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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the year ended December 31, 2004

OR

For the transition period from              to             

Commission file number: 0-16645

RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

Partnership’s telephone number, including area code (650) 343-9300

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Units of Limited Partnership Interest

(Title of class)

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

No market for the Limited Partnership Units exists and therefore a market value for such Units cannot be determined.

DOCUMENTS INCORPORATED BY REFERENCE: None.

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INDEX

RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

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Part I

Item 1. Business

Rancon Income Fund I, a California Limited Partnership, (“the Partnership”) was organized in accordance with the provisions of the California Revised Limited Partnership Act for the purpose of acquiring, operating and disposing of existing income producing commercial, industrial and residential real estate properties. The Partnership reached final funding in April 1989. The Partnership was formed with initial capital contributions from Rancon Income Partners I, L.P. (the General Partner) and Daniel L. Stephenson and Rancon Financial Corporation (RFC), the initial limited partner, who indirectly owns and controls the General Partner. RFC is wholly-owned by Daniel L. Stephenson. The General Partner and its affiliates are hereinafter referred to as the General Partner. The Partnership has no employees.

In 2004, 366 Units were redeemed at an average price of $409. As of December 31, 2004 and 2003, there were 12,600 and 12,966 Units outstanding, respectively.

As of December 31, 2004, the Partnership owned one property, which is more fully described in Item 2.

On January 18, 2005, the Partnership entered into a contract to sell the Wakefield Industrial Center for a price of $3,900,000. On March 15, 2005, the sale closed and generated net proceeds of approximately $3,659,000 and a gain on sale of approximately $2,446,000.

After the close of escrow for the sale of Wakefield Industrial Center, the last property owned by the Partnership, the Partnership’s plan is to proceed with final distribution of available funds and dissolve the Partnership per the Partnership agreement. The process will be done under the direction of our attorney and tax accountant in a timely manner.

Item 2. Properties

As of December 31, 2004, the Partnership owned the property listed below:

Wakefield Industrial Center

In April 1987, the Partnership acquired the Wakefield facility, at a cost of approximately $1,899,000 plus acquisition fees of $87,000. The Wakefield property consists of three parcels totaling approximately 3.99 acres of land. Two buildings are constructed on two of the parcels with the remaining parcel serving as a parking lot between the buildings. The property is located in Temecula, California, on the west side of Jefferson Avenue, approximately 500 feet west of the Interstate 15 highway in an area that is zoned for “medium manufacturing”. Temecula Valley submarket is continuing to grow. As the population increases, the demand for commercial and industrial space, as well as the rental rates, are expected to increase.

Both buildings are composed of concrete tilt-up construction and have central heating and air conditioning systems in the office areas. One building contains approximately 25,000 square feet of leasable space, of which approximately 5,900 square feet is office space, with the balance used for manufacturing and related purposes. The other building contains approximately 19,200 square feet of leasable space of which approximately 4,800 square feet is office space, with the balance used for warehousing and related purposes. The Wakefield facility provides uncovered parking for approximately 54 cars and includes partially improved land which is used for car parking and truck access.

According to research conducted by the Partnership’s leasing director, the market has approximately 12 million square feet of existing industrial space, with an overall vacancy rate of 7.5%. The area offers a wide range of high quality, attractive industrial projects ranging from multi-tenant incubator space to large, single-user distribution facilities located in master-planned business parks. There is approximately 600,000 square feet of multi-tenant and free standing industrial space that competes directly with Wakefield Industrial Center. Wakefield is one of the original industrial buildings in the area. The asking rent for industrial space in this area ranges from $4.56 to $6.24 per square foot triple net (tenant pays all operating expenses, including taxes, insurance, and capital) with newer properties at the high end.

The neighborhood surrounding Wakefield has grown over the years and now has added many retail properties which benefit from the high traffic count on Jefferson Avenue. A new retail shopping center is now located directly adjacent to Wakefield.

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The occupancy level at Wakefield for each of the five years ended December 31, 2004, expressed as a percentage of the total net rentable square feet, and the average annual effective rent per square foot, were as follows:

Annual effective rent is calculated by dividing the aggregate of annualized current monthly rental income for each tenant by the total square feet occupied at the property.

One tenant occupies 100% of the net rentable square footage of the two buildings. The principal terms of the lease and the nature of the tenant’s business are as follows:

On January 18, 2005, the Partnership entered into a contract to sell the Wakefield Industrial Center for a price of $3,900,000. On March 15, 2005, the sale closed and generated net proceeds of approximately $3,659,000 and a gain on sale of approximately $2,446,000.

