CASTLE GROUP INC (Form: 10KSB, Received: 09/19/2007 15:13:11)

Net Income

Foreign Currency Adjustment

Total Comprehensive Income

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

(Mark One)

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

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-23338

THE CASTLE GROUP, INC .

(Name of small business issuer 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) (Zip Code)

Issuer’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, $.02 par value

(Title of class)

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-B contained in this form, and no disclosure will be contained, to the best of Issuer’s knowledge, in definitive proxy

Page 1

or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]

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

Issuer’s revenues for its most recent fiscal year: December 31, 2006: $21,071,756

As of August 31, 2007, there were approximately 4,254,014 shares of common voting stock of the Issuer held by non-affiliates. Because there has been no “established public market” for the Issuer’s common stock during the past five years, the Issuer has arbitrarily valued these shares at par value of $0.02 per share or $85,080.28.

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 August 20, 2007: 9,538,055

Documents Incorporated by Reference

See Part III, Item 13. The Exhibit Index appears on page 60.

Transitional Small Business Disclosure Format: Yes [ ] No [X]

Page 2

TABLE OF CONTENTS

PART I 4

ITEM 1. DESCRIPTION OF BUSINESS 4

ITEM 1A. RISK FACTORS 13

ITEM 2. DESCRIPTION OF PROPERTY 17

ITEM 3. LEGAL PROCEEDINGS 19

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19

PART II 19

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 19

ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION 21

ITEM 7. FINANCIAL STATEMENTS 29

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. 50

ITEM 8A(T). CONTROLS AND PROCEDURES. 50

ITEM 8B. OTHER INFORMATION. 51

PART III 51

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT 51

ITEM 10. EXECUTIVE COMPENSATION. 56

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 58

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 59

ITEM 13. EXHIBITS. 61

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 61

SIGNATURES 63

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, including 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.

Page 3

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.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

A. SUMMARY OF SIGNIFICANT EVENTS FROM 1999 TO 2006 .

The Castle Group, Inc., (“Castle” or the “Company”) through its wholly owned subsidiaries provides management and related hospitality services to hotel and resort condominium projects under the trade name, “Castle Resorts and Hotels.” Castle is a hospitality and hotel management company that prides itself in its ability to be both “ Flexible and Focused” , the Company’s operating motto: Flexible to meet the specific needs of property owners and condo owners at the properties that it manages, and Focused in its efforts to achieve enhanced rental income and profitability for those owners. During the period from 1999 to present, Castle has grown from managing a limited number of resort and hotel properties located only in the state of Hawaii, to expanding into additional markets in Hawaii, New Zealand, Guam and Micronesia, today.

While the Company grew substantially from 1999 to the present, it has not done so without challenges along the way. During 2000 the company sustained substantial financial losses from its operations in Guam and on Kauai. The events of September 11, 2001 caused a major decrease in tourism worldwide, negatively impacting vacation and business travel to Hawaii. As a result, during the latter half of 2001 and well into 2002, the occupancy and average daily rate for the properties that Castle managed in Hawaii decreased substantially. This caused Castle to incur substantial losses in 2001 and 2002.

In the latter part of 2002 and 2003, Castle focused on improving the cost effectiveness of its operations in its existing properties where it only managed a portion of the units; adding more units under its management; and obtaining management contracts for new properties. Although Castle was unprofitable in both 2002 and 2003, Castle’s total revenues increased from $14,585,000 in 2002, to $17,924,000 in 2003. Increases in revenues were a result of revenue growth from existing properties and from the addition of new hotel rooms and condominiums under management. Further, during this period, the overall occupancy of the properties managed increased, and the average daily rate (“ADR”) increased as tourism in Hawaii strengthened.

In 2004, Castle became profitable with net income (after foreign currency gains) of $671,000 on total revenues of $18,044,000. In 2005 and 2006, Castle continued improving its operations and began focusing on its sales and marketing expertise, in order to increase occupancy and ADR at its managed properties. These efforts succeeded as overall occupancy and ADR increased, as compared to the prior year.

During 2005, Castle added new properties under management and expanded its reach into new tourist destinations. The Company’s revenues reached $20,696,442 for the year and comprehensive income

Page 4

was $593,000. Increases in revenue from 2004 to 2005 were attributable to the New Zealand subsidiary increasing its revenues by $1.2 million and the contracting of new properties in Hawaii, which provided an additional $1.4 million dollars in 2005, as compared to 2004.

Castle’s comprehensive income (after foreign currency losses) for 2006 was $338,414, on total revenues of $21,071,756. Revenue increases from 2005 to 2006 were primarily due to the overall increased strength of the tourism industry in Hawaii, where Castle has the majority of its properties.

