The Castle Group, Inc. (CAGU) 10-K 2009 FY Annual report

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE S ECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________________ to ________________________

Commission file number: 000-23338

THE CASTLE GROUP, INC.

(Exact name of registrant as specified in its charter)

Utah	99-0307845
(State or Other Jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

500 Ala Moana Boulevard, 3 Waterfront Plaza, Suite 555, Honolulu HI 96813

(Address of principal executive office)

Registrant’s telephone number: (808) 524-0900

Securities registered under Section 12(b) of the Exchange Act:  None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $0.02 par value

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

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 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 [  ]

Check if there is no disclosure of delinquent filers in response to Item 405 of regulation S-K contained in this form, and no disclosure will be contained, to the best of Issuer’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. [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of  7;large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer [   ]

Accelerated filer                    [  ]  

Non-accelerated filer  [   ]  (Do not check if a smaller reporting company)

Smaller reporting company  [X]

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  [   ] Yes   [X] No

Aggregate Market Value of Non-Voting Common Stock Held by Non-Affiliates

As of March 29, 2010, there were approximately 4,889,989 shares of common voting stock of the Issuer held by non-affiliates. As of March 29, 2010, the closing price of the common stock on the OTC Bulletin board was $.35 per share or an aggregate value of $1,711,496.

Issuers Involved in Bankruptcy Proceedings During the Past Five Years

Not applicable.

Check whether the Issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.

Not applicable. 

Applicable Only to Corporate Issuers

Number of shares outstanding of the Issuer’s common stock as of March 30, 2010:   9,946,392

Documents Incorporated by Reference

See Part IV, Item 15.  The Exhibit Index appears on page 40.

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TABLE OF CONTENTS

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PART I

Item 1.  Business.

Forward-looking Statements.

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements made by or on behalf of Castle.  Castle and its representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this Annual Report and other filings with the Securities and Exchange Commission, and in reports to Castle’s stockholders.  Management believes that all statements that express expectations and projections with respect to future matters, as well as from developments beyond Castle’s control, i ncluding changes in global economic conditions, are forward-looking statements within the meaning of the Act.  These statements are made on the basis of management’s views and assumptions, as of the time the statements are made, regarding future events and business performance. There can be no assurance; however, that management’s expectations will necessarily come to pass.

Factors that may affect forward-looking statements include a wide range of factors that could materially affect future developments and performance, including the following: Changes in company-wide strategies, which may result in changes in the types or mix of businesses in which Castle is involved or chooses to invest; changes in U.S., global or regional economic conditions; changes in U.S. and global financial and equity markets; including significant interest rate fluctuations; which may impede Castle’s access to, or increase the cost of, e xternal financing  for its operations and investments; increased competitive pressures, both domestically and internationally; legal and regulatory developments, such as regulatory actions affecting environmental activities; the imposition by foreign countries of trade restrictions and changes in international tax laws or currency controls; adverse weather conditions or natural disasters, such as hurricanes and earthquakes; and labor disputes, which may lead to increased costs or disruption of operations.  This list of factors that may affect future performance and the accuracy of forward-looking statements are illustrative, but by no means exhaustive.  Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

Description of the Business

The Castle Group, Inc. (“the Company,” “Castle, 8; “we,” or ‘us”) through its subsidiaries manages luxury and mid-range resort condominiums and hotels on all of the major islands within the state of Hawaii, and resorts located in Saipan, and New Zealand. The Company was incorporated in Utah on August 21, 1981 and on June 4, 1993 the name of the Company was changed to The Castle Group, Inc.  

Principal Products or Services and Their Markets

General

Castle is a full service hospitality and hotel management company that prides itself on its ability to be both “Flexible and Focused,” the Company’s operations motto.  Flexible, to meet the specific needs of property condo owners at the properties that it manages; and Focused, in its efforts to achieve enhanced rental income and profitability for those owners.  Castle earns its revenues by providing several types of services to property owners including, hotel and resort management and operations; reservations staffing and operations; sales and marketing; and accounting.  Castle’s revenues are derived primarily from two sources: (1) the rental of hotel rooms and condominium accommodations along with food and beverage sales at the properties it manages and; (2) fees paid for services it provides to property owners.  Castle also derives revenues from commissions and incentive payments, based on sales and performance criteria at each property.

Corporate Culture

Castle’s corporate culture has been internally branded as “F & F,” which means Flexibility and Focus.  The organization and infrastructure is solid; and designed for maximum flexibility to react to any and all marketplac e dynamics; while at the same time, allowing us to remain focused on our objectives and overall strategy without losing focus or perspective.

Marketing Strategy

Most of our marketing efforts are focused towards acquiring and retaining guests for the properties we manage.  Castle does not own any hotels or resorts; however, it has made an investment in the property that it manages in New Zealand.  Marketing is done through a variety of distribution channels including direct Internet sales, wholesalers, online and traditional travel agencies and group tour operators.   Castle also manages and operates an interactive web site (www.Castleresorts.com) for customers to view information about the properties we manage and make reservations to stay at the properties.  The website offers user-

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friendly navigation, interactive features and rich content, while offering attractive rates and a travel booking engine that can handle rate conversions for over 100 foreign currencies.  The proprietary online booking and reservations engine supports a dynamic pricing model which maximizes revenues for all of our properties under management.  

Castle supports its online presence with its own full service, reservation call center that provides a wide range of services from tour reservation processing and rooms control, to handling group bookings.  The reservation center electronically connects resort property inventory and rates to the four major Global Distri bution Systems (“GDS”).  This connectivity displays rates and inventory of Castle’s properties to over 500,000 travel agents worldwide as well as Internet connectivity to over 1,200 travel websites around the globe.

Diversity

Castle has a diverse portfolio of properties located in desired island resort destinations throughout the Pacific Region and beyond. We represent hotels, resort condominiums, luxury villas and lodging accommodations throughout Hawaii, in Saipan, and in New Zealand.

In Hawaii, Castle is the only lodging chain that represents properties on the five major Hawaiian Islands of Oahu/Waikiki, Maui, Kauai, Molokai and Hawaii, which allows customers the option to island-hop, and provides Castle cross-selling opportunities. Our Honolulu headquarters ser ves as the epicenter for international operations in Saipan and New Zealand.  Our diverse destinations offer customers the opportunity to discover new experiences and varying cultures.

Castle offers a wide range of accommodations at various price points from exclusive private villas, full-service all-suites hotels, oceanfront resort condominiums, to modestly priced hotels with up to 450 guest rooms.  Our collection of all-suites condominium resorts, hotels, villas, lodges and vacation rentals allows customers to select the best accommodation to suit their individual style and budget.    

Our ability to deliver consistent financial returns to our property owners demonstrates Castle’s competency in managing and marketing a wide range of accommodations to our customers via multiple channels of distribution.  

Brand Strategy

Each property Castle manages is individually branded in order to extract maximum value from its strengths.  The Castle brand stays in the background and our focus is on marketing the uniqueness of each property, while satisfying the needs and expectations of our owners.  Each property we manage maintains its own brand identity and personality, while utilizing the Castle advantage of our powerful marketing resources, channel distribution, resort management expertise, industry partnerships and networks.

Castle’s brand strategy is one of the areas that clearly differentiate us from the high profile branded hospitality companies.  When a hotel owner or developer is considering contracting a large worldwide hospitality company for possible hotel management, there are several considerations that must be as sessed.  With major worldwide brands, usually come the high costs that the owner must bear to sustain the expensive marketing and operational expense that the brand demands to offset their marketing costs. There are also some tangible differences from the guest’s or customer’s perspective as well.  At Castle, we believe that one size does not fit all.

Castle markets each property with its own independent brand identity and deploys customized marketing programs to fit the specific demographics attracted to each of our properties.  Through our brand building efforts, we begin the process of positioning each of our resort brands to our key market segments, niche targeted customers and distribution channels.

We also do not flag our properties with the Castle name.  The advantages of doing so are several.  There is a high demand for the ind ependent smaller boutique hotels and condominiums, as travelers favor a more individualized and unique travel experience. We believe that this allows the consumer to better choose the specific type of vacation experience desired based upon the specific attributes of the property selected.  This ongoing trend towards smaller, independent hotels, as opposed to the familiar mid-range chains has been seen in recent years throughout the world tourism marketplace.

Marketing Programs and Promotions

Castle has implemented numerous marketing programs and promotions directed towards both the consumer and trade markets to generate incremental revenue and market loyalty for the individual properties.  We have developed a wide range of programs designed specifically to reflect the unique attributes of each of our resort properties, while providing various incentives.  We manage a number of marketing programs and promotions, some of which are seasonal to drive incremental room night revenues during valley or shoulder periods, and some of which are ongoing throughout the year.  During the past year we have emphasized programs relating to value travel and accommodations as well as the new Luxury properties we have begun managing.

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Growth Strategy

The majority of the properties presently managed by Castle are located within the state of Hawaii.  In addition, Castle manages properties in New Zealand and Saipan.

During the course of 2009, as a result of the declines in world economic conditions and decreasing revenues from our existing operations, Castle has slowed its expansion plans and efforts aimed at the Far East Asian region.  While we believe that significant opportunities for Castle exist there, we have chosen to focus on obtaining additional contracts within the State of Hawaii due to the opportunities afforded by the economic downturn including sales of properties, foreclosures, underperformance of certain properties, and dissatisfaction with the current management of our competitors.  

As part of Castle’s strategies to secure long term, multi-year management contracts, from time to time, we have found it advantageous to purchase or lease selected real property within a resort or condominium project.  This occurred in 2004, when Castle’s wholly owned subsidiary, NZ Castle Resorts and Hotels Limited, entered into an agreement to purchase all of the shares of Mocles Holdings Limited (“Mocles”), a New Zealand Corporation.  Mocles owns the Podium levels (“Podium”) of the Spencer on Byron Hotel in Auckland, New Zealand, which includes the front desk, restaurant, bar, ballroom, board room, conference rooms, back of the house facilities and other areas necessary for the hotel’s operation.  Through our ownership of the Podium and a multi-year management contract for the Spencer on Byron hotel, Castle is assured of ongoing revenues in future years from this property.

Item 1A.  Risk Factors

The demand for hotels rooms and resort condominiums may decrease further and impair our ability to earns profits and obtain financing.

As a result of the economic downturn, the decreased number of airline seats to Hawaii, and increased cost of airline travel, the demand for hotel rooms and vacation property rentals decreased substantially in 2009 both worldwide and in the areas we serve. This resulted in lower occupancies for the accommodations we manage and lower rental rates paid for those accommodations.  As a result thereof, as more fully described on the attached financial statements, our gross revenues decreased and we incurred a net loss in 2009.  No assurance can be given that the demand for hotel rooms and vacation property rentals in the areas we serve will not decline even further or remain at the present level.  Especially under these conditions, no assurance can be provided that Castle will be able to reduce its costs or increase its revenues to the extent necessary for the company to earn a net profit in any quarter, year or other period future period.  Continuing losses may make it difficult or impossible for Castle to continue to obtain the financing or investment capital necessary to operate and/or grow our business.

Our Business and financial results depend upon factors that affect the vacation rental and property management industries.

Factors such as the following could have a negative impact on Castle’s business and financial results:

·

the continuation or worsening of current economic conditions in the United States and other parts of the world;

·

impact of war and terrorist activity (including threatened terrorist activity) and heightened travel security measures instituted in response thereto;

·

travelers’ fears of exposures to contagious diseases;

·

domestic and international political and geopolitical conditions;

·

reduction in the demand and adverse changes in travel and vacation patterns

·

an interruption or decrease of airline service, and/or the financial condition of the airline industry and the impact on air travel;

·

adverse weather conditions or natural disasters, such as hurricanes, tidal waves or tornados; and

·

events such as terrorist attack or outbreaks of disease or the threats thereof, which cause potential customers to cancel their vacation or travel plans.

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Operations are geographically concentrated in three areas.

Castle manages properties that are significantly concentrated in Hawaii, New Zealand, and Saipan. Adverse events or conditions which affect these areas in particular, such as economic recession, changes in regional travel patterns, extreme weather conditions or natural disasters, would have a more significant adverse effect on our operations than if its oper ations were more geographically diverse.

Renewal of the Company’s management contracts is important to the success of our business.

Castle’s management contracts vary in term from a few months to several years and over its history have been renewed consistently for many years.  Pursuant to Hawaii's condominium law, all leases of property owned by the Association of Apartment Owners (such as the front desk and other areas used in the operation of a rental program) are cancelable by the Association of Apartment Owners on sixty days’ notice. This requirement extends to Castle and to all of our competitors operating in Hawaii.  As a result of this requirement and for competitive reasons, most of our management contracts contain terms which provide for cancellation or termination within one year or less.  The loss of the property wide mana gement contract for one or more of the hotels or resorts managed by Castle could have a significant adverse impact on our gross revenues and earnings.  As a result of the decreased revenues and net income in 2008 and 2009 at one large property managed by Castle, the owner elected to terminate the management contract with Castle.  Another significant property for which Castle provided sales and marketing serves was sold in 2009 and the new owner elected to handle sales and marketing itself. Although management believes that the number of properties, rooms and condominium units Castle manages will increase substantially over time, no assurances can be given that the number of such properties, rooms and condominium units will increase and not decrease in any quarter, year or other period.  There can be no assurances that we will be able to keep our current portfolio of property contracts or that we would be able to replace any contracts terminated by the property owners.  

Our Services may be rendered uncompetitive.

The vacation rental and property management industry is highly competitive and has low barriers to entry. The industry has two distinct customer groups -- vacation property renters and vacation property owners.  Castle competes for vacation property owners primarily (but not exclusively), with regional and local vacation rental and property management companies located in our markets.  Some of these competitors are affiliated with the owners or operators of resorts where these competitors provide their services.  Certain of these competitors may have lower cost structures and/or may provide their services at lower rates.  Castle competes for vacation property renters and owners with local competitors (including owners of similar properties who manage the units themselves or through a realtor or other management company ) who may have lower cost structures and/or may be willing to rent their units at lower rates than we can afford.  Castle also competes for vacation property renters and for vacation property owners with regional, national and international management companies who may have more recognizable brand names, larger marketing budgets and the advantages of marketing programs and relationships which are not available to us.

We may not be able to expand the number of properties we manage.

