UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  Form 10-KSB  xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the Fiscal Year Ended December 31, 2006 OR oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to  .   000-51230(Commission File No.)  CASTLE ARCH REAL ESTATE INVESTMENT COMPANY, L.L.C. (name of small business issuer in its charter)    California20-1077312(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)9595 Wilshire, PH 1000, Beverly Hills, CA90212(Address of principal executive offices)(Zip Code)  Issuers telephone number: (310) 385-5970  Securities registered under Section 12 (b) of the Exchange Act: None  Securities registered under Section 12 (g) of the Exchange Act: Title of Class: Common Units, no par value.  Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act:  £  Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past twelve 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 x No o  Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-KSB or any amendment to this Form 10-KSB. x    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No x  State issuer’s revenues for its most recent fiscal year: $48,041  The aggregate market value of the voting and non-common voting equity held by non-affiliates computed by reference to the average bid and asked price of such common equity, as of March 28, 2007 was: not applicable. There is no market for our securities and we have not requested that a ticker symbol be issued.  The number of outstanding shares of the registrants Common Units, no par value, as of March 27, 2007 was 24,087,379 common member units.  DOCUMENTS INCORPORATED BY REFERENCE Not applicable  Transitional Small Business Disclosure Format: Yes o No x      TABLE OF CONTENTS  PagePART IItem 1.Description of Business4Item 2.Description of Property7Item 3.Legal Proceedings10Item 4.Submission of Matters to a Vote of Security Holders10PART IIItem 5.Market for Common Equity, Related Stockholder Matters and Small BusinessIssuer Purchases of Equity Securities11Item 6.Managements Discussion and Analysis or Plan of Operation12Item 7.Financial Statements13Item 8.Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure13Item 8A.Controls and Procedures13Item 8B.Other Information15PART IIIItem 9.Directors, Executive Officers, Promoters and Control Persons;Compliance with Section 16(a) of the Exchange Act15Item 10.Executive Compensation18Item 11.Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters19Item 12.Certain Relationships and Related Transactions20Item 13.Exhibits22Item 14.Principal Accountant Fees and Services22SIGNATURES23    3    CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS  This annual report on Form 10-KSB and other reports that we file with the SEC contain statements that are considered forward-looking statements. Forward-looking statements give the Companys current expectations, plans, objectives, assumptions or forecasts of future events. All statements other than statements of current or historical fact contained in this annual report, including statements regarding the Companys future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward -looking statements by terminology such as anticipate, estimate, plans, potential, projects, ongoing, expects, management believes, we believe, we intend, and similar expressions. These statements are based on the Companys current plans and are subject to risks and uncertainties, and as such the Companys actual future activities and results of operations may be materially different from those set forth in the forward looking statements. Any or all of the forward-looking statements in this annual report may turn out to be inaccurate and as such, you should not place undue reliance on these forward-looking statements. The Company has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. The forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and assumptions due to a number of factors, including:  ·continued development of our technology;·dependence on key personnel;  ·competitive factors;·the operation of our business; and  ·general economic conditions.  These forward-looking statements speak only as of the date on which they are made, and except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements contained in this annual report.  PART I  ITEM 1. DESCRIPTION OF BUSINESS  Company Business  We are a residential and commercial land development company with target properties located primarily in the Western United States. Our principal activities are 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. We do not actually enter into option contracts, but rather place deposits on land to hold it while we consider whether or not to purchase it. Thus, we have the option to fully purchase the land, but we are not actually entering into an option contract per se. Properties we target may have end uses that range from residential, multifamily, retail, office, to industrial. Our officers may also consider other opportunities, such as locating properties we believe are priced at a value and later reselling them without making improvements.   4   From our inception through December 31, 2006, we have incurred costs for deposits, purchase and entitlement in connection with several thousand acres of undeveloped land. During the twelve month period ended December 31, 2006, we incurred costs related to nine separate properties, totaling $14,774,480.  Of this amount, $6,719,749 reflects debt proceeds used to fund the closing of three separate purchases during the period.  In addition, we incurred $415,348 in costs related to five separate properties and classified them as earnest and increased deposits, and entitlement costs at December 31, 2006. The parcels which we have purchased or to which we have purchase rights are located in California, Arizona and Utah. The parcels are described in more detail in the section entitled Item 2. Description Of Property below.  Marketing  We do not intend to market properties to the general public.  Currently, our management intends to sell improved property directly to buyers that they locate through contacts rather than commission based brokers. Our management teams contacts include hundreds of past and present as well as future anticipated business associates and friends. In some cases the contacts may be affiliated with each other or members of our management team.  Competition  Our competitors include established real estate development companies. Many of our current and potential competitors have longer operating histories and financial, sales, marketing and other resources substantially greater than those we possess. As a result, our competitors may be able to adapt more quickly to changes in the real estate market or to devote greater resources than we can to the sales of our real estate projects. For example, resistance among groups who wish to curb the building development growth in the area to preserve the status quo of an area may be more easily offset by larger firms with more resources that can afford larger and perhaps more skilled professional teams to respond to regulatory issues or organizational interference. Such competitors could also attempt to increase their presence in our markets by forming strategic alliances with other competitors. As the market for real estate development has evolved, price competition and ability to purchase prime real estate for development has intensified and is likely to continue to intensify. Such competition could adversely affect our gross profits, margins and results of operations. There can be no assurance that we will be able to compete successfully with existing or new competitors. Most of our competitors have substantially greater financial resources than we have, and they have much larger staffs allowing them to analyze more potential transactions, entitle land more quickly and sell it sooner and for more money.  Governmental and Environmental Regulation  The housing and land development industries are subject to increasing environmental, building, zoning and real estate sales regulations by various federal, state and local authorities. Such regulations affect home building by specifying, among other things, the type and quality of building materials that must be used, certain aspects of land use and building design, as well as the manner in which we conduct sales activities and otherwise deal with customers. Such regulations affect development activities by directly affecting the viability and timing of projects.   5   We must obtain the approval of numerous government authorities which regulate such matters as land use and level of density, the installation of utility services, such as water and waste disposal, and the dedication of acreage for open space, parks, schools and other community purposes. If such authorities determine that existing utility services will not adequately support proposed development (including possibly in ongoing projects), building moratoria may be imposed. As a result, we may need to devote an increasing amount of time to evaluating the impact of governmental restrictions imposed upon a new residential development. Furthermore, as local circumstances or applicable laws change, we may be required to obtain additional approvals or modifications of approvals previously obtained or even stop all work. Such increasing regulation may result in a significant increase in time (and related carrying costs) between our initial acquisition of land and the commencement and completion of its developments.  Before we can develop a property, we must obtain a variety of discretionary approvals from local and state governments, as well as the federal government in certain circumstances, with respect to such matters as zoning, subdivision, grading, architecture and environmental matters. The entitlement approval process is often a lengthy and complex procedure requiring, among other things, the submission of development plans and reports and presentations at public hearings. Because of the provisional nature of these approvals and the concerns of various environmental and public interest groups, the approval process can be delayed by withdrawals or modifications of preliminary approvals and by litigation and appeals challenging development rights. Accordingly, our ability to develop properties and realize income from such projects could be delayed or prevented due to litigation challenging previously obtained governmental approvals. We may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or "slow-growth" or "no-growth" initiatives that could be implemented in the future.  We may be required to expend significant financial and managerial resources to comply with environmental regulations and local permitting requirements. Although we believe that our operations will be in general compliance with applicable environmental regulations, certain risks of unknown costs and liabilities are inherent in developing and owning real estate.  