During the past few years, Castle has continued to build a strong management team while maintaining continuity of its senior management. As the founder of the Company, Mr. Rick Wall, Chairman of the Board and Chief Executive Officer, has been with Castle throughout the lifespan of the Company. Mr. Michael Nitta has been Castle’s Chief Financial Officer of the Castle Group since 1993, and was recently appointed as Chief Financial Officer of Castle Resorts and Hotels. Mr. Howard Mendelsohn became Chief Financial Officer of the Castle Group in July, 2007. Mr. Alan Mattson was appointed President of Castle’s principal subsidiary, Castle Resorts & Hotels, Inc., on July 27, 2005, and subsequently named to the position of Chief Operating Officer of The Castle Group in May 2007. Mr. Thomas Blankley, Jr., the former Vice President of Finance, left Castle in November, 2000, to pursue other interests.

Specific Business Events 2000- 2006

Hanalei Bay Resort

From 1989 until March, 1999, Castle and its predecessor, Castle Group, Ltd. (which was merged into Castle in 1993), managed the Hanalei Bay Resort, a luxury resort condominium project in Princeville, Kauai, Hawaii. The Hanalei Bay Resort was Castle’s flagship property and contributed substantially to Castle’s revenues. In March, 1999, Hanalei Bay International Investors (“HBII”), the owner of the 88 condominiums and related facilities of the Hanalei Bay Resort in Hanalei, Kauai, Hawaii, completed the sale of the property. The purchaser, Quintus HBR, LLC (“Quintus”), purchased the condominiums for resale as time-share units. As part of the transaction, Castle’s management contract for the Hanalei Bay Resort was canceled.

Manhattan (Guam), Inc.

In March, 1999, Castle, as lessee, and Manhattan (Guam), Inc (“Manhattan Guam”) as lessor, entered into a lease agreement to operate the Royal Orchid Hotel in Guam when it opened later in 1999. The lease required the lessor to deliver and maintain the hotel in good condition and required Castle to make fixed monthly payments towards lease rent. When the hotel only partially opened in October of 1999, and at all times during the period when Castle managed the hotel, the condition of the hotel was unsatisfactory to Castle. Castle’s revenue from operating the hotel was far less than anticipated, leading to substantial losses from the operation of the hotel in 1999, and 2000.

In December 2000, the disputes between Manhattan Guam and Castle came to a head. Castle contended that Manhattan Guam had failed to properly complete the construction of the hotel and maintain the hotel in good condition, and therefore breached its obligations under the lease agreement. Manhattan Guam sought to cancel its lease with Castle and to collect the amounts it claimed were owed by Castle for unpaid lease rent and other charges.

In January 2001, Castle and Manhattan Guam entered into a Compromise Agreement whereby, inter alia, (i) the lease for the hotel was canceled and possession of the hotel was returned to Manhattan Guam on January 29, 2001, (ii) Castle executed a promissory note in the amount of $632,493.79 in

Page 5

favor of Manhattan Guam and issued 900,000 shares of Castle’s common stock to Manhattan Guam and (iii) Manhattan Guam agreed to assume the equipment leases and/or return certain leased equipment which had been leased by Castle for use in the hotel.

In October 2002, Castle filed an action against Manhattan Guam for damages caused by Manhattan Guam’s breach of the Compromise Agreement. Manhattan Guam filed a counterclaim seeking to rescind the Compromise Agreement and/or collect the amounts which it contended were due on the promissory note and/or for unpaid lease rent. As noted in the heading “Subsequent Events,” Item I C. page 10 herein, Castle and Manhattan Guam executed a new Settlement Agreement in June, 2007, whereby the Compromise Agreement and Promissory Note issued to Manhattan Guam are to be canceled upon Castle’s payment of a total of $500,000 to Manhattan Guam. Such payment is to be completed prior to January 18, 2008. Subsequent to the date of this report, as of August 27, 2007, Castle has paid $200,000 of the amount due.

Spencer on Byron

In 1999, Castle entered into agreements to manage the Spencer on Byron Hotel near Auckland, New Zealand, upon completion of its construction in 2001. Castle subsequently entered into lease agreements with the owners of the 250 individually owned condominiums, which allowed Castle to lease their condominiums as part of the Spencer on Byron Hotel operation. Unfortunately, shortly before the Spencer on Byron Hotel opened for business in August, 2001, several unexpected negative events occurred. One of the major airlines servicing the routes between Australia to New Zealand, ceased operations which adversely affected the number of visitors traveling to New Zealand from this important market. Also, the events of September 11, 2001, dealt another serious blow to the travel and hotel industry, including New Zealand, and reduced the occupancy and revenues of the Spencer on Byron Hotel. The outbreak of the SARS illness in 2002 also had a significant negative impact on the travel industry, particularly in Asia and the Pacific regions and reduced the demand for hotel rooms and revenues at the Spencer on Byron Hotel once again.