Management intends to continue to increase the number of properties we manage both within our current markets and in the future, within other targeted geographic areas.  Especially in light of current economic conditions and the losses we have incurred, no assurance can be given that the number of rooms and properties which we manage will increase and not decrease in any quarte r, year or other period.  It is possible that competition may increase for properties we currently manage or might seek to manage.

Acquisitions of properties also involve a number of special risks, which could have a material adverse effect on our business and financial results.  These risks include but are not limited to the following:

·

failure of acquired properties to achieve expected financial results;

·

diversion of management’s attention;

·

failure to retain key personnel;

·

increased potential for customer dissatisfaction or performance problems of newly acquired properties which may adversely affect our reputation.

Our business depends on attracting and retaining highly capable management and employees.

Castle’s business substantially depends on the efforts and relationships of our senior management and will likely be dependent on senior management for obtaining manageme nt contracts for additional properties or businesses acquired in the future.  If any of our senior managers becomes unable or unwilling to continue in his or her role, or if we are unable to attract and retain other

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qualified employees, it could have a material adverse effect on our business and financial results.  Although Castle has entered into long term employment agreements with our two executive officers and an officer of its subsidiary, no assurance can be given that either these individuals or other members of senior management will continue in his or her present capacity for any particular period of time.

Our business and operating results are seasonal.

The travel and hospitality business is seasonal.  Castle’s financial results have been and will continue to be subject to quarterly fluctuations caused primarily by the combination of seasonal variations and our revenue recognition policies.  Our quarterly financial results may also be subject to fluctuations as a result of the timing and cost of acquisitions, changes in relationships with travel providers, extreme weather conditions or other factors affecting leisure travel, and the vacation rental and property management industry.  Unexpected variations in our quarterly financial results could adversely affect the price of our common stock.

Our stock price may be depressed and our common stock may be thinly traded.

On December 31, 2007, the common stock of the Company began trading on the OTC Bulletin Board under the symbol CAGU for the first time since 2000.  Since the commencement of trading, the stock has been very thinly traded.  Prior to this our existing stockholders have not had the opportunity to publicly sell the common stock they own on a securities exchange or through a broker dealer since 2000.  We cannot assure you that these stockholders will not attempt to sell their existing holdings at times or in such quantities or prices, that will not exceed the demand for our common stock and/or which will not depress the market price for our common stock.  Our revenues, income, market capitalization and the trading volume of our common stock may not be sufficient to induce securities analysts to follow, analyze or recommend our stock or to induce or allow institutional investors to purchase our common stock.

The following factors, among others, may cause the market pric e to significantly increase or decrease:

·

any projections of revenues or income which we announce may be inaccurate;

·

our annual or quarterly financial results may vary significantly from quarter to quarter or from year to year, which variations may be greater than those of our competitors;

·

conditions in the general economy, or the vacation and property rental management or leisure and travel industries in particular are subject to change for a variety of reasons;

·

unfavorable publicity about us or our industry; and

·

significant price and volume volatility in the stock market in general for reasons unrelated to us.

Item 2.  Property.

Castle leases office space for its principal executive offices.  The current lease expires on October 31, 2011 at a rental cost that averages $9,928 per month, plus the cost of common area maintenance.  Castle has an option to renew the leases for an additional three years at the then prevailing rental rates.

Castle leases additional office space at a rental cost of $5,472 per month, plus the cost of common area maintenance, this lease expires on February 28, 2011.

In July, 2001, Castle entered into lease agreements (in lieu of a traditional management agreements) with each of the owners of approximately 250 investment units of the Spencer on Byron condominium project for the purpose of having those units be part of the rental program at the Spencer on Byron Hotel.  The leases are for a period of ten years expiring on July 18, 2011, and Cast le has the option to extend these leases for an additional 20 years.  Monthly lease rent through 2011 is calculated as a percentage of the purchase price paid by the original owner of each condominium.  Monthly lease rent for the option period after July 18, 2011 will be based on the net profits of the rental program at the Spencer on Byron Hotel.  Management intends to exercise it’s option to continue to manage the rental of the individual condominiums.

On December 24, 2004, the Company, through its wholly owned subsidiary NZ Castle Resorts and Hotels Limited, entered into an agreement to purchase all of the shares of Mocles Holdings Limited (“Mocles”), a New Zealand Corporation.  The purchase price for Mocles was $7,455,213 (NZ$10,367,048), net of imputed interest $1,164,699 (NZ$1,632,952).  The face value of the purchase price was $8,619,912 (NZ$12,000,000).   Details of this purchase an d residual amounts due are more fully described in Note 11 of the Notes to Financial Statements.  

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Item 3.  Legal Proceedings.

The Company is subject to various claims and lawsuits which are normal and reasonably foreseeable in light of the nature of the Company’s business and the growth in the Company’s business.  In the opinion of management, although no assurances can be given, the resolution of these claims will not have a material adverse effect on the Company’s financial position, results of operations and liquidity.  Further, to the knowledge of management, no director, officer, affiliate, or record of beneficial owner of more than 5% of the common voting stock of the Company is a party adverse to the Company or has a material adverse interest to the Company in any material proceeding.

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

No matter was submitted to a vote of the security holders of record during 2009.

PART II

Item 5.  Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Castle’s common stock began trading on December 31, 2007 under the trading symbol CAGU.  Prior to that time, it traded sporadically on the “pink sheets.”  The OTC Bulletin Board is an over the counter market quotation system and as such, all stock prices reflect as noted by the system are inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.  

Price Range of Common Stock

The price range per share of common stock presented below represents the highest and lowest sales prices for the Company’s common stock on the OTC Bulletin Board during each quarter of the two most recent fis cal years.

	4th Quarter	3rd Quarter	2nd Quarter	1st Quarter
Fiscal 2009 price range per common share	$0 .40-$0.30	$0 .48-$0.25	$0.65-$0.36	$1.17-$0.65
Fiscal 2008 price range per common share	$1.31-$1.00	$1.65-$1.00	$1.75-$1.00	$2.00-$1.00

Holders of Record

There were approximately 280 owners of record of Castle’s common stock as of March 30, 2010.

Dividends

Castle has not paid any dividends with respect to its common stock, and does not intend to pay dividends on its common stock in the foreseeable future.  As more fully de scribed in Note 7 to Castle’s consolidated financial statements included herein, in 1999 and 2000, the Company issued a total of 11,050 shares of $100 par value redeemable preferred stock.  Dividends are cumulative from the date of original issue and are payable semi-annually, when, and if declared by the board of directors beginning July 15, 1999, at a rate of $7.50 per annum, per share.  During the fiscal year ended July 31, 2000, the Company paid dividends to holders of record as of July 15, 2000, in the amount of $16,715.  At December 31, 2009, undeclared and unpaid dividends on these shares totaled $870,199 or $78.75 per preferred share.  These dividends are not accrued as a liability, since no dividends have been declared.  Castle cannot pay dividends on its common stock until it declares and pays the dividends on its preferred stock.  It is the present intention of management to utilize all available funds for the development and expansion of Castle’s business, rather than for common stock dividend payments.  

Securities Authorized for Issuance under Equity Compensation Plans

Castle does not have any equity compensation plans and as such no securities have been authorized for issuance subject to such a plan.

Recent Sales of Unregistered Securities

During the last three years, we issued the following unregistered securities:

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During 2007, there were no new issuances of registered or unreg istered securities.

In April, 2008, the Company raised additional capital from the completion of a Unit offering which resulted in the issuance of 333,337 Units at a price of $1.50 per Unit.  Each Unit consists of one of the Company’s common stock and a warrant to purchase an additional share of the Company’s common stock at a price of $3.50 for a period of three years, subject to certain restrictions.  Through this financing the Company raised a net amount of $224,745 for use as working capital and converted $227,500 in outstanding debt and short term obligations.  Members of management and certain directors purchased 260,003 Units at the offering price.

During the quarter ended June 30, 2008, the Company issued 75,000 shares of its common stock to one of its directors for services rendered to the Company.These shares were valued at $1.75 per share which equals the closing price of  the common stock on the date of issuance and the entire valuation was recorded as compensation expense on that date.

Castle issued all of these securities to persons who were “accredited investors” or “sophisticated investors,” as those terms are defined in Regulation D of the Securities and Exchange Commission; and each such person had prior access to all material information about us.  We believe that the offer and sale of these securities were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Sections 4(2) and 4(6) thereof, and Rule 506 of Regulation D of the Securities and Exchange Commission.  Sales to “accredited investors” are preempted from state regulation.

During 2009, there were no new issuances of registere d or unregistered securities.

Use of Proceeds of Registered Securities.

There were no proceeds received by Castle from the sale of registered securities during the 12 months ending December 31, 2009.

Purchases of Equity Securities by Us and Affiliated Purchasers.

 There were no Purchases of Equity Securities or Affiliated Purchasers during the 12 months ending December 31, 2009.

Item 6.  Selected Financial Data and Supplementary Financial Information.

Not Applicable

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Plan of Operations” including statements regarding the anticipated development and expansion of Castle’s business, the intent, belief or current expectations of the performance of Castle, and the products and/or services it expects to offer and other statements contained herein regarding matters that are not historical facts, are “forward-looking” statements.  Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.  Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the factors set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Plan of Operations.”

Factors that may affect forward- looking statements include a wide range of factors that could materially affect future developments and performance, including the following: Changes in company-wide strategies, which may result in changes in the types or mix of businesses in which Castle is involved or chooses to invest; changes in U.S., global or regional economic conditi ons, changes in U.S. and global financial and equity markets, including significant interest rate fluctuations, which may impede Castle’s access to, or increase the cost of, external financing  for its operations and investments; increased competitive pressures, both domestically and internationally, legal and regulatory developments, such as regulatory actions affecting environmental activities, the imposition by foreign countries of trade restrictions and changes in international tax laws or currency controls; adverse weather conditions or natural disasters, such as hurricanes and earthquakes, labor disputes, which may lead to increased costs or disruption of operations.  This list of factors that may affect future performance and the accuracy of forward-looking statements are illustrative, but by no means exhaustive.  Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

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RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009 and 2008

For added clarity in the discussion below the Company’s Quarterly Statement of Operations for 2009 and 2008 are presented as reported in the Company’s Form 10-Q Quarterly Reports with the Securities and Exchange Commission:

THE CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
By Quarter 2009 and 2008
($ in millions)
	Q1/2009	Q2/2009	Q3/2009	Q4/2009	2009	Q1/2008	Q2/2008	Q3/2008	Q4/2008	2008
Revenues
Revenue attributed from        properties	$3.313	$2.864	$3.372	$3.711	$13.260	$5.1700	$4.0060	$4.1220	$4.3140	$17.6120
&nb sp; Management & Service	0.689	0.702	0.720	0.640	2.751	0.811	0.593	0.570	0.467	2.442
Other Income	0.020	0.000	0.000	0.001	0.021	0.025	0.024	0.004	0.019	0.071
Total Revenues	4.022	3.566	4.092	4.352	16.032	6.006	4.623	4.696	4.80 0	20.125
Operating Expenses
Attributed property expenses	3.294	3.109	3.252	3.407	13.062	4.636	4.280	4.019	3.896	16.831
Payroll and office expenses	0.520	0.528	0.570	0.674	2.292	0.663	0.707	0.596	0.654	2.620
Administrative and general	0.150	0.074	0.172	0.129	0.525	0.378	0.401	0.172	0.141	1.092
Depreciation	0.041	0.051	0.055	0.114	0.261	0.056	0.056	0.052	0.042	0.206
Total Operating Expense	4.005	3.762	4.049	4.324	16.140	5.733	5.444	4.839	4.733	20.749
Operating Profit (Loss)	0.017	(0.196)	0.043	0.028	(0.108)	0.273	(0.821)	(0.143)	0.067	(0.624)
Foreign Exchange Gain (Loss)	0.065	(0.351)	(0.294)	(0.002)	(0.582)	0.000	0.000	0.000	0.585	0.585
Interest Income	0.000	0.000	0.000	0.000	0.000	0.003	0.000	0.003	0.000	0.005
Interest Expense	(0.048)	(0.055 )	(0.062)	(0.206)	(0.371)	(0.109)	(0.094)	(0.088)	(0.162)	(0.453)
Income (Loss) before taxes	0.034	(0.602)	(0.313)	(0.180)	(1.061)	0.167	(0.915)	(0.228)	0.490	(0.487)
Income tax benefit (Expense)	(0.082)	0.140	0.062	(0.081)	0.039	(0.067)	0.370	0.108	(0.213)	0.197
Net Profit (L oss)	($0.048)	($0.462)	($0.251)	($0.261)	($1.022)	$0.100	($0.545)	($0.120)	$0.277	($0.290)

Revenue

For 2009, our revenue trend is reflective of a substantial decrease in the number of visitors to Hawaii as a result of the decrease in seating capacity provided by the airlines serving Hawaii in 2009 as compared to 2008 as well as a reluctance on the part of travelers to embark on leisure travel to Hawaii and New Zealand during the difficult economic times.  The Hawaii State Department of Business, Economic Development, and Tourism announced that overall there was a 5.6% reduction in airline seats available to bring passengers to Hawaii in 2009 as compared to 2008.  This trend was mirrored by a decrease of 4.1% in visitor days and a 4.4% decrease in the number of visitors to the Islands during 2009, as compared to 2008.¹   Statewide, as reported by Hospitality Advisors and Smith Travel Research, room revenues of hotels in Hawaii fell 17% and hotel occupancy fell 4.0 percentage points. ²

¹ Hawaii State Department of Business, Economic Development and Tourism (http://www.hawaiitourismauthority.org/documents_upload_path/tr_documents/December%202009%20Visitor%20Stats%20News%20Release%20(final).pdf)

² KITV News (http://www.kitv.com/travelgetaways/22581289/detail.html)

11

Castle’s Revenues totaled $16,031,926 for the year ended December 31, 2009, representing an 20% decrease from $20,125,185, in 2008.  Castle’s quarterly revenues decreased 33%, 23%, 13% and 9% for the first through fourth quarters, respectively, in 2009 as compared 2008. Total revenue for the fourth quarter of 2009 totaled $4,351,981 as compared to $4,800,290 in the fourth quarter of 2008.