Available Information  Our internet address is http://www.castlearch.com. Our filings with the Securities and Exchange Commission (SEC), including this annual report on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are accessible and available to the public to read and copy at the SECs Public Reference Room at 100 F Street, N.E., Room 1580 Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The reports are also available at www.sec.gov.   6   ITEM 2. DESCRIPTION OF PROPERTY  Tooele County Utah Properties  As of December 31, 2006, we owned 348 acres of raw land in Tooele, Utah and had rights to purchase an additional 83 acres. We intend for the property to be a family residential development. We expect to complete entitlements for 900 to 1,000 single-family homes on the properties, including multi-family residences, in the next two years. In the twelve month period ended December 31, 2006, we incurred $18,608 in entitlement costs in the form of government filing fees, engineering fees and legal fees in connection with planning and approvals, Tooele zoning entitlements, conceptual and master land use plan, noise assessment study, and annexation requests. We are currently attempting to induce Tooeles City council to approve annexation of our properties into the city of Tooele. If this occurs, we will have substantially completed the entitlement process. We intend to sell the lots in three phases. We believe that we will be able to sell approximately 30% of the lots within the next 12 months. We anticipate selling the lots to home builders.  We targeted the Tooele area because of its sustained growth. According to the most recent US Census, Tooeles population is growing. Members of our management who live and work in northern Utah observe that much of the growth is attributable to young families who find the cost of new homes in Tooele attractive in comparison to those in Salt Lake City.  Our management believes that almost half of Tooeles workforce commutes 20 to 30 miles on Interstate 80 to jobs in neighboring Salt Lake valley. Tooeles local economy is starting to keep pace, led by retail and other services to support the growing population. A major boost to the employment base came from the Utah Industrial Depot, a converted military base, now home to some 60 private employers including a 195,000 square-foot Freightliner truck refurbishing facility. The Depot is about four miles from Castle Archs properties.  Other major employment sectors in Tooele County are government, military, manufacturing, environmental services and distribution, including a Wal-Mart regional distribution center in nearby Grantsville. The recently completed Miller Motor Sports Park will be a major motor sports venue and is scheduled to begin hosting national circuit events in June 2006. Just ten minutes from the Castle Arch property, the Park is expected to spur additional recreational, lodging and hospitality development in the area.  The Castle Arch project lies at the northern end of the Tooele municipality, seven miles from Interstate 80 and close to schools, community amenities and shopping, including a Wal-Mart SuperCenter, two grocery supermarkets, and a Home Depot.  Kingman Arizona Properties  Through Castle Arch Kingman, L.L.C., a company in which we are a majority owner, we own or have purchase rights to a total of approximately 2,100 acres of raw land just outside of the city of Kingman Arizona. In the twelve month period ended December 31, 2006, we purchased 453.28 acres of land in Kingman. As of December 31, 2006, we had 1,649.72 acres under contract, but have yet to pay the purchase price. We intend, in connection with Castle Arch Kingman, L.L.C., to develop a community with up to 10,000 dwelling units, a golf course, a club house and other recreational amenities. We plan to sell fully entitled building lots to production builders over a period of seven to ten years, with the first lot sales anticipated to begin in 2008. During the twelve month period ended December 31, 2006, we spent $130,482 in connection with entitling our properties in Kingman.   7   We are interested in developing land in the Kingman Area because it is located 95 miles southeast of Las Vegas, Nevada in Mohave County, Arizona. Mohave County is one of Arizonas fastest growing counties, registering 65% population growth in the last ten-year U.S. census report. Our management believes that Mohave County has potential for new job creation in manufacturing, distribution, recreation and tourism as well as from services to an influx of retirees, mostly from California.  The Kingman area has good transportation access. With the completion of the Hoover Dam Bypass in 2008, U.S. Highway 93 will be a four-lane divided highway over the 95 miles between Kingman and Las Vegas. Interstate 40 links Kingman with Southern California. The Kingman airports 6,000-foot runway handles large commercial aircraft. Kingman is served by three commercial flights daily to and from Phoenix, as well as numerous charter services.  We believe that Kingmans climate will attract property buyers. Kingmans elevation at 3,400 feet above sea level gives it a moderate climate with highs averaging 96oF in the hottest month (July) and 54oF in the coldest month (January). This pleasant, sunny climate makes Kingman a very attractive destination for retirees and compares favorably against the average 104o summer highs of Phoenix and Las Vegas. Kingmans proximity to Las Vegas, Henderson, Boulder City, Laughlin and Lake Mead make it a feasible location for commuters. We anticipate that local and regional growth, combined with good transportation infrastructure, will fuel the demand for high-quality housing and recreation facilities in the Kingman area.  Imperial County Properties  We have rights to purchase 160 acres of raw land in Imperial County California. The total expected purchase price of the property is $7.5 million. During the twelve month period ended December 31, 2006, we have incurred entitlement costs in the form of government filing fees, engineering fees and legal fees in connection with planning and civil engineering services, environmental site assessment, biological study, burrowing owl survey, tentative subdivision map, engineering services, site assessment, preparation of conceptual layout, biological assessment, research and reporting, environmental consulting services.  Fresno County California Properties  Due to the softening of the residential market in California in 2006, there was an increase in tracts of raw land subject to distressed sales across the state. The nature of the market has hindered our ability to profit from the resale of the properties to which we have ownership rights in Fresno County California. We are currently considering the benefits of participating in the development of the land beyond entitlements in order to maximize our profits from the investment.  The origin of our interest in the parcels began in September, 2004, when we entered into two agreements entitled Assignment and Assumption of Purchase and Sale Agreement (collectively the Assignment) wherein we were assigned the rights to purchase two properties to which Brett Baillio had previously acquired purchase rights. The properties consist of 158 and 181 acres of raw land in the cities of Coalinga and Firebaugh, California, respectively. The purchase price for the properties was $3,838,250 and $7,890,900, respectively.  8   Our benefit for entering into the Assignment is that we were in a position to acquire land that we believed would appreciate in value due to general appreciation trends in the area and as a result of our entitlement efforts. Mr. Baillios benefit for assigning his purchase rights to us stemmed from eliminating the requirement that he finance the collective $10.5 million purchase price, but kept him in a position to profit from the resale of the properties once they had been worked through the entitlement process and parceled up or otherwise improved by us. Section 2 of the Assignment required us to pay Mr. Baillio 10% of the proceeds from any resale of the property by us within three years of the closing date of the property purchase. In addition, Section 2 of the Assignment also required us to pay Mr. Baillio 30% of our net profits from the resale of the properties. Prior to cancellation of the original assignment we paid costs totaling $180,409 and $149,145 for the Coalinga and Firebaugh properties, respectively. The costs include all deposits and costs paid to Mr. Baillio in connection with the purchase of the properties between the period from the Assignment to the Reassignment.  In June, 2005, we entered into two agreements entitled Reassignment and Assumption of Purchase and Sale Agreement (collectively the Reassignment) wherein we reassigned our rights to the two properties back to Mr. Baillio and eliminated our duties under the Assignment. We entered into the Reassignment due to the fact that we had other investment opportunities in which we preferred to deploy capital. In addition to preserving capital, we are in a position to benefit from the Reassignment because Mr. Baillio agreed to pay to us $10.5 million as consideration for the Reassignment. Mr. Baillio has agreed to pay an additional $10.5 million to us while continuing to be responsible for the $11.7 million purchase price to the seller. Mr. Baillio closed on the purchase of Coalinga in September 2005 and Firebaugh in February 2006. Mr. Baillio is in a position to benefit from the resale value of the properties if they exceed the sum of the aggregate $11.7 million purchase price and the $10.5 million consideration for the Reassignment to be paid to us. We believe that the property has appreciated due to market conditions and entitlement improvements made by us. We estimate the current value of the properties to total approximately $30 million. However, neither property has been resold by Mr. Baillio.  During the period between the Assignment and the Reassignment, we reimbursed Mr. Baillio for all deposits and costs incurred by him in connection with the purchase of the properties. In addition, we have paid other deposit and entitlement costs totaling $210,785 for Firebaugh and $125,145 for Coalinga through December 31, 2006. In 2006, we paid an additional $1,000,000 to the original sellers of the properties to maintain Mr. Baillios purchase rights. The Reassignment did not require us to pay the additional $1,000,000. However, our management believed it prudent to pay the amounts due by Mr. Baillio in order to maintain the rights under the purchase and increase the likelihood of recovering the consideration owed to us by Mr. Baillio. We will seek recovery of the $1,000,000 in addition to the $10.5 million owed us under the Reassignment. We also interpret language of the Reassignment to allow us to recover the $335,930 in deposit and entitlement costs paid by us in connection with the properties; however, there is ambiguity in the Reassignment and potential for dispute between the parties on this point.  The Reassignments require Mr. Baillio to pay the consideration in December, 2005 and February 2006, respectively.  