
      factors that could cause our actual results, performance or financial condition
      to differ materially from expectations are:*


*·*
            *Changes
                in interest rates;*


*·*
            *Decreases
                in the value of the property underlying our mortgage
                loans;* 
 *·*
            *Burton’s
                motivation to recommend riskier investments in an effort to maximize
                its
                incentive compensation under the advisory agreement;
                and* 
 *·*
            *Although
                we believe our method of operations is in conformity with the requirements
                for qualification as a REIT, we cannot assure you that we will continue
                to
                qualify as a REIT. Our failure to qualify or remain qualified as
                a REIT
                could have material adverse effect on our performance and your
                investment.*




We
      undertake no obligation to publicly update or revise any forward-looking
      statements, whether as a result of new information, future events or otherwise.
      In light of these risks, uncertainties and assumptions, the events described
      by
      our forward-looking statements might not occur. We qualify any and all of our
      forward-looking statements by these cautionary factors. In addition, you should
      carefully review the risk factors described in other documents we file from
      time
      to time with the Securities and Exchange Commission.




**General**


We
      are a
      Maryland corporation formed in December 2003 as a REIT that specializes in
      the
      origination and financing of short-term mortgage loans. We generally invest
      in
      12- to 18- month, first and second lien mortgage loans, consisting of
      acquisition and development loans and construction loans to developers and
      builders of residential and commercial property. The loans are primarily
      sub-prime and have a fixed rate of interest. We derive our revenues primarily
      from interest payments received from mortgage investments funded with our equity
      capital and borrowed funds. Our principal business objective is to generate
      net
      income for distribution to our stockholders from the spread between interest
      income on our mortgage assets and the costs of financing the acquisition of
      these assets. This spread, net of operating expenses, provides both operating
      capital and distributable income. Our business depends on our access to external
      sources of financing at a cost we can absorb while still generating an
      attractive risk-adjusted return on the loans we acquire using the proceeds
      of
      our financings. Our business also depends on our ability to locate suitable
      investments to keep our capital fully deployed at favorable rates. We are
      externally managed and advised by Burton.





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





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




**Critical
      Accounting Policies and Management Estimates**


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




**Revenue
      Recognition**


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





Loan
      brokerage fees for loans brokered to private investors are recognized as income
      upon the recording of the loans. Servicing and other loan fee income related
      to
      the third party portfolio of loans is recognized when the services have been
      performed.




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


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





**Allowance
      for Loan Losses**


Management
      monitors the delinquencies and defaults on the underlying mortgages and, if
      an
      impairment of the related mortgage loan is deemed to be other than temporary,
      the carrying value of the related mortgage loan will be reduced to fair value
      through a charge to the allowance for loan losses.





An
      allowance for loan loss is reflected in our financial statements based upon
      an
      evaluation of known and inherent risks in our mortgage loans. The allowance
      is
      based on our assessment of numerous factors affecting our portfolio of mortgage
      assets including, but not limited to, current and projected economic conditions,
      delinquency status, credit losses to date on underlying mortgages and any
      remaining credit protection. Loan loss estimates are reviewed periodically
      and
      adjustments are reported in earnings when they become known. Actual losses,
      if
      any, could ultimately differ from these estimates.




9
 Table
          of Contents


**Income
      Taxes**


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




Our
      taxable REIT subsidiaries are subject to federal, state, and local
      taxes.


**Results
      of Operations**





***Comparison
      of the three months ended June 30, 2006 compared to three months ended June
      30,
      2005.***





***Revenues***




Interest
      income increased $3.3 million, or 367%, to $4.2 million in the second quarter
      of
      2006 from $0.9 million for the three months ended June 30, 2005. This increase
      was due to a 365% increase in the average balance of the loan portfolio from
      $23
      million for the quarter ended June 30, 2005 to $107 million in the same period
      in 2006. This was a result of increased loan funding as a result of the ongoing
      sale of our equity securities and an increase in the amount of borrowed funds.
      The average yield on mortgage investments increased 120 basis points to 13.5%
      for the quarter ended June 30, 2006 from 12.3% in the same period in 2005.
      This
      increase was a result of higher market rates of interest as well as a 50%
      increase in the average amount of second lien mortgages outstanding in the
      second quarter of 2006 as compared to the second quarter of 2005.




Non-interest
      income decreased $0.7 million, or 21%, to $2.7 million in the second quarter
      of
      2006 from $3.4 for the same period in 2005. This decrease was primarily due
      to
      us funding a majority of the new loans in the second quarter of 2006, as opposed
      to private investors, and the deferral and amortization of the origination
      fees
      on those loans instead of immediate recognition of the fees.




