##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 _______________
  FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 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 ___
 ____________________
   DESERT CAPITAL REIT, INC.
  Maryland
    
    20-0495883(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 1291 Galleria Drive, Suite 200, Henderson, NV 89014
   (800) 419-2855
 þ o




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DESERT CAPITAL REIT, INC.
 FORM 10-Q
 For the Quarter Ended June 30, 2005
 INDEX
  
 Part I. Financial InformationItem 1.     Consolidated Financial Statements (Unaudited)
    
    
    2a)     Consolidated Balance Sheets as of June 30, 2005 and
December 31, 2004
    
    
    2b)     Consolidated Statements of Operations for the three and
six months ended June 30, 2005 and 2004
    
    
    3c)     Consolidated Statements of Cash Flows for the six
months ended June 30, 2005 and 2004
    
    
    4d)     Consolidated Statements of Changes in Stockholders
Equity for the six months ended June 30, 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 4.     Submission
of Matters to a Vote of Security Holders
    
    
    18Item 5.     Other Information
    
    
    18Item 6.     Exhibits
    
    
    19Signatures
    
    
    20Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO and CFO Pursuant to Section 906




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Item 1. Consolidated Financial Statements
 DESERT
CAPITAL REIT, INC.
 
 Consolidated Balance Sheets
 June 30, 2005
    
    
    December 31, 2004(unaudited)ASSETSMortgage investments  net
    
    $
    27,499,962
    
    
    $
    17,217,116Goodwill
    
    
    8,396,108
    
    
    
    Building and equipment  net
    
    
    7,584,478
    
    
    
    180,000Land
    
    
    1,820,000
    
    
    
    Cash
    
    
    10,099,604
    
    
    
    2,375,309Investment in subsidiary
    
    
    
    
    
    
    3,501,047Other
    
    
    403,300
    
    
    
    281,882Total assets
    
    $
    55,803,453
    
    
    $
    23,555,354LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable and accrued expenses
    
    $
    1,669,312
    
    
    $
    450,227Notes payable
    
    
    16,586,399
    
    
    
    6,322,139Total liabilities
    
    
    18,255,710
    
    
    
    6,772,366Minority interest
    
    
    942,309
    
    
    
    Preferred stock, $0.01 par value: 15,000,000 shares
authorized, none outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value: 100,000,000 shares authorized; 4,252,962, and 1,996,386
shares issued and outstanding on June 30, 2005, and December 31, 2004, respectfully
    
    
    42,530
    
    
    
    19,964Additional paid-in capital
    
    
    36,548,043
    
    
    
    16,782,200Retained earnings
    
    
    14,860
    
    
    
    (19,176
    )Total stockholders equity
    
    
    36,605,433
    
    
    
    16,782,988Total liabilities and stockholders equity
    
    $
    55,803,453
    
    
    $
    23,555,354
  2




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DESERT CAPITAL REIT, INC.
 
 Consolidated Statements of Operations
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004INTEREST INCOME:Mortgage notes receivable
    
    $
    863,445
    
    
    
    
    
    
    $
    1,544,381
    
    
    
    Other interest
    
    
    40,228
    
    
    
    
    
    
    
    73,803
    
    
    
    Total interest income
    
    
    903,673
    
    
    
    
    
    
    
    1,618,184
    
    
    
    INTEREST EXPENSE:Interest expense
    
    
    262,417
    
    
    
    
    
    
    
    501,306
    
    
    
    Total interest expense
    
    
    262,417
    
    
    
    
    
    
    
    501,306
    
    
    
    Net interest income
    
    
    641,256
    
    
    
    
    
    
    
    1,116,878
    
    
    
    Provision for loan losses
    
    
    8,590
    
    
    
    
    
    
    
    27,606
    
    
    
    Net interest income after provision for loan loss
    
    
    632,666
    
    
    
    
    
    
    
    1,089,272
    
    
    
    NON-INTEREST INCOME:Loan brokerage fees
    
    
    2,554,319
    
    
    
    
    
    
    
    5,419,450
    
    
    
    Service and other loan fees
    
    
    812,178
    
    
    
    
    
    
    
    1,364,803
    
    
    
    Other
    
    
    64,834
    
    
    
    
    
    
    
    66,631
    
    
    
    Total non-interest income
    
    
    3,431,331
    
    
    
    
    
    
    
    6,850,884
    
    
    
    NON-INTEREST EXPENSE:Compensation and payroll
    
    
    530,565
    
    
    
    48,000
    
    
    
    937,454
    
    
    
    48,000Management fees
    
    
    888,741
    
    
    
    
    
    
    
    1,745,774
    
    
    
    Professional fees
    
    
    511,990
    
    
    
    
    
    
    
    984,804
    
    
    
    Insurance
    
    
    116,146
    
    
    
    
    
    
    
    229,131
    
    
    
    Other
    
    
    275,004
    
    
    