In October 2004, the Partnership sold the property listed below:

Bristol Medical Center

In October 1987, the Partnership entered into an agreement with Rancon Financial Corporation (“RFC”) to acquire Bristol Medical Center for a purchase price of $5,105,000, plus all costs incurred by RFC in ownership and management of the property from December 1986. The purchase price was paid in installments through May 1988, for a total cost of $5,370,000. Bristol Medical Center is located in Santa Ana, California, on the west side of Bristol Street, approximately 1.5 miles from a major east-west freeway and approximately 2 miles from a major north-south freeway. The John Wayne Orange County airport is located 2.5 miles northwest of the property.

Bristol Medical Center consists of two 2-story medical office buildings and related parking spaces on approximately 3.42 acres. The two office buildings contain an aggregate of approximately 52,311 net rentable square feet of office space. Each of the buildings have one elevator and three stairways, and each suite is served by its own roof-mounted heating and air conditioning unit. The property contains uncovered parking for approximately 299 cars.

On October 28, 2004, the Partnership entered into a contract to sell Bristol Medical Center for a price of $7,250,000. On December 14, 2004, the sale closed and generated net proceeds of approximately $6,800,000 and a gain on sale of approximately $3,800,000. On December 17, 2004, the Partnership made distributions of $6,300,000 to the limited partners and accrued $128,000 for the General Partner. The Partnership added the remaining proceeds to its cash reserves.

Item 3. Legal Proceedings

Certain claims and lawsuits have arisen against the Partnership in its normal course of business. The Partnership believes that such claims and lawsuits will not have a material adverse effect on the Partnership’s financial position, cash flow or results of operations.

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

None.

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Part II

Item 5. Market for Partnership’s Common Equity and Related Stockholder Matters

Market Information

There is no established trading market for the Units.

Holders

As of December 31, 2004, a total of 1,010 persons (Limited Partners) held Units.

Distributions

Distributions are paid from either Cash From Operations or Cash From Sales or Financing.

Cash From Operations is defined in the Partnership Agreement as all cash receipts from operations in the ordinary course of business (except for the sale, refinancing, exchange or other disposition of real property in the ordinary course of business) after deducting payments for operating expenses. Distributions of Cash From Operations are generally allocated as follows: (i) first to the Limited Partners until they receive a noncumulative 6% return per annum on their unreturned capital contributions and (ii) the remainder, if any in a given year, shall be divided in the ratio of 90% to the Limited Partners and 10% to the General Partner.

Distributions equal to the amounts otherwise allocable to the General Partner but reallocated to the Limited Partners pursuant to (i) above shall be paid to the General Partner on the next occasion on which Cash From Operations is available for distribution to Limited Partners in an amount in excess of the amount required to provide the Limited Partners with a 6% per annum return on their unreturned capital contributions, in which case the excess shall be paid to the General Partner in an amount up to the aggregate amount previously re-allocated pursuant to (i) above and not subsequently repaid in accordance with the provisions of this paragraph.

Cash From Sales or Financing is defined in the Partnership Agreement as the net cash realized by the Partnership from the sale, disposition or refinancing of any property after retirement of applicable mortgage debt and all expenses related to the transaction, together with interest on any notes taken back by the Partnership upon the sale of a property. All distributions of Cash From Sales or Financing are allocated generally as follows: (i) first, 2% to the General Partner and 98% to the Limited Partners until the Limited Partners have received an amount equal to their capital contributions; (ii) second, 2% to the General Partner and 98% to the Limited Partners until the Limited Partners have received a 6% return on their unreturned capital contributions (less prior distributions of Cash From Operations); (iii) third, to the General Partner the amount of subordinated real estate commissions payable per the Partnership Agreement; (iv) fourth, 2% to the General Partner and 98% to the Limited Partners until the Limited Partners have received an additional 4% return on their unreturned capital contributions (less prior distributions of Cash From Operations); (v) fifth, 2% to the General Partner and 98% to the Limited Partners until the Limited Partners who purchased their Units prior to June 1, 1988, receive an additional return (depending on the date on which they purchased the Units) on their unreturned capital of either 8%, 5% or 2% (calculated through the first anniversary date of the purchase of the Units); (vi) sixth, 98% to the General Partner and 2% to the Limited Partners until the General Partner has received an amount equal to 15% of all prior distributions made to the Limited Partners and the General Partner pursuant to subparagraphs (iv) and (v) (less prior distributions to the General Partner under subparagraphs (iv) and (v)); and (vii) seventh, 85% to the Limited Partners and 15% to the General Partner. A more detailed statement of the distribution policies is set forth in the Partnership Agreement.