To date, Mr. Baillio has failed to pay us and is in default of the Reassignment. There are no termination rights for Mr. Baillio. Mr. Baillio has indicated to members of our management that he intends to pay us immediately upon his resale of the properties. The properties are for sale. However, due to recent downturns in the real estate market in the area, our management assesses that demand for raw land has softened. In response to the market shift, our management is currently reviewing the benefits of advancing the physical development of the properties through excavation, installation of curb and gutter, sewer lines and possibly building construction. We currently do not have any other partnership agreements with Mr. Baillio. However, we may partner with him in the physical development of the properties.   9   Alternative to facilitating further development of the properties, we are entitled under the terms of the Reassignments to bring a court action against Mr. Baillio for failure to pay. Currently have not commenced any actions against Mr. Baillio for breach of contract. We believe that if we obtain a judgment against Mr. Baillio, we could foreclose on the land. However, our positions are subordinate to lien positions held by those who financed Mr. Baillios purchase of the properties and our management believes that the market for distressed land sales in the area is soft. As a result, obtaining a judgment and forcing a fire sale of the land does not currently appear to be a prudent avenue to maximize profits. Nevertheless, opportunities in the real estate market and opportunities presented to us may improve the attractiveness of attempting foreclosure against the properties.  Our management recognizes that our president, Robert Geringers relationship with Mr. Baillio creates a potential conflict of interest. However, Mr. Geringer has disclosed the scope of and nature of his relationship with Mr. Baillio to our board. Our board deems Mr. Geringers interactions with Mr. Baillio to be fair to us. Notwithstanding his influence within our management team, Mr. Geringer does not have unilateral authority, nor veto power, with regards to whether we sue Mr. Baillio nor how we move forward with the Fresno properties, or any other properties to which we have rights.  We do not intend for reassignment of purchase rights to be our primary model. However, our lack of liquidity caused us to in effect flip the property to retain the value that we had created from working the properties through the entitlement process.  Offices  We maintain administrative offices in Beverly Hills, California and also pay for a portion of the office expenses for Kirby D. Cochran and Douglas W. Child, two of our executive officers located in the State of Utah and for Jeff Austin our senior vice president located in Orange County California.  We also maintain approximately 1,700 square feet of office space in the Salt Lake City, Utah area where our accounting department is located along with some of our marketing consultants. We believe that will have adequate leased space to accommodate current operations and that our facilities for administrative personnel are adequate for expansion plans.  We also believe that expansion space is readily available in virtually all the markets in which we operate.  ITEM 3. LEGAL PROCEEDINGS  There are no material pending legal proceedings to which we are a party or to which any of our property is subject and, to the best of our knowledge, no such actions against us are contemplated or threatened.  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  We did not submit any matters to a vote of our security holders during 2006.   10   PART II  ITEM 5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES  Market Information  As of March 27, 2007 there were approximately 463 holders of record of our common and preferred units. We have no outstanding options, warrants to purchase or securities convertible into our common equity. In addition, we have no common units that can be sold pursuant to Rule 144, and, we have no securities that are being publicly offered or that we are proposing to publicly offer.  There is no public market for our membership interests.  We have elected to be treated as a partnership for federal and state income tax purposes.  As a consequence, under current law, holders of membership interests will receive annual K-1 reports or direct allocations of profits or losses relating to our financial results. Dividends  We intend that the first 40% of net profits will be paid as a dividend to holders of the common units to offset phantom income tax liability.  However, we are not bound to do so and may use profits to redeem preferred units and pay preferred dividends. In addition, we currently do not have, and may not have in the future, any net profits for distribution.  Once preferred units have been redeemed, if ever, earnings may be distributed to the holders of our common units. Any future determination as to the distribution of cash dividends will depend upon the earnings and financial position at that time and such other factors as the Companys board of directors may deem appropriate.  During the twelve month period ended December 31, 2006, we accrued an additional $1,894,652 of 8% preferred unit distributions payable to preferred unit holders. The total amounts payable from our inception on April 15, 2004 through December 31, 2006 is $2,578,094 based on the period of time from receipt of funds related the preferred unit holders respective investment to date.  Recent Sales of Unregistered Securities  (1) During the twelve month period ended December 31, 2006, Castle Arch Kingman, L.L.C., an entity in which we have majority ownership, issued and sold 479,238 common units and 95,848 preferred units to 44 accredited investors for a total of $2,396,194 in cash. We believe the transactions to be exempt under Section 4(2) of the Securities Act of 1933, as amended, because they did 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 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 the Company's counsel that registration is not required under the Securities Act of 1933.   11   ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION  This discussion and analysis should be read in conjunction with the accompanying Consolidated Financial Statements and related notes. Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis we review our estimates and assumptions. Our estimates were based on our historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations.  Overview  The following management discussion and analysis relates to our business of residential and commercial land development with target properties located primarily in the Western United States.  Our principal activities 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.  The financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate our continuation as a going concern. We have sustained significant operating losses since our inception, including the years 2006 and 2005. At December 31, 2006, we had total net member capital of $13,755,887, and cash on hand of $1,500,652. In the coming twelve months, our liquidity and cash requirements will depend on several factors. If our resources are not sufficient to fund our needs through 2007 there are no assurances that we will be successful in raising sufficient capital.  Revenues  We had revenues of $48,041 (net of related cost of property sold) in the year ended December 31, 2006 compared to no revenues in 2005. Our revenues were primarily derived from the from the sale of a limited amount of land that we controlled. These revenues were not derived from our primary business target of selling property that we have improved through obtaining legal entitlements or other developmental improvements.  Currently, we are continuing to work several properties through the entitlement process and expect to generate revenues from those activities in 2007. Due to our limited revenues, our operations are currently funded by capital funding.  Selling, General and Administrative Expenses  Our operating selling, general and administrative expenses totaled $5,186,520 during the twelve month period ended December 31, 2006, compared to $2,302,145 during the comparable twelve month period ended December 31, 2005. The increase in operating expenses is primarily attributable to increased salaries of our executive officers and additional employees, office costs, professional services and the costs of terminating purchase agreements, i.e., the forfeiture of deposits. We anticipate that our general and administrative expenses consisting of salaries and professional fees, will continue to rise in the coming twelve months due to increased entitlement activities on an increasing number of property projects. We anticipate that our total revenues during such period will also increase as a result of revenues derived from the sale of residential building lots out of the Tooele properties.   12   Liquidity and Capital Resources  At December 31, 2006, we had cash and cash equivalents of $1,500,652, compared to $4,030,912 at December 31, 2005. Our decreased cash balance as of December 31, 2006 is largely attributable to deployment of capital to meet selling, general and administrative expenses and to secure rights to real property.  Proceeds from the private offering and expected revenues will be sufficient to for us to survive as a going concern for the next 12 months. However, additional funding will be necessary to finance growth and to achieve our strategic objectives. Management is actively pursuing additional sources of funding. In addition, management is expecting an increase in cash flows through anticipated increases in revenue.  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.  ITEM 7. FINANCIAL STATEMENTS  The financial statements of the Company appear at the end of this report beginning with the Report of Independent Registered Public Accounting Firm on page F-1.  ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  Not applicable.  ITEM 8A. CONTROLS AND PROCEDURES  Based on their evaluation as of the end of the period covered by this annual report on Form 10-KSB, our principal executive officer and principal financial officer, with the participation and assistance of our management, concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, were effective in design and operation.  As described in Item 3 in each  of our Forms 10-QSB for the three-month periods ended March 31, 2006, June 30, 2006 and September 30, 2006, significant changes in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting included the following:  1) Internal controls implemented and related to separation of incompatible duties and restricted access of cash, including the following activities:  i. Checks are not returned to the preparer after signing is complete (this procedure was implemented in response to a deficiency identified in managements evaluation of internal controls), ii. Bank accounts are reconciled by a person independent of the cash receipts and disbursements function, iii. Upon receipt of mail, daily cash receipts are recorded independent of the cash and bookkeeping functions, iv. Employees with cash disbursement and bank reconciliation duties are required to take vacations, and other employees are required to perform those functions when the employee is absent   13   2) Internal controls implemented and related to the recording of cash.  