The Company has two basic types of agreements.  Under a “Gross Contract” the Company records revenue which is based on a percentage of the gross rental proceeds received from the rental of hotel or condominium units.   Under a “Gross Contract” the Company pays a portion of the gross rental proceeds to the owner of the rental unit.  The Company only records the difference between the gross rental proceeds and the amount paid to the owner of the rental unit as “Revenue Attributed from Properties.”  Under the Gross Contract, the Company is responsible for all of the operating expenses for the hotel or condominium unit.  Under a “Net Contract”, the Company receives a management fee that is based on a percentage of the gross rental proceeds received from the rental of hot el or condominium units.  Under the Net Contract, the owner of the hotel or condominium unit is responsible for all of the operating expenses of the rental program covering the owner’s unit.  Under the Net Contract, the Company also typically receives an incentive management fee, which is based on the net operating profit of the covered property. Revenues received under the net contract are recorded as Management and Service Income.  Under both types of agreements, revenues are recognized after services have been rendered.  A liability is recognized for any deposits received for which services have not yet been rendered.

Revenues attributed from Properties decreased 25% to $13,259,906 for the year ended December 31, 2009, as compared to $17,612,130, in 2008.  Revenues attributed to Castle’s New Zealand operation decreased a total of 25% in 2009, as compared to 2008, with one third of the decrease coming a s a result of the strengthened NZ Dollar exchange rate as compared to the US Dollar. The remainder of the decrease is indicative of a 7% decrease in occupied room nights and a 15% decrease in Average Daily Rate in 2009, as compared to 2008. For rooms at properties managed under Gross Contracts outside of New Zealand.  Management and Service Revenues increased 13% to $2,751,068 in 2009, from $2,442,137 in 2008.  This net increase is due to three additional properties managed under Net Contracts during 2009, as compared to 2008.  Due to the unexpected duration of the downturn in the economy and related impacts on the Company’s revenues, in late 2008, and early 2009, Castle renegotiated some of its longer term contracts with certain property owners which provided substantially higher revenues per room managed in order to help restore the Company’s overall profitability.  

Costs and Expenses

Total Operating Expenses were $16,139,870 for the 12 months ending December 31, 2009.  This represents a 22% decrease from the Total Operating Expenses of $20,749,229, in 2008.  In response to the decreasing revenues, we instituted a number of difficult but necessary efficiency and cost saving measures during the second half of 2008 and early 2009, which resulted in the 22% decrease in operating expenses for 2009 as compared to 2008.  These cost saving measures will continue through 2010.

Attributed Property Expenses decreased 22% to $13,062,203 for the 12 months ending December 31, 2009, as compared to $16,831,482 in 2008.  Attributed Property Expenses include the operating expenses of the properties which are managed under Gross Contracts.  The decrease in expenses resulted in part from decreased variable costs and decreased staffing required due to lower occ upancy.  In addition, the Company instituted other measures to better match costs and expenses with the lower occupancy and average daily rates we are encountering at our properties.  This allowed our gross profit margin on Attributed Property Revenues (Attributed Property Revenues – Attributed Property Expenses) to be preserved at 1% in 2009 as compared to 4% in 2008, on revenues which were 25% lower in 2009 as compared to 2008.  

Payroll and office expense totaled $2,291,247 for the full year of 2009, as compared to $2,620,058 in the year earlier period. This decrease is primarily related to salary and wage reductions in 2009 as compared to 2008.  The Company reduced its staffing through attrition, the elimination of positions, and pay rate decreases in 2009.  In addition the Chairman and CEO of the Company declined a salary in 2009.  

Administrative and general expense totaled $525,383 in 2009, a reduction of 52% as compared to $1,091,729 for 2008.  The reduction in administrative and general expenses is a result of a decrease in expenses relating to the Company’s decision to defer expansion into Far East Asia and the costs incurred in 2008 related to the relisting of the Company’s stock.   Professional fees, which included the cost of the relisting of the Company’s stock for the year ending 2009 were $149,037 as compared to $583,903 in 2008, and travel costs in 2009 were $40,323 as compared to $216,325 in 2008, which included travel costs related the Company’s expansion into Far East Asia.  

EBITDA reflects the Company’s earnings without the effect of depreciation, interest income or expense or taxes.  Castle’s management believes that EBITDA is a good alternative indicator of the Company’s financial perform ance, because it removes the effects of non-cash depreciation and amortization of assets as well as the fluctuations of interest costs based on Castle’s borrowing history along with increases and decreases in tax expense brought about by changes in the provision for future tax effects rather than current income.  A comparison of EBITDA and Net Income for 2009 and 2008 is shown below.  For the year ended 2009, EBITDA was $153,093 as compared to ($418,085) for 2008, an increase of $571,178.  EBITDA for the

12

Fourth quarter of 2009 was $142,575 as compared to an EBITDA of $109,562 in the fourth quarter of 2008.   EBITDA is not a measure that is recognized within generally accepted accounting principles ( GAAP).

Comparison of Net Income to EBITDA:

THE CASTLE GROUP INC.
Comparison of Net Income to EBITDA
By Quarter 2009 and 2008
	Q1/2009	Q2/2009	Q3/2009	Q4/2009	2009	Q1/2008	Q2/2008	Q3/2008	Q4/2008	2008
Net Income	($47,624)	($462,251)	($251,002)	($261,553)	($1,022,430)	$99,658	($545,882)	($120,519)	$276,714	($290,029)
Add Back:
Income Taxes	81,576	(140,263)	(62,435)	82,107	(39,015)	67,309	(369,783)	(107,543)	213,419	(196,598)
Interest Expense	47,630	55,079	61,671	206,803	371,183	105,946	94,229	85,432	161,925	447,532
Depreciation	41,211	50,748	55,541	113,537	261,037	56,290	55,637	51,579	42,454	205,960
Less:
Foreign Exchange (Gain) Loss	(64,702)	350,819	294,520	1,681	582,318	0	0	0	(584,950)	(584,950)
EBITDA	$58,091	($145,868)	$98,295	$142,575	$153,093	$329,203	($765,799)	($91,051)	$109,562	($418,085)

Depreciation expense in 2009 increased by $55,077, to $261,037 when compared to 2008.  This was due to a weakening of the US Dollar as compared to the New Zealand Dollar, and additional assets purchased for our New Zealand operation.

A foreign exchange loss of $582,318 was recognized in 2009 which resulted from the impact of an increase of the Guarantor Obligation of the Company that is payable in New Zealand Dollars (see note 4 of the Notes to Consolidated Financial Statements).  This reduction was due to the weakening of the US Dollar exchange rate against the New Zealand Dollar.   In 2008, the Company recorded a foreign exchange gain of $584,950, as during 2008, the US Dollar strengthened against the New Zealand Dollar.

Interest expense f or 2009 totaled $371,183 for 2009, a decrease of $76,350 as compared to 2008’s total of $447,533.  This decrease is primarily due to a decrease in the amount of amortized interest relating to the discount on the New Zealand debt.

Income tax benefit for 2009 totaled $39,015, a decrease of $157,583 when compared to 2008’s Income Tax Benefit of $196,598 due to the impact on the income tax provision from a decrease in taxable loss in 2009 as compared to 2008.  The Company’s deferred tax asset balance of $2,197,088 on December 31, 2009 is derived primarily from its taxable losses in recent years.  This reflects the Company’s estimate of the amount which will offset tax liabilities from expected taxable income in future years.  The Company expects to be profitable in 2010, and in future years as the benefits of the cost savings measures noted above are realized and additional properties and management cont racts are added.  We believe that it is likely that the current portion of the deferred tax asset will be utilized in 2010 and the remainder will be utilized in subsequent years.  Since the majority of these losses occurred in recent years, the useful life of the tax asset extends well into the projected taxable periods.  Further, the nature of the derivation of the tax asset is directly applicable to the nature of the expected tax liability in future periods; as such the ‘quality’ of the tax asset in relation to the expected utilization is high.  (see note 9 of the Notes to Consolidated Financial Statements.)

Net Loss for the year ended December 31, 2009, was ($1,022,430), a change of ($732,401) compared to the Net Loss of ($290,029) for the year ended December 31, 2008.   The net loss for 2009 includes an exchange loss of $582,318 as compared to an exchange gain of $584,950 in 2008.  Excludin g the effects of the foreign exchange gains & losses, we were successful in reducing our Net Loss for the year 2009 by $434,867.

Liquidity:

Our primary sources of liquidity include available cash and cash equivalents, and borrowing under the credit facility which was secured in October 2008 and further modified in 2009, consisting of a $500,000 term loan and a $200,000 line of credit for our US operations and a NZ$300,000 line of credit for our New Zealand operations.  These facilities contain representations and warranties, conditions, covenants and events of default that are customary for this type of credit facility but do not contain financial covenants.  We do not believe the limitations contained in the credit facility will, in the foreseeable future, adversely affect our ability to use the credit facility and execute our business plan.

13

Expected uses of cash in fiscal 2010 include funds required to support our operating activities, including continuing to opportunistically and selectively expand the number of properties under our management.   

We experienced a loss in fiscal 2009 of $1,022,430, and our Total Current Assets declined from $3.3 million at the end of 2008, to $2.8 million at the end of 2009.  The trend of continued losses due to the economic downturn has slightly reversed in recent months as the Company reported positive EBITDA in all but the second quarter of 2009 against the positive EBITDA of the first and fourth quarters of 2008.  We antici pate a continuation of current occupancy and average room rates for the properties currently under contract for the remainder of 2010.  We plan to expand the number of properties under management, which will increase the overall revenue stream in 2010.  The specific impact of these additions on revenue depends on the timing of when new properties are added during the year.  More importantly, since 2008 we  implemented a number of cost saving and efficiency programs that began to improve the Company’s profitability and cash flows which resulted in EBITDA of $153,093 for 2009 as compared to an EBITDA loss of $418,085 in 2008.  We believe that it represents a significant turnaround during these difficult times as our EBITDA improved by $571,178 on revenues which were $4,093,259 lower when compared to 2008.  We project that the Company will significantly improve the overall profitability, cash flows, and working capital liquidity through 2010 as compared to 2009.  This vie w is based on the following assumptions:

·

A continuation rather than a deterioration of weak global macroeconomic trends in consumer spending and especially travel spending by consumers, and the resulting visitation trends to Hawaii and New Zealand particularly in the first half of the fiscal year.

·

A stabilization of occupancy levels and average daily rates at the properties we manage as compared to recent years and slight increase in these levels during the second half of 2010.

·

A continuation of the cost savings and efficiency measures and reduction in business development and investor relations costs.  This will provide the basis for improved operating trends throughout 2010.  

·

Expansion of the number of properties under management, with emphasis on Hawaii and New Zealand.

·

A stabilization of the exchange rate between the US and New Zealand currency.

Based on current revenue forecasts and operating projections we anticipate recording an Operating Profit for the first quarter of 2010, and our current forecasts and projections anticipates that the Company will be profitable in 2010 .  Our plans to manage our liquidity position in fiscal 2010 include:

·

Maintaining an intense focus on controlling expenses; while maintaining strong relationships with our owners and travel wholesalers and partners to ensure continuity and good communication.  

·

Improving our accoun ts receivable collection rates which will have a positive impact on working capital and liquidity.

·

Continuing with only limited capital expenditures and projects.

·

Maintain our relationships with banks and other institutions and through improved profitability and financial stability increase our borrowing availability under our credit facility.

We have considered the impact of the financial outlook on our liquidity and have performed an analysis of the key assumptions in o ur forecast such as sales, gross margin and expenses; an evaluation of our relationships with our travel partners and property owners and an analysis of cash requirements, other working capital changes, capital expenditures and borrowing availability under our credit facility.  Based upon these analyses and evaluations, we expect that our anticipated sources of liquidity will be sufficient to meet our obligations without disposition of assets outside of the ordinary course of business or significant revisions of our planned operations through 2010.  

Other Borrowings

In October 2009, the Company extended its available credit facilities by renewing its line of credit with a local bank in Hawaii. As of March 31, 2010, the Company has the full $200,000 line of credit available for use.  During 2009, the Company drew in the aggregate $350,000 against it s line of credit and repaid $300,000, leaving a balance of $50,000 owing as of December 31, 2009.

14

The Company had in the past also utilized an equipment lease line of credit totaling $150,000 to finance its capital equipment and computer hardware.  In December of 2007, as part of the Company acquiring a new hotel management agreement, the Company allowed the hotel owner to purchase computer hardware using the Company’s equipment lease line of credit in the amount of $76,501.  The hotel owner shall be responsible for making the operating lease payments to the bank, and also agreed to assume, refinance, or retire the lease should the management agreement between the Company and the hotel be te rminated.  In October 2008 the equipment lease line of credit was terminated, and in December 2009 the balance of the equipment lease was assigned to the owner of the hotel.

In 2009, the Company renewed and increased its NZ$100,000 line of credit with a bank.  The Company now has a NZ$300,000 line of credit with a New Zealand bank to finance its general working capital flows in New Zealand.  As of December 31, 2009 and March 31, 2010 there were no borrowings against this line of credit.  

In May 2009, the Company received a loan of $200,000 from an unrelated party.  The loan calls for monthly payments plus interest and is due on or before January 31, 2011.

Off-Balance Sheet Arrangements

As of December 31, 2007, the Company had an available lease line of credit with a bank for up to $250,000.  In December of 2007, as part of the Company acquiring a new hotel management agreement, the Company allowed the hotel owner to purchase computer hardware using the Company’s equipment lease line of credit in the amount of $76,501.  The hotel owner shall be responsible for making the operating lease payments to the bank, and also agreed to assume, refinance or retire the lease should the management agreement between the Company and the hotel be terminated.  On October 24, 2008, the lease line of credit was terminated by the bank upon the Company refinancing its term loan and revolving line of credit with another bank.  Refer to Note 4 of the Financial Statements, and in December 2009, the outstanding balance due under the lease line of credit was assigned over to the hotel owner.

Foreign Currency

The U.S. dollar is the functional currency of our consolidated entities operating in the United States.  The functional currency for our consolidated entities operating outside of the United States is generally the currency of the country in which the entity primarily generates and expends cash.  For consolidated entities whose functional currency is not the U.S. dollar, Castle translates its financial statements into U.S. dollars.  Assets and liabilities are translated at the exchange rate in effect as of the financial statement date, and results of operations are translated using the weighted average exchange rate for the period.  Translation adjustments from foreign exchange are included as a separate component of stockholders’ equity.