    16,856
    
    
    
    623,834
    
    
    
    16,856Total non-interest expense
    
    
    2,322,446
    
    
    
    64,856
    
    
    
    4,520,997
    
    
    
    64,856Net income before taxes
    
    
    1,741,550
    
    
    
    (64,856
    )
    
    
    3,419,159
    
    
    
    (64,856
    )Income tax expense
    
    
    193,279
    
    
    
    
    
    
    
    362,016
    
    
    
    Income before minority interest
    
    
    1,548,271
    
    
    
    (64,856
    )
    
    
    3,057,143
    
    
    
    (64,856
    )Income allocated to minority interest
    
    
    624,461
    
    
    
    
    
    
    
    1,435,357
    
    
    
    Net income
    
    $
    923,810
    
    
    
    (64,856
    )
    
    $
    1,621,786
    
    
    
    (64,856
    )Net earnings (loss) per share  basic and diluted
    
    
    0.27
    
    
    
    (3.24
    )
    
    
    0.54
    
    
    
    (3.24
    )Dividends declared per share
    
    
    0.29
    
    
    
    
    
    
    
    0.53
    
    
    
    
  3




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DESERT CAPITAL REIT, INC.
Consolidated Statements of Cash Flows
  Six MonthsEnded June 30,2005
    
    
    2004OPERATING ACTIVITIESNet income (loss)
    
    $
    1,621,786
    
    
    $
    (64,856
    )Adjustments to reconcile net income (loss) to net cashDepreciation
    
    
    32,758
    
    
    
    Minority interest
    
    
    1,435,357
    
    
    
    Stock based compensation
    
    
    33,333
    
    
    
    Provision for loan loss
    
    
    27,606
    
    
    
    Net change
inOther assets
    
    
    (119,418
    )
    
    
    Accounts payable
    
    
    (12,959
    )
    
    
    Net cash provided by operating activities
    
    
    3,018,464
    
    
    
    (64,856
    )INVESTING ACTIVITIESInvestment in subsidiary (net of cash received of $1,039,908)
    
    
    (2,460,093
    )
    
    
    Increase in mortgage notes receivable
    
    
    (7,721,912
    )
    
    
    Acquisition of land
    



    
    (1,820,000
    )Acquisition of building and equipment
    
    
    (7,175,725
    )
    
    
    Net cash used by investing activities
    
    
    (19,177,730
    )
    
    
    FINANCING ACTIVITIESIncrease in borrowings
    
    
    9,012,859
    
    
    
    214,557Issuance of common stock
    
    
    19,618,702
    
    
    
    Dividends on common stock
    
    
    (826,566
    )
    
    
    Dividends to minority interest
    
    
    (1,440,893
    )
    
    
    Offering costs paid
    
    
    (2,480,541
    )
    
    
    (281,181
    )Net cash provided by financing activities
    
    
    23,883,561
    
    
    
    (66,624
    )Net increase in cash
    
    
    7,724,295
    
    
    
    (131,480
    )Cash at beginning of period
    
    
    2,375,309
    
    
    
    182,202Cash at end of period
    
    $
    10,099,604
    
    
    $
    50,722Cash paid for interest
    
    $
    579,535
    
    
    $
    Cash paid for taxes
    
    
    29,085
    
    
    
    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
    
    
    1,322,139
    
    
    
    Common stock issued for dividend reinvestment program
    
    
    499,925
    
    
    
    Common stock dividends declared but not paid
    
    
    387,528
    
    
    
    Offering costs incurred but not paid
    
    $
    388,850
    
    
    $
    
  4




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DESERT CAPITAL REIT, INC.
 
 Consolidated Statements of Changes in Stockholders Equity
  Common
    
    
    Common Stock
    
    
    Additional Paid-inStock Shares
    
    
    Par Value
    
    
    Capital
    
    
    Retained Earnings
    
    
    TotalBalance at December 31, 2004
    
    
    1,996,386
    
    
    $
    19,964
    
    
    $
    16,782,200
    
    
    $
    (19,176
    )
    
    $
    16,782,988Issuance of common stock
    
    
    2,256,576
    
    
    
    22,566
    
    
    
    22,543,194
    
    
    
    
    
    
    
    22,565,760Stock based compensation
    
    
    
    
    
    
    
    
    
    
    33,334
    
    
    
    
    
    
    
    33,334Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,587,750
    )
    
    
    (1,587,750
    )Offering costs
    
    
    
    
    
    
    
    
    
    
    (2,810,685
    )
    
    
    
    
    
    
    (2,810,685
    )Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,621,786
    
    
    
    1,621,786Balance at June 30, 2005
    
    
    4,252,962
    
    
    $
    42,530
    
    
    $
    36,548,043
    
    
    $
    14,860
    
    
    $
    36,605,433
  5




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Desert Capital REIT, INC.
 