They include the following activities:  i. Bank accounts are reconciled by a person independent of the cash receipts and disbursements function, ii. A list of daily cash receipts are compared to the days recordings by an individual independent of the cash receipts function, iii. Owner/manager and other appropriate individuals daily compare cash receipts and disbursements to budgeted (forecasted) cash receipts and disbursements and follows up on significant variances,  3) Internal controls implemented and related to the separation of incompatible duties and restricted access of equity, including the following:  i. Segregation of the following duties:  a. Approving membership units and other equity transactions b. Issuing, transferring, and canceling stock certificates c. Maintaining detailed stockholder records d. Processing cash receipts and disbursements (dividends)  ii. Computerized equity records are limited to those with a logical need for such access  4) Internal controls relating to the recording of equity have been implemented.  They include the following activities:  i. Stock certificates are numbered and sequentially issued, and unissued certificates are safeguarded, ii. Stock records are monitored and periodically reconciled to the general ledger, iii. Reconciliations are reviewed by the owner/manager or other appropriate person, iv. All dividends and other equity transactions are approved by the board of directors  Note: The utilization of an independent transfer agent was also added as a control procedure at managements request.  Other than the changes in our system of internal control over financial reporting discussed above, there have been no changes in our system of internal control over financial reporting in connection with the evaluation by our principal executive officer and principal financial officer during the period since December 31, 2006 through the date of the filing of this From 10-KSB that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  The ability to manage and operate our business as we execute our development and growth strategy will require effective planning. Significant rapid growth could strain our internal resources, and other problems that could adversely affect our financial performance. We expect that our efforts to grow will place a significant strain on our personnel, management systems, infrastructure and other resources. Our ability to manage future growth effectively will also require us to successfully attract, train, motivate, retain and manage new employees and continue to update and improve our operational, financial and management controls and procedures. If we do not manage our growth effectively, our operations could be adversely affected, resulting in slower growth and a failure to achieve or sustain profitability.   14   ITEM 8B. OTHER INFORMATION  Not applicable.  PART III  ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT  The following table shows information about our executive officers and directors as of December 31, 2006: NameAgePositionKirby D. Cochran52Chairman & Chief Executive OfficerRobert D. Geringer47Director and PresidentDouglas W. Child46Director and Chief Financial OfficerJeff Austin51Director and Senior Vice PresidentWilliam Warwick71DirectorWilliam H. Davidson54Director  Kirby D. Cochran chief executive officer and chairman of the board of directors, age 52, has extensive knowledge and experience investing in growth, emerging growth and established operating companies. He has bought and sold millions of dollars of real estate throughout his career, with a primary focus on raw land including a 70-acre development in Wyoming. In the past five years, Mr. Cochran has been an angel investor and business consultant, assisting over a dozen growth stage companies with their strategy and operations.  Mr. Cochran holds an MBA from North Dakota State University and has taught graduate school for several years as an adjunct professor in the Business and Finance departments at the University of Utah. He teaches courses in finance, business strategy, analysis, growth and venture financing. His teaching has given him the time and ability to develop proprietary capitalization models using debt and equity instruments for the investment, acquisition and operations of companies.  Robert Geringer, president and member of the board of directors, age 47, is a licensed attorney with practical and legal experience in development, finance, taxation syndications, and mergers and acquisitions. He has participated in the management of several real estate development companies in various locations across the United States.  An approved HUD developer, Mr. Geringer is highly experienced in the development of single-family residential, commercial and specialty use real estate. Projects in which Mr. Geringer has been involved include the formation, development, management and continuing operation of commercial and residential real estate projects in California, Tennessee, New Mexico and Texas.  Mr. Geringer recently completed the development of a 240-unit multi-family facility in San Antonio, Texas and a 175-lot residential project in Brentwood, Tennessee. He was also instrumental in the acquisition and build-to-suit development of a distressed property for Federal Express and The Los Angeles Times (Times Mirror Corporation).   15   Mr. Geringer has been involved in most phases of business formation and operations and has served in the capacity of both officer and director in numerous companies. He received his B.A. in Economics from UCLA in 1981, and his J.D. from Southwestern University in 1985. He also holds an LLM in Taxation from New York University.  Douglas W. Child, chief financial officer and member of the board of directors, age 46, is the Managing Partner of Child, Child, Van Wagoner & Bradshaw, PLLC, Certified Public Accountants. As the managing member of two other real estate and holding companies, Mr. Child is experienced in a broad array of real estate areas including: residential development, residential foreclosures of both conventional and HUD mortgages and real estate taxation. He is also a licensed mortgage broker with numerous high-level contacts in the real estate industry.  As a member of the American Institute of Certified Public Accountants (AICPA), Mr. Child has over 18 years of audit, tax and management consulting experience with both Ernst & Young and in his own accounting practices.  Mr. Childs specialties include financial statement and compliance audits for publicly held entities, private investment funds, small businesses, and non-profit organizations. He has served as an expert witness in numerous depositions ranging from breaches of contract to valuation of property issues. In addition to managing the income tax practices of Ernst & Youngs Small Business Advisory Services and his own practices, Mr. Child has also performed business valuations for several entities.  Mr. Childs firm, Child, Van Wagoner & Bradshaw, PLLC, is registered with the Public Company Accounting Oversight Board, which qualifies his firm to perform public company audits. He is a graduate of Utah State University with a B.S. in Accounting, and is licensed as a CPA in Utah, Wyoming, Colorado, Idaho, Nevada, Missouri and Montana.  Jeff Austin, senior vice president and member of the board of directors, age 51, has over 25 years of experience in sales and marketing. He was brought onboard for his ability and experience in leveraging teamwork and accountability to elevate service-focused organizations to new levels of performance. He has focused on building and growing companies through by attracting strategic partners and building relationships between and within businesses.  Mr. Austins industry experience includes high tech, financial, medical and real estate software services. He is the former President of FIS Inc., where he led the companys development and marketing of Enterprise Facility and Portfolio Real Estate Management software products on an international scale. His responsibilities included direction of sales, services and marketing to Fortune 100 companies as well as the Federal Government. He is also a former Vice President of Sales for Qwest Communications, Corio Inc., JBA International and PeopleSoft.  Mr. Austin has personally invested in and purchased several million dollars of real estate properties and companies, including several apartments, residential properties and real estate focused limited partnerships. Further, under his guidance FIS developed application software to manage some of the largest real estate properties in the world for companies including Sprint, Cisco, Verizon, Corning, Intel and many other high profile customers. Mr. Austin received his B.S. in Business Marketing from the University of Colorado.  William Warwick, independent member of the board of directors, age 71, is a business consultant with over 40 years of experience, primarily in the telecommunications industry. Mr. Warwick most recently served as Senior Vice President, AT&T, and Chairman and CEO, AT&T China, Ltd. and continues to serve as Chairman, AT&T China.   16   Mr. Warwick has served: on the board of directors for the US/China Business Council, Beijing, 1994-1996; as Chairman of the Board, American Chamber of Commerce, Beijing, 1995; Board of Trustees, New Jersey Business and Industry Association, 1988-1994; Vice-Chairman of the Board, New Jersey Business and Industry Association, 1992-1993; Board of Directors, New Jersey Manufacturers Insurance Company, 1988-1994; Vice Chairman of the Board, New Jersey Manufacturers Insurance Company, 1992-1993; and the Board of Directors, Semiconductor Industry Association, 1987-1993.  William H. Davidson, Ph.D., independent member of the board of directors, age 54, is Chairman of Mesa Research. Dr. Davidson was a tenured professor at the Marchall Business School at USC, served as leader for Deloitte Touche Telecom and Media Practice. He has served on five public company boards and numerous private company boards. As a partner in six venture capital funds, he has participated in the financing of 50 venture-backed companies. Dr. Davidson has authored eight books including Breakthrough Companies and holds an MBA and a PhD in management both from Harvard Business School.  Limitation on Liability and Indemnification of Directors and Officers  Our Amended Operating Agreement provides that no director or officer shall have any liability to the Company if the person acted in good faith and with the same degree of care and skill as a prudent person in similar circumstances.  