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

Foreign Currency Exchange Risk

In addition to our US operations, we conduct business in New Zealand. Our foreign currency risk primarily relates to our New Zealand loan guaranty and investments in foreign subsidiaries that transact business in a functional currency other than the U.S. Dollar. The exposure to this risk is minimized as we have generally reinvested profits or funded operations via local currencies for our international operations. In addition, we are exposed to foreign currency risk related to our assets and liabilities denominated in a currency other than the functional currency.

As currency exchange rates change, translation of the income statements of our international businesses into U.S. dollars affects year-over-year comparability of operating results. We have not hedged translation risks because cash flows from international operatio ns were generally reinvested locally. Non-operating foreign exchange net loss for 2009 was $582,318 and net gain for the year ended December 31, 2008 was $584,950 attributable to the guaranty of debts in currency other than the functional currency. This was principally driven by U.S. dollar positions held at December 31, 2009 and 2008 affected by the shift in the value of the dollar to the New Zealand dollar.

Our operations are affected to potentially volatile movements in currency exchange rates. The economic impact of currency exchange rate movements on us is often linked to macroeconomic factors such as GDP growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing, operating and hedging strategies.  We have not made any changes to our currency exchange risk exposures between the current and preceding fiscal years.

15

Item 8.  Financial Statements

The Castle Group, Inc. and Subsidiaries

Table of Contents

Report of Independent Registered Public Ac counting Firm	Page  17
Consolidated Balance Sheets – December 31, 2009 and 2008	Page  18
Consolidated Statements of Operations and Comprehensive Income (Loss) -  Years Ending December 31, 2009 and 2008	Page  19
Consolidated Statements of Cash Flows – Years Ending December 31, 2009 and 2008	Page  20
Consolidated Statements of Stockholders’ Deficit - Years Ending December 31, 2009 and 2008	Page  21
Notes to Consolidated Financial Statements	Pages  22-33

16

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

T he Castle Group, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of The Castle Group, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations and comprehensive income, cash flows, and stockholders’ deficit, for the years ended December 31, 2009 and 2008.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit 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.  The Compan y has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides 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 The Castle Group, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of operations and cash flows for the years ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.

/s/Mantyla McReynolds LLC

Mantyla McReynolds LLC

Salt Lake City, Utah

March 31, 2010

17

THE CASTLE GROUP INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 & 2008
ASSETS
			2009	2008
Current Assets
Cash and cash equivalents	&nbs p;		$        623,485	$        344,677
Accounts receivable, net of allowance for bad debts			1,710,449	2,169,325
Deferred tax asset			189,000	379,625
Prepaid and other current assets			288,952	426,843
Total Current Assets			2,811,886	&nb sp; 3,320,470
Property furniture & equipment, net			7,088,097	5,894,698
Goodwill			54,726	54,726
Deposits			24,477	26,837
Restricted cash			145,320	215,428
Deferred tax asset			2,008,088	1,778,448
TOTAL ASSETS			$   12,132,594	$   11,290,607
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable		$     3,023,711		$     3,101,731
Payable to related parties		131,737		& nbsp; 190,240
Deposits payable		& nbsp;    289,488		345,170
Current portion of long term debt		494,162		464,082
Current portion of long term debt to related parties		6,2 50		16,440
Accrued salaries and wages		763,488		913,799
Accrued taxes		139,542		132,714
Accrued interest		10,388		47,947
Other current liabilities		8,734		;      17,222
Total Current Liabilities		4,867,500		5,229,345
Non Current Liabilities
Long term debt, net of current portion		4,812,785		3,924,532
Deposits payable		369,804		215,428
Notes payable to related parties		151,170		157,420
Other long term obligations, net		3,015,368		2,433,050
Total Non Current Liabilities		8,349,127		6,730,430
Total Liabilities		13,216,627		11,959,775
Stockholders' Deficit
Preferred stock, $100 par value, 50,000 shares authorized, 11,050		1,105,000		1,105,000
shares issued and outstanding in 2009 and 2008
Common stock, $.02 par value, 20,000,000 shares authorized, 9,946,392		198,929		198,929
shares issued and outstanding in 2009 and 2008
Additional paid in capital		4,240,906		4,100,700
Retained deficit		(6,347,389)		(5,324,959)
Accumulated other comprehensive income (loss)		(281,479)		(748,838)
Total Stockholders' Deficit		(1,084,033)		(669,168)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$   12,132,594		$   11,290,607
The accompanying notes are an integral part of these consolidated financial statements

THE CASTLE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDING DECEMBER 31, 2009 & 2008
		2009	2008
Revenues
Revenue attributed from properties		$           13,259,906	$           17,612,130
Management & Service		2,751,068	2,442,137
Other Income		20,952	70,918
Total Revenues		16,031,926	20,125,185
Operating Expenses
Attributed property expenses		13,062,203	16,831,482
Payroll and office expenses		2,291,247	2,620,058
Administrative and general		&n bsp;     525,383	1,091,729
Depreciation		261,037	205,960
Total Operating Expense		16,139,870	20,749,229
Operating Loss		(107,944)	&n bsp;              (624,044)
Foreign Exchange Gain (Loss)		(582,318)	584,950
Interest Expense		(371,183)	(447,533)
Loss before taxes		(1,061,445)	(486,627)
Income tax bene fit		39,015	196,598
Net Loss		$           (1,022,430)	$              (290,029)
Other Comprehensive Income
Foreign currency translation adjustment		467,359	(680,207)
Total Comprehensive Income (Loss)		$              (555,071)	$              (970,236)
	& nbsp;
Earnings (Loss) Per Share
Basic		$                    (0.10)	$                   &n bsp;(0.03)
Diluted		$                     (0.10)	$                    (0.03)
Weighted Average Shares
Basic		9,946,392	9,812,134
Diluted		9,946,392	9,812,134
The accompanying notes are an integral part of these consolidated financial statements

19

THE CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDING DECEMBER 31, 2009 & 2008
				2009	2008
Cash Flows from Operating Activities
Net income (loss)				$            (1,022,430)	$              (290,029)
Depreciation				& nbsp;261,037	205,960
Amortization of discount				141,006	174,312
Foreign exchange (gain) loss on guarantor obligation				582,318	(584,950)
Stock issued for compensation				0	131,250
Interest on guarantor obligation				140,206	158,445
(Increase) decrease in
Accounts receivable				95,611	860,679
Other current assets				42,784	(137,745)
Deposits and other assets				2,378	1,111
Restricted cash				107,750	(115,434)
Deferred taxes				(39,015)	&nb sp;           (196,598)
Increase (decrease) in
Accounts payable and accrued expenses				52,203	230,814
Net Cash from Operating Activities				363,848	437,815
Cash Flows from Investing Activities
Disposal of assets				7,053	0
Purchase of assets				(81,376)	(46,638)
Net Cash from Investing Activities				(74,323)	(46,638)
Cash Flows from Financing Activities			&n bsp;
Proceeds from notes		;		550,000	500,000
Private placement of stock				-	224,744
Payments on notes				(597,706)	(1,188,174)
Net Cash from Financing Activities				(47,706)	(463,430)
Effect of exchange rate on cha nges in cash				36,989	(77,159)
Net Change in Cash				278,808	(149,412)
Beginning Balance				344,677	494,089
Ending Balance				$                623,485	$                344,677
Supplementary Information
Cash Paid for Interest				$                  77,514	$                120,097
Cash Paid for Income Taxes	&nb sp;			$                            -	$                &nbs p;           -
Significant Non-cash Transactions
Conversion of Debt to Stock				$                            -	$                227,500
The accompanying notes are an integral part of these consolidated financial statements

THE CASTLE GROUP INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

YEARS ENDING DECEMBER 31, 2009 & 2008

							Accumulated
					Additional		Other
	Preferred Stock		Common Stock		Paid-in	Retained	Comprehensive
	Shares	Amount	Shares	Amount	Capital	Deficit	Income (Loss)	Total
Balance 12/31/07	11,050	$1,105,000	9,538,055	$190,761	$3,366,928	$(5,034,930)	$         (68,631)	$    (440,872)
Net Loss 12/31/08						(290,029)		(290,029)
Interest on Guarantor Obligation					158,445			158,445
Issuance of Stock for Services			75,000	;   1,500	129,750			131,250
Private Placement of Stock, net of Issuance costs			333,337	6,668	445,577			452,245
Foreign Currency
Translation Adjustment							&nbs p;       (680,207)	(680,207)
Balance 12/31/08	11,050	1,105,000	9,946,392	198,929	4,100,700	(5,324,959)	(748,838)	(669,168)
	;
Net Loss 12/31/09						(1,022,430)		(1,022,430)
Interest on Guarantor Obligation					140,206			140,206
Foreign Currency
Translation Adjustment							467,359	467,359
Balance 12/31/09	11,050	$1,105,000	9,946,392	$198,929	$4,240,906	$(6,347,389)	$      (281,479)	$ (1,084,033)
The accompanying notes are an integral part of these consolidated financial statements

21

The Castle Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   

Summary of Significant Accounting Policies

Organization

The Castle Group, Inc. was incorporated under the laws of the State of Utah on August 21, 1981.  The Castle Group, Inc. operates in the hotel and resort management industry in the State of Hawaii, New Zealand, and the Commonwealth of Saipan under the trade name “Castle Resorts and Hotels.”  The accounting and reporting policies of The Castle Group, Inc. (the “Company”) conform with generally accepted accounting principles and p ractices within the hotel and resort management industry.

Principles of Consolidation

The consolidated financial statements of the Company include the accounts of The Castle Group, Inc. and its wholly-owned subsidiaries, Hawaii Reservations Center Corp., HPR Advertising, Inc., Castle Resorts & Hotels, Inc., Castle Resorts & Hotels Thailand Ltd., NZ Castle Resorts and Hotels Limited (a New Zealand Corporation),  NZ Castle Resorts and Hotels’ wholly-owned subsidiary, Mocles Holdings Limited (a New Zealand Corporation), Castle Resorts & Hotels NZ Ltd., Castle Group LLC (Guam), Castle Resorts & Hotels Guam Inc. and KRI Inc. dba Hawaiian Pacific Resorts (Interactive).  All significant inter-company transactions have been eliminated in the consolidated financial statements.

Use of Management Estimates in Financial Statements

The preparation of financial statements in conformity with generally accepted accounting principles 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 amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

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

Restricted Cash

The Company holds funds on behalf of the unit owners for one of the properties it manages.  These funds are to be used only for the replacement and refurbishment of the furniture and equipment within the rooms owned by the unit owner.  As of December 31, 2009 and 2008, the Company had $145,320 and $215,428, respectively, of funds held for this purpose.  The Company records an offsetting liability as a long term deposit payable on its balance sheet.

Accounts Receivable

The Company records an account receivable for revenue earned but net yet collected.  If the Company determi nes any account to be uncollectible based on significant delinquency or other factors, it is immediately written off.  An allowance for bad debts has been provided based on estimated losses amounting to $185,749 and $244,631 as of December 31, 2009 and 2008, respectively.    

Property, Furniture, and Equipment

Property, furniture, and equipment are recorded at cost.  When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounting records, and any resulting gain or loss is reflected in the Consolidated Statement of Operations for the period.  The cost of maintenance and repairs are expensed as incurred.  Renewals and betterments are capitalized and depreciated over their estimated useful lives.

22

At December 31, 2009 and 2008, property, furniture, and equipment consisted of the following:

         2009                  2008           

     Real estate - Podium (see Note 11)

           ; 

                $   7,440,400        $ 6,003,533

     Equipment and furnishings

     1,427,281           1,104,065

     Less accumulated depreciation

    (1,779,584)        (1,212,900)

   ;          

 $   7,088,097       $ 5,894,698

Depreciation is computed using the declining balance and straight-line methods over the estimated useful life of the assets (Equipment and furnishings 5 to 7 years, Podium 50 years).  For the years ended December 31, 2009 and 2008, depreciation expense was $261,037 and $205,960, respectively.  

Goodwill and Intangibles

Goodwill related to our historical acquisitions is not amortized , but is subject to annual review for impairment or upon the occurrence of certain events, and, if impaired, are written down to its fair value.  The Company has not recognized any impairment losses during the periods presented.

Revenue Recognition

The Company recognizes revenue from the management of resort properties according to terms of its various management contracts.

The Company has two basic types of agreements.  Under a “Gross Contract” the Company records revenue which is based on a percentage of the gross rental proceeds received from the rental of hotel or condominium units.   Under a “Gross Contract” the Company pays a portion of the gross rental proceeds to t he owner of the rental unit.  The Company only records the difference between the gross rental proceeds and the amount paid to the owner of the rental unit as “Revenue Attributed from Properties.”  Under the Gross Contract, the Company is responsible for all of the operating expenses for the hotel or condominium unit.  Under a “Net Contract”, the Company receives a management fee that is based on a percentage of the gross rental proceeds received from the rental of hotel or condominium units.  Under the Net Contract, the owner of the hotel or condominium unit is responsible for all of the operating expenses of the rental program covering the owner’s unit.  Under the Net Contract, the Company also typically receives an incentive management fee, which is based on the net operating profit of the covered property. Revenues received under the net contract are recorded as Management and Service Income.  Under both types of agreements, revenues are recogni zed after services have been rendered.  A liability is recognized for any deposits received for which services have not yet been rendered.

Under a Gross Contract, the Company records the expenses of operating the rental program at the property covered by the agreement.  These expenses include housekeeping, food & beverage, maintenance, front desk, sales & marketing, advertising and all other operating costs at the property covered by the agreement.  Under a Net Contract, the Company does not record the operating expenses of the property covered by the agreement.  The difference between the Gross and Net contracts is that under a Gross Contract, all expenses, and therefore the ownership of any profits or the covering of any operating loss, belong to and is the responsibility of the Company; under a Net Contract, all expenses, and therefore the ownership or any profits or the covering of any op erating loss belong to and is the responsibility of the owner of the property.  The operating expenses of properties managed under a Gross Contract are recorded as “Attributed Property Expenses.”

Advertising, Sales and Marketing Expenses

The Company incurs sales and marketing expenses in conjunction with the production of promotional materials, trade shows, and retainers for out-of-state sales agents, and related travel costs.  The Company expenses advertising and marketing costs as incurred or as the advertising takes place.  For the years ended December 31, 2009 and 2008, total advertising expense was $975,171 and $1,310,388 respectively.

