UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-QSB



|  |                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------
|S | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2006



| |   
| | --
| | or



|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|£ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.





|                     
|---------------------
|000-51230            
|(Commission File No.)



CASTLE ARCH REAL ESTATE INVESTMENT COMPANY, L.L.C.

______________________________________________________________________________

(name of small business issuer in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|California                                                     |  | 20-1077312                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|9595 Wilshire, PH 1000, Beverly Hills, CA                      |  | 90212                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Issuers telephone number: (310) 385-5970



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes £   No S



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 (the "Exchange Act") during the preceding 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 S   No £



As of March 31, 2006, the Registrant had 32,094,685 units, consisting of 22,620,405 common units, 9,474,280 preferred units.

_____________________________________________________________________________________









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INDEX



Castle Arch Real Estate Investment Company, LLC

For The Quarter Ending March 31, 2006





|                               |                                                                                                                                                                                                    |   
|------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --
|Part I.  Financial Information |                                                                                                                                                                                                   
|                               |                                                                                                                                                                                                    |   
|Item 1.                        | Financial Statements                                                                                                                                                                               | 3 
|                               |                                                                                                                                                                                                    |   
|                               | Statement of Financial Condition  March 31, 2006 (Unaudited).                                                                                                                                     | 3 
|                               |                                                                                                                                                                                                    |   
|                               | Statements of Operations (Unaudited)  For the three months ended March 31, 2006; and for the three months ended March 31, 2005; and cumulative from April 15, 2004 (inception) to March 31, 2006. | 4 
|                               |                                                                                                                                                                                                    |   
|                               | Statements of Cash Flows (Unaudited)  For the three months ended March 31, 2006, and for the three months ended March 31, 2005, and cumulative from April 15, 2004 (inception) to March 31, 2006. | 5 
|                               |                                                                                                                                                                                                    |   
|                               | Notes to Financial Statements (Unaudited)  March 31, 2006.                                                                                                                                        | 7 
|                               |                                                                                                                                                                                                    |   
|Item 2.                        | Managements Discussion and Analysis of Financial Condition or Plan of Operation.                                                                                                                  | 13
|                               |                                                                                                                                                                                                    |   
|                               | Controls and Procedures                                                                                                                                                                            | 15
|                               |                                                                                                                                                                                                    |   
|                               |                                                                                                                                                                                                    |   
|Part II.  Other Information    | 15                                                                                                                                                                                                
|                               |                                                                                                                                                                                                    |   
|                               |                                                                                                                                                                                                    |   
|Item 5.                        | Other Matters                                                                                                                                                                                      | 16
|                               |                                                                                                                                                                                                    |   
|Item 6.                        | Exhibits and Reports on Form 8-K                                                                                                                                                                   | 16
|                               |                                                                                                                                                                                                    |   
|Signatures                     | 17                                                                                                                                                                                                
|                               |                                                                                                                                                                                                    |   
|                               |                                                                                                                                                                                                   



2





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PART 1  FINANCIAL INFORMATION



Item 1. Financial Statements

Financial Information

Castle Arch Real Estate Investment Company, LLC

(A Development Stage Company)

Statement of Financial Condition (Unaudited)





|                                                       |   |            
|------------------------------------------------------ | - | -----------
|                                                       |   | March 31,  
|ASSETS                                                 |   | 2006       
|                                                       |   |            
|Current assets:                                        |   |            
|Cash and cash equivalents                              | $ | 1,174,862  
|Interest receivable                                    |   | 10,978     
|Notes receivable                                       |   | 500,000    
|Prepaid expenses                                       |   | 6,425      
|Total current assets                                   |   | 1,692,265  
|                                                       |   |            
|Property and equipment:                                |   |            
|Office equipment                                       |   | 34,552     
|Less: accumulated depreciation                         |   | (5,566)    
|Net property and equipment                             |   | 28,986     
|                                                       |   |            
|Other assets:                                          |   |            
|Properties held for sale                               |   | 149,145    
|Other properties held for investment                   |   | 15,925,940 
|Options, earnest money deposits, and entitlement costs |   | 4,497,607  
|Total other assets                                     |   | 20,572,692 
|                                                       |   |            
|Total assets                                           | $ | 22,293,943 
|                                                       |   |            
|LIABILITIES AND MEMBERS CAPITAL                       |   |            
|                                                       |   |            
|Current liabilities:                                   |   |            
|Accounts payable and accrued expenses                  | $ | 234,036    
|Preferred unit distributions payable                   |   | 1,077,503  
|Notes payable                                          |   | 5,306,327  
|Total current liabilities                              |   | 6,617,866  
|                                                       |   |            
|Members Capital:                                      |   |            
|Common units, 22,620,405, issued and outstanding,      |   |            
|ranging from $.001 to $2.50 per unit                   |   | 634,246    
|Non-managing members units, series A preferred,       |   |            
|1,000,000 units issued and outstanding, $1.00 per unit |   | 713,214    
|Non-managing members units, series B preferred,       |   |            
|2,000,000 units issued and outstanding, $2.00 per unit |   | 1,491,704  
|Non-managing members units, series C preferred,       |   |            
|3,300,000 units issued and outstanding, $3.00 per unit |   | 2,649,767  
|Non-managing members units, series D preferred,       |   |            
|3,174,280 units issued and outstanding, $5.00 per unit |   | 13,916,549 
|Deficit accumulated during the development stage       |   | (3,729,403)
|Total members capital                                 |   | 15,676,077 
|                                                       |   |            
|Total liabilities and members capital                 | $ | 22,293,943 