In 2004, Castle favorably negotiated amendments to the leases of the condominiums at Spencer on Byron. The new terms lowered the annual lease rent payable by Castle to the owners of the condominium from 8% of the purchase price of their condominiums as provided in the original leases, to (i) 2% of the original purchase price from May, 2002 to July, 2003, (ii) 3% from August, 2003 to July 18, 2004, (iii) 4% from July 18, 2004 to July 18, 2006 and (iv) 6% from July 18, 2006, until the renewal of the leases on July 18, 2011, or the termination thereof.

Paulin and Paulin Group

In October, 2001, in an effort to increase its revenues by obtaining management contracts for additional properties, Castle entered into an agreement with Michael Paulin (the former owner of Marc Resorts & Hotels) whereby, Mr. Paulin became the co-chairman of the Board of Castle and was to become a substantial shareholder. Mr. Paulin’s primary role was to obtain new management contracts for Castle.

The relationship between Castle and Mr. Paulin, and his companies, Paulin Group, LLC and Aqua Hotels & Resorts, LLC proved to be very unsatisfactory and disruptive to Castle’s operations. Mr. Paulin resigned from his position with Castle, effective as of February, 2003. Castle believed that Mr. Paulin acted in bad faith and had breached his agreement with Castle. As a result, Castle initiated an arbitration proceeding against Mr. Paulin and Paulin Group, LLC to recover the compensation paid to Mr. Paulin and to cancel the Company’s obligation to issue Castle’s common stock to Mr. Paulin, which he was to receive pursuant to his agreement with Castle.

Page 6

Castle’s claims against Mr. Paulin and Paulin Group, LLC were settled in December, 2003. Pursuant to the Settlement Agreement, Mr. Paulin and Paulin Group, LLC agreed to pay Castle $150,000, with the last $50,000 due when Mr. Paulin and/or Paulin Group, LLC received certain funds from a designated payment source. The parties also agreed to cancel the Company’s obligation to issue Castle’s common stock to Mr. Paulin.

In September, 2004, Castle filed a lawsuit against Michael Paulin and his company, Paulin Group, LLC, alleging that Mr. Paulin and Paulin Group, LLC had not paid the last $50,000 owed pursuant to the Settlement Agreement, and that he had perpetrated a fraud on Castle by making false representations, claiming that they had not received the $50,000 payment from the payment source specified in the Settlement Agreement. The lawsuit was settled by Mr. Paulin and Paulin Group, LLC paying a total of $90,000 to settle all claims arising from the non-payment of the $50,000 originally owed, in exchange for a release from all of Castle’s claims against them.

B. THE PRESENT STATUS OF CASTLE

Principal products or services and their markets

Castle has contracts to provide management and/or marketing or other services to resort condominium and hotel properties around the Pacific Rim. Castle manages luxury and mid-range condominium resort hotels on all of the major islands within the state of Hawaii, a luxury condominium resort located in Saipan, a full service luxury condominium resort in New Zealand and full service hotels in Honolulu, Hilo and Guam. Castle has a wide range of products available to the leisure traveler, from luxury condominium resorts with room rates exceeding $1,500 per night, to small budget inns with rates under $100 per night. Castle has adopted a strategic plan to expand not only in Hawaii, but also in Micronesia, New Zealand, other Pacific Basin markets, Thailand and other select Asian markets and Central American locales.

Castle’s resort and property management services are built around providing “ Flexibility and Focus” to resort and property owners based on proven business practices, backed by an in-depth understanding of the markets which it serves. When combined with carefully crafted strategic planning, and timely innovative problem solving, Castle provides a comprehensive package of services for the operation of hotel and condominium properties. Each management contract is customized with a combination of the following services that best meet the owner’s specific needs and goals:

1. Pre-Opening Technical Services

Castle’s services often begin well before a property opens, with a full market assessment and pre-opening review of the project, to identify factors that will influence profitability and operating efficiencies. These services include determining and evaluating operating criteria and efficiencies, determining requirements for furniture, fixtures and equipment, providing input on architectural/interior design and layout, maintenance, engineering and information technology.

Page 7

2. Hotel & Resort Operations

Castle provides a full range of hotel and resort management services to operate both limited and full service properties. The scope of management services includes:

Front office operations

Housekeeping

Maintenance

Security

Service quality assurance

Food and beverage services

Employee hiring

Training and supervision

Guest services

Guest experience enhancement programs

Information technology

Purchasing

3. Sales and Marketing

Castle provides comprehensive sales and marketing services to properties on an individualized basis that specifically targets the guest demographics and audience most appropriate for each property. After the initial research phase, Castle develops a strategic marketing program for its managed resort properties, targeting specific markets that are closely monitored and measured against established goals and objectives. Castle-generated marketing and sales activities are based on solid, comprehensive research and focus studies. Ongoing studies for each property define marketplace position; competitive and pricing analysis; growth potential; inbound visitor trends; emerging visitor segments; customer attitudes and perceptions; satisfaction levels; resort brand awareness; and industry positioning.