Stock-Based Compensation

The Company has accounted for stock-based compensation by recording an expense associated with the fair value of stock-based compensation.  The Company currently uses the Black-Scholes option valuation model to calculate the valuation of stock options and warrants at the date of grant.  Option pricing models require the input of highly subjective assumptions, including the expected price volatility.  Changes in these assumptions can materially affect the fair value estimate.

The average risk-free interest rate is determined using the U. S. Treasury rate in effect as of the date of grant, based on the expected term of the warrant.

23

Income Taxes

Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities.  The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement.  Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.  Our policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense.  For the years ended December 31, 2009 and 2008, the Company did not recognize any interest or penalties in its Statement of Operations, nor did it have any interest or penalties accrued in its Balance Sheet at December 31, 2009 and 2008, relating to unrecognized benefits.

Basic and Diluted Earnings per Share

Basic earnings per share of common stock were computed by dividing income available to common stockholders, by the weighted average number of common shares outstanding.  Diluted earnings per share were computed using the “treasury stock method”. The calculation of Basic and Diluted earnings per share for 2009 and 2008 di d not include 368,335 shares which would be issued upon conversion of the outstanding $100 par value redeemable preferred stock of the Company, nor does it include 483,337 shares issuable pursuant to the exercise of vested warrants as of December 31, 2008 and 583,337 vested warrants as of December 31, 2009 as the effect would be anti-dilutive.

Concentration of Credit Risks

The Company maintains its cash with several financial institutions in Hawaii and New Zealand.  Balances maintained with these institutions are occasionally in excess of federally, insured limits.  As of December 31, 2009 and 2008, the Company had balances of $221,782 and $85,181, respectively, in excess of US federally insured, limits of $250,000 per financial institution.    

Concentration in Market Area

The Company manages hotel properties in Hawaii, New Zealand and Saipan, and is dependent on the visitor industries in these geographic areas.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.  A fair valu e hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, may be used to measure fair value.  The carrying value of notes receivable and notes payable approximates fair values as these notes have interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Guarantees 

We record a liability for the fair value of a guarantee on the date a guarantee is issued or modified.  The offsetting entry depends on the circumstances in which the guarantee was issued.  Funding under the guarantee reduces the recorded liability.  When no funding is forecasted, the liability is amortized into income on a straight-line basis over the remaining term of the guarantee. Guar antees are presented as other long term obligations on the balance sheet.  

Foreign Currency Translation and Transaction Gains/Losses 

The U.S. dollar is the functional currency of our consolidated entities operating in the United States.  The functional currency for our consolidated entities operating outside of the United States is generally the currency of the country in which the entity primarily generates and expends cash.  For consolidated entities whose functional currency is not the U.S. dollar, we translate their financial statements into U.S. dollars.  Assets and liabilities are translated at the exchange rate in effect as of the financial statement date, and the line items of the results of operations are translated using the weighted average exchange rate for the year. Tra nslation adjustments from foreign exchange are included as a separate component of shareholders’ equity.  Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations.

24

New Accounting Pronouncements

In June 2009, the FASB issued FASB ASC 860-10-05 (Prior authoritative literature: FASB Statement 166, Accounting for Transfers of Financial Assets). This Statement removes the concept of a qualifying special-purpose entity from Statement 140 and removes the exception from applying FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, to qualifying special-purpose entities. FASB ASC 860-10-05 is effective for fiscal years beginning after November 15, 2009. The Company is currently assessing the impact of FASB ASC 860-10-05 on its financial position and results of operations.

In June 2009, the FASB issued FASB ASC 810-10-25 (Prior authoritative literature: FASB Statement 167-Amendment to FIN 46(R), Consolidation of Variable Entities). FASB ASC 810-10-25 eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires a qualitative analysis to determine whether an enterprise’s variable interest gives it a controlling financial interest in a variable interest entity. FASB ASC 810-10-25 contains certain guidance for determining whether an entity is a variable interest entity. This statement also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. FASB ASC 810-10-25 will be effective as of the beginning of the Company’s 2010 fiscal year. The Company is currently evaluating the impact of the adoption of FASB ASC 810-10-25.

In October 2009, the FASB issued ASU No. 200-13, Revenue Recognition – Multiple Deliverable Revenue Arrangements (“ASU 2009-13”).  ASU 2009-13 updates the existing multiple-element revenue arrangements guidance currently included in FASB ASC 605-25.  The revised guidance provides for two significant changes to the existing multiple-element revenue arrangements guidance.  The first change relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting.  This change will result in the requirement to separate more deliverables within an arrangement, ultimately leading to less revenue deferral.  The second change modifies the manner in which the transaction consideration is allocated across the separately identified deliverables.  Together, these changes will result in earlier recognition of revenue and related costs for multiple-element arrangements than under previous guidance.  This guidance expands the disclosures required for multiple-element revenue arrangements.  Effective for interim and annual reporting periods beginning after December 15, 2009.  The Company is currently evaluating the potential impact, if any, of this guidance on its financial statements.

2.   

Related Party Tr ansactions

Hanalei Bay International Investors (“HBII”)

The Chairman and CEO of the Company is the sole shareholder of HBII Management, Inc., the managing General Partner of Hanalei Bay International Investors (“HBII”).  In March 1999, HBII consummated the sale of its interest in Hanalei Bay Resort to an unrelated third party.  The cash proceeds received by HBII on the closing of the sale were not sufficient to satisfy all claims of HBII’s creditors, including the Company, and the Company accepted a note receivable in the amount of $4,420,003 as settlement for its account receivable balance of $1,105,001 at the time of the sale.  The excess amount $3,315,002 over the receivable balance was accounted for as a shareholder contribution.  Under the te rms and conditions of the agreement to sell Hanalei Bay Resort, HBII was entitled to receive a percentage of the future cash flows from the resort’s hotel operations and the sale of certain time-share units.    

As part of the Company’s purchase of real estate in New Zealand (see Note 11), an assignment of $3,018,000 of the total note receivable from HBII was made to the seller of the real estate, with the Company remaining as guarantor should the note receivable not be collected before December 24, 2010 (See Note 3).  The Company has received a letter from the note holder and reasonably expects that the maturity date of this liability will extend to December 31, 2012 and is currently working on the legal documentation for this extension.  As such, this liability is presented as a long term liability on the Balance Sheet.

During 2006, the purchaser of Hanalei Bay Resort (“HBR”), disputed the amount that it was indebted to HBII, and HBII filed a lawsuit to collect the amounts owed by HBR.  In March 2008, HBII and Quintus Resorts, LLC (“Quintus”), the parent company of HBR, entered into a settlement to resolve the litigation by Quintus issuing a 19.9% membership interest in Quintus to HBII or its designee, which included a preferred return as to the first $6.2 million of future distributions of available cash flow.

Quintus is the owner of a timeshare resort project in Genoa, Nevada, near Lake Tahoe.  Quintus has not yet completed its financial statements for 2009 but the latest unaudited financial statements received from Quintus showed a net equity of approximately $1.6 million.  Neither Quintus’ estimates as to the fair market value of its assets nor its projections have been verified or reviewed by Management or any independent third party.  

For at least the next year, Quintus will be required to use all of its available cash flow to pay down the substantial indebtedness it incurred in purchasing the resort.  Based on Quintus’s financial projection, HBII’s management believes that it is likely to receive in excess of $6,000,000 from its ownership interest in Quintus and that it will utilize these funds to pay its indebtedness to the

25

Company.  In that the distributions from HBII will likely not be realized for a number of year s and are subject to uncertainty and risks over which the Company has no control, there can be no assurance that the Company will receive any distributions from HBII’s ownership interest in Quintus within the next ten years, if at all.  In light of such uncertainties, as required by Generally Accepted Accounting Principles (“GAAP”) the Company has established a reserve for uncollectible amounts equal to the entire amount of the receivable.  

Loan Fees

In 2006, the Company secured $600,000 in financing from a bank, which was subsequently replaced by a loan and line of credit from another bank (see note 6 to the financial statements).  The CEO of the Company acted as guarantor for these loans.  As consideration for the guaranty, the Company pays a quarterly guaranty fee of 2% of the amount of the credit facility utilized per annum to the CEO of the Company.  During 2009 and 2008, the Company paid $0 and $4,499, respectively, in guaranty fees to the Company’s CEO.  

Related Party Loans

In June, 2004, a director loaned the Company $100,000 with interest at the rate of 8% per annum and monthly payments of interest plus $521, and a maturity date of January 1, 2012.

In December of 2007, and early 2008 the Chairman and CEO of the Company advanced a total of $100,000 to the Company to capitalize the Company’s Thailand subsidiary, and in April 2008, the advance was converted to common stock and warrants as part of the Company’s Unit offering.

In April 2008 two directors converted loans outstanding totaling $100,000 into common stock and warrants as part of the Company’s Unit offering.

Through December 2009, the Company has accrued but not paid the Chairman and CEO a total of $45,332 for expenses incurred on behalf of the Company, and $49,282 for interest accrued on a note payable.

Through December 2009, the Company has accrued but not paid the Company’s Corporate Secretary a total of $8,000 for professional fees earned during 2009.  

3.   

Notes Receivable

Notes receivable consisted of the following:

       2009

               2008

Note receivable from Hanalei Bay International Investors,

secured by a direct assignment of Hanalei Bay International

Investors right to receive future proceeds from HBII’s

ownership interest in Quintus.

 (Assigned to third parties- see Note 2)

$ 4,269,151       $ 4,269,151

Less Reserve for Uncollectible Notes

   4,269,151          4,269,151

Notes Receivable, Non-current

$              0       $               0

See Note 2 above. Pursuant to GAAP, the Company has established a reserve for uncollectible amounts.  The Company recorded an expense during 2007 for $954,459, and reduced additional paid in capital for $3,315,002 in providing for the reserve. This is a reflection of the nature of the original accounting treatment.  This line item does not appear on the balance sheet due to its $0 carrying value.

4.   

Commitments and Contingencies

Leases

The Company leases two office spaces expiring February 28, 2011 and October 31, 2011 and for the years ended December 31, 2009 and 2008, the C ompany paid $379,358 and $340,554, respectively, in lease expense for these leases. As of December 31, 2009, the future minimum rental commitment under these leases was $498,222.

In July, 2001, Castle entered into lease agreements (in lieu of a traditional management agreements) with each of the owners of approximately 250 investment units of the Spencer on Byron condominium project for the purpose of having those units be part of the rental program at the Spencer on Byron Hotel.  The leases are for a period of ten years expiring on July 18, 2011, and Castle has the option to extend these leases for an additional 20 years.  Monthly lease rent through 2011 is calculated as a

26

percentage of the purchase price paid by the original owner of each condominium. Total lease expense for the year ending December 31, 2009 and 2008 was $2,037,292 and $2,231,637, respectively.  

As of December 31, 2009, the future lease commitments are as follows:

  Year

      Amount    

  2010

       2,604,721

  2011

       1,535,875

  2012

                    0

  Total

$     4,140,596

The purchase of Mocles Holdings Limited (see Note 11) includes a requirement for monthly payments of the greater of $14,354 (NZ$20,000) or Surplus Profits, as defined at Note 11.  Using the monthly rate of $14,354, total annual payments are approximately $172,248 per year, beginning in 2005 and continuing through 2011 at that amount.  The Company has not yet determined whether the Surplus Profits will be greater than $172,248 for 2010.  The approximate term is 2 years.  

As of December 31, 2007, the Company had an available lease line of credit with a bank for up to $250,000.  In December of 2007, as part of the Company acquiring a new hotel management agreement, the Company allowed the hotel owner to purchase computer hardware using the Company’s equipment lease line of credit in the amount of $76,501.  The hotel owner is responsible for making the operating lease payments to the bank, and also agreed to assume, refinance or retire the lease should the management agreement between the Company and the hotel be terminated.  On October 24, 2008, the lease line of credit was terminated by the bank upon the Company refinancing its term loan and revolving line of credit with another bank.  In December 2009, the balance due on the lease line of credit was assigned over to the hotel owner.

Guaranty

As part of the Company’s purchase of real estate in New Zealand (see Note 11), an assignment of $3,018,000 of the total note receivable from HBII was made to the seller of the real estate, with the Company remaining as guarantor should the note receivable not be collected before December 31, 2012 (see Note 2).  Due to the devaluation of the New Zealand dollar against the US dollar, the amount recorded as “Other long term obligations” on the Company’s balance sheet was reduced to $2,433,050; with the difference of $584,950 recorded as a foreign exchange gain as of December 31, 2008.   In 2009, the New Zealand dollar strengthened against the US dollar, and the Company recorded a foreign exchange loss of $582,318, and increased the amount recorded as “Other long term obligations” to $3,015,368.

The assignment does not have a provision for interest and in 2007, the Company had fully amortized the imputed interest on the assignment.  For 2009 and 2008, the Company recorded interest expense of $140,206 and $158,445, respectively, based on 5.25% on the guaranty of NZ$ 4,201,433 assignment and an increase in Additional Paid in Capital for the same amount.

The Company has recognized a guarantor liability for these assignments, amounting to $3,015,368 as of December 31, 2009, and $2,433,050 as of December 31, 2008, which repres ents the present fair value of the obligation undertaken in becoming a guarantor of the payment of the assigned receivables.  Pursuant to an extension agreement signed in March 2008, since the Company was current with its other obligations in connection with the purchase of the New Zealand Real Estate, the remaining balance will be due on December 24, 2010.  Further, if the Company is current with those obligations as of December 24, 2010, and has paid not less than NZ$ 7,183,260 toward the purchase price, an additional six month extension is available. In March 2010, the Company further extended the due date such that if the Company is current with its obligations in connection with the purchase of the New Zealand Real Estate, an additional extension of twenty four months, to December 31, 2012 is available.

Management Contracts

The Company manages several hotels and resorts under management agreements expiring at various dates.  Several of these management agreements contain automatic extensions for periods of 1 to 10 years.  

In addition, the Company has sales, marketing and reservations agreements with other hotels and resorts expiring at various dates through March 2014.  Several of these agreements contain automatic extensions for periods of one month to three years.  Fees received are based on revenues, net available cash flows or commissions as defined in the respective agreements.

Litigation

There are various claims and lawsuits pending against the Company involving complaints, w hich are normal and reasonably foreseeable in light of the nature of the Company’s business.  The ultimate liability of the Company, if any, cannot be determined at this time.  Based upon consultation with counsel, management does not expect that the aggregate liability, if any, resulting

27

from these proceedings would have a material effect on the Company’s consolidated financial position, results of operations or liquidity.