See accompanying notes



3





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Castle Arch Real Estate Investment Company, LLC

(A Development Stage Company)

Statement of Operations (Unaudited)



|                                       |   |                    |   |                    |   |                
|-------------------------------------- | - | ------------------ | - | ------------------ | - | ---------------
|                                       |   |                    |   |                    |   | Cumulative From
|                                       |   | Period From        |   | Period From        |   | April 15, 2004 
|                                       |   | January 1, 2006 to |   | January 1, 2005 to |   | (inception) to 
|                                       |   | March 31, 2006     |   | March 31, 2005     |   | March 31, 2006 
|                                       |   |                    |   |                    |   |                
|Revenues and Other Income              |   |                    |   |                    |   |                
|                                       |   |                    |   |                    |   |                
|Proceeds from sale of property, net    |   |                    |   |                    |   |                
|of cost of property sold               | $ | -                  | $ | -                  | $ | -              
|Total revenues and other income        |   | -                  |   | -                  |   | -              
|                                       |   |                    |   |                    |   |                
|Expenses                               |   |                    |   |                    |   |                
|                                       |   |                    |   |                    |   |                
|Salaries, wages and other compensation |   | 272,244            |   | 179,408            |   | 1,383,481      
|Selling and marketing                  |   | 122,488            |   | 46,291             |   | 404,091        
|Start-up and organizational costs      |   | -                  |   | -                  |   | 55,696         
|Office supplies and expenses           |   | 100,986            |   | 39,378             |   | 493,704        
|Legal and outside services             |   | 236,010            |   | 86,651             |   | 773,312        
|Costs of terminated purchase           |   |                    |   |                    |   |                
|agreements                             |   | 1,155              |   | -                  |   | 246,518        
|Travel, meals and lodging              |   | 44,995             |   | 34,890             |   | 226,029        
|Depreciation                           |   | 1,471              |   | 1,874              |   | 5,566          
|Amortization of loan issuance costs    |   | 65,917             |   | -                  |   | 65,917         
|Taxes and licenses                     |   | 180                |   | -                  |   | 95,158         
|Total operating expenses               |   | 845,446            |   | 388,492            |   | 3,749,472      
|                                       |   |                    |   |                    |   |                
|Net operating loss                     |   | (845,446)          |   | (388,492)          |   | (3,749,472)    
|                                       |   |                    |   |                    |   |                
|Other income (expense)                 |   |                    |   |                    |   |                
|                                       |   |                    |   |                    |   |                
|Interest income                        |   | 17,851             |   | 3,920              |   | 68,714         
|Interest expense                       |   | (48,389)           |   | (256)              |   | (48,645)       
|Total other income (expense)           |   | (30,538)           |   | 3,664              |   | 20,069         
|                                       |   |                    |   |                    |   |                
|Net loss                               | $ | (875,984)          | $ | (384,828)          | $ | (3,729,403)    
|                                       |   |                    |   |                    |   |                
|Loss per common unit (Note 1)          | $ | (.06)              | $ | (.03)              |   |                
|                                       |   |                    |   |                    |   |                
|Weighted average units outstanding     | $ | 22,458,040         | $ | 18,530,867         |   |                

















See accompanying notes







4





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Castle Arch Real Estate Investment Company, LLC

(A Development Stage Company)