Each property Castle manages is individually branded in order to extract maximum value from its strengths. The Castle brand stays in the background while Castle focuses on marketing the uniqueness of each property, and satisfying the needs and expectations of the owners. Each hotel and resort under management maintains its own brand identity and personality, while utilizing Castle’s marketing resources, channel distribution, resort management expertise, industry partnerships and networks. Each Castle property is marketed individually, emphasizing the uniqueness, personality, location and the market niche of each location. Castle’s “non-Flag” approach to marketing its properties under management is also based upon the belief that its marketing funds are better served by promoting the individual properties’ attributes and focusing on filling the rooms, versus building the Castle brand. Castle believes that by adopting this approach, it has positioned itself to be more competitive.

4. Reservations

Castle offers direct to consumer online booking reservations of guest rooms at resort and condominium properties under contract and also offers vacation packages with attractions and activities related to its hotels and condominiums through its interactive web site at www.CastleResorts.com.

Castle supports its online presence with its own proprietary full service, 7 day a week reservation call center that provides a wide range of services from tour reservation processing and rooms control, to

Page 8

handling group bookings. The reservation center electronically connects resort property inventory and rates to the four major Global Distribution Systems (“GDS”). This connectivity allows the GDS to display 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 worldwide.

5. Property Management

Castle provides comprehensive property management services for resort condominiums, including management of the Association of Apartment Owners or Body Corporate (“AOAO”), which owns the common areas of condominium projects. The scope of services include, but are not limited to, physical management; bulk purchasing; staffing; training; preparation and distribution of requests for proposals; maintenance; engineering; collection of delinquent fees; enforcement of by-laws and house rules; and conducting AOAO annual and board meetings.

On behalf of AOAO’s and property owners, Castle’s also implements specific programs, including upgrade and renovation packages; repairs and maintenance; rental program acquisition and development programs; ongoing inspections; regular owner communications; extensive owner relations programs; monthly owner distribution returns; and comprehensive guest relations programs. Castle’s focus is to ensure the protection of owner’s assets and to ensure a quality product, which ultimately should result in higher returns to the owner.

6. Castle Design Group

In 2006, Castle formed an in-house renovation and interior design service dedicated to property owners under the trade name, “Castle Design Group.” This group offers professional cost-effective design, consulting and project management services, which provides a variety of efficiencies and savings on renovation and capital improvement projects. In addition, the Castle Design Group provides owners with enhanced purchasing power through its bulk furniture-purchasing program.

C. SUBSEQUENT EVENTS

On June 7, 2007, Castle entered into a Settlement Agreement with the developer of a hotel that was previously leased by Castle between 1999 and 2001. Castle and the developer previously entered into a Compromise Agreement in 2001, which called for Castle to make certain payments to the developer, and also to issue 900,000 shares of its restricted common stock to the developer. In 2001, Castle recorded the issuance of 900,000 shares of common stock to the developer. The Settlement Agreement reached in June 2007 rescinded the 2001 Compromise Agreement, and therefore, as of December 31, 2006, Castle voided the 900,000 shares that were previously issued. Castle agreed to pay $500,000 to the developer, in monthly installments commencing in June 2007, with all amounts to be paid on or before January 18, 2008. As of August 20, 2007 Castle has paid $200,000, of this amount leaving a total of $300,000 remaining to be paid.

John Brogan joined Castle’s Board of Directors and Executive Committee in April, 2007.

Alan Mattson was appointed the Chief Operating Officer of Castle on May 2, 2007.

Howard Mendelsohn was appointed Chief Financial Officer of Castle on July 1, 2007.

Page 9

D. SOURCES OF REVENUE AND FEE INCOME

Castle typically provides all services necessary to operate a hotel or resort, including management, sales, marketing, reservations, maintenance and accounting. Castle and other hotel management companies usually manage hotels on a Net Contract basis, that is, they receive a fee for their services based on a percentage of the rental proceeds, and also usually receive an incentive management fee based on the net operating profit generated by the hotel. Under a typical Net Contract management contract, the owner of the hotel, not the management company, is responsible for all expenses of operating the hotel, such as staffing the front desk, housekeeping and guest services departments. For Net Contracts, Castle records as Management and Services Revenue only, the fees it receives for its services and is responsible for the costs of performing those services, such as payroll costs for administration, sales, marketing and reservation services.