Our Amended Operating Agreement provides that we will indemnify our directors and officers and may indemnify our employees or agents to the fullest extent permitted by law against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices. However, nothing in our Amended Operating Agreement protects or indemnifies a director, officer, employee or agent against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. To the extent that a director has been successful in defense of any proceeding, the California Corporations Code, as amended (the Corps.C. Sec.17000, et seq.), provides that he or she shall be indemnified against reasonable expenses incurred in connection with the proceeding.  Section 16(a) Beneficial Ownership Reporting Compliance  Section 16(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act) requires our executive officers and directors and persons who own more than ten percent of our common stock to file reports of ownership and changes in ownership with the SEC. Such executive officers, directors and greater than ten percent stockholders are also required by SEC rules to furnish us with copies of all Section 16(a) forms they file. Based on information supplied to the Company and filings made with the SEC, the Company believes that despite the fact that there is no market for its securities, during the fiscal year ended December 31, 2006, Section 16(a) filing requirements applicable to its Directors, officers, and greater than ten percent beneficial owners were not complied with. We expect that within the coming weeks that our Directors, officers, and greater than ten percent beneficial owners will file Form 3s necessary to fully comply with Section 16(a) filing requirements applicable to each of them.  17    ITEM 10. EXECUTIVE COMPENSATION  Summary Compensation Table  The cash and non-cash compensation that we have paid during the fiscal year ended December 31, 2006 to our named executive officers is detailed in the following table. Long-Term CompensationAnnual CompensationAwardsPayoutsAll Other
Compen-sationName and Principal PositionYearSalary(5)BonusOther Annual CompensationSecurities Underlying Options(#)LTIP PayoutsKirby D. Cochran (1) Chairman and CEO2006
2005$
$300,000
281,000$$$$Robert D. Geringer (2) President2006
2005$
$300,000
281,000$$$$Douglas W. Child (3) CFO2006
2005$
$120,000
170,000$$$$Jeff Austin (4)
 SVP2006
2005$
$215,000
170,000$
$$75,000

$$$ 1. Kirby D. Cochran is currently compensated $25,000 per month. 2. Robert D. Geringer is currently compensated $25,000 per month. 3. Douglas W. Child is currently compensation $15,000 per month. 4. Jeff Austin is currently compensated $20,833 per month. 5. Three of our executive officers receive $2,000 per month toward reimbursement for expenses. One officer receives $10,000 per month toward reimbursement for expenses.  Long-Term Incentive Plan Awards/Employment Agreements We do not maintain any long-term incentive plans. However, our board of directors may adopt, with member approval, an option plan where up to 20% of our authorized common units may be purchased by employees.  The option plan may provide for the grant of nonstatutory unit options and the grant of unit purchase rights both our employees, non-employee directors, consultants and advisors, and to the employees, non-employee directors, consultants and advisors of subsidiary corporations.  Under the option plan, the exercise price or purchase price may, at the discretion of our board of directors or the committee appointed by the board to administer the option plan, be paid in cash, cash equivalents, promissory notes, surrender of stock, a cashless exercise, past services, cancellation of indebtedness owed to the grantee or any form of payment that is consistent with applicable laws, regulations and rules.  18   We have consulting agreements with each of our four executives.  The consulting agreements are substantially similar except with respect to compensation.  Each agreement provides for:           An at will term that may be terminated with one week notice by the executive or the company;           A monthly consulting fee, plus reimbursement of expenses; and           A covenant to not render or perform any services for any other corporation, firm, entity or person which would impair the executives ability to perform his duties to us. Under the consulting agreements, Messrs. Cochran and Geringer are entitled to $25,000 per month, respectively, in compensation. Messrs. Child and Austin are entitled to $15,000 per month each. In addition to their base compensation, each of our officers receives a monthly $2,000 fee for reimbursement of expenses.  Significant Employees  Except for our executive officers, we have no significant employees.  Option Grants   We did not grant any options to our executive officers in the fiscal year ended December 31, 2006.  Option Exercises and Year-End Option Values   None of our executive officers held any options as of December 31, 2006.  Compensation of Our Independent Directors Each of our directors who are not also an employee receives director fees not to exceed $25,000 per annum. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  The following table presents information about the beneficial ownership of our common stock as of December 31, 2006 by: * each person or entity who is known by us to own beneficially more than 5% of the outstanding shares of our common stock; *    each of our directors and named executive officers; *    all directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities, subject to community property laws, where applicable.  The percentage of beneficial ownership of our common units subject to this registration statement is based on a total of 23,550,841 common units outstanding as of December 31, 2006. Preferred units which we intend to redeem at prices ranging from $1.00 to $5.00 per unit total 10,240,000 issued and outstanding of which 576,500 or 5.57% are owned by our executive officers.   19    Name and Address of Beneficial OwnerNumber of Common Units
Beneficially Owned (1)Percentage of ClassKirby D. Cochran  (2)
9595 Wilshire, Suite PH 1000
Beverly Hills, CA, 902128,106,16733.65%Robert D. Geringer   (3)
9595 Wilshire, Suite PH 1000
Beverly Hills, CA, 902124,106,16717.05%Jeff Austin   (4)
9595 Wilshire, Suite PH 1000
Beverly Hills, CA, 902122,509,16710.42%Douglas W. Child   (5)
1284 Flint Meadow Dr., Suite D
Kaysville, UT 84037850,8833.53%All current directors and executive officers as a group (4 persons)15,572,33464.65%  (1) Units include common units only; Our preferred shares are not convertible into commons shares or other voting shares. (2) Kirby D. Cochran is our chief executive officer and a member of our board of directors and owns a total of 8,270,667 units consisting of 8,106,167 common units and 164,500 preferred units. (3) Robert D. Geringer is our president and a member of our board of directors and owns a total of 4,270,667 units consisting of 4,106,167 common units and 164,500 preferred units. (4) Jeff Austin is our senior vice president and a member of our board of directors and owns a total of 2,676,000 units consisting of 2,509,167 common units and 167,500 preferred units. (5) Douglas W. Child is our chief Financial officer and a member of our board of directors and owns a total of 930,833 units consisting of 850,833 common units and 80,000 preferred units.  ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS  Our office space is leased from our officers  Our chief financial officer, Douglas W. Child, provides office facilities and administrative services for our operations in the state of Utah.  During 2006, we entered into a sublease agreement with a separate business entity, owned by Mr. Child, for office space.  Pursuant to the terms of the agreement, we are required to make monthly payments, totaling $3,430, over a two-year term.  As of December 31, 2006, we had paid $9,792 for lease and administrative fees to Mr. Childs separate entity.  In addition, our president, Robert Geringer, provides office facilities and administrative services for our operations in the state of California. For the period ended December 31, 2006, we paid $210,000 to a separate entity owned by Mr. Geringer. The separate entity provided office facilities and administrative services.  Transactions by the Management  Our executive officers or directors may pursue acquisitions of assets and businesses in connection with their existing businesses or a new line of business without first offering such opportunities to us.   20   Our Executive Officers or Directors Other Business Activities  Our executive officers or directors are involved in a variety of business and professional activities outside of managing our operations.  These other activities may result in a conflict with respect to the allocation of management resources away from our operations and to other activities.  Diverse Membership; Relationships with Members  Owners of our securities may include persons or entities organized in various jurisdictions, including the United States and Asian and European countries, which may have conflicting investment, tax and other interests with respect to their investments in us. The conflicting interests of particular members may relate to or arise from, among other things, the nature of investments made by us, the structuring of the acquisition of real estate investments, and the timing of disposition of real estate investments. Such structuring of our investments and other factors may result in different returns being realized by different members. As a consequence, conflicts of interest may arise in connection with decisions made by our management, including with respect to the nature of structuring of real estate investments, which may be more beneficial for one member than for another member, especially with respect to the members particular tax situations.  Management of the Company  Our Management devotes only such time to our operations as they, in their sole discretion deem necessary to carry out our operations effectively. Except as described above, our officers and directors work on other projects and conflicts of interest may arise in allocating management time, services or functions among such affiliates.  Limitation of Rights  The Operating Agreement provides that our management will not be liable for actions taken by them in good faith in furtherance of our business, and will be entitled to be indemnified by us in such cases. Therefore, our members may have a more limited right against the management, their affiliates and their respective related parties than they would have absent such limitations in the Operating Agreement. In addition, indemnification of the management, their affiliates and their respective related parties could deplete our assets possibly resulting in loss by the members of a portion or all of their investment.   21   ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.  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 twelve months ended December 31, 2006.  ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES  The following table sets forth the fees paid by us for services rendered by Bouwhuis, Morrill & Company, LLC for the years ended December 31, 2006 and December 31, 2005:   20062005Audit Fees15,6009,068Audit-Related Feesn/an/aTax Feesn/an/aAll Other Feesn/an/aTotal$15,600$9,068   22   SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on March 30, 2007. CASTLE ARCH REAL ESTATE INVESTMENT COMPANY, L.L.C.  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)  23       REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    To the Board of Directors of Castle Arch Real Estate Investment Company, LLC (a development stage company) Midvale, Utah   We have audited the accompanying consolidated statement of financial condition of Castle Arch Real Estate Investment Company, LLC (a development stage company) and Subsidiary as of December 31, 2006 and the related consolidated statements of operations, changes in members capital, and cash flows for the years ended December 31, 2006 and 2005 and for the period from inception on April 15, 2004 to December 31, 2006.  These consolidated financial statements are the responsibility of the Companys management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Castle Arch Real Estate Investment Company, LLC (a development stage company) and Subsidiary as of December 31, 2006 and the results of its operations and its cash flows for the years ended December 31, 2006 and 2005 and for period from inception on April 15, 2004 to December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.   /s/ Bouwhuis, Morrill & Company  Bouwhuis, Morrill & Company Layton, Utah ­­­­­­­­­­­­­March 23, 2007  F- 1    Financial Information