***Expenses***




Interest
      expense increased $0.1 million, or 33%, to $0.4 million in the second quarter
      of
      2006 from $0.3 million for the same period in 2005. This increase was due to
      a
      171% increase in the average debt financing on our loan portfolio from $7
      million for the quarter ended June 30, 2005 to $19 million for the same period
      in 2006. This increase was due to greater borrowing for loan originations,
      as
      well as a 24% increase in the average cost of these borrowings from 5.9% to
      7.3%
      resulting from increased market rates of interest and principal amounts of
      borrowings.




Non-interest
      expenses increased $0.5 million, or 22%, to $2.8 million in the second quarter
      of 2006 from $2.3 for the same period in 2005. This increase was primarily
      due
      to an increase in base management fees and incentive fees to Burton as a result
      of the increase of the average balance of our loan portfolio, additional
      depreciation expense associated with the office building that was placed into
      service in July 2005, and an increase in advertising expenses.





***Comparison
      of the six months ended June 30, 2006 compared to six months ended June 30,
      2005.***





***Revenues***




Interest
      income increased $5.6 million, or 350%, to $7.2 million in the first six months
      of 2006 from $1.6 million for the six months ended June 30, 2005. This increase
      was due to a 343% increase in the average balance of the loan portfolio from
      $21
      million for the six months ended June 30, 2005 to $93 million in the same period
      in 2006. This increase was primarily due to increased loan originations as
      a
      result of the ongoing sale of our equity securities and an increase in the
      amount of borrowed funds. The average yield on the mortgage investments
      increased 110 basis points to 13.5% for the six months ended June 30, 2006
      from
      12.4% in the same period in 2005, as a result of increased market rate of
      interest as well as an 38% increase in the average amount of second lien
      mortgages outstanding in the first six months of 2006 as compared to the first
      six months of 2005.




Non-interest
      income decreased $1.1 million, or 16%, to $5.7 million in the first six months
      of 2006 from $6.8 million for the same period in 2005. This decrease was
      primarily due to us funding a majority of the new loans in the first six months
      of 2006, as opposed to private investors, and the deferral and amortization
      of
      the origination fees on those loans instead of immediate recognition of the
      fees.




***Expenses***




Interest
      expense increased $0.2 million, or 40%, to $0.7 million for the first six months
      of 2006 from $0.5 million for the same period in 2005. This increase was due
      to
      a 158% increase in the average debt financing on our loan portfolio from $6.5
      million for the six months ended June 30, 2005 to $16.8 million for the same
      period in 2006. This increase was primarily due to increased borrowing for
      loan
      originations, as well as a 16% increase in the average cost of these borrowings
      from 6.2% to 7.2% as a result of increased market rates of interest and
      principal amounts of borrowings.




Non-interest
      expenses increased $1.1 million, or 24%, to $5.6 million in the first six months
      of 2006 from $4.5 for the same period in 2005. This increase was primarily
      due
      to an increase in base management fees and incentive fees to Burton as a result
      of the increase of the average balance of our invested assets, additional
      depreciation expense associated with the office building that was placed into
      service in July 2005, and an increase in advertising expenses.





**Liquidity
      and Capital Resources**


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





Net
      cash
      provided by operating activities for the six months ended June 30, 2006, was
      approximately $6.4 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 Offering into mortgage loans and generate additional
      origination fees.





We
      have a
      $5 million secured revolving credit facility with a term of one year that
      expires in October 2006.  The facility is drawn upon for short term funding
      requirements. Amounts drawn under this facility bear interest at a rate equal
      to
      prime plus 75 basis points and must be repaid within 45 days.  Amounts
      drawn under this facility generally are secured by the corresponding loan that
      is being funded. The interest rate on this facility at June 30, 2006 was 9.00%.
      At June 30, 2006 we had $3,496,100 outstanding and $1,503,900 available under
      this facility. We intend to renew this credit facility under similar terms
      when
      it matures in October 2006.





In
      June,
      2006 we completed the issuance of $30 million in unsecured trust preferred
      securities through a newly formed Delaware statutory trust, Desert Capital
      TRS Statutory Trust I, which is our wholly owned subsidiary.  The
      securities bear interest at a floating rate based on the three-month LIBOR
      plus
      400 basis points, which was 9.48% on June 30, 2006.




10
 Table
          of Contents


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




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




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




In
      April
      2006 we commenced the second public offering of our common stock. Through June
      30, 2006, we received gross proceeds of $2.5 million. These proceeds were used
      to invest in mortgage loans and pay offering expenses.