Management companies frequently manage resort condominiums under a Net Contract basis much like a standard hotel management contract. However, a key aspect of Castle’s corporate culture is to be flexible and responsive to the needs and goals of the owners of the properties it manages. Accordingly, Castle manages some of its resort condominium projects under a Gross Contract arrangement, whereby Castle pays the owner a fixed percentage of revenues from the rental of the hotel or condominium units. For these contracts, other than the owner’s percentage of gross revenues, all revenue from the rental of rooms and ancillary services is included in Castle’s gross income for financial reporting purposes, and is noted as Revenues Attributed from Properties. Castle is then responsible for paying the operating expenses of the property, such as staffing the front desk, housekeeping and guest services departments, and the costs for administration, sales, marketing and reservation services. Castle’s profit under a Gross Contract agreement is the amount remaining after the payment of the owner’s percentage of revenue and Castle’s expenses.

At the Spencer on Byron Hotel, Castle leases the individual condominium units on a long term basis and pays each owner a fixed lease payment. Castle records as Revenues Attributed from Properties all of the proceeds from the rental of the condominium units and the operation of the restaurant, bar and the provision of other hotel services and is responsible for all of the operating expenses for the hotel operation.

Some properties contract with Castle to provide only select services, such as sales and marketing or reservations or accounting. For these services, Castle charges a fee for the services provided, and this revenue is accounted for and is included in Management and Services Revenue.

E. POTENTIAL CONFLICTS OF INTEREST

The potential exists for a conflict of interest if Castle were to enter into any management or similar contracts with a property in which an officer, director or significant stockholder of Castle has a material financial interest. Although it is possible that this might occur, management has no plans to enter into any such contract with any property in which an officer, director or significant stockholder of Castle has a material financial interest. In any such situation, management will require that material terms and provisions of any management contracts negotiated with affiliated entities to be no less favorable than those that could have been negotiated at arms length.

Page 10

F. COMPETITION AND COMPETITIVE POSITION IN THE INDUSTRY

The executive officers and key employees of Castle possess substantial experience in the hotel, resort and condominium management industry. Management believes that Castle’s sales and marketing, central accounting and administrative support services meet or exceed the level of such services provided by its competitors. Management believes that Castle has a competitive advantage over its principal competitors in that Castle focuses on providing cost effective services, and is more flexible and responsive to the needs of the individual owners of the properties it manages, than some of its competitors.

In order to substantially increase its revenues and profits, Castle seeks to acquire management contracts for additional properties. However, the management and marketing of hotels and resorts is very competitive, particularly in Hawaii. Castle competes with international, national, regional and local management companies, some of which have a larger network of locations, greater financial resources and brand name recognition. Some of Castle’s competitors have greater financial resources and/or may be more willing to assume risks inherent with making investments in properties and/or incurring obligations which Castle has not done historically. For these and numerous other reasons, there is no assurance that Castle will be able to obtain management contracts for additional properties on terms acceptable to Castle.

G. SOURCES AND PRINCIPAL SUPPLIERS

The principal sources of the revenue generated by Castle for its clients and for itself are generated through the on-line electronic distribution vendors, wholesalers, tour operators, travel agents and Castle’s web site. Castle utilizes the major electronic distribution vendors and has numerous tour operators and wholesalers under contract. Castle’s contracts with these distribution channels give these vendors the right to sell the hotel and resort rooms in properties managed and/or marketed by Castle at rates that are typically less than full rack rates. These contracts are non-exclusive and are typical of the industry. Management believes, but no assurances can be given, that Castle will continue to have access to such contracts and relationships on terms and conditions satisfactory to Castle.

H. DEPENDENCE ON ONE OR A FEW CUSTOMERS

Castle’s management contracts vary in term from a few months to several years, and over its history the Company’s contracts 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 terminable by the Association of Apartment Owners on sixty days notice. This requirement extends to Castle and it its competitors operating in Hawaii. As a result of this requirement and for competitive reasons, all of Castle’s management contracts (except for the Spencer on Byron) contain terms, which provide for cancellation or termination within one year or less. The loss of the property wide management contract for one or more of the hotels or resorts managed by Castle could have a significant adverse impact on Castle’s gross revenues and earnings. Although management believes that the number of properties, rooms and condominium units it manages will increase substantially over time, no assurances can be given that the number of such properties, rooms and condominium units will increase, and will not decrease in any quarter, year or other period.

Page 11

I. PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS AND LABOR CONTRACTS

Castle does not have any material patents, trademarks, licenses, franchises, concessions, or royalty agreements, the loss or expiration of which would have a material adverse impact on Castle.

At December 31, 2006, employees at one of the smaller properties managed by Castle, which makes up less than one percent of the total rooms represented, were subject to a union labor contract.

J. EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL

REGULATIONS ON THE BUSINESS

To the best of management’s knowledge, the products and services provided by Castle are not subject to governmental approval except for health, liquor licensing, safety and similar regulations of general applicability, which do not have a materially adverse effect on its operations. The promulgation of new laws, rules or regulations detrimental to the visitor industry (including, but not limited to those, regulating wages, benefits, pricing, taxes and/or financing) could have a substantial impact on Castle’s business and profitability. Management is not presently aware of any proposed laws, rules or regulations which would have a materially adverse effect on Castle’s business or profitability.

K. COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS

To the best of management’s knowledge, Castle's products and services are not materially affected by the presently existing environmental laws, rules and regulations. Management believes that the regulations related to hazardous material and waste disposal can be complied with by services provided by local governmental agencies or numerous private contract suppliers. Castle is not aware of any environmental claims pending or threatened against it, or against the owners of the properties managed by Castle; however, no assurances can be given that such a claim will not be asserted against Castle in the future, or that Castle’s business or operations might not be affected by additional or amended environmental laws, rules and/or regulations.

L. RESEARCH AND DEVELOPMENT

Castle does not engage in any significant research or development activities.

M. EMPLOYEES

In the majority of the properties managed by Castle, all of the property employees are employees of Castle as agents for the owner, instead of being employed directly by the property owner. As of December 31, 2006, Castle had approximately 425 employees. The number and categories in which these employees serve may vary significantly from month to month, depending on the season. Castle considers its relations with its employees, and with employees of its clients whom it supervises to be excellent.

N. SEASONAL AND OTHER FLUCATIONS IN BUSINESS

Tourism in general is seasonal, though to a lesser extent in the State of Hawaii, where tourism represents one of the principal industries year round. Tourism in Hawaii is also affected by

Page 12

fluctuations in the number and type of visitors to each of the Islands of Hawaii. Such fluctuations affect occupancy, room rates or average daily rate (“ADR”), the number of employees required for housekeeping other services, as well as quarterly revenues, expenses and earnings.

The percentage of Castle’s revenues and net profits earned in each quarter has varied significantly from year to year in the past and is expected to vary significantly from year to year in the future based on a number of factors which are difficult to determine in advance. Consequently, no assurance can be given that the percentages of revenue and net profits earned by Castle in any quarter of 2006 or any other quarter or year will be a reliable indicator of the revenues or net profits Castle will earn in any future quarter or year.

ITEM 1A. RISK FACTORS

OUR STOCK PRICE MAY BE DEPRESSED AND OUR COMMON STOCK MAY BE THINLY TRADED.

The Company has not filed the reports and other documents with the Securities and Exchange Commission and other agencies and organizations as required by the applicable securities laws since 2000, and our common stock has not been publicly traded since then. 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 and market capitalization and the trading volume of our common stock may not be sufficient to induce securities analysts to follow, analyze or recommend our common stock or to induce or allow institutional investors to purchase our common stock. There is presently no market for our common stock, and we cannot assure you that an active market for our common stock will develop in the future.

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

· any projections of revenues or income which we announce and/or financial research analysts’ estimates (if any) of our revenues or earnings 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.

WE MAY NOT BE ABLE TO COMPLETE SUCCESSFULLY OUR PLANNED EXPANSION.

We intend to continue to expand the markets we serve and to increase the number of properties we manage both within our current markets and within other geographic areas we’ve targeted. Expansion may occur in part, through the acquisition of additional vacation rental and property management

Page 13

companies. We may also make investments in or incur other obligations in connection with the acquisition of management contracts for other properties. We cannot assure you that we will be able to identify, acquire or profitably manage additional properties or businesses which we could profitably manage or successfully integrate acquired properties or businesses into our existing operations without substantial costs, delays or other operational or financial problems. It is possible that competition may increase for properties or for companies that we might seek to acquire. There may be fewer acquisition opportunities available to us than we anticipate and/or less favorable terms or increased financial obligations, expenses and/or risks than we anticipate.

We may also seek to acquire management contracts, properties or companies in international locations that may subject Castle to additional risks associated with doing business in such countries. We continually review various strategic acquisition opportunities and have held and continue to hold discussions with a number of properties and/or companies, which are acquisition candidates.

Acquisitions of properties or management companies 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 or companies to achieve expected financial results;

· diversion of management’s attention;

· failure to retain key personnel;

· amortization of any acquired intangible assets;

· increased potential for customer dissatisfaction or performance problems of newly acquired properties or companies which may adversely affect our reputation; and

· fluctuations in the value of the currencies of foreign countries in which we manage properties are difficult or impossible to predict or hedge against and may adversely affect our earnings and/or cause our earnings to vary significantly from prior periods and are difficult to forecast.

WE MAY NOT BE ABLE TO COLLECT THE RECEIVABLE OWED TO US BY AN AFFILIATED COMPANY OR TO OBTAIN ADDITIONAL FINANCING.