5.

Employee Benefits

The Company has a 401(k) Profit Sharing Plan (the “Plan”) available for its employees.  Under the terms of the Plan, the Company may match 50% of the compensation reduction of the participants in the Plan up to 1% of compensation.  Matching contributions for the years ended December 31, 2009, and 2008 were $2,660 and $13,030, respectively.  Any employee with one-year of continuous service and 1,000 credit hours of service, who is at least twenty-one years old, is eligible to participate.  For the years ended December 31, 2009 and 2008, the Company made no profit contributions.  On March 1, 2009, the Company terminated its matching contribution.  Employees may continue to contribute a portion of their compensation into the plan however the Company will not make a matching contribution.

The Company also has a Flex ible Benefits Plan (the “Benefits Plan”).  The participants in the Benefits Plan are allowed to make pre-tax premium elections which are intended to be excluded from income as provided by Section 125 of the Internal Revenue Code of 1986.  To be eligible, an employee must have been employed for 90 days.  The benefits include group medical insurance, vision care insurance, disability insurance, cancer insurance, group dental coverage, group term life insurance, and accident insurance.

6.

Notes Payable

Notes payable consisted of the following:

         2 009

         2008

Note dated 4/26/04 to the Company’s CEO with interest

at prime plus 2.5%, with monthly payments of $2,544

balance due on 4/26/09, unsecured

$              0

$      10,190

Note dated 6/6/04 to a director, with interest at the rate

of 8%, monthly payments of  interest plus $521,

balance due 1/1/12, unsecured

        40,104

        46,354

Note dated 6/16/04 to unrelated party with interest at the

rate of 15% due on 1/1/12 with monthly payments of

NZ$3,225 (US$2,315), unsecured     

      185,167

   ;    149,408

Note dated 7/31/95 to former stockholders, due 8/31/98

with interest at 6%, unsecured.  No formal demand has

been made on the Company.   

        12,000

        12,000

Note dated 12/31/02 from the Company’s CEO, with

interest at 10%, due on o r before 1/1/12, unsecured

      117,316

      117,316

Note dated 12/31/04, payable in New Zealand, net of

discount of US$0.158 million and US$0.256 million, as of 2009

and 2008, respectively, with an original face value of US$8.6

million and which is secured by real estate in New Zealand

and a general security agreement including an assignment of

US$3.018 million of the note receivable due from HBII.  The

Company acts as a guarantor for the payment of the assigned

receivable, and therefore, the obligation undertaken as a guarantor

is included in this amount.  The guarantor obligation is referred

to as “Other long term obligations” on the Balance Sheet

(See Note 4).  The effective interest rate at December 31,

2009 is 4.35% per annum.  The maturity date is December

31, 2012 (See Note 2).

    7,483,447

   6,048,787

Note dated 12/31/04 payable to unrelated

party, with interest at 10% due 3/01/12

with monthly payments of $2,975, unsecured

        64,445

       92,176

Note dated 10 /20/08 payable to a bank, with interest

at the bank’s prime rate plus 1%, secured by a security

28

interest in all personal property of the Company and by

the personal guaranty of the Company’s Chairman &

CEO, with monthly payments of $8,333 plus interest.

The note is due on or before 10/20/2013

      383,338

     483,334

Revolving line of credit with a bank for up to $200,000.

The line is secured by a general security interest in the

Company’s assets.  Draws against the line will bear interest

at the bank’s base lending rate plus 1%.  The line has a

termination date of October 31, 2010.                     

        50,000

 0

Revolving line of credit with a bank for up to NZ $300,000.

The line is secured by a general security interest in the Company’s

assets in New Zealand.  Draws against the line will bear interest at

the bank’s base lending rate plus 2%.  The line is cancellable at

any time by the bank.

                0

    ;            0

Note dated 5/15/09 payable to unrelated party, unsecured, with

interest at 10% and monthly payments of $12,011.  The note

is due on or before January 11, 2011.

      143,918

               0

Note dated 12/31/04 payable to unrelated party,

secured by up to $800,000 of the note receivable from

Hanalei Bay Resort (see note 3) with interest at 8%,

balance is due on 5/1/2009

               0

       35,959 

Subtotal

$ 8,479,735

$ 6,995,524

Less Current Portion

     500,412

      480,522

Notes payable, non-current

$ 7,979,323

$ 6,515,002

The five year payout schedule for notes payable is as follows:

 Year

   Amount  

 2010

$   500,412

 2011

     326,948

 2012

  7,569,036

 2013

       83,339

 2014

 0

 Total

$ 8,479,735

7.

Redeemable Preferred Stock

In 1999 and 2000, the Company issued a total of 11,050 shares of $100 par value redeemable preferred stock to certain officers and directors.  Dividends are cumulative from the date of original issue and are payable semi-annually, when, and if declared by the board of directors beginning July 15, 1999, at a rate of $7.50 per annum per share.  During the fiscal year ended July 31, 2000, the Company paid dividends to holders of record as of July 15, 2000, in the amount of $16,715.  At December 31, 2009, undeclared and unpaid dividends on these shares were $870,199 or $78.75 per preferred share.  These dividends are not accrued as a liability, as no declaration has occurred.  The shares are nonvoting, and are convertible into the Company’s common stock at an exercise price of $3.00 per share.  As of January 15, 2001, the redeemable preferred stock is redeemable at the option of the Company at a redemption price of $100 per share plus accrued and unpaid dividends.

8.

Common Stock

During 2008, the Company issued 408,337 shares of its $.02 par value common stock comprised of the following:  

The Company issued 333,337 shares under a private placement for $1.50 per share.  Of the $500,000 received, $227,500 was received through the conversion of outstanding debt and the balance of $272,500 was received in cash.  The Company offset $47,756 of costs relating to the private placement against the proceeds received.  Participants in the private placement also received for each share of common stock purchased, a warrant to purchase one share of the Company’s common stock for $3.50 per share, exercisable on or before April 30, 2011.

29

The Company issued 75,000 shares to a director for services.  The shares were valued at $1.75, which was the last publicly traded value quoted on the OTCBB at the time the shares were issued.  As a result, compensation expen se was immediately recognized amounting to $131,250.

The Company has a guarantor obligation of NZ$ 4,201,433 related to the purchase of real estate (see Note 11).  The terms of the agreement do not provide for interest to be paid to the holder of this debt and therefore in 2009 and 2008, the Company recorded interest expense of $140,206 and $158,445, respectively, representing 5.25% of the obligation and increased Additional Paid in Capital for the amount of interest expense recorded on the obligation.

Common Stock Options and Warrants

The Company does not have Stock Based Incentive, Stock Purchase or Stock Option or Warrant Plans.  During 2008, the Company granted Warrants for the purchase of up to 333 ,337 shares of the Company’s common stock.  No compensation expense for these Warrants is necessary since they were purchased as part of the 2008 private placement.  During 2007, the Company granted the Warrants for the purchase of up to 250,000 shares of the Company’s common stock.  None of these Warrants have been exercised as of December 31, 2009.  In applying the Black-Sholes methodology to the warrant grants the fair value of the Company’s stock-based awards granted was estimated using an expected annual dividend yield of 0%, a risk free interest rate of 4.87%, an expected warrant life of  between 0 and 1.0 years and expected price volatility of  39.02%.  The overall impact on the consolidated statement of operations for stock-based compensation expense for the years ended December 31, 2009 and 2008 was negligible. No options or warrants were outstanding prior to January 1, 2007.

The average risk-free interest rate is determined using the U.S. Treasury rate in effect as of the date of grant, based on the expected term of the stock warrant.  The Company determined the expected term of the stock warrants as being equal to one half of the contractual term of the warrants due to a lack of forfeiture history and the thinly traded volume of the Company’s common stock.   The expected price volatility was determined using the average historical volatility of the stock prices of a group of 15 publically traded peer companies in the Company’s industry.  The stock price used was equal to the historical average stock price over the 6 month period prior to grant, which approximately represented the book value of the stock at the time of grant. For warrants with a vesting period, compensation expense is recognized on a straight line basis over the service period which corresponds to the vesting period. 

Changes in warrants for the years ended December 31, 2009 and 2008 were as follows: 

	Number of Shares	Weighted Average Exercise Price	Remaining Contractual Term (in Years)	Intrinsic Value
Balance at December 31, 2007	250,000	$2.20	3.5	$         0
2008:
Granted	333,337	$3.50	2.3	$         0
Exercised	0
Forfeited/expired	0
Outstanding at December 31, 2008	583,337	$2.95	Various	$         0
Vested at December 31, 2008	483,337	$2.95	Various	$         0
Exercisable at December 31, 2008	0	$      0		$         0
Weighted average fair value of warrants granted during year-$0
2009:
Granted	0	$      0	0	$         0
Exercised	0
Forfeited/expired	0
Outstanding at December 31, 2009	583,337	$2.95	Various	$         0
Vested at December 31, 2009	583,337	$2.95	Various	$         0
Exercisable at December 31, 2009	0	$      0		$         0

30

The following table summarizes information about compensatory warrants outstanding at December 31, 2009:

	Warrants Outstanding			Warrants Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price	Number Exercisable		Weighted Average Exercise Price
$2.00	200,000	2.5	$       2.00	0		$         0
$3.00	50,000	2.6	3.00	0		$         0
Total:
$2.00-$3.00	250,000	2.5	$        2.20	0	&nb sp;	$         0

9.            Income Taxes

The provision for income taxes consists of the following:

			2009	2008
Current	$                 0	$                0
Deferred
Federal	(    32,834)	(    165,454)
State	(      6,181)	(      31,144)
Foreign	- &nbs p;	-
Total Provision (Benefit)	$ (    39,015)	$ (    196,598)

The components of the Company’s deferred tax assets and liabilities are as follows:

	2009	2008
Deferred Tax Assets
Current:
Accounts Receivable	$              52,076	$             71,134
Accrued Vacation	103,924	130,491
Net Operating Loss	33,000	178,000
Total Current	189,000	379,625
Non-Current
Note Receivable	385,601	385,601
Goodwill	29,758	39,637
Net Operating Loss Carryforwards	1,691,955	1,863,035
Total Non-Current	2,107,314	2,288,273
Total Deferred Tax Assets	2,296,314	2,667,898
Less: Valuation Allowance	(99,226)	(509,825)
Net Deferred Tax Asset	$         2,197,088	$         2,158,073
Deferred Tax Assets (Liabilities)
Current Portion	$            189,000	$             379,625
Non-Current Portion	$          2,008,088	$          1,778,448

As of December 31, 2009, the Company had net operating loss carry forwards amounting to $4,024,082 and $330,753 for domestic and foreign, jurisdictions, respectively, which expire on various dates through 2029.  The Company expects to utilize $33,000 of the loss carryforward for the year ended December 31, 2010, and has therefore classified the deferred tax asset associated with the loss carryforward as a current asset on the Company’s consolidated balance sheet.  The valuation allowance decreased during the period by $410,599 to $99,226 from 2008 to 2009.  

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Income tax expense differs from amounts computed by applying the statutory Federal rate to pretax income as follows:

	2009	2008
Expected US Income Tax (Benefit) on Consolidated Income before Tax	$ (  360,891)	$  (164,454)
Effects of:
Expected State Income Tax (Benefit) on Consolidated Income before Tax	(   67,932)	(30,116)
Change in valuation allowance	410,599	(30,207)
Other	(   20,791)	29,179
Effective Tax Provision (Benefit)	$   (  39,015)	$  (196,598)

The Company has evaluated its uncertain tax positions and determined that any required adjustments would not have a material impact on the Company's balance sheet, income statement, or statement of cash flows.

A reconciliation of t he unrecognized tax benefits for the years ending December 31, 2009 and 2008 is presented in the table below:

	2009	2008
Beginning Balance	$                       0	$                       0
Additions based on tax positions related to t he current year	0	0
Reductions for tax positions of prior years	0	0
Reductions due to expiration of statute of limitations	&nbs p;        0	0
Settlements with taxing authorities	0	0
Ending Balance	$                       0	$                        0

Our policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense.  For the year ended December 31, 2009 and 2008, we did not recognize any interest or penalties, nor did we have any interest or penalties accrued as of December 31, 2009 and 2008 relating to unrecognized benefits.

The tax years 2000 through 2009 remain open to examination for federal income tax purposes and by other major taxing jurisdictions to which we are subject.

10.

Business Segments

As stated in Note 1, the Company has two basic types of hotel management agreements:  Gross Contracts and Net Contracts. As described in Note 1, the revenues and expenses are disclosed separately on the statements of operations for each type of agreement.  The assets included in the consolidated financial statements only consist of assets owned in relation to the Gross Contract agreements and other assets used for general corporate purposes.  The financial statements do not include any assets the Company manages under the Net Contract agreements, since the Company does not have the same level of responsibility that it has under Gross Contracts.

The consolidated financial statements include the following related to international operations (which are predominately in New Zealand and related to Gross Contract agreements):  Revenues of $6,679,508 in 2009 and $8,954,324 in 2008; results from operations of ($525,876) in 2009 and $181,268 in 2008; and fixed assets of $7,070,019 in 2009 and $5,855,385 in 2008.   The consolidated financial statements also include the following related to our operations in Thailand:  Revenues of $374,499 in 2009 and $725,082 in 2008; results from operations of ($111,831) in 2009 and ($89,731) in 2008; and fixed assets of $0 in 2009 and $9,028 in 2008.

11.

Purchase of Mocles Holdings Limited

On December 24, 2004, the Company, through its wholly owned subsidiary NZ Castle Resorts and Hotels Limited, entered into an agreement to purchase all of the shares of Mocles Holdings Limited (“Mocles”), a New Zealand Corporation.  Following are the significant provisions of this agreement (with modifications according to a “Deed of Variation” dated April 15, 2005):

Mocles owns the Podium levels (“Podium”) of the Spencer on Byron Hotel in Auckland, New Zealand.

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The purchase price for Mocles was $7,440,430 (NZ$10,367,048), net of imputed interest $1,171,970 (NZ$1,632,952).  The face value of the purchase price was $8,612,400 (NZ$12,000,000).   

The purchase price is to be paid as follows:

Partial assignment of the Company’s receivables from Hanalei Bay International Investors (“HBII”) in the amount of US$3,018,000.  In the event that this amount is not realized from HBII, the Company is obligated to make up the difference by December 31, 2012.