Statements of Cash Flows (Unaudited)







|                                                                            |   |                    |   |                    |   |                
|--------------------------------------------------------------------------- | - | ------------------ | - | ------------------ | - | ---------------
|                                                                            |   |                    |   |                    |   | Cumulative From
|                                                                            |   | Period From        |   | Period From        |   | April 15, 2004 
|                                                                            |   | January 1, 2006 to |   | January 1, 2005 to |   | (inception) to 
|                                                                            |   | March 31, 2006     |   | March 31, 2005     |   | March 31, 2006 
|                                                                            |   |                    |   |                    |   |                
|Cash Flows From Operating Activities:                                       |   |                    |   |                    |   |                
|Net loss                                                                    | $ | (875,984)          | $ | (384,828)          | $ | (3,729,403)    
|Adjustments to reconcile net loss to
net cash used in operating activities: |   |                    |   |                    |   |                
|Depreciation                                                                |   | 1,471              |   | 1,874              |   | 5,566          
|Amortization of debt issuance costs                                         |   | 76,962             |   | -                  |   | 76,962         
|Professional outside services paid in                                       |   |                    |   |                    |   |                
|the form of common units                                                    |   | 50,000             |   | 172                |   | 147,500        
|Changes in operating assets and liabilities:                                |   |                    |   |                    |   |                
|Interest receivable                                                         |   | (6,582)            |   | -                  |   | (10,978)       
|Prepaid expenses                                                            |   | 17,359             |   | -                  |   | (6,425)        
|Accounts payable and accrued expenses                                       |   | (75,643)           |   | (79,491)           |   | 117,953        
|Due to related party                                                        |   | -                  |   | (20,000)           |   | -              
|Properties held for sale                                                    |   | -                  |   | -                  |   | (149,145)      
|Properties held for investment                                              |   | (5,194,565)        |   | -                  |   | (14,692,608)   
|Net cash used in operating activities                                       |   | (6,006,982)        |   | (482,273)          |   | (18,240,578)   
|                                                                            |   |                    |   |                    |   |                
|Investing Activities                                                        |   |                    |   |                    |   |                
|Option, earnest money,                                                      |   |                    |   |                    |   |                
|entitlement deposits                                                        |   | (157,000)          |   | (242,838)          |   | (477,789)      
|Notes receivable                                                            |   | (400,000)          |   | -                  |   | (500,000)      
|Purchase of property and equipment                                          |   | (8,868)            |   | -                  |   | (34,552)       
|Net cash used in investing activities                                       |   | (565,868)          |   | (242,838)          |   | (1,012,341)    
|                                                                            |   |                    |   |                    |   |                
|Financing Activities                                                        |   |                    |   |                    |   |                
|Proceeds from issuance of member units                                      |   |                    |   |                    |   |                
|for cash (net of offering costs)                                            |   | 2,143,765          |   | 1,824,325          |   | 20,427,781     
|Proceeds from subscriptions receivable                                      |   | 1,573,035          |   | 301,134            |   | -              
|Proceeds (payments) from issuance                                           |   |                    |   |                    |   |                
|of notes payable                                                            |   | -                  |   | (11,843)           |   | -              
|Net cash provided by financing activities                                   |   | 3,716,800          |   | 2,113,616          |   | 20,427,781     
|                                                                            |   |                    |   |                    |   |                
|Net increase (decrease) in cash and cash                                    |   |                    |   |                    |   |                
|equivalents                                                                 |   | (2,856,050)        |   | 1,388,505          |   | 1,174,862      
|Cash at beginning of period                                                 |   | 4,030,912          |   | 2,341,332          |   | -              
|Cash at end of period                                                       | $ | 1,174,862          | $ | 3,729,837          | $ | 1,174,862      



5





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Castle Arch Real Estate Investment Company, LLC

(A Development Stage Company)

Statements of Cash Flows (Unaudited)