 Notes to Consolidated Financial Statements
June 30, 2005
(Unaudited)
 Note 1 - Description of Business and Basis of Presentation
     April 1,2005AssetsCash
    
    $
    562,349Mortgage investments
    
    
    1,392,217Equipment
    
    
    167,320Goodwill
    
    
    7,843,367Total assets
    
    $
    9,965,254LiabilitiesAccounts payable and accrued expenses
    
    $
    581,887Notes payable
    
    
    1,383,367Total liabilities
    
    $
    1,965,254Total purchase price as of June 30, 2005
    
    $
    8,000,000
 6




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Note 2 - Summary of Significant Accounting Policies
 Use of Estimates
  Cash and Cash Equivalents
  Revenue Recognition
   Organization Expenses
  7




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Offering Costs
  Property, Plant and Equipment
  Loans
  Allowance for Loan Losses
  Impairment Policy
  Goodwill
  Income Taxes
   8




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Stock Compensation
  Recent Accounting Developments
      Note 3 - Mortgage Notes Receivable
  9




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Acquisition & development loans
    
    $
    13,635,336Construction loans
    
    
    13,845,536Commercial property loans
    
    
    68,600Allowance for loan loss
    
    
    (49,510
    )Mortgage notes receivable (net)
    
    $
    27,499,962
 Note 4 - Allowance for Loan Losses
   Balance, December 31, 2004
    
    $
    21,904Provision for loan loss
    
    
    27,606Balance, June 30, 2006
    
    $
    49,510
  Note 5 - Stock Based Compensation
  Note 6 - Building and Equipment
  Building
    
    
    6,760,288Equipment
    
    
    244,276Furniture and fixtures
    
    
    650,585Software
    
    
    206,6117,861,760Less accumulated depreciation
    
    
    277,2827,584,478
  Note 7 - Income taxes
  10




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For the three months endedJune 30, 2005Income taxed at Federal tax rate
    
    $
    Income taxes computed on income of taxable REIT subsidiaries
    
    
    193,279Total income taxes
    
    $
    193,279
  Note 8 - Earnings per Share
  For the three months endedJune 30, 2005Net income
    
    $
    923,810Weighted average number of
common shares outstanding
    
    
    3,475,763Basic earnings per share
    
    $
    0.27
 Note 9 - Dividends
  Note 10 - Notes Payable
  11




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Note 11 - Commitments and Related Parties
     
 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
 12




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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.
  General
    13




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Public Offering of Equity Securities/Use of Proceeds
    Critical Accounting Policies and Management Estimates
  Revenue Recognition
   Offering Costs
  Loans
  Allowance for Loan Losses
  14




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Impairment Policy
  Income Taxes
    Results of Operations
    15




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GAAP net income (loss)
    
    $
    923,810Adjustments to GAAP net income:Provision for loan loss
    
    
    8,590Net adjustment for TRS income
    
    
    (230,891
    )REIT taxable net income (loss)
    
    $
    701,509
  Liquidity and Capital Resources
   th
 Cash Flows from Operating Activities .
 Cash Flows used in Investing Activities .
 Cash Flows from Financing Activities .
 16




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Item 3. Quantitative and Qualitative Disclosures about Market Risk
   17




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Item 4. Controls and Procedures
  
 Part II. Other Information
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   .
 
 Item 4. Submission of Matters to a Vote of Security
Holders
  SharesShares
  
  Voted
  
  Shares
  
  SharesProposal
  
  

Voted
For
  
  Against
  
  Withheld
  
  AbstainedElection of Directors:Todd B. Parriott
  
  
  1,695,520.54
  
  3,558.372
  
  0
  
  0Robert M. Beville
  
  
  1,695,520.54
  
  3,558.372
  
  0
  
  0G. Steven Dawson
  
  
  1,695,520.54
  
  3,558.372
  
  0
  
  0James L. George
  
  
  1,695,520.54
  
  3,558.372
  
  0
  
  0Bryan L. Goolsby
  
  
  1,695,520.54
  
  3,558.372
  
  0
  
  0Tom Gustafson
  
  
  1,695,520.54
  
  3,558.372
  
  0
  
  0
 
 Item 5. Other Information
  18




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Item 6. Exhibits
  31.1
    
    
    
    Certification of Chief Executive Officer, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*31.2
    
    
    
    Certification of Chief Financial Officer, Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*32.1
    
    
    
    Certification of Chief Executive Officer and Chief Financial Officer, Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002**
 
 *
    
    Filed herewith**
    
    Furnished herewith 19




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SIGNATURES
  DESERT CAPITAL REIT, INC.August 15, 2005
    /s/ TODD B. PARRIOTTTodd B. Parriott,Chairman of the Board, Chief Executive Officer, President
and Chief Investment Officer(Principal Executive Officer)August 15, 2005
    /s/ JONATHAN G. ARENSJonathan G. Arens,Chief Financial Officer(Principal Accounting Officer) 20




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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