Castle Arch Real Estate Investment Company, LLC
(A Development Stage Company)
Consolidated Statement of Financial ConditionDecember 31,2006ASSETSCurrent assets:Cash and cash equivalents$1,500,652Interest receivable, net of allowance,totaling $9,97348,654Other receivable250,000Notes receivable  current, net of allowance,totaling $100,000505,000Prepaid expenses and other current assets7,225Total current assets2,311,531Property, plant and equipment:Office equipment38,910Less: accumulated depreciation(11,044)Net property, plant and equipment27,866Other assets:Note receivable  noncurrent255,000Other properties held for investment23,561,741Earnest money and other deposits160,000Entitlement costs576,244Other noncurrent assets3,430Total other assets24,556,415Total assets$26,895,812LIABILITIES AND MEMBERS CAPITALCurrent liabilities:Accounts payable$1,396,106Other accrued expenses108,109Preferred dividends payable2,578,094Notes payable6,820,287Total current liabilities10,902,596Total liabilities10,902,596Members capital:Minority interest in consolidated subsidiary (see Note 7)2,237,329Common units, 23,550,841, issued and outstanding,ranging from $.001 to $2.50 per unit1,046,038Non-managing members units, series A preferred,1,000,000 units issued and outstanding, $1.00 per unit647,940Non-managing members units, series B preferred,2,000,000 units issued and outstanding, $1.00 per unit1,376,156Non-managing members units, series C preferred,3,300,000 units issued and outstanding, $1.00 per unit2,452,316Non-managing members units, series D preferred,3,940,000 units issued and outstanding, $5.00 per unit16,880,672Deficit accumulated during the development stage(8,647,235)Total members capital15,993,216Total liabilities, minority interest, and members capital$26,895,812  See notes to consolidated financial statements.  F- 2    Financial Information
Castle Arch Real Estate Investment Company, LLC
(A Development Stage Company)
Consolidated Statement of OperationsCumulativeFrom April 15,Year EndedYear Ended2004 (inception) toDecember 31, 2006December 31, 2005December 31, 2006Revenues:Proceeds from sale of property,net of cost of property sold$48,041$-$48,041Total revenues48,041-48,041Operating expenses:Selling, general and administrative5,186,5202,302,1457,785,415Depreciation and amortization130,2523,604134,348Cost of terminated purchase agreements802245,363246,166Bad debt expense and impairment losses109,973-109,973Start-up and organizational costs--55,696Total operating expenses5,427,5472,551,1128,331,598Operating income/(loss)(5,379,506)(2,551,112)(8,283,557)Other revenue/(expenses)Interest income98,49648,992149,359Interest expense(567,811)(231)(568,042)Income/(loss) from continuing operationsbefore minority interest(5,848,821)(2,502,351)(8,702,240)Minority interest in losses of consolidatedsubsidiary55,005-55,005Net loss and deficit accumulated duringthe development stage$(5,793,816)$(2,502,351)$(8,647,235)Accumulated preferred dividends$1,894,652$617,332$2,578,094Net loss available to commonunitholders$(7,688,468)$(3,119,683)$(11,225,329)Net loss per common unit (Note 1)$(33.49)$(16.16)Weighted average units outstanding22,952,87819,304,121  See notes to consolidated financial statements.   F- 3    Financial Information
Castle Arch Real Estate Investment Company, LLC
(A Development Stage Company)
Consolidated Statement of Cash FlowsCumulativeFrom April 15,Year EndedYear Ended2004 (inception) toDecember 31, 2006December 31, 2005December 31, 2006Cash flows from operating activitiesNet loss$(5,793,816)$(2,502,351)$(8,647,235)Adjustments to reconcile net loss tonet cash used in operating activitiesDepreciation6,9483,60411,044Amortization of debt issue costs123,303-123,303Allowance for bad debts109,973-109,973Minority interest in losses of subsidiary(55,005)-(55,005)Professional outside services paid inthe form of common units1,333,75078,7501,412,500Changes in operating assets and liabilities:Increase in notes receivable(255,000)-(255,000)Interest receivable(54,232)(4,395)(58,627)Other receivable(250,000)-(250,000)Prepaid expenses and othercurrent assets16,559(23,784)(7,225)Accounts payable39,5239,466247,657Other accrued expenses68,2734,21172,484Due to related party-(20,000)-Properties held for investment(7,171,464)(8,713,063)(16,975,170)Other(3,430)-(3,430)Net cash used in operating activities(11,884,618)(11,167,562)(24,274,731)Cash flows from investing activitiesOption, earnest money, andentitlement deposits(415,348)(1,105,018)(579,618)Additions to notes receivable(505,000)(100,000)(605,000)Purchase of property, plant andequipment(13,226)(9,152)(38,910)Net cash provided by investing activities(933,574)(1,214,170)(1,223,528)Cash flows from financing activitiesProceeds from issuance of memberunits8,785,36214,697,74128,328,796Offering costs(391,400)(915,720)(1,307,120)Proceeds from subscription receivables1,916,735301,134-Proceeds from issuance of long-term debt---Repayment of long-term debt-(11,843)-Debt issuance costs(22,765)-(22,765)Net cash provided by financing activities10,287,93214,071,31226,998,911Net increase (decrease) in cash and cashequivalents(2,530,260)1,689,5801,500,652Cash at beginning of period4,030,9122,341,332-Cash at end of period$1,500,652$4,030,912$1,500,652  See notes to consolidated financial statements.  F- 4    Financial Information
Castle Arch Real Estate Investment Company, LLC
(A Development Stage Company)
Consolidated Statement of Cash Flows (continued)CumulativeFrom April 15,Year EndedYear Ended2004 (inception) toDecember 31, 2006December 31, 2005December 31, 2006Non-cash investing and financing activitiesNotes payable issued for other propertyheld for investment6,859,632-6,859,632Debt issuance costs on notes payable139,883-139,883Issuance of member units for subscriptionreceivables1,117,6531,985,135-Preferred dividend payable1,894,652617,3322,578,094Referral fees paid with common units258,510345,184779,897Accrued referral fees paid with commonunits152,39467,744-Supplemental disclosuresCash paid for interest$556,766$231$556,997  See notes to consolidated financial statements.    F- 5


Castle Arch Real Estate Investment Company, LLC (A Development Stage Company) Consolidated Statement of Changes in Members Capital Period From April 15, 2004 (inception) to December 31, 2006  AccumulatedDeficitNon-managing MembersNon-managing MembersNon-managing MembersNon-managing MembersDuring theTotalCommon UnitsUnits Series A PreferredUnits Series B PreferredUnits Series C PreferredUnits Series D PreferredDevelopmentMinorityMembersUnitsAmountUnitsAmountUnitsAmountUnitsAmountUnitsAmountStageInterestCapitalBalance (inception)April 15, 2004-$          --$          --$          --$          --$          -$          --$          -Sale of common unitsat $0.001 per unit16,000,00016,000----------16,000Sale of Series Ainvestment unitsat $1.00 per unit1,000,000-1,000,0001,000,000--------1,000,000Sale of Series Binvestment unitsat $2.00 per unit900,350---1,800,7001,800,700------1,800,700Sale of Series Cinvestment unitsat $3.00 per unit191,667-----575,000575,000----575,000Subscriptionsreceivable-----(31,134)-(270,000)----(301,134)Preferred dividendPayable---(38,209)-(25,379)-(2,522)----(66,110)Offering costs---(154,610)-(280,223)-(115,058)----(549,891)Net loss----------(351,068)-(351,068)Balance,-December 31, 200418,092,017$16,0001,000,000$     807,1811,800,700$   1,463,964575,000$     187,420-$          -$   (351,068)-$2,123,497   See notes to consolidated financial statements


F- 6


Castle Arch Real Estate Investment Company, LLC (A Development Stage Company) Statements of Changes in Members Capital (continued) Period from April 15, 2004 (inception) to December 31, 2005  AccumulatedDeficitNon-managing MembersNon-managing MembersNon-managing MembersNon-managing MembersDuring theTotalCommon UnitsUnits, Series A PreferredUnits, Series A PreferredUnits, Series A PreferredUnits, Series A PreferredDevelopmentMinorityMembersUnitsAmountUnitsAmountUnitsAmountUnitsAmountUnitsAmountStageInterestCapitalIssuance of shares forreferral fees andservices268,981425,388---------425,388Sale of Series Binvestment unitsat $2.00 per unit99,650---199,300199,300-----199,300Sale of Series Cinvestment unitsat $3.00 per unit908,333-----2,725,0002,725,000---2,725,000Sale of Series DInvestment unitsat $5.00 per unit2,659,167-------2,659,16713,295,836-13,295,836SubscriptionsReceivable---------(1,985,135)-(1,985,135)Proceeds fromSubscribed units-----31,134-270,000----301,134Preferred dividendPayable---(79,241)-(157,098)-(205,159)-(175,834)--(617,332)Offering costs-----(1,144)-(260,461)-(605,756)--(867,361)Net Loss----------(2,502,351)-(2,502,351)Balance,December 31, 200522,028,148$441,3881,000,000$727,9402,000,000$1,536,1563,300,000$2,716,8002,659,167$10,529,111$(2,853,419)-$13,097,976Issuance of units forReferral fees andServices241,860604,650----------604,650Consolidation ofsubsidiary-----------2,237,3292,237,329Sale of Series DInvestment unitsAt $5.00 per unit1,280,833-------1,280,8336,404,165--6,404,165Subscription receivables---------(68,400)--(68,400)Proceeds fromSubscribed units---------1,985,135--1,985,135Preferred dividendPayable---(80,000)-(160,000)-(264,484)-(1,354,629)--(1,859,113)Offering cost---------(614,710)--(614,710)Net loss----------(5,793,816)-(5,793,816BalanceDecember 31, 200623,550,841$1,046,0381,000,000$     647,9402,000,000$    1,376,1593,300,000$    2,452,3163,940,000$    16,880,672$  (8,647,235)2,237,329$  15,993,216  See notes to consolidated financial statements.