|                                                |   |                    |   |                    |   |                
|----------------------------------------------- | - | ------------------ | - | ------------------ | - | ---------------
|                                                |   |                    |   |                    |   | Cumulative From
|                                                |   | Period From        |   | Period From        |   | April 15, 2004 
|                                                |   | January 1, 2006 to |   | January 1, 2005 to |   | (inception) to 
|                                                |   | March 31, 2006     |   | March 31, 2005     |   | March 31, 2006 
|                                                |   |                    |   |                    |   |                
|Non-Cash Investing and Financing Activities:    |   |                    |   |                    |   |                
|Issuance of members units for subscriptions    |   |                    |   |                    |   |                
|receivable                                      | $ | 630,795            | $ | 978,732            | $ | 630,795        
|Distributions payable                           | $ | 1,077,503          | $ | 98,750             | $ | 1,077,503      
|Accrued finders fees (offering costs)           | $ | 92,298             | $ | 88,044             | $ | 92,298         
|Accrued finders fees paid with common units     | $ | 124,110            | $ | 30,250             | $ | 470,746        
|Issuance of notes payable (net of debt offering |   |                    |   |                    |   |                
|costs and accrued interest) in exchange for     |   |                    |   |                    |   |                
|other properties held for investment            | $ | 2,165,019          | $ | -                  | $ | 2,165,019      
|Issuance of notes payable (net of debt offering |   |                    |   |                    |   |                
|costs and accrued interest) in exchange for     |   |                    |   |                    |   |                
|options, earnest money deposits and             |   |                    |   |                    |   |                
|entitlement costs                               | $ | 3,064,346          | $ | -                  | $ | 3,064,346      
|Accrued interest receivable applied towards     |   |                    |   |                    |   |                
|the purchase of other property held for         |   |                    |   |                    |   |                
|investment                                      | $ | 2,438              | $ | -                  | $ | 2,438          
|Accrued land deposits                           | $ | 21,347             | $ | -                  | $ | 21,347         
|                                                |   |                    |   |                    |   |                
|Supplemental Disclosures                        |   |                    |   |                    |   |                
|Cash paid for interest                          | $ | 31,300             | $ | 256                | $ | 31,556         

















See accompanying notes







6





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Castle Arch Real Estate Investment Company, LLC

(A Development Stage Company)

Notes to Financial Statements

March 31, 2006 (Unaudited)



1.

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



A.

General Description of the Company and Presentation



Castle Arch Real Estate Investment Company, LLC, a California limited liability company, was organized on April 15, 2004 as a residential and commercial land development company with target properties located primarily in the Western United States.  The principal activities of the Company include securing acquisition rights to the property, obtaining zoning and other entitlements for the property, securing financing for the purchase of the property, improving the propertys infrastructure and amenities, and selling the property.  Property targeted by the Company may have end uses that range from residential, multifamily, retail and office, to industrial.  The Company may also consider other strategic and joint venture opportunities.



The Company has completed or commenced four private placements of membership units in the Company as follows:



Effective May 1, 2004, the placement of 1,000,000 Series A membership units consisting of one common and one preferred unit each at $1.00 per membership unit.



Effective July 20, 2004, the placement of 1,000,000 Series B membership units, consisting of one common and two preferred units each at $2.00 per membership unit.



Effective November 5, 2004, the placement of 1,100,000 Series C membership units, consisting of one common and three preferred units each at $3.00 per membership unit.



Effective June 30, 2005, the placement of 3,000,000 Series D membership units, consisting of one common and one preferred unit each at $5.00 per membership unit.



Effective April 14, 2006, the Company elected to oversubscribe the Series D private placement; resulting in an additional 940,000 Series D membership units, consisting of one common and one preferred unit each at $5.00 per membership unit (see Note 2).



As of March 31, 2006, the Company had completed the Series A, B, and C private placement offerings, and had raised $15,871,401 of the Series D private placement.  Of this amount, $630,795 represents Series D subscribed units outstanding for which funds had not been received at March 31, 2006.



The Members share in the profits and losses of the Company in proportion to their respective interests in the Company based on the weighted average number of membership units each member holds during the period.  A non-Managing Members loss is limited to the amount of his or her investment.  Consistent with the Companys policy and its private placement memorandums, profits and losses have been allocated to the various members interests as follows:













7





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Castle Arch Real Estate Investment Company, LLC

(A Development Stage Company)

Notes to Financial Statements

March 31, 2006 (Unaudited)



1.

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



A.

General Description of the Company (continued)



a)

Allocation of profits shall be made:



(i)

First, to the members, up to the aggregate of, and in proportion to, any losses previously allocated to each member, to the extent not previously offset by allocations of profits;

(ii)

Second, to preferred members, subject to the Managers election to redeem the membership units and to the extent of the cumulative preferred unit return;

(iii)

Third, to the common members, in proportion to their percentage interests.



b)

Allocation of losses shall be made as follows:



(i)

First, to the members, up to the aggregate of, and in proportion to, any profits previously allocated to each member and not previously offset by losses until their capital account balances have been reduced to zero;



(ii)

Second, to the preferred members until their capital account balances have been reduced to zero;



(iii)

Third, to the common members, in proportion to their percentage interest.



c)



At no time shall the sum of all historical net profit distributions to common unit holders exceed the total amounts paid toward redeeming any outstanding preferred units, until all preferred units have been redeemed.