As more fully set forth it Item 3 below, and in Notes 2 and 3 to Castle’s consolidated financial statements, Hanalei Bay International Investors (“HBII”) owes Castle $4,420,003. HBII intends to pay that amount from its share of proceeds owed to it pursuant to an agreement with Quintus (HBR), LLC (“Quintus”). However, Quintus disputes the amount that it is indebted to HBII, and the matter has been made the subject of litigation. Subsequent to the date of this report, HBII and the current owner of Hanalei Bay Resort have entered into direct negotiations related to the settlement of this dispute. HBII believes that it will prevail in recovering the majority of the disputed amounts in this matter, which are ultimately owed to Castle; however, no guaranty can be given that HBII will prevail.

Page 14

OUR BUSINESS MAY BE NEGATIVELY AFFECTED IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY.

We plan to continue to grow internally and through the acquisition of additional management contracts and/or companies. We will continue to expend significant time and resources in expanding the existing operating companies and in identifying, completing and integrating acquisitions. We cannot assure you that our systems, procedures and controls will be adequate to support our operations as they expand. Any future growth also will impose significant added responsibilities on members of senior management, including the need to identify, recruit and integrate new managers and executives. We cannot assure you that we will be able to identify and retain such additional management. If we are unable to manage our growth efficiently and effectively, or we are unable to attract and retain additional qualified management, it could have a material adverse effect on our business and financial results.

OUR BUSINESS AND FINANCIAL RESULTS DEPEND UPON FACTORS THAT AFFECT THE VACATION RENTAL AND PROPERTY MANAGEMENT INDUSTRY.

· Our business and financial results are dependent upon various factors affecting the vacation rental and property management industry. Factors such as the following could have a negative impact on our business and financial results

· changes in general economic conditions, including the prospects for improved performance in 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;

· a downturn in the leisure and tourism industry;

· decreases in the demand for hotel rooms and/or vacation properties in the areas we serve and related lodging services, including a reduction in business and leisure travel as a result of general economic conditions;

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

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

· adverse weather conditions or natural disasters, such as hurricanes, tidal waves or tornados, and/or events such as terrorist attacks or outbreaks of disease, or the threats thereof, which cause potential customers to cancel their vacation or travel plans.

Page 15

OUR OPERATING RESULTS ARE SEASONAL.

The travel and hospitality business is seasonal. Our 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 BUSINESS COULD BE HARMED IF THE MARKET FOR LEISURE AND VACATION TRAVEL DOES NOT CONTINUE TO GROW.

Although travel and tourism expenditures have generally increased over the years, there have been, and there may be, years in which spending has or will declined. We cannot assure you that we or the total market for hotel rooms and vacation property rentals in the areas we serve will continue to experience growth. Factors affecting our ability to continue to experience internal growth include our ability to:

· maintain existing relationships with property owners;

· expand the number of properties under management;

· increase rental rates and/or occupancy; and

· sustain continued demand for our rental inventory.

OUR OPERATIONS ARE CONCENTRATED IN THREE GEOGRAPHIC AREAS.

We manage properties that are significantly concentrated in Hawaii, New Zealand and the Pacific Basin (Guam 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 our operations were more geographically diverse.

OUR BUSINESS DEPENDS ON ATTRACTING AND RETAINING HIGHLY CAPABLE MANAGEMENT AND EMPLOYEES.

Our business substantially depends on the efforts and relationships of our senior management, and we will likely be dependent on senior management for obtaining management 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 qualified employees, it could have a material adverse effect on our business and financial results. Although we have entered into long term employment agreements with our two principal executive officers, we cannot assure you that either these individuals or other members of senior management will continue in his or her present capacity for any particular period of time.

Page 16

IF VACATION RENTAL PROPERTY OWNERS DO NOT RENEW A SIGNIFICANT NUMBER OF PROPERTY MANAGEMENT CONTRACTS OUR BUSINESS WOULD BE ADVERSELY AFFECTED.

We provide rental and property management services to property owners pursuant to management contracts which are generally for a period of one year. The majority of such contracts contain automatic renewal provisions, but many also allow property owners to terminate the contract within a period of one to three months. Although management believes that these contracts will continue to be renewed on an on-going basis, no assurance can be provided that the owners will renew or not terminate their contracts with Castle. If property owners do not renew a significant number of management contracts, or we are unable to attract additional property owners, it would have a material adverse effect on our business and financial results. In some of the properties we manage, we provide management and rental services to only a portion of the condominiums in the condominium project. In those situations, we cannot assure you that our revenues and/or income will not decrease because of increased competition from other rental management companies, through increased incidence of self-management by owners who choose to rent their units or through local realtors or other management companies, and/or loss of a portion of our inventory of rooms through increased usage of the units as primary or second homes or as long term rentals.

COMPETITION COULD RENDER OUR SERVICES 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. We compete 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. We compete 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. We also compete for vacation property renters and for vacation property owners with regional, national and international management companies who have more recognizable brand names, larger marketing budgets and have advantages of marketing programs and relationships which are not available to us.