Monthly payments of the greater of NZ$20,000 (US$14,354), or Surplus Profits defined as 50% of net profits, whichever is higher, calculated in accordance with New Zealand’s Generally Accepted Accounting Principles or International Reporting Standards.  Beginning on August 1, 2011, monthly payments will be increased by NZ$20,000 (US$14,354), which represents interest on the outstanding obligation.  The vendor has the right to increase the interest payable on the then outstanding balance of the purchase price provided that the interest rate does not exceed the Westpac Banking Corporation indicator lending rate plus a margin of 3%.

At the time of purchase, Mocles had additional debts, namely:

(1)

Bank Mortgage – There is $2,273,502 payable to a bank which is secured by the Podium.  The liability to the bank must be refinanced, paid in full, or renegotiated to the extent that the current guarantors are released from all obligations associated therewith, by December 31, 2009, which was subsequently extended to December 24, 2010.

(2)

Advances from parties heretofore related to Mocles in the amount of $1,509,768.  The entire amount is due and payable by December 31, 2012 (See Note 2).  There is no interest associated with this liability through 2010.

The purchase price is deemed to be satisfied in part by NZ Castle procuring repayment of Mocles additional debts.  After NZ Castle has procured repayment of the additional debts by or on behalf of Mocles, the total payable to the seller of the Mocles shares under 1 and 2 above is $4,836,642.

Mocles shares are being held legally by the seller of such shares until such time as all obligations associated with this transaction are satisfied.

An amount equal to the interest payable by Mocles to the bank is to be paid annually to Mocles by the Company as rental for the Podium.

A replacement fund is to be established from 50% of the net profits from the operation of the Podium, until such time as there is NZ$175,000 (US$125,598) regularly available for the replacement of furniture, fixtures and equipment installed in the Podium.  If and to the extent that the balance in the replacement fund would exceed NZ$175,000 (US$125,598), the 50% share of the net profits must be paid towards the purchase price rather than being accumulated.  As of December 31, 2009 and 2008, there was NZ$1,801 (US$1,293) and NZ$146,338 (US$84,744) in the replacement fund.

12.

Settlement Agreement

On June 7, 2007, the Company entered into a Settlement Agreement with the developer of a hotel that was previously leased by the Company between 1999 and 2001.  The Company and the developer had previously entered into a Compromise Agreement in 2001, which called for the Company to make certain payments to the developer, and also to issue 900,000 shares of its restricted common stock to the developer.  In 2001, the Company recorded the issuance of 900,000 shares of common stock to the developer and recorded a note payable for $240,000, representing the balance of the payments due to the developer.  The Settlement Agreement reached in June 2007 voided the Compromise Agreement and therefore as of December 31, 2006, the Company voided the 900,000 shares that were previously issued.  Under the terms of the Settlement Agreement, the Company was also required to pay an additional $260,000, for a total of $500,000 to the developer, in monthly installments commencing in June 2007, with the total amount to be paid on or before January 18, 2008.  In accordance with the terms of the Settlement Agreement, the Company increased the note payable to the developer by $260,000 as of December 31, 2006.  The Company paid the note payable to the developer in full on January 18, 2008.

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Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A(T). Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company’s management conducted an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer (who is also the Acting Chief Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2009.  Our Chief Executive Officer has concluded that all disclosure controls and procedures were effective as of December 31, 2009, in providing reasonable assurance tha t information required to be disclosed by us in the reports we file under the Exchange Act are recorded, processed, summarized, and reported as specified in the Securities and Exchange Commission’s rules, regulations, and forms.   

The design and evaluation of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.  Management has determined that any identified deficiencies, in the aggregate, do not constitute material weaknesses in the design and operation of our internal controls in effect prior to December 31, 2009.

Changes in Internal Control over Financial Reporting

There have not been any cha nges in the Company’s internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during its fourth fiscal quarter of 2009 that have materially affected, or are reasonably likely to materially affect its internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Our internal control system is intended to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements and that we have controls and procedures designed to ensure that the information required to be disclosed by us in our reports that we are required to file under the E xchange Act is accumulated and communicated to our management, including our principal executive and our principal financial officers or persons performing similar functions, as appropriate to allow timely decisions regarding financial disclosure.   

Management’s assessment of the effectiveness of our internal controls is based principally on our financial reporting as of December 31, 2009.  In making our assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework.  Our management, with the participation of our Chief Executive Officer (who is also the Acting Chief Financial Officer), has evaluated the effectiveness of our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as of Decembe r 31, 2009.  Those rules define internal control over financial reporting as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”) and includes those policies and procedures that:

·

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

·

Provide reasonable assurance that the tr ansactions are recorded as necessary to permit the preparation of financial statements in accordance with GAAP, and the receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

·

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Based on our assessment and those criteria, management believes that, as of December 31, 2009, the Company’s internal control over financial reporting is effective.  Because of its inherent limitati ons, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

34

This Annual Report does not include an attestation report of the Company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for Smaller Reporting Companies.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.  Our auditors have not advised us of any material weaknesses in our internal controls in connection with auditing our consolidated financial statements for the years ended December 31, 2009, and 2008. 

Item 9B. Other Information.

In 2009, the Company discontinued its matching contribution on the Company’s 401k pension plan (see note 5 to the consolidated financial statement).

PART III

Item 10.  Directors, Executive Officers and Corporate Governance.

The following table sets forth certain information concerning the directors and executive officers of Castle as of December 31, 2009.  Except as otherwise stated below, the directors will serve until the next annual meeting of stockholders or until their successors are elected or appointed, and the executive officers will serve until their successors are appointed by the Board of Directors.

Name	Age	Position	Position Held Since
Rick Wall	66	Chief Executive Officer, acting Chief Financial Officer, Director and Chairman of the Board	1993
Alan R. Mattson	53	Chie f Operating Officer and Director	2004
Jerry Ruthruff	62	Secretary and Director	2004
John Brogan	77	Director	2007
Michael Irish	56	Director	2004
Rick Humphreys	66	Director	2005
Stanley Mukai	77	Director	2004
Motoko Takahashi	65	Director	1993
Roy Tokujo	68	Director	1998
Tony Vericella	57	Director	2004
Robert Wu	44	Director	2007

Director and Officer Backgrounds

Rick Wall. - Mr. Wall was appointed Castle’s Chief Executive Officer and Chairman of the Board in 1993. &nbs p;Mr. Wall is the founder of Castle, and has served on the board of directors, and the executive committee of the Hawaii Visitors and Convention Bureau.  

Alan Mattson – Mr. Mattson possesses over 25 years of executive level hospitality and travel industry experience.  Mr. Mattson was formerly vice president of sales and marketing for Dollar Rent a Car, responsible for all sales and marketing efforts for Hawaii, Asia, and the Pacific.  Prior to that, he was director ofmarketing for Avis Car Rental, operating out of the Avis worldwide headquarters in New York and responsible for the marketing within the US rental car division.  In addition, Mr. Mattson has seven years of sales and marketing experience with Hilton Hotels Corporation, performing in a variety of senior level sales and marketing positions in Hawaii and the domestic United States.  He joined Castle in September 1999 , as senior vice president of sales and marketing and was later promoted to President in July, 2005.  Mr. Mattson was appointed to the position of Chief Operating Officer of the Castle Group, Inc., in June, 2007.  

Jerry Ruthruff - Mr. Ruthruff joined Castle in 2003 as general counsel.  He is a graduate of the University of Washington and earned his law degree from Harvard Law School in 1972.  Mr. Ruthruff has been in private practice since 1972, focusing on commercial matters and is a former trustee of the State of Hawaii Employees Retirement System.

John Brogan - Mr. Brogan is a well-respected and recognized leader in the hotel industry, Mr. Brogan’s last position before retirement was President of Starwood Hotels and Resorts - Hawaii.  Previously, he chaired various boards, including Hawaii Visitors & Convention Bureau, Hawaii Hotel Assoc iation, American Heart Association-Hawaii, Blood Bank of Hawaii, Waikiki Improvement Association, and Chaminade University.

35

Rick Humphreys - Mr. Humphreys has almost 40 years of financial expertise.  He started his career with Bank of California, and was formerly president of both First Federal S & L and Hawaiian Trust Company.  He also served as chairman of Bank of America in Hawaii.  Mr. Humphreys is currently the President of Hawaii Receivables Management, LLC.  Additionally, he is a trustee of Pacific Capital Funds, and also a board member of the Bishop Museum, and Cancer Research Center of Hawaii.

Mike Irish - Mr. Irish has been a successful businessman in Hawaii for over 30 years.  Mr. Irish began his career in hotel management, but moved to real estate and business acquisitions during the 1980s.  He became part of the Hawaii food service industry with the purchase of Parks Brand Products in 1985, Halm’s Kim Chee in 1986, and Diamond Head Seafood in 1995, where he continues to serve as CEO.  

Stanley Mukai - Mr. Mukai is a partner practicing commercial and tax law in the Hawaii law firm of McCorriston, Miller, Mukai, MacKinnon.  He holds a law degree from the Harvard Law School.  He is a member of the Board of Directors of Waterhouse, Inc., AIG Hawaii, and on the Board of Governors of Iolani School.  Mr. Mukai has also served as Chairman of the Board of Regents of the University of Hawaii and on the Board of Governors of the East-West Center.  

Motoko Takahashi - Ms. Takahashi was appointed Secretary of Castle in August of 1994, and as director in March of 1995. Ms. Takahashi had previously served as director for various Japanese investment companies in the United States.  She also holds the position as Vice President of N.K.C. Hawaii, Inc.  Ms. Takahashi was born in Tokyo, Japan where she completed her education and has resided in the United States for more than thirty years, with the past ten in Hawaii.

Roy Tokujo - Mr. Tokujo was elected to the board of directors in March 2000.  Mr. Tokujo has over 45 years of experience in the hotel, restaurant and entertainment business in Hawaii, and he is the President and CEO of Cove Enterprises and Cove Marketing.  Mr. Tokujo was a founding member of the Hawaii Tourism Authority and is managing partner of Ko Olina Activities, LLC and Ko Olina Marketing & Licensing, LLC.

Tony Vericella - Mr. Vericella is the Managing Director of Island Partners Hawaii, a premier destination management company servicing the meeting and incentive travel needs of corporations and organizations, primarily from North America, Asia/Pacific and Europe.  He has 30 years of extensive leadership experience in all aspects of the travel and tourism industry.  His career in Hawaii began with Hawaiian Airlines and evolved to American Express Travel Related Services, Budget Rent a Car-Asia/Pacific and the Hawaii Visitors and Convention Bureau.

Robert Wu- Mr. Wu currently serves as Executive Vice President for Asian development for Castle Resorts & Hotels a subsidiary of the Castle Group, Inc.  He joined the Company in January 2008 and became an integral part of Castle’s business development in the Asia region.  Mr. Wu serves as the Chief Executive Officer for the Wu Gro up, a Hawaii based firm that specializes in Asia imports, management of several Hawaii businesses and business consultation services for the Asia-Pacific region.

Significant Employees

None, not applicable.

Family Relationships

There are no family relationships between any Castle officers and directors.

Involvement in Certain Legal Proceedings

During the past five years, no current director, person nominated to become a director, executive officer, promoter or control person of Castle:

(1) was a general pa rtner or executive officer of any business against which any bankruptcy petition was filed, either at the time of the bankruptcy or two years prior to that time;

(2) was convicted in a criminal proceeding or named subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

(3) was subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

36

(4) was found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

Compliance with Section 16(a) of the Securities Exchange Act.

Section 16 of the Securities Exchange Act of 1934 requires Castle’s directors and executive officers and persons who own more than 10% of a registered class of Castle’s equity securities to file with the Securities and Exchange Commission initial reports of beneficial ownership (Form 3) and reports of changes in beneficial ownership (Forms 4 and 5) of Castle’s common stock and other equity securities of Castle.  Officers, directors and greater than 10% shareholders ar e required by SEC regulation to furnish Castle with copies of all Section 16(a) reports they file. Appropriate beneficial ownership forms have been filed with the Securities and Exchange Commission and may be found at (www.sec.gov).

To Castle’s knowledge, as of the date hereof, all directors, officers and holders of more than 10% of Castle’s common stock, have filed all reports required of Section 16(a) of the Securities Exchange Act of 1934.

Code of Ethics

Castle has adopted a Code of Ethics that applies to all of its directors and executive officers serving in any capacity, including our principal executive officer, principal financial officer, and principal accounting officer or controller or persons performing similar functions.  See Part III, Item 13.

Nominating Committee

The Board of Directors has not established a Nominating and Corporate Governance Committee because Castle management believes that the Board of Directors is able to effectively manage the issues normally considered by a Nominating and Corporate Governance Committee.

Audit Committee

The Board of Directors has appointed Richard Humphreys, Stanley Mukai and Motoko Takahashi as the Audit Committee.  Mr. Humphreys, Mr. Mukai and Ms. Takahashi are independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.

Item 11. Executive Compensation.

Executive Compensation

The following table shows for the fiscal years ended December 31, 2009 and 2008 the aggregate annual remuneration of the highly paid persons who are executive officers of Castle:

SUMMARY COMPENSATION TABLE

Name and Principal Position	Year	Salary	Bonus	Stock Awards	Option Awards	Non-Equity Incentive Plan Compensation	Nonqualified  Deferred Compensation	All Other Compensation (1)	Total Earnings
Rick Wall CEO & Director	12/31/09 12/31/08	$      1,000 225,249	$   ;       0 0	$           0 0	$           0 0	$                     0 0	$                       0 0	$                   83               2,252	$        1,083 227,501
Alan Mattson COO & Director	12/31/09 12/31/08	170,875 181,988	0 0	0 0	0 0	0 0	0 0	290 1,853	171,165 183,841

Mr. Wall earns salary commensurate with his Employment Agreement dated July 1, 2004, however, in 2009; Mr. Wall declined his salary for the calendar year 2009.

Mr. Mattson earns salary commensurate with his Employment Agreement January 1, 2006.  

In addition, both Mr. Wall and Mr. Mattson participate in Castle’s 401(k) benefit plan.

(1)

All Other Compensation consists of Company contributions to the Company’s qualified 401(k) plan

37

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

None as the Company does not have, nor has it has in the past, an equity compensation program.  