The Company has not received revenues from the sale or development of property as of March 31, 2006 in accordance with its business plan.  Accordingly, the Companys activities have been accounted for as those of a development stage enterprise as defined in Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises.  All losses since inception have been considered as part of the Companys development stage activities.



d)

Presentation



The Company prepared the financial statements as of March 31, 2006 and for the periods ended March 31, 2006 and 2005, without audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, all necessary adjustments, which consist primarily of normal recurring adjustments, to the financial statements have been made to present fairly the financial position and results of operations and cash flows.  The results of operations for the respective periods presented are not necessarily indicative of the results for the respective complete years.  The Company has previously filed with the SEC an annual report on Form 10-KSB, which included audited financial statements for the period ending December 31, 2005.  It is suggested that the financial statements contained in this filing be read in conjunction with the statements and notes thereto contained in the Companys 10-KSB filing.



8





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Castle Arch Real Estate Investment Company, LLC

(A Development Stage Company)

Notes to Financial Statements

March 31, 2006 (Unaudited)



1.

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



B.  Reclassifications



Certain amounts in the accompanying financial statements have been reclassified to conform to current quarter presentation.



C.  Method of Reporting and Use of Estimates



The Companys financial statements are presented in accordance with U.S. generally accepted accounting principles (GAAP).  Such principles require the use of certain estimates and assumptions made by the Companys management in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.



D.   Accounting Method



The Companys financial statements are prepared using the accrual method of accounting.  The Company has elected a December 31 year end.



E.   Income and Expense Recognition



Gains or losses associated with real estate are realized in full when the property is sold by the full accrual method in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 66 Accounting for Sales of Real Estate.



Costs associated with real estate are accounted for in accordance with the provisions of Statement of Financial Accounting Standard (SFAS) No. 67 Accounting for Cost and Initial Rental Operations of Real Estate Projects.Accordingly, acquisition, development and construction costs, including property taxes and interest on associated debt and selling costs, are capitalized.  Such costs are specifically allocated to the related components or, if relating to multiple components, allocated on a pro rata basis as appropriate.  Estimates are reviewed periodically and revised as needed.  The respective real estate projects are also periodically reviewed to determine that the carrying amount does not exceed the net  realizable value.  To date, no allowance has had to be provided for estimated impairments of value based on evaluation of the projects.



F.   Income Taxes



No provision for income taxes has been made in these financial statements because each member is individually responsible for reporting income or loss based on its respective share of the Companys income and expenses as reported for income tax purposes.  The Company prepares calendar year federal and state information tax returns and reports to the members their allocable shares of the Companys income, expenses, and gains or losses.



G.   Cash and Cash Equivalents



The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.





9





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Castle Arch Real Estate Investment Company, LLC

(A Development Stage Company)

Notes to Financial Statements

March 31, 2006 (Unaudited)



1.

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



H.   Offering Costs



Costs incurred in the successful raising of capital under the Companys private placement memorandums such as finders fees and attorneys costs have been offset against various components of members equity as a reduction of the proceeds received from the sale of membership units.





I.   Property and Equipment



Property, plant and equipment are stated at cost.  Depreciation is computed primarily using the straight-line method based on estimated useful lives of 5 years.



J.   Advertising Costs



The Company may incur costs of advertising which it will expense as incurred.  Advertising costs do not include commissions for the sale of property or finders fees incurred for the successful raising of capital.



K.   Options and Deposits on Land and Entitlement Costs



As of March 31, 2006, the Company has successfully placed both earnest and increased money deposits, or deposits to acquire options, for the purchase of twelve properties totaling $6,852,000.  The terms of the purchase agreements provide for property review periods during which the deposits may be refunded upon written notice of unsuitability.  Upon expiration of the review periods, the deposits become non-refundable as liquidated damages to the seller if the purchase does not close.



The Companys policy is to capitalize entitlement costs and applicable deposits incurred as other assets until such time as the properties are purchased.  Upon purchase, the Company classifies the property as held for sale only when certain requirements are met, including the completion of the respective entitlements and the preparation of the property for immediate sale in its existing condition, an active program to identify potential buyers has been initiated, and when the Company believes the sale is probable and expected to occur within the following twelve months.  Those properties that do not meet these criteria are classified as held for investment.



Of the successful deposits placed by the Company at March 31, 2006, $1,442,000 has been applied towards the purchase of six separate properties, with purchase prices totaling $13,303,581.  The Company has also incurred $98,726 in entitlement costs and $1,139,406 in water rights associated with these purchased properties at March 31, 2006.  These costs are included in other properties held for investment at March 31, 2006, totaling $19,925,940.  Of the remaining $5,410,000 in earnest and increased deposits, $360,000, combined with associated entitlement costs of $137,607, is related to four separate properties the Company has entered into purchase agreements to acquire and, accordingly, has been recorded as options, earnest money deposits, and entitlement costs at March 31, 2006.