The following distributions of Cash From Operations were made by the Partnership during the three most recent fiscal years:

Of the total distributions noted above, $220.29, $3.34, and $4.76 per unit represented a return of capital for the fiscal years ended December 31, 2004, 2003 and 2002, respectively.

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Item 6. Selected Financial Data

The following is selected financial data for each of the five years in the period ended December 31, 2004 (in thousands, except per Unit data):

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Partnership’s financial statements and notes thereto in Item 15 of Part IV:

Results of Operations

2004 versus 2003

Rental income increased $11,000, or 5%, for the year ended December 31, 2004, compared to the year ended December 31, 2003, primarily due to an increase in rental rate in a new lease term from the one tenant at Wakefield property. The tenant extended their lease term for another three years to December 31, 2007.

Occupancy rates at the Partnership’s rental properties for the years ended December 31, 2004 and 2003 were as follows:

Discontinued operations

Income from discontinued operations increased $3,674,000 for the year ended December 31, 2004, compared to the year ended December 31, 2003, primarily due to the sale of the Bristol property.

2003 versus 2002

Rental income decreased $10,000, or 4%, for the year ended December 31, 2003, compared to the year ended December 31, 2002, primarily due to 2003 operating expenses reimbursement received in 2002.

Occupancy rates at the Partnership’s rental properties for the years ended December 31, 2003 and 2002 were as follows:

Discontinued operations

Income from discontinued operations increased $42,000 for the year ended December 31, 2003, compared to the year ended December 31, 2002, primarily as a result of overall increases in occupancy at Bristol Medical Center.

Liquidity and Capital Resources

On April 21, 1989, Rancon Income Fund I (“the Partnership”) was funded from the sale of 14,559 limited partnership units (“Units”) in the amount of $14,559,000. Four Units were retired in 1990. Prior to 2004, a total of 1,589 Units were redeemed. During 2004, a total of 366 Units were redeemed at an average price of $409, and 12,600 Units remain outstanding at December 31, 2004.

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As of December 31, 2004, the Partnership had cash of $565,000. The remainder of the Partnership’s asset consisted primarily of the Wakefield property, which totaled approximately $1,200,000 at December 31, 2004.

On October 28, 2004, the Partnership entered into a contract for the sale of the Bristol Medical Center for a price of $7,250,000. On December 14, 2004, the sale closed and generated net proceeds of approximately $6,800,000 and a gain on sale of approximately $3,800,000. On December 17, 2004, the Partnership made distributions of $6,300,000 to the limited partners and $128,000 to the General Partner. The Partnership added the remaining proceeds to its cash reserves.

The Partnership is contingently liable for a subordinated real estate commission payable to the General Partner in the amount of $30,000 at December 31, 2004 for the May 1999 sale of Aztec Village Shopping Center. Upon the sale of a Partnership property, the Partnership Agreement entitles the General Partner to a subordinated real estate commission, provided that, in no event shall the subordinated real estate commission payable to the General Partner exceed 3% of the gross sales price of the property which is sold. The subordinated real estate commission is payable only after the limited partners have received distributions equal to their original invested capital plus a cumulative non-compounded return of 6% per annum on their adjusted invested capital. Since the circumstances under which this commission would be payable are limited, the liability has not been recognized in the Partnership’s financial statements; however, the amount will be recorded if and when it becomes payable.

On January 18, 2005, the Partnership entered into a contract to sell the Wakefield Industrial Center for a price of $3,900,000. On March 15, 2005, the sale closed and generated net proceeds of approximately $3,659,000 and a gain on sale of approximately $2,446,000.

After the close of escrow for the sale of the remaining property of the Partnership – Wakefield Industrial Center, the Partnership’s plan is to proceed with the final distributions of the available funds and dissolve the Partnership per the Partnership agreement. The process will be done under the direction of our attorney and tax accountant in a timely manner.

Operating Activities

During the year ended December 31, 2004, the Partnership’s cash provided by operating activities totaled $339,000.

The $122,000 decrease in deferred costs at December 31, 2004, compared to December 31, 2003, was due to a write-off of $59,000 in lease commission as a result of the sale of the Bristol property, and $81,000 of amortization expenses, offset by $18,000 of lease commission paid for the new and renewal leases related to the Bristol property.