F- 7


Financial Information Castle Arch Real Estate Investment Company, LLC (A Development Stage Company)   Notes to the Consolidated Financial Statements  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 five private placements of membership units in the Company, and its subsidiaries 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.  As of December 31, 2006, the Company has successfully placed 3,940,000 membership units.  Effective May 22, 2006, the placement of 1,200,000 membership units in Castle Arch Kingman, LLC (CAK), a variable interest entity, of which the Company is considered the primary beneficiary (see Note 7).  Each membership unit consists of five common and one preferred unit at $25.00 per membership unit.  At December 31, 2006, CAK had raised $3,195,276, resulting in the placement of 127,811 membership units.  Of this amount, $799,082 represents subscribed units outstanding for which funds had not been received at December 31, 2006.  At December 31, 2006, the Company had completed the Series A, B, and C private placement offerings, and had raised $19,700,000 of the Series D private placement, resulting in the placement of 7,040,000 membership units.  Of this amount, $68,400 represents Series D subscribed units outstanding for which funds had not been received at December 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 dollar amount invested 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:  F-8   Financial Information Castle Arch Real Estate Investment Company, LLC (A Development Stage Company) Notes to the Consolidated Financial Statements   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.  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 significant revenues from the sale or development of property as of December 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 part of the Companys development stage activities.  B. 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.  Significant estimates that may change in the near future include properties held for sale and other properties held for investment if it becomes necessary to incur unexpected additional costs to prepare these properties for sale within the next twelve months.  In addition, significant estimates include potential impairment of certain promissory notes receivable whose maturities have expired at December 31, 2006 (see Note 2).  D. Principles of Consolidation  The accompanying consolidated financial statements include the accounts of the Company and, effective April, 2006, the accounts of Castle Arch Kingman, LLC (CAK).  In December 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46(R) ("FIN 46(R)"), which further clarified and amended FIN 46, Consolidation of Variable Interest Entities, which requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or is the primary beneficiary, as a result of ownership, contractual or other financial interests in the entity.  CAK is considered a variable interest entity of which the Company is the primary beneficiary (see Note 2).  All intercompany accounts and transactions have been eliminated in the consolidated financial statements.  E. Reclassifications  Certain prior year amounts have been reclassified to conform to the current years presentation.  F-9   Financial Information Castle Arch Real Estate Investment Company, LLC (A Development Stage Company) Notes to the Consolidated Financial Statements  F. Accounting Method  The Companys financial statements are prepared using the accrual method of accounting. The Company has elected a December 31 year end.  G. 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.  H. Uninsured Cash Balances  The Company maintains its corporate cash balances in multiple accounts at one bank.  Corporate cash accounts at banks are insured by the FDIC up to $100,000.  Amounts in excess of insured limits were approximately $1,400,652 at December 31, 2006.  To date, the Company has not experienced any losses as a result of this excess and does not anticipate any such losses in the future.  I. 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.  J. Cash and Cash Equivalents  The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.  Cash and cash equivalents are carried at cost, which approximates fair value.  K. Offering Costs  Costs incurred in the successful raising of capital under the Companys private placement memorandums such as referral 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.  L. Property, Plant and Equipment  Property, plant and equipment is stated at cost.  Depreciation is computed primarily using the straight-line method based on estimated useful lives of 5 years.  F-10   Financial Information Castle Arch Real Estate Investment Company, LLC (A Development Stage Company) Notes to the Consolidated Financial Statements  1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  M. 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 referral fees incurred for the successful raising of capital.  N. Options, Deposits and Entitlement Costs  The terms of the Companys purchase agreements provide for due diligence periods during which 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 transpire.  The Companys policy is to capitalize entitlement costs and applicable deposits incurred as noncurrent assets, classified as earnest and increased money deposits, and entitlement costs, until such time as the properties are purchased.  Upon purchase, the Company classifies certain properties as held for sale that meet the requirements of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. These requirements include the completion of the respective entitlements and the preparation of the property for immediate sale in its existing condition, the initiation of an active program to identify potential buyers, and the expectation of occurrence of a probable sale within the following twelve months.  Those properties that do not meet these criteria are classified as other properties held for investment.  During the year ended December 31, 2006, the Company incurred costs related to nine separate properties, totaling $14,774,480.  Of this amount, $6,719,749 reflects debt proceeds used to fund the closing of three separate purchases during the year (see Note 3).  These amounts have been classified as other properties held for investment.  In addition, the Company incurred $415,348 in costs related to five separate properties and classified as earnest and increased deposits, and entitlement costs at December 31, 2006.  O. Recent Accounting Pronouncements  In February, 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments.  SFAS No. 155 eliminates the temporary exemption of bifurcation requirements to securitized financial assets, contained in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.  As a result, similar financial instruments are accounted for similarly regardless of the form of the instruments.  In addition, in instances where a derivative would otherwise have to bifurcated, SFAS No. 155 allows a preparer on an instrument-by-instrument basis to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to remeasurement.  The adoption of SFAS No. 155 has not materially affected the Companys reported loss, financial condition or cash flows.  In March, 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.  The pronouncement establishes standards whereby servicing assets and servicing liabilities are initially measured at fair value, where applicable.  In addition, SFAS No. 156 allows subsequent measurement of servicing assets and liabilities at fair value, and where applicable, derivative instruments used to mitigate risks inherent with servicing assets and liabilities are likewise measured at fair value.  The adoption of SFAS No. 156 has not materially affected the Companys reported loss, financial condition, or cash flows.  In March, 2006, the FASB issued Interpretation No. 48, (FIN 48) Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes.  FIN 48 prescribes criteria for the recognition and measurement of a tax position taken or expected to be taken in a tax return.  Accordingly,  F-11   Financial Information Castle Arch Real Estate Investment Company, LLC (A Development Stage Company) Notes to the Consolidated Financial Statements  1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  O. Recent Accounting Pronouncements (continued)  tax positions are analyzed to determine whether it is more likely than not they will be sustained when examined by the appropriate tax authority.  Positions that meet the more-likely-than-not criteria are measured to determine the amount of benefit to be recognized, whereas those positions that do not meet the more-likely-than-not criteria are derecognized in the financial statements.  The adoption of FIN 48 has not materially affected the Companys reported loss, financial condition, or cash flows.  In September, 2006, the FASB issued SFAS No. 157, Fair Value Measurements.  The statement defines fair value, determines appropriate measurement methods, and expands disclosure requirements about thosemeasurements.  The adoption of SFAS No. 157 has not materially affected the Companys reported loss, financial condition, or cash flows.  In September, 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans.  This statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year of change through comprehensive income.  In addition, SFAS No. 158 requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position.   The adoption of SFAS No. 158 has not materially affected the Companys reported loss, financial condition, or cash flows.  P. 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 in accordance with SFAS No. 128, Earnings Per Share.  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 December 31, 2006 the basic and diluted net loss per common unit is the same as there are no common unit equivalents outstanding.  Accumulated preferred unit dividends, totaling $1,793,837 for the twelve months ended December 31, 2006, have been included in the computation of net loss per common unit, resulting in an incremental increase in loss per unit of $7.82.   F-12   Financial Information Castle Arch Real Estate Investment Company, LLC (A Development Stage Company) Notes to the Consolidated Financial Statements   2. NOTES, OTHER RECEIVABLES  Notes receivable at December 31, 2006, consisted of the following:  AmountCurrentInterest RateDue Date$50,0008%200650,0008%2006400,0008%200725,0008%200725,0008%200725,0008%200720,0008%200710,0008%2007$605,000Non-current$255,00012%2010  Accrued interest along with principal is to be paid in full on or before the respective maturity date.  During 2006, the Company issued $505,000 in promissory notes receivable, bearing interest at 8 percent per annum.  Maturity dates associated with these issuances vary throughout 2007.  At December 31, 2006, two uncollateralized promissory notes, with principal balances of $50,000 each, along with accrued interest became due in full.  To date, the Company has not received payment for the required principal and interest amounts.  Accordingly, management has recorded an impairment of the notes and corresponding interest receivable, totaling $109,973 (see also Note 4).  In addition, at December 31, 2006, the Company was owed $250,000, representing a refundable earnest money deposit the Company had originally placed on a separate property, and subsequently decided not to pursue once the due diligence period had transpired.  This amount has been classified as an other receivable at December 31, 2006, and funds were subsequently received in 2007.  The Company realized sales proceeds of $840,000 during 2006.  A component of these proceeds included a note receivable, totaling $255,000 at December 31, 2006.  This note bears interest at 12 percent per annum and interest together with principal is owed to the Company in May, 2010.  3. NOTES PAYABLE  Notes payable at December 31, 2006, consisted of the following:  AmountInterest rateDue DateNote 1$5,389,29310.75%2007Note 21,479,33910.25%2007Total$6,868,632   F-13   Financial Information Castle Arch Real Estate Investment Company, LLC (A Development Stage Company) Notes to the Consolidated Financial Statements   During 2006, the Company entered into two promissory notes payable with a third-party lender totaling $5,380,293 and $1,479,339, respectively.  The Company incurred combined debt issue costs totaling $76,745, of which amount $22,765 was paid from the Companys bank accounts.  These debt issue costs have been amortized over the 12-month terms of the notes.  