At March 31, 2006, the Company had exercised an option to purchase an additional 216 acres, totaling $5,625,000.  The option was provided the Company in conjunction with the purchase agreement of a separate property.  Accordingly, at March 31, 2006, the Company has released $4,000,000 to the seller, and the remaining amount plus any closing costs will be paid during the second quarter (see Note 2).  The $4,000,000 has been included in options, earnest money deposits and entitlement costs at March 31, 2006.





10





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Castle Arch Real Estate Investment Company, LLC

(A Development Stage Company)

Notes to Financial Statements (continued)

March 31, 2006 (Unaudited)



1.

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



K.   Options and Deposits on Land and Entitlement Costs (continued)



As of March 31, 2006, the Company has incurred $200,000 in project costs for services to design, construct and market a 36-hole golf course on a purchased property.  In addition, the Company placed land deposits of $1,065,000, and incurred associated entitlement costs of $119,227 to obtain rights to one property, which rights were subsequently sold in 2005.  To date, the proceeds to be paid to the Company have not been realized.  These costs have also been included in other properties held for investment at March 31, 2006.



L.

Properties Held for Sale



During 2005, the Company placed land deposits of $50,000 and incurred associated entitlement costs totaling $99,145 to purchase the rights to one property.  These rights were subsequently sold by the Company in 2005.  Accordingly, these costs, totaling $149,145 have been recorded as properties held for sale.  To date, the proceeds to be paid to the Company have not been realized.



M.   Notes Receivable



At March 31, 2006, the Company had entered into three promissory notes receivable with a nonrelated entity, totaling $500,000.  One of the three notes has a principal balance of $400,000, and, pursuant with the original terms, bears interest at 8 percent per annum.  Accrued interest along with principal is to be paid in full on or before January 17, 2007.  The two remaining notes have principal balances of $50,000 each.  These promissory notes bore interest at 8 percent per annum, and accrued interest along with principal was to be paid in full on or before March 14, and April 20, 2006, respectively.  In January, 2006, the Company extended the maturity date of the two notes to December 31, 2006, and all accrued interest to date became due in full.  At March 31, 2006, the Company had not received payment for the required interest payments, but did not record any impairment for the interest receivable as it expects to extend by mutual agreement, the due date for the interest.



N.

Notes Payable



In March, 2006, the Company entered into a promissory note payable with a lender totaling $5,380,293.  The Company incurred loan issuance costs totaling $74,786 and, accordingly, these costs will be amortized over the 12-month term of the loan.  The Company collateralized the note with three properties and associated water rights purchased during 2005 (see Note 1, item K).  The note bears an annual interest rate of 10 percent with interest only payments due on a monthly basis over the term of the loan.  At the date of maturity, all principal and accrued interest is due in full.  In addition to using the proceeds for the acquisition of property held for investment, the Company also used $1,576,055 to repay an existing note payable and associated accrued interest.



O.   Net loss per common unit



Net loss per common unit is computed based on the weighted-average number of common units and, as appropriate, dilutive common unit equivalents outstanding during the period.  Basic net loss per common unit is the amount of net loss for the period available to each common unit outstanding during the reporting period.  Diluted net loss per common unit is the amount of net loss for the period available to each common unit outstanding during the reporting period and to each unit that would have been outstanding assuming the issuance of common units for all dilutive potential common units outstanding during the period.  At March 31, 2006, the basic and diluted net loss per common unit is the same as there are no common unit equivalents outstanding.



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Castle Arch Real Estate Investment Company, LLC

(A Development Stage Company)

Notes to Financial Statements (continued)

March 31, 2006 (Unaudited)



1.

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



O.

Net loss per common unit (continued)



Accumulated preferred unit dividends, totaling $394,061 for the three month period ended March 31, 2006, have been included in the computation of net loss per common unit, resulting in an incremental increase in loss per unit of $.02.



2.

SUBSEQUENT EVENTS



Effective April 2006, and subsequent to the quarters end, the Company adopted FIN 46(R), resulting in the consolidation of Castle Arch Kingman, LLC (CAK).  In accordance with the pronouncement, CAK is considered a variable interest entity, and the Company its primary beneficiary.  CAK was founded in April, 2006 by members and managers of the Company to develop over 2,000 acres of land in the Kingman, Arizona area into commercial and residential properties.  At the date of CAKs formation, the Company agreed to sell, at cost, all of the land it has or will acquire in the Kingman, Arizona area.  As of June 30, 2006, the Company had purchased approximately 237 acres, totaling $6,131,127.