The $26,000 decrease in prepaid expenses and other assets at December 31, 2004, compared to December 31, 2003, was primarily due to the write-off of tenant rents receivable recognized on a straight line basis as a result of the sale of the Bristol property.

The $16,000 increase in accounts payable and other liabilities at December 31, 2004, compared to December 31, 2003, was primarily due to accruals of building operating expenses related to the Bristol property.

The $69,000 decrease in security deposits at December 31, 2004, compared to December 31, 2003, was primarily due to the transfer of tenant security deposits from the Bristol property to the buyer after the sale.

Investing Activities

During the year ended December 31, 2004, the Partnership’s cash provided by investing activities totaled $6,634,000 which consisted of $6,800,000 net proceeds from the sale of the Bristol property, offset by $166,000 building improvement expenses related to the Bristol property.

Financing Activities

During the year ended December 31, 2004, the Partnership’s cash used for financing activities totaled $6,756,000 which consisted of $6,606,000 of distributions to the Limited Partners, and $150,000 paid to redeem 366 limited partnership units (“Units”).

Critical Accounting Policies

Revenue recognized on a straight-line basis

The Partnership recognizes rental revenue on a straight-line basis at amounts that it believes it will collect on a tenant by tenant basis. The estimation process may result in higher or lower levels from period to period as the Partnership’s collection experience and the credit quality of the Partnership’s tenants changes. Actual amounts collected could be lower than the amounts recognized on a straight-line basis if specific tenants are unable to pay rent that the Partnership has previously recognized as revenue.

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Carrying value of rental properties

The Partnership’s rental properties are stated at cost unless events or circumstances indicate that cost cannot be recovered, in which case, the carrying value of the property is reduced to its estimated fair value. Estimated fair value is based upon (i) the Partnership’s plans for the continued operations of each property, and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized rental income based upon the age, construction and use of the building. The fulfillment of the Partnership’s plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Partnership to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of the Partnership’s properties could be materially different than current expectations.

Item 7A. Qualitative and Quantitative Disclosures About Market Risk

As of December 31, 2004, the Partnership does not own any derivative instruments, and does not have any debt obligations.

Item 8. Financial Statements and Supplementary Data

For information with respect to Item 8, see Financial Statements and Schedule as listed in Item 15.

Item 9A. Controls and procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision of the General Partner’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the General Partner’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in alerting him on a timely basis to material information required to be included in this report. There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

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Part III

Item 10. Directors and Executive Officers of the Partnership

Rancon Income Partners I, L.P. is the General Partner of the Partnership. Daniel L. Stephenson and Rancon Financial Corporation (“RFC”) are the General Partners of Rancon Income Partners I, L.P. The executive officer and director of RFC is Daniel L. Stephenson who is Director, President, Chief Executive Officer and Chief Financial Officer.

Mr. Stephenson founded RFC in 1971 for the purpose of establishing a commercial, industrial and residential property syndication, development and brokerage concern. Mr. Stephenson has, from inception, held the position of Director. In addition, Mr. Stephenson was President and Chief Executive Officer of RFC from 1971 to 1986, from August 1991 to September 1992, and from March 31, 1995 to present. Mr. Stephenson is Chairman of the Board of PacWest Group, Inc., a real estate firm, which has acquired a portfolio of assets from the Resolution Trust Corporation.

Item 11. Executive Compensation

The Partnership has no executive officers. For information relating to fees, compensation, reimbursements and distributions paid to related parties, reference is made to Item 13 below.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Security Ownership of Certain Beneficial Owners

No person is known by the Partnership to be the beneficial owner of more than 5% of the Units.

Security Ownership of Management

Changes in Control

The Limited Partners have no right, power or authority to act for or bind the Partnership. However, the Limited Partners have the power to vote upon the following matters affecting the basic structure of the Partnership, each of which shall require the approval of Limited Partners holding a majority of the outstanding Units: (i) amendment of the Partnership Agreement; (ii) termination and dissolution of the Partnership; (iii) sale, exchange or pledge of all or substantially all of the assets of the Partnership; (iv) removal of the General Partner or any successor General Partner; (v) election of a new General Partner; (vi) the approval or disapproval of the terms of purchase of the General Partner’s interest; and (vii) the modification of the terms of any agreement between the Partnership and the General Partner or an affiliate.