Compensation of Directors

DIRECTOR COMPENSATION  

Director	Fees Earned or Paid in Cash	Stock Awards	O ption Awards	Non-Equity Incentive Plan Compensation	Nonqualified Deferred Compensation Earnings	All Other Compensation	Total
Rick Wall* ^	$     1,000	$         0	$         0	$         0	$         0	$         0	$    1,000
Alan Mattson* ^	1,000	0	0	0	0	0	1,000
John Brogan	1,000	0	0	0	0	0	1,000
Rick Humphreys	500	0	0	0	0	0	500
Michael Irish	1,000	0	0	0	0	0	500
Stanley Mukai	1,000	0	0	0	0	0	1,000
Jerry Ruthruff	500	0	0	0	0	52,000	52,500
Motoko Takahashi*	1,000	0	0	0	0	0	1,000
Roy Tokujo	1,000	0	0	0	0	0	1,000
Tony Vericella	1,000	0	0	0	0	0	1,000
Robert Wu*	500	0	0	0	0	0	500

*Directors who are employees of the Company

^Fees are included as compensation under Item 10 "Summary Compensation Table"

In May, 2009, the members of the Board decided to forego compensation for attending meetings of the Board.  Prior to this, non-employee Directors were paid $500 for each meeting of the Board which they attend.  Members of the Executive Committee, Compensation Committee and Audit Committee were paid $250 for each meeting of the respective committees which they attend. Castle does not presently have a stock option or similar compensation or incentive plan for members of the Board of Directors

Item 12 . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Security Ownership of Certain Beneficial Owners

The following table sets forth the number of shares of Castle’s common stock beneficially owned as of March 31, 2010 by:  (i) each of the two highest paid persons who were officers and directors of Castle, (ii) all officers and directors of Castle as a Group, and (iii) each shareholder who owned more than 5% of Castle’s common stock, including those shares subject to outstanding options, warrants and other convertible items.  Amounts also reflect shares held both directly and indirectly by the persons named.

Name and Address	Beneficially Owned (1)	Shares % of Class (4)
Rick Wall 3 Waterfront Plaza, Suite 555 500 Ala Moana Boulevard Honolulu, HI 96813	2,719,833 (2)	27.3%
Motoko Takahashi 3 Waterfront Plaza, Suite 555 500 Ala Moana Boulevard Honolulu, HI 96813	1,138,900	11.5%
Roy Tokujo 1580 Makaloa St. Honolulu, HI  96814	413,334	4.2%
Jerry Ruthruff 700 Richards Street, Apt. 2709 Honolulu, HI 96813	333,334	3.4%
Stanley Mukai 500 Ala Moana Blvd 4th Floor Honolulu, HI  96813	180,334(3)	1.8%
Alan R. Mattson 3 Waterfront Plaza, Suite 555 500 Ala Moana Boulevard Honolulu, HI 96813	102,000	1.0%
Robert Wu P.O Box 11119 Honolulu, HI 96828	93,667	0.9%
Michael Irish 3 Waterfront Plaza, Suite #555 Honolulu, HI 9 6813	25,000	0.3%
John Brogan 797 Moanila St. Honolulu, HI 96821	33,334	0.3%
Tony Vericella 1909 Ala Wai Blvd #1603 Honolulu, HI 96815	16,667	0.2%
Directors and officers as a group (10  persons)	5,056,403	50.8%

(1)

Except as otherwise noted, Castle believes the persons named in the table have sole voting and investment power with respect to the shares of Castle’s common stock set forth opposite such persons names.  Amounts shown include the shares owned directly by the holder and shares held indirectly by family members of the holder or entities controlled by the holder.

(2)

Includes 310,000 shares owned by HBII Management.

(3)

Includes 180,344 shares held by a family foundation and pension plan.

(4)

Determined on the basis of 9,946,392 shares outstanding.  

Changes in Control

There are no current or planned transactions that would or are expected to result in a change of control of Castle.

Securitie s Authorized for Issuance under Equity Compensation Plans

There are no current of planned issuances of securities under any equity compensation plan.

Options, Warrants and Rights

In 1999 and 2000, Castle issued 11,105 shares of Castle’s $100 par value redeemable Preferred Stock through a private placement for a gross consideration of $1,105,000.  The stock bears cumulative dividends at the rate of $7.50 per annum for each share of stock.  Upon certain tender offers to acquire substantially all of Castle’s common stock, the holders of the Redeemable Preferred Stock may require that the shares be redeemed at a redemption price of $100 per share plus accrued and unpaid dividends.  The shares are nonvoting and entitle the holder to convert each share of Preferred Stock into 33.33 shares of Castle’s common stock.  Dividends are cumulative from the date of original issue and are payable, semi-annually, when, and if, declared by the board of directors.  At December 31, 2009, undeclared and unpaid dividends on these shares were $870,199 or $78.75 per preferred share.

In April, 2008, the Company raised additional capital from the completion of a Unit offering which resulted in the issuance of 333,337 Units at a price of $1.50 per Unit.  Each unit consists of one a of the Company’s common stock and a warrant to purchase an additional share of the Company’s common stock at a price of $3.50 for a period of three years, subject to certain restrictions.  Through this financing the Company raised a net amount of $224,744 for use as working capital and converted $227,500 in outstanding debt and short term obligations.

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Item 13. Certain Relationships and Related Transactions, and Director Independence

Transactions with Related Persons

Hanalei Bay International Investors (“HBII”)

The Chairman and CEO of the Company is the sole shareholder of HBII Management, Inc, the managing General Partner of HBII.  In March 1999, HBII consummated the sale of its interest in Hanalei Bay Resort to an unrelated third party.  The cash proce eds received by HBII on the closing of the sale were not sufficient to satisfy all claims of HBII’s creditors, including the Company, and the Company accepted a note receivable in the amount of $4,420,003 as settlement for its account receivable balance of $1,105,001 at the time of the sale.  The excess amount ($3.315M) over the receivable balance was accounted for as a shareholder contribution.  Under the terms and conditions of the agreement to sell Hanalei Bay Resort, HBII is entitled to receive a percentage of the future cash flows from the resort’s hotel operations and the sale of certain time-share units.    

As part of the Company’s purchase of real estate in New Zealand (see Note 11), an assignment of $3,018,000 of the total note receivable from HBII was made to the seller of the real estate, with the Company remaining as guarantor should the note receivable not be collected before December 3 1, 2010 (See Note 2 to the Consolidated Financial Statements).

Castle has recorded a note receivable from Hanalei Bay International Investors (“HBII”) which amounted to $4,269,151 including interest as of December 31, 2008.  In March 2008, HBII and Quintus Resorts, LLC (“Quintus”), the parent company of HBR, entered into a settlement to resolve the litigation by Quintus issuing a twenty percent (19.9%) membership interest in Quintus to HBII or its designee, which included a preferred return as to the first $6.2 million of future distributions of available cash flow.

For at least the next two or three years, Quintus will be required to use all of its available cash flow to pay down the substantial indebtedness it incurred in purchasing the resort.  Based on Quintus’s financial projection, HBII’s management believes that it is likely to receive in excess of $6 ,000,000 from its ownership interest in Quintus and that it will utilize these funds to pay its indebtedness to Castle.  In that the distributions from HBII will likely not be realized for a number of years and are subject to uncertainty and risks over which Castle has no control, there can be no assurance that Castle will receive any distributions from HBII’s ownership interest in Quintus within the next ten years, if at all.  As required by Generally Accepted Accounting Principles (“GAAP”) the Company has established a reserve of $4,269,141 for uncollectible notes relating to this transaction.  

In October 2008, the Company secured a line of credit with a local bank for up to $250,000.  The line is secured by the personal guaranty of the Company’s Chairman and CEO, and a general security interest in the Company’s asset s.  In October 2009, the line of credit was renewed for $200,000 and the personal guaranty of the Company’s Chairman and CEO was removed.  The line is due in October 2010.

In April, 2008, the Company raised additional capital from the completion of a Unit offering which resulted in the issuance of 333,337 Units at a price of $1.50 per Unit.  Each unit consists of one a of the Company’s common stock and a warrant to purchase an additional share of the Company’s common stock at a price of $3.50 for a period of three years, subject to certain restrictions.  Through this financing the Company raised a net amount of $224,744 for use as working capital and converted $227,500 in outstanding debt and short term obligations.  Directors and Officers of the Company purchased a total of 260,003 Units in this offering.

Loan Fees

In 2006, the Company secured $600,000 in financing from a bank, which was subsequently replaced by a loan and line of credit from another bank (see note 6 to the financial statements).  The CEO of the Company acted as guarantor for these loans.  As consideration for the guaranty, the Company pays a quarterly guaranty fee of 2% of the amount of the credit facility utilized per annum to the CEO of the Company.  During 2009 and 2008, the Company paid $0 and $4,499, respectively, in guaranty fees to the Company’s CEO.

Related Party Loans

In June, 2004, a director loaned the Company $125,000 with interest at the rate of 8% per annum and monthly payments of interest plus $521, and a maturity date of January 1, 2012.  In Ma rch 2008, $50,000 of the principle balance was converted to common stock and warrants as part of the Company’s 2008 unit offering.

In December of 2007, and early 2008 the Chairman and CEO of the Company advanced a total of $100,000 to the Company to capitalize the Company’s Thailand subsidiary, and in April 2008, the advance was converted to common stock and warrants as part of the Company’s unit offering.

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During 2002, the Company’s CEO advanced $117,316 to the Company for general working capital.  The note bears interest at 10% and is due on or before Ja nuary 1, 2012.

During 2004, the Company’s CEO advanced $125,000 to the Company for general working capital.  The note calls for monthly payments of $2,544, including interest at prime plus 2.5%, with the remaining principle balance due on 4/26/09.  In April 2009, the note was paid in full.

Through December 2009, the Company has accrued but not paid the Chairman and CEO a total of $45,332 for expenses incurred on behalf of the Company, and $49,282 for interest accrued on a note payable.

Through December 2009, the Company has accrued but not paid the Company’s Corporate Secretary a total of $8,000 for professional fees earned during 2009.  

Except for the transactions with HBII, the issuance of stock and warrants described above, the financing guarantee arrangement, the related party loans and unpaid fees, and the employment agreements with Rick Wall and Alan Mattson, there were no transactions, proposed transactions or outstanding transactions to which Castle or any of its subsidiaries was or is to be a party, in which the amount involved exceeds $50,000 and in which any director or executive officer, or any shareholder who is known to Castle to own of record or beneficially more than 10% of Castle’s common stock, or any member of the immediate family of any of the foregoing persons, had a direct or indirect material interest.

Parents of the Issuer:  

Not applicable.

Transactions with Promoters and Control Persons

Except as indicated under the heading “Transactions with Related Persons” of this Item 12, above, there were no material transactions, or series of similar transactions, during Castle’s last five fiscal years, or any currently proposed transactions, or series of similar transactions, to which we or any of our subsidiaries was or is to be a party, in which the amount involved exceeded $120,000 and in which any promoter or founder of ours or any member of the immediate family of any of the foregoing persons, had an interest.

Item 14. Principal Accounting Fees and Services.

The following is a summary of the fees billed to us by our principal accountants during the fiscal years ended December 31, 2009 and 2008:

Fee Category	2009	2008
Audit Fees	$       95,217	$       156,828
Audit-related Fees	0	0
Tax Fees	10,333	3,792
All Other Fees	4,063	4,741
Total Fees	$     109,613	$       165,361

AUDIT FEES

The aggregate fees billed by Castle’s auditors for professional services rendered in connection with the audit of Castle’s annual consolidated financial statements and reviews of the interim consolidated financial statements for 2009 and 2008 were $95,217 and $156,828, respectively.

AUDIT-RELATED FEES

There were no aggregate fees billed by Castle’s auditors for any additional fees for assurance and related services that are reasonably related to the performance of the audit or review of Castle’s financial statements and are not reported under “Audit Fees” above for 2009 and 2008.

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TAX FEES

The aggregate fees billed by Castle’s auditors for professional services for tax compliance, tax advice, and tax planning for 2009 and 2008 were $10,333 and $3,792, respectively.

ALL OTHER FEES

The aggregate fees billed by Castle’s auditors for all other non-audit services rendered to Castle, such as attending meetings and other miscellaneous financial consulting, for 2009 and 2008 were $4,063 and $4,741, respectively.

PART IV.

Item 15. Exhibits and Financial Statement Schedules.

Exhibit Index

				&nb sp;
Exhibit No.	Title of Document	Location if other than attached hereto	Previously Filed
3.1 *	Restated Articles of Incorporation	Part I, Item 1 *	*
3.2 *	Certificate of Designation	Part I, Item 1 *	*
3.3 *	By-Laws	Part I, Item 1 *	*
3.4 *	By-Law Amendment	Part I, Item 1 *	*
10.1	Settlement Agreement Manhattan Guam	Part I, Item 1 *	*
10.2	Employment Agreement with Rick Wall as amended	Part III, Item 10 *	*
10.3	Employment Agre ement with Alan Mattson	Part III, Item 10 *	*
14	Code of Ethics	Part III, Item 10	*
21	Subsidiaries of the Company
31.1	302 Certification of Rick Wall
32	906 Certification

* Incorporated herein by reference and Filed as exhibit to Form 10KSB for the year ended December 31, 2006 on September 19, 2007.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

THE CASTLE GROUP, INC.

March 31, 2009

By  /s/ Rick Wall

Rick Wall, Chief Executive Officer

and Chairman of the Board

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Rick Wall	Date:	3/31/10
Rick Wall
Chief Executive Officer and
Chairman of the Board

/s/ Alan R. Mattson	Date:	3/31/10	/s/ Jerry Ruthruff	Date	3/31/10
Alan R. Mattson			Jerry Ruthruff
Director and President Castle Resorts and Hotels, Inc.		;	Secretary and Director

/s/ John Brogan	Date:	3/31/10		/s/ Mike Irish	Date	3/31/10
John Brogan				Mike Irish
Director			&nbs p;	Director

/s/ Rick Humphreys	Date:	3/31/10	/s/ Stanley Mukai	Date	3/31/10
Rick Humphreys			Stanley Mukai
Director			Director

/s/ Motoko Takahashi	Date:	3/31/10	/s/ Roy To kujo	Date	3/31/10
Motoko Takahashi			Roy Tokujo
Director			Director

/s/ Tony Vericella	Date:	3/31/10	/s/ Robert Wu	Date	3/31/10
Tony Vericella			Robert Wu
Director			Director

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