To date, the Company owns 100 percent of all outstanding common units of CAK, and members of the Companys management team effectively control CAK.  The Company intends on funding CAKs working capital requirements and future operating expenses through a private placement offering, consisting of the placement of 1,200,000 membership units, consisting of one common and five preferred units each at $25.00 per membership unit.  At the close of the offering, the investors of CAK will collectively own all 1,200,000 outstanding preferred units and 50 percent of all outstanding common units, or 6,000,000 units.  The Company will own the other 50 percent of CAKs common units.  In addition, the Company will receive a management fee of 2 percent of all funds raised on CAKs behalf.



As CAK is dependent upon the Company for its financial support, and the Company is expected to receive a majority of CAKs expected losses, and a majority of CAKs residual returns based upon its existing and anticipated interest upon completion of the private placement, CAK will be consolidated and all intercompany transactions will be eliminated accordingly.



Subsequent to quarters end, the Company finalized the purchase an additional 216 acres of property in accordance with an option exercised at March 31, 2006 (see Note 1, Item K).  Accordingly, the Company paid an additional $1,635,815 upon closing.  This amount, along with the $4,000,000 released to the seller at March 31, 2006, will be recorded in other properties held for investment.



Subsequent to quarters end, the Company elected to oversubscribe the Series D private placement, resulting in the issuance of an additional 940,000 Series D membership units, consisting of one common and one preferred unit each at $5.00 per membership unit.









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Item 2. Management's Discussion and Analysis or Plan of Operation.



We are in the business of developing residential and commercial land with target properties located primarily in the Western United States.  Our principal activities include securing acquisition rights to properties, obtaining zoning and other entitlements for the properties, securing financing for the purchase of the properties, improving the properties infrastructure and amenities, and selling the properties.  Properties targeted by us may have end uses that range from residential, multifamily, retail and office, to industrial.  We may also consider other strategic and joint venture opportunities.



We have received no revenues from the sale or development of property as of December 31, 2005 or March 31, 2006. However, we are continuing to work several properties through the entitlement process and expect to generate revenues from those activities in the coming 12 months.



Our operations are currently funded by equity sales and loans.



Results of Operations



The following discussion should be read in conjunction with selected financial data and the financial statements and notes to financial statements.



Selected Financial Information



|                       |  |                    |           |      |   |          |  
|---------------------- |  | ------------------ | --------- | ---- | - | -------- | -
|                       |  | Three months ended |          
|                       |  | March 31,          |          
|                       |  | 2006               |           | 2005 |  
|Revenue, net           |  | $                  | - 0 -     |      | $ | - 0 -    |  
|                       |  |                    |           |      |   |          |  
|Gross profit (loss)    |  |                    | (845,446) |      |   | (388,492 | )
|                       |  |                    |           |      |   |          |  
|Operating loss         |  |                    | (845,446) |      |   | (388,492 | )
|                       |  |                    |           |      |   |          |  
|Other income (expense) |  |                    | 17,851    |      |   | 3,920    |  
|                       |  |                    |           |      |   |          |  
|Net income (loss)      |  |                    | (875,984) |      |   | (384,828 | )



____________________________________________________________________________________



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|                           |  |                |            |                   |   |            | 
|-------------------------- |  | -------------- | ---------- | ----------------- | - | ---------- | 
|                           |  | March 31,
2006 |            | December 31,
2005 |  
|Balance Sheet Data:        |  |                |            |                   |  
|                           |  |                |            |                   |  
|Cash and Cash Equivalents  |  | $              | 1,174,862  |                   | $ | 4,030,912  | 
|                           |  |                |            |                   |   |            | 
|Total Current Assets       |  |                | 1,692,265  |                   |   | 4,159,091  | 
|                           |  |                |            |                   |   |            | 
|Total Assets               |  |                | 22,293,943 |                   |   | 14,148,656 | 
|                           |  |                |            |                   |   |            | 
|Total Current Liabilities  |  |                | 6,617,866  |                   |   | 1,050,680  | 
|                           |  |                |            |                   |   |            | 
|Total stockholders equity |  | $              | 15,676,077 |                   | $ | 13,097,976 | 



____________________________________________________________________________________



Discussion



During the three month period ended March 31, 2006 our revenues from operations were limited to interest income due to the fact that we received no funds from the sale of any property. During the three month period we continued to focus on locating, acquiring rights to, and entitling target properties. During the three month period ended March 31, 2006, we continued to incur entitlement costs on both properties under contract and those properties which we own. None of these activities have produced revenues. We expect that our first revenues will be derived from amounts due from our reassignment of the Fresno California properties.