Item 13. Certain Relationships and Related Transactions

For the year ended December 31, 2004, the Partnership did not incur any costs reimbursable to RFC or any affiliate of the Partnership.

Item 14. Principal Accountant Fees and Services

The Partnership was billed for each of the last two calendar years for professional services rendered by the principal accountant in connection with the audit of the annual financial statements on Form 10-K and the review of the quarterly financial statements on Form 10-Q in the amount of $22,000 and $21,000 in 2004 and 2003, respectively.

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Part IV

Item 15 Exhibits, Financial Statements, Schedule and Reports on Form 8-K

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

On December 23, 2004, the Partnership filed a report on Form 8-K regarding the sale of the Bristol property. On March 21, 2005, the Partnership filed a report on Form 8-K regarding the sale of the Wakefield property.

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SIGNATURES

Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Partnership and in the capacities and on the dates indicated.

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RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

INDEX TO FINANCIAL STATEMENTS

AND SCHEDULE

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

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Report of Independent Registered Public Accounting Firm

The General Partner

RANCON INCOME FUND I, A California Limited Partnership:

We have audited the accompanying balance sheets of RANCON INCOME FUND I, a California Limited Partnership, as of December 31, 2004 and 2003, and the related statements of operations, partners’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index to the financial statements and schedule. These financial statements and financial statement schedule are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in all material respects, the financial position of RANCON INCOME FUND I, a California Limited Partnership, as of December 31, 2004, and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related information in the financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

San Francisco, California

March 23, 2005

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RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Balance Sheets

December 31, 2004 and 2003

(in thousands, except units outstanding)

The accompanying notes are an integral part of these financial statements.

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RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Statements of Operations

For the years ended December 31, 2004, 2003 and 2002

(in thousands, except per unit and unit amounts)

The accompanying notes are an integral part of these financial statements

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RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Statements of Partners’ Equity

For the years ended December 31, 2004, 2003 and 2002

(in thousands)

The accompanying notes are an integral part of these financial statements

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RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Statements of Cash Flows

For the years ended December 31, 2004, 2003 and 2002

(in thousands)

The accompanying notes are an integral part of these financial statements.

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RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Financial Statements

December 31, 2004 and 2003

Note 1. ORGANIZATION

Rancon Income Fund I, a California Limited Partnership, (“the Partnership”) was organized in accordance with the provisions of the California Revised Limited Partnership Act for the purpose of acquiring, operating and disposing of existing income producing commercial, industrial and residential real estate properties. The Partnership reached final funding in April 1989. The Partnership was formed with initial capital contributions from Rancon Income Partners I, L.P. (the General Partner), and Daniel Lee Stephenson and Rancon Financial Corporation (RFC), the initial limited partner, who indirectly owns and controls the General Partner. The General Partner and its affiliates are hereinafter referred to as the General Partner.

At December 31, 2004 and 2003, 12,600 and 12,966 units were issued and outstanding, respectively.

Allocation of Net Income and Net Loss

Allocations of the profits and losses from operations are made pursuant to the terms of the Partnership Agreement.

Generally, net income from operations is allocated to the General Partner and the limited partners in proportion to the amounts of cash from operations distributed to the partners for each fiscal year. In no event shall the General Partner be allocated less than 1% of the net income from any period. If there are no distributions of cash from operations during such fiscal year, net income shall be allocated 90% to the limited partners and 10% to the General Partner. Net losses from operations are allocated 90% to the limited partners and 10% to the General Partner until such time as a partner’s account is reduced to zero. Additional losses will be allocated entirely to those partners with positive account balances until such balances are reduced to zero. In no event will the General Partner be allocated less than 1% of net loss for any period.

Net income other than net income from operations shall be allocated as follows: (i) first, 1% to the General Partner; (ii) second, to the partners who have a deficit balance in their capital account in proportion to and to the extent of such deficit balances, provided, that in no event shall the General Partner be allocated more than 10% of the net income other than net income from operations until the earlier of sale or disposition of substantially all of the assets or the distribution of cash (other than cash from operations) equal to the original invested capital of the General Partner and the limited partner; (iii) the balance, if any, shall be allocated (a) first, to the General Partner in an amount equal to the lesser of (1) the amount of cash from sale or financing anticipated to be distributed to the General Partner or (2) an amount sufficient to increase the General Partner’s account balance to an amount equal to such distribution from sale or financing; (b) the balance, to the limited partners. In no event shall the General Partner be allocated less than 1% of the net income other than net income from operations for any period.