The Company collateralized the notes with four properties and associated water rights purchased during 2005 and 2006, respectively.  The notes bear annual interest rates of 10.75 and 10.25 percent, respectively, with interest only payments due on a monthly basis over their respective terms.  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 $1,565,010 and $11,045 to repay an existing note payable and associated accrued interest, respectively.  Debt issuance costs related to this note payable totaled $65,097.  4. COMMITMENTS AND CONTINGENCIES  At December 31, 2006, the maturities on two promissory notes receivable, each totaling $50,000, came due.  In addition, during the first quarter, 2007, a third promissory note, totaling $400,000, with a maturity date of January 17, 2007 also came due (see Note 8).  The Company has obtained collateral for the $400,000 note in accordance with the terms of the promissory note agreement whose value, in the opinion of management, equals or exceeds the face value of the note.  The remaining two notes are uncollateralized.  Accordingly, at December 31, 2006, the Companys management elected to impair two of the three promissory notes, resulting in a valuation allowance totaling $100,000.  Although an element of uncertainty currently exists regarding collectibility, given the expired agreements, management has had open communication with the promissee and, based on these discussions, fully anticipates recouping the amounts due to the Company, along with the associated interest.  5. RELATED-PARTY TRANSACTIONS  Certain officers of the Company provide office facilities and administrative services to the Company.  During the year ended December 31, 2006, the Company paid $210,000 to other officers or affiliated entities for facilities and administrative services.  As of December 31, 2006, three officers of the Company receive $2,000 per month and one officer of the Company receives $10,000 per month toward reimbursement for these expenses.  During 2006, the Company entered into a sublease agreement with a separate entity, owned by an officer of the Company, for office space.  Pursuant to the terms of the agreement, the Company is required to make monthly payments, totaling $3,430, over a two-year term.  As of December 31, 2006, the Company had paid $9,792 to the officers separate entity  6. CONSOLIDATION OF VARIABLE INTEREST ENTITY  Effective April 2006, 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.  Accordingly, the Company has consolidated CAK and eliminated all intercompany transactions.  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 (the Project).  At the date of CAKs formation, the Company entered into an Option Contract for Sale and Purchase (the Contract) and, accordingly, agreed to sell, at cost, all of the land it has or will acquire in the Kingman, Arizona area to CAK.  At December 31, 2006, the Company has purchased approximately 453 acres, totaling $12,008,373.  In addition, at December 31, 2006, the transfer to CAK has not yet been consummated.   F-14   Financial Information Castle Arch Real Estate Investment Company, LLC (A Development Stage Company) Notes to the Consolidated Financial Statements  6. CONSOLIDATION OF VARIABLE INTEREST ENTITY (CONTINUED)  In exchange for $6,000 in capital contributed to CAK at the date of its formation, the Company was issued 6,000,000 common units, representing approximately 92 percent of all outstanding common units of CAK at December 31, 2006.  Members of the Companys management team effectively control CAK pursuant to its operating agreement, wherein the Company and its managing members have been appointed as the managing member of CAK and, therefore, shall direct, manage and control and have complete authority, power, and discretion in decisions to accomplish the intended business and objectives of CAK.  The Company intends to fund CAKs working capital requirements and future operating expenses through a private placement offering, consisting of the placement of 1,200,000 membership units, comprising one preferred and five common units each at $25.00 per membership unit.  The preferred units bear a 6 percent cumulative, noncompounded preferred dividend.  At December 31, 2006, the Company had accrued $35,539 of 6 percent preferred unit distributions payable to preferred units holders of CAK.  The Company may, at its option, at any time, redeem any number of outstanding CAK preferred units at a rate of $25.00 per unit, plus any accrued preferred dividends.  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.  At December 31, 2006, CAK had raised $3,195,276 and, accordingly, had accrued a management fee payable to the Company totaling $63,906.  The minority interest in the Companys earnings during the year ended December 31, 2006 totals $55,005. A reconciliation of the minority interest in CAK at December 31, 2006 is as follows:  2006Beginning balance:$                    -Add: Capital raised3,195,276Less: Subscriptions receivable(799,082)Minority interest in current year  loss(55,005)Minority interest in referral fees of  Companys subsidiary(68.321)Minority interest in accrued dividend of Companys subsidiary(35,539)Ending balance$      2,237,329  The total equity investment at risk in CAK will be insufficient to accomplish, in its entirety, the scope of the Project and, therefore, will require additional subordinated support.  In addition, the Company is anticipated to absorb a majority of CAKs expected losses.  Therefore, upon close of the private placement offering, resulting in the Company owning 6,000,000 common units issued and outstanding, or 50 percent in CAK, the Company will continue to be considered the primary beneficiary and, accordingly, will continue to consolidate the entity.   F-15   Financial Information Castle Arch Real Estate Investment Company, LLC (A Development Stage Company) Notes to the Consolidated Financial Statements  7. MEMBERS EQUITY  Each membership unit issued to date consists of one common unit and any number of preferred units depending upon the offering.  The Company is authorized to issue up to 50,000,000 common units and 100,000,000 preferred units.  As of December 31, 2006 common units issued and outstanding totaled 23,537,161.  Of this amount, 16,510,841 represents founders capital and referral and other consulting fees paid in the form of common units.  Accordingly, the value attributable to the respective common units varies.  Founders capital consists of 16,000,000 common units issued and outstanding and was valued at $.001 per unit at inception of the Company.  Common units representing referral and other consulting fees are valued based on payment options available to the recipient which provide for payment solely in the form of cash, or a combination of cash and units. Accordingly, the valuation of common units to be paid for referral and consulting fees is based on the amount of cash the individual would have been paid had he or she selectedthe cash only option less the amount of cash he would have been paid for the cash and units option.  This value was used for all referral and consulting fees to be paid in the form of common units in each respective private placement regardless of whether the individual actually elected the cash only option.  Utilizing this valuation methodology, at December 31, 2006 the Company had issued the following common units to advisory council members, consultants, and as referral fees:  RoundNumber of Units IssuedValue
Per UnitTotalRound A38,750$.50$19,375Round B30,0761.0030,076Round C124,4511.50186,677Round D317,5642.50793,910Totals510,841$$1,030,038  The Series A preferred units may be redeemed at a price of $1.00 per unit.  The Series A preferred units have preferred dividend rights equal to 8 percent per year on a cumulative noncompounded basis.  These preferred dividends will be paid in cash upon redemption of Series A preferred units and after the return of principal.  Holders of Series A preferred units have no voting rights.  The Company may, at its option, at any time, redeem any number of outstanding Series A preferred units at a rate of $1.00 per unit, plus any accrued preferred dividends.  The Series B preferred units can be redeemed at a price of $1.00 per unit.  The Series B preferred units have preferred dividend rights equal to 8 percent per year on a cumulative noncompounded basis.  These preferred dividends will be paid in cash upon redemption of Series B preferred units and after the return of principal.  Holders of Series B preferred units have no voting rights.  The Company may, at its option, at any time, redeem any number of outstanding Series B preferred units at a rate of $1.00 per unit, plus any accrued preferred dividends.  The Series C preferred units can be redeemed at a price of $1.00 per unit.  The Series C preferred units have preferred dividend rights equal to 8 percent per year on a cumulative noncompounded basis.  These preferred dividends will be paid in cash upon redemption of Series C preferred units and after the return of principal.  Holders of Series C preferred units have no voting rights.  The Company may, at its option, at any time, redeem any number of outstanding Series C preferred units at a rate of $1.00 per unit, plus any accrued preferred dividends.  The Series D preferred units can be redeemed at a price of $5.00 per unit.  The Series D preferred units have preferred dividend rights equal to 8 percent per year on a cumulative noncompounded basis.  These preferred dividends will be paid in cash upon redemption of Series D preferred units and after the return of principal.  Holders of Series D preferred units have no voting rights.  The Company may, at its option, at any time, redeem any number of outstanding Series D preferred units at a rate of $5.00 per unit, plus any accrued preferred dividends.   F-16   Financial Information Castle Arch Real Estate Investment Company, LLC (A Development Stage Company) Notes to the Consolidated Financial Statements   7. MEMBERS EQUITY (CONTINUED)  As of December 31, 2006, the Company had accrued $2,542,555 of 8 percent preferred unit distributions payable to preferred unit holders based on the period of time from receipt of funds related to the preferred unit holders respective investment to date.  The holders of the common units are entitled to one vote for each unit held of record by them and may not accumulate votes.  This means that the holders of more than 50 percent of the common units voting for the election of directors can elect all of the directors if they choose to do so.  In such event, the holders of the remaining common units will not be able to elect any person to the board of directors.  The holders of the common units are entitled to receive dividends when, and if declared by the board of directors out of funds legally available therefore, subject to payment of all accrued dividends on outstanding preferred units.  In the event of the Companys liquidation, dissolution or winding up, the holders of the common units have the right to share proportionately in the Companys remaining net assets after payment of the total liquidation preference of all outstanding preferred units.  Holders of common units, as such, have no conversion, preemptive or other subscription rights, and there are no redemption rights applicable to the common units.  In the future, the Company intends to raise working capital through sales of additional preferred units.  The board of directors has authority, in accordance with the provisions of the Companys operating agreement, and without action by the members, to designate and issue all or any portion of the remaining authorized but unissued preferred units, and to determine the voting rights, preferences, privileges, and restrictions, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of units constituting any series in the designation of such series.  Such preferred units, if and when issued, may carry rights superior to those of the common units.  8. SUBSEQUENT EVENTS  In March, 2007, the Company acquired a separate property, totaling $1,102,008.  Of this amount, $450,000 represents a note payable to the seller, secured by the acquired property and bearing interest at 8 percent per annum.  Combined principal and interest is due in full on or before September, 2007.  In January and March, 2007, the Company issued three promissory notes receivable to an unrelated entity, totaling $65,000.  The notes receivable bear interest of 8 percent and principal is to be paid together with interest on or before March 31, 2007.   F-17