Our general and administrative expenses totaled $776,723 during the three month period ended March 31, 2006, compared to $386,618 during the comparable three month period ended March 31, 2005. The increase in general and administrative expenses is primarily attributable to increased salaries of our executive officers and additional employees, office costs and professional services. We anticipate that our general and administrative expenses will remain fairly constant during the next several quarters, while we anticipate that our total revenues during such period will increase.



Liquidity and Capital Resources



At March 31, 2006, we had cash and cash equivalents of $1,174,862, compared to $3,729,837 on the same date one year earlier, and $4,030,912 at December 31, 2005. Our decreased cash balance at March 31, 2006 is largely attributable to general and administrative expenses and land acquisition costs.



We believe that proceeds from sales of our securities will be sufficient to for us to survive as a going concern for the next 12 months. Our management is actively pursuing additional sources of funding. In addition, our management is expecting an increase in cash flows through anticipated increases in revenue.





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If we do not raise sufficient funds in the future, we may not be able to fund expansion, take advantage of future opportunities, meet our existing debt obligations or respond to competitive pressures or unanticipated requirements. Financing transactions in the future may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. We may also sell unimproved land or land purchase contracts that we own. However, we currently do not have plans in the coming several months to sell unimproved land.



Prospective shareholders should understand that several factors govern whether any forward-looking statement contained herein will be or can be achieved. Any one of those factors could cause actual results to differ materially from those projected herein. These forward-looking statements include plans and objectives of management for future operations, including plans and objectives relating to the products and the future economic performance of the Company. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete development projects, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of those assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in any of the forward-looking statements contained herein will be realized. Based on actual experience and business development, the company may alter its marketing, capital expenditure plans or other budgets, which may in turn affect the companys results of operations. In light of the significant uncertainties inherent in the forward-looking statements included therein, the inclusion of any such statement should not be regarded as a representation by the Company or any other person that the objectives or plans of the company will be achieved.



Item 3.  Controls and Procedures



We carried out an evaluation as of March 31, 2006, under the supervision and with participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Subsequent to March 31, 2006, there have been no significant changes in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



PART II - OTHER INFORMATION



Item 1.  Legal Proceedings



The Company currently is not party to any material legal proceedings.







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



During the three month period ended March 31, 2006, we received $2,575,565 from the sale of our securities. We believe the transactions to be exempt under Section 4(2) of the Securities Act of 1933, as amended, because they do not involve a public offering. We believe that this sale of securities did not involve a public offering on the basis that each investor is an accredited investor as defined in Rule 501 of Regulation D



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and because we provided each of our investors with a private placement memorandum disclosing items set out in Rule 501 and 506 of Regulation D.  The shares sold were restricted securities as defined in Rule 144(a)(3). Further, each common stock certificate issued in connection with this private offering bears a legend providing, in substance, that the securities have been acquired for investment only and may not be sold, transferred or assigned in the absence of an effective registration statement or opinion of legal counsel that registration is not required under the Securities Act of 1933.

Item 3.  Defaults Upon Senior Securities.



None.



Item 4.  Submission of Matters to a Vote of Security Holders.



None.



Item 5.  Other Information.



On March 28, 2006, we entered into a promissory note totaling $5,380,293 payable to ANB financial. The term of the loan is 12-months. The note bears an annual interest rate of 10 percent with interest only payments due on a monthly basis over the term of the loan.  At the date of maturity, all principal and accrued interest is due in full.  The use of proceeds from the loan is $1,576,055 to repay an existing note payable and associated accrued interest and the remaining amounts is earmarked for the acquisition of property held for investment.



Item 6.  Exhibits and Reports on Form 8-K.



(a)

Exhibits (filed with this report unless indicated below)



Exhibit 31.1

Certification of principal executive officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



Exhibit 31.2

Certification of principal financial officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



Exhibit 32.1

Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



Exhibit 32.2

Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





(b)

Reports on Form 8-K.



No reports on Form 8-K were filed by the Company during the three months ended March 31, 2006.







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SIGNATURES



In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



CASTLE ARCH REAL ESTATE INVESTMENT COMPANY, L.L.C.



Dated:  May 12, 2006





By: /s/ Kirby D. Cochran

Kirby D. Cochran, Chief Executive Officer

(Principal Executive Officer)



By: /s/ Douglas W. Child

Douglas W. Child, Chief Financial Officer

(Principal Financial Officer)



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