Distributions

Distributions of cash from operations are generally allocated as follows: (i) first, to the limited partners until they receive a non-cumulative 6% return per annum on their unreturned capital contributions and (ii) the remainder, if any in a given year, shall be divided in the ratio of 90% to the limited partners and 10% to the General Partner.

Distributions of cash from sales or financing are generally allocated as follows: (i) first, 2% to the General Partner and 98% to the limited partners until the limited partners have received an amount equal to their capital contributions; (ii) second, 2% to the General Partner and 98% to the limited partners until the limited partners have received a cumulative non-compounded return of 6% per annum on their unreturned capital contributions (less prior distributions of cash from operations); (iii) third, to the General Partner for the amount of subordinated real estate commissions payable per the Partnership Agreement; (iv) fourth, 2% to the General Partner and 98% to the limited partners until the limited partners have received an additional 4% return on their unreturned capital contributions (less prior distributions of cash from operations); (v) fifth, 2% to the General Partner and 98% to the limited partners until the limited partners who purchased their partnership units (“Units”) prior to June 1, 1988, receive an additional return (depending on the date on which they purchased the Units) on their unreturned capital of either 8%, 5% or 2% (calculated through the first anniversary date of the purchase of the Units); (vi) sixth, 98% to the General Partner and 2% to the limited partners until the General Partner has received an amount equal to 15% of all prior distributions made to the limited partners and the General Partners pursuant to subparagraphs (iv) and (v), reduced by the aggregate of all prior distributions to the General Partner under subparagraphs (iv) and (v); and (vii) seventh, the balance, 85% to the limited partners and 15% to the General Partner.

The terms of the Partnership Agreement call for the General Partner to restore any deficits that may exist in its capital account after allocation of gains and losses from the sale of the final property owned by the Partnership, but prior to any liquidating distributions being made to the partners.

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RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Financial Statements

December 31, 2004 and 2003

Management Agreement

Effective January 1, 1995, Glenborough Corporation (“GC”) entered into an agreement with the Partnership and other related Partnerships (collectively, the “Rancon Partnerships”) to perform or contract on the Partnership’s behalf for financial, accounting, data processing, marketing, legal, investor relations, asset and development management and consulting services for a period of ten years or until the liquidation of the Partnership, whichever comes first. Effective January 1, 1998, the agreement was amended to eliminate GC’s responsibility for providing investor relation services and Preferred Partnership Services, Inc., a California corporation unaffiliated with the Partnership, contracted to assume the investor relations services. In October 2000, GC merged into Glenborough.

Effective July 1, 1999, the agreement was further amended to: (i) reduce the asset administration fee to $100,000 plus CPI annually ($107,000 and $105,000 as of December 31, 2004 and 2003, respectively); (ii) increase the sales fee for improved properties from 2% to 3% ($217,000 during 2004) and (iii) reduce the management fee applicable to Wakefield Industrial Center from 5% to 3% of the gross rental receipts. The Partnership will also pay Glenborough: (i) a sales fees of 4% for land; (ii) a refinancing fee of 1% and (iii) a management fee of 5% of gross rental receipts from Bristol Medical Center. As part of the agreement, Glenborough will perform certain duties for the General Partner of the Rancon Partnerships. RFC agreed to cooperate with Glenborough, should Glenborough attempt to obtain a majority vote of the limited partners to substitute itself as the General Partner for the Rancon Partnerships. Glenborough is not an affiliate of the Partnership or RFC.

In July 2004, the Partnership extended its management relationship with Glenborough through December 31, 2006. The following provides the general terms of the new agreement. Commencing on January 1, 2005 and ending December 31, 2006, the Partnership engages Glenborough to perform services for the following fees: (i) a management fee of 3% of gross rental revenue; (ii) a construction services fee per certain schedules; (iii) a specified asset and Partnership services fee of $75,000 per year with reimbursements of certain expenses and consulting service fee; (vi) a sales fee of 2% for improved properties and 4% for unimproved properties; (v) a financing services fee of 1% of gross loan amount; (vi) a development fee equals to 5% of the hard costs of the development project, excluding the cost of the land, and the development fee plus the general contractor’s fee shall not exceed 11.5%, in the aggregate, of the hard costs of the development project; and (vii) a dissolution service fee of $60,000. As part of this agreement, Glenborough will perform certain duties for the General Partner of the Rancon Partnerships.