In
      order
      to continue to qualify as a REIT and to avoid corporate-level tax on the income
      we distribute to our stockholders, we are required to distribute at least 90%
      of
      our REIT taxable income on an annual basis. Therefore, once the net proceeds
      we
      receive from the offering are substantially fully invested, we need to continue
      to borrow in order to grow our business and acquire additional assets. Our
      sources of funds are primarily the net proceeds from the offering, operating
      cash flows and borrowings. Operating cash flows consist of fees and interest
      received on mortgage loans and investments. Liquidity is also generated through
      lines of credit with commercial banks. We believe that we will continue to
      be
      able to obtain financing in amounts and on terms that are acceptable to us
      and
      consistent with our business strategy. We believe that these cash resources
      are
      sufficient to satisfy our immediate liquidity requirements, and we do not
      anticipate a need to raise funds from other than these sources within the next
      12 months.





**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. Our mortgage investments contain fixed rates of interest, while
      the liabilities that we finance our investments with contain variable interest
      rates. 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 held-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, we carried out an
      evaluation, under the supervision and with the participation of management,
      including the our Chief Executive Officer and Chief Financial Officer, of the
      effectiveness of the design and operation of the Company’s disclosure controls
      and procedures pursuant to Securities Exchange Act Rule 13a-15. 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 have been no changes in the
      internal controls over financial reporting identified in connection with the
      evaluation described above that occurred during the period covered by this
      report that materially affected, or is reasonably likely to materially affect,
      our internal control over financial reporting.




**Part
      II. Other Information**





**Item
      1A****. Risk
      Factors**


During
      the periods covered by this report, there were no material changes to the risk
      factors discussed in our Annual Report on Form 10-K for the year ended December
      31, 2005.





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




Desert
      Capital REIT’s Form S-11 Registration Statement, File No. 333-128885,
      registering the sale of up to 15,000,000 shares of Desert Capital’s common
      stock, was declared effective by the Securities and Exchange Commission on
      March
      22, 2006. The offering commenced on April 1, 2006. The offering is a “best
      efforts” offering, and as of the date of the filing of this Form 10-Q, the
      offering is continuing. The dealer-manager for the offering is CMC Financial
      Services, Inc. The offering price is $15.00 per share, with discounts and
      commissions payable to the dealer-manager equaling $1.425 per share. The
      aggregate price of the 15,000,000 shares of common stock registered is
      $225,000,000 As of June 30, 2006 Desert Capital has sold 165,672 shares, with
      an
      aggregate offering price of $2,485,074, and issued 77,407 shares pursuant to
      the
      dividend reinvestment plan.




From
      April 1, 2006 through June 30, 2006, Desert Capital has incurred offering
      expenses of approximately $294,584, consisting of $236,082 in commissions paid
      to CMC Financial Services, Inc., the dealer-manager, and $58,502 for legal,
      accounting, and filing fees resulting in total expenses of $295,584. 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 June 30, 2006 are $2,190,490.




Of
      the
      $2,190,490 of net proceeds received from sales of Desert Capital’s common stock
      as of June 30, 2006, $2,190,490 has been invested in loans secured by real
      estate.




11
 Table
          of Contents


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




**Period**
            **Total
                Number of Shares
                Purchased**
            **Average
                Price Paid Per Share**
            **Total
                Number of Shares Purchased as part of Publicly Announced Plans or
                Programs
                (1)**
            **Maximum
                Number of Shares that May Yet Be Purchased Under the Plans or
                Programs**January
                1, 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)April
                1, 2006 - April 30, 2006
            152,726
            $10
            152,726
            (2)May
                1, 2006 - May 31, 2006
            -
            
            -June
                1, 2006 - June 30, 2006
            -
            
            -Total
            180,689
            
            180,689


(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.




**Item
      6.Exhibits**




a)
      Exhibits




10.1
              Junior
                Subordinated Indenture, dated June 16, 2006, by and between Desert
                Capital
                REIT, Inc. and JP Morgan Chase Bank, N.A.10.2
              Amended
                and Restated Trust Agreement, dated June 16, 2006, by and among Desert
                Capital REIT, Inc. and JP Morgan Chase Bank, N.A., Chase Bank USA,
                N.A.
                and the Administrative Trustees Named Herein31.1
              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










12
 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.August
                14, 2006
            /s/
                TODD B. PARRIOTTTodd
                B. Parriott,Chairman
                of the Board, Chief Executive Officer, President and Chief Investment
                Officer
              (Principal
                Executive Officer)








August
                14, 2006
            /s/
                JONATHAN G. ARENSJonathan
                G. Arens,Chief
                Financial Officer
              (Principal
                Accounting Officer)








13
 Table
          of Contents


EXHIBIT
      INDEX




10.1
            Junior
              Subordinated Indenture, dated June 16, 2006, by and between Desert
              Capital
              REIT, Inc. and JP Morgan Chase Bank, N.A.10.2
            Amended
              and Restated Trust Agreement, dated June 16, 2006, by and among Desert
              Capital REIT, Inc. and JP Morgan Chase Bank, N.A., Chase Bank USA,
              N.A.
              and the Administrative Trustees Named Herein31.1
            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