The new management agreement has a deduction of $32,000 in the asset and Partnership services fee in 2005 and 2006, a decrease of 1% from 3% to 2% in sales fee for improved properties.

Note 2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with Generally Accepted Accounting Principles in the United States of America (U.S. GAAP).

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported results of operations during the reporting period. Actual results could differ from those estimates.

Rental Properties

Rental properties, including the related land, are stated at cost unless events or circumstances indicate that cost cannot be recovered, in which case the carrying value is reduced to the estimated fair value. Estimated fair value: (i) is based upon the Partnership’s plans for the continued operation of each property; and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized rental income based upon the age, construction and use of the building. The fulfillment of the Partnership’s plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Partnership to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of the Partnership’s properties could be materially different than current expectations.

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RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Financial Statements

December 31, 2004 and 2003

Depreciation is provided using the straight-line method over useful lives ranging from five to forty years for the respective assets.

Cash and Cash Equivalents

The Partnership considers certificates of deposit and money market funds with original maturities of less than ninety days when purchased to be cash equivalents. As of December 31, 2004, the Partnership does not own any certificates of deposit, and or money market funds.

Fair Value of Financial Instruments

For certain financial instruments, including cash and cash equivalents, accounts payable and other liabilities and security deposits, recorded amounts approximate fair value due to the relatively short maturity period.

Deferred Costs

Deferred lease commissions are amortized over the initial fixed term of the related lease agreement on a straight-line basis.

Revenue

The Partnership recognizes rental revenue on a straight-line basis at amounts that it believes it will collect on a tenant by tenant basis. The estimation process may result in higher or lower levels from period to period as the Partnership’s collection experience and the credit quality of the Partnership’s tenants changes. Actual amounts collected could be lower or higher than the amounts recognized on a straight-line basis if specific tenants are unable to pay rent that the Partnership has previously recognized as revenue, or if other tenants pay rent whom the Partnership previously estimated would not.

The Partnership’s portfolio of leases turns over continuously, with the number and value of expiring leases varying from year to year. The Partnership’s ability to re-lease the space to existing or new tenants at rates equal to or greater than those realized historically is impacted by, among other things, the economic conditions of the market in which a property is located, the availability of competing space, and the level of improvements which may be required at the property. No assurance can be given that the rental rates that the Partnership will obtain in the future will be equal to or greater than those obtained under existing contractual commitments.

Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue in the period the applicable expenses are incurred. Differences between estimated and actual amounts are recognized in the subsequent year.

Sales of Real Estate

The Partnership recognizes sales of real estate when a contract is in place, a closing has taken place, the buyer’s investment is adequate to demonstrate a commitment to pay for the property and the Partnership does not have a substantial continuing involvement in the property. Each property is considered a separately identifiable component of the Partnership and is reported in discontinued operations when the operations and cash flows of the Property have been (or will be) eliminated from the ongoing operations of the Partnership as a result of the disposal transaction and the Property will not have any significant continuing involvement in the operations of the Partnership after the disposal transaction.

Net Income (Loss) Per Limited Partnership Unit

Net income (loss) per limited partnership unit is calculated using the weighted average number of limited partnership units outstanding during the period and the limited partners’ allocable share of the net income (loss).

Income Taxes

No provision for income taxes is included in the accompanying financial statements as the Partnership’s results of operations are passed through to the partners for inclusion in their respective income tax returns. Net income (loss) and partners’ equity for financial reporting purposes will differ from the Partnership income tax return because of different accounting methods used for certain items, principally depreciation expense and the provision for impairment of investments in real estate.

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RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Financial Statements

December 31, 2004 and 2003

Concentration Risk

One tenant represented 100% of rental income for the year ended December 31, 2004. Two tenants represented 44% of rental income for the year ended December 31, 2003. Three tenants represented 65% of rental income for the year ended December 31, 2002.

Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” which addresses consolidation by business enterprises of variable interest entities (“VIEs”) either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (FIN 46 Revised) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. However, FIN 46 Revised must be applied no later than the first quarter of fiscal 2004. Special Purpose Entities (“SPEs”) created prior to February 1, 2003 may be accounted for under FIN 46 or FIN 46 Revised’s provisions no later than the fourth quarter of fiscal 2003. The Partnership has not entered into any arrangements which are considered SPEs. FIN 46 Revised may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The disclosure requirements of FIN 46 Revised are effective for all financial statements initially issued after December 31, 2003. The adoption of FIN 46 Revised did not have any impact on the financial statements of the Partnership, since the Partnership has not entered into any arrangements that are VIEs.

Note 3. INVESTMENTS IN REAL ESTATE

Rental properties consisted of the following at December 31, 2004 and 2003:

None of the Partnership’s properties were encumbered by debt as of December 31, 2004 and 2003.

The decrease of the rental properties was primarily due to the sale of the Bristol property.

On October 28, 2004, the Partnership entered into a contract for the sale of the Bristol Medical Center for a price of $7,250,000. On December 14, 2004, the sale closed and generated net proceeds of approximately $6,800,000 and a gain on sale of approximately $3,800,000. On December 17, 2004, the Partnership made distributions of $6,300,000 to the limited partners and $129,000 to the General Partner. The Partnership added the remaining proceeds to its cash reserves

In accordance with SFAS 144 “Accounting for the Impairment or Disposal of Long Lived Assets”, effective for financial statements issued for fiscal years beginning after December 15, 2002, net income and gain or loss on sales of real estate for properties sold or classified as held for sale subsequent to December 31, 2002 are reflected in the consolidated statements of operations as “Discontinued operations” for all periods presented.

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RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Financial Statements

December 31, 2004 and 2003

Below is a summary of the results of operations of Bristol Medical Center through its disposition date (dollars in thousands):

Note 4. LEASES

The Partnership’s rental property is leased under a non-cancelable operating lease that expires in 2007. Minimum future rents under the non-cancelable operating lease as of December 31, 2004 are as follows:

In addition to minimum rental payments, certain tenants pay reimbursements for their pro rata share of specified operating expenses, which amounted to $98,000, $116,000, and $74,000 for the years ended December 31, 2004, 2003, and 2002, respectively. These amounts are included in the accompanying statements of operations.

Note 5. COMMITMENTS AND CONTINGENT LIABILITIES

General Uninsured Losses

The Partnership carries property and liability insurance with respect to its property. This coverage has policy specification and insured limits customarily carried for similar properties. However, certain types of losses (such as from earthquakes and floods) may be either uninsurable or not economically insurable. Should the property sustain damage as a result of an earthquake or flood, the Partnership may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Additionally, the Partnership has elected to obtain insurance coverage for “certified acts of terrorism” as defined in the Terrorism Risk Insurance Act of 2003; however, the Partnership’s policies of insurance may not provide coverage for other acts of terrorism. Any losses from such other acts of terrorism might be uninsured. Should an uninsured loss occur, the Partnership could lose some or all of its capital investment, cash flow and anticipated profits related to the remaining property.

Other Matters

The Partnership is contingently liable for a subordinated real estate commission payable to the General Partner in the amount of $30,000 at December 31, 2004 for the May 1999 sale of Aztec Village. Upon the sale of a Partnership property, the Partnership Agreement entitles the General Partner to a subordinated real estate commission, provided that, in no event shall the subordinated real estate commission payable to the General Partner exceed 3% of the gross sales price of the property which is sold. The subordinated real estate commission is payable only after the limited partners have received distributions equal to their original invested capital plus a cumulative non-compounded return of 6% per annum on their adjusted invested capital. Since the circumstances under which this commission would be payable are limited, the liability has not been recognized in the accompanying financial statements; however, the amount will be recorded if and when it becomes payable.

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RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Financial Statements

December 31, 2004 and 2003

Note 6. TAXABLE INCOME

The Partnership’s tax returns, the qualification of the Partnership as a partnership for federal income tax purposes, and the amount of income or loss are subject to examination by federal and state taxing authorities. If such examinations result in changes to the Partnership’s taxable income or loss, the tax liability of the partners could change accordingly.

The following is a reconciliation of the net income for financial reporting purposes to the estimated taxable income, for the years ended December 31, 2004, 2003 and 2002, determined in accordance with accounting practices used in preparation of federal income tax returns (in thousands):

The following is a reconciliation as of December 31, 2004 and 2003 of partners’ equity for financial reporting purposes to estimated partners’ equity for federal income tax purposes (in thousands):

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RANCON INCOME FUND I,

A CALIFORNIA LIMITED PARTNERSHIP

Notes to Financial Statements

December 31, 2004 and 2003

Note 7. UNAUDITED QUARTERLY RESULTS OF OPERATIONS

The following represents an unaudited summary of quarterly results of operations for the years ended December 31, 2004 and 2003 (in thousands, except for per unit amounts and units outstanding):