ITEM 2. DESCRIPTION OF PROPERTY

Castle leases office space for its principal executive offices. The current lease is for the period from November 1, 2006, through October 31, 2008, at a monthly rental cost that averages $6,992 per month, plus the cost of common area maintenance. Castle has an option to renew the lease for an additional five years at the then prevailing rental rates.

On February 1, 2006, Castle leased additional office space. The lease covers the period from February 1, 2006, through February 28, 2008, at a monthly rental cost of $6,200 per month, plus the cost of common areas maintenance. Castle has an option to renew the lease for an additional two years at the then prevailing market rent.

Page 17

In July, 2001, Castle entered into rental agreements (in lieu of a traditional management agreements) with each of the owners of condominiums in 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 percentage of the purchase price paid by the original owner of each condominium.

On December 24, 2004, 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 operation. Following are the significant provisions of this agreement (with modifications according to a “Deed of Variation” dated April 15, 2005):

1. 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).

2. The purchase price is to be paid as follows:

A. Partial assignment of Castle’s receivables from Hanalei Bay International Investors (“HBII”) in the amount of US$3,017,999. In the event that this amount is not realized from HBII, Castle is obligated to make up the difference by December 31, 2009.

B. Monthly payments of the greater of NZ$20,000 (US$14,100), or Surplus Profits defined as 50% of net profits calculated in accordance with New Zealand’s Generally Accepted Accounting Principles or International Reporting Standards.

C. The remaining balance is due December 31, 2009. However, if Castle is current with its other obligations as set forth herein, and has paid not less than $7,183,260 toward the purchase price, an extension of up to 18 months is available.

3. At the time of purchase, Mocles had additional debts as follows which were assumed by Castle:

A. 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.

B. Advances from parties heretofore related to Mocles in the amount of $1,509,768. The entire amount is due and payable by December 31, 2009. There is no interest associated with this liability.

4. 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.

Page 18

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

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

ITEM 3. LEGAL PROCEEDINGS

Castle was a party to a lawsuit in the Superior Court of Guam brought by Castle against Manhattan Guam to collect amounts which the Company believes Manhattan Guam owes to Castle in connection with a Settlement Agreement of a prior dispute. As discussed in the heading Subsequent Events under Part I, Item C, page 10, this lawsuit has been settled.

The receivable in the amount of $4,420,003 referred to in Notes 2 and 3 to Castle’s consolidated financial statements arises from a partial assignment by Hanalei Bay International Investors (“HBII”) of its interest in the proceeds from the Purchase and Participation Agreement between HBII and Quintus (HBR), LLC (“Quintus”). As of March, 1999, when HBII sold 88 condominium units it owned in the Hanalei Bay Resort in Princeville, Kauai, Hawaii to Quintus, HBII owed $1,105,001 to Castle for unpaid fees and reimbursable expenses. 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 partial assignment of the amounts to be owed to HBII by Quintus in the amount of $4,420,003 as settlement for its account receivable balance of $1,105,001 at the time of the sale.

During 2006, the current owner of Hanalei Bay Resort notified HBII that it was disputing the number of condominium units upon which the future cash flows are based, and on July 27, 2006, HBII filed a lawsuit against the current owner of Hanalei Bay Resort to determine the unit counts that the cash flows should be based upon.

Subsequent to the date of this report, HBII and the current owner of Hanalei Bay Resort have entered into direct negotiations related to the settlement of this dispute. HBII believes that it will prevail in recovering the majority of their disputed amounts in this matter, which is expected to be in excess of the amounts due to Castle; however, no guaranty can be given that HBII will prevail.

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 the years 2000 through the date of this Annual Report.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

Castle has not filed the required reports with the Securities and Exchange Commission since July, 1999, and by reason of not filing its required reports, was not eligible for quotations of its common stock on the OTCBB of the National Association of Securities Dealers, Inc. (the “NASD”). There is currently no established public trading market for Castle’s common stock. Castle’s common stock is occasionally traded on the Pink Sheets of the NASD under the symbol “CAGU.” Castle intends to

Page 19

submit for quotations of its common stock on the OTCBB of the NASD once all required reports have been filed with the Securities and Exchange Commission, the NASD and other agencies as required.

HOLDERS

There were approximately 350 owners of record of Castle’s common stock as of July 23, 2007.

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 described 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. At December 31, 2006, undeclared and unpaid dividends on these shares were $601,213 or $54.41 per 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.

Castle does not have a stock option or other equity compensation plan in place at this time.

Recent Sales of Unregistered Securities

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

During the year ended December 31, 2004, Castle issued 3,510,000 shares of common stock that were “restricted securities” to employees, directors and consultants for entering into employment contracts or for past services rendered.

The shares were valued at $0.02 per share. These values approximated the fair value of the services that were rendered and the value of having these persons enter into employment contracts, as well as the fair value of the shares on the issuance date, given the trading range of the stock in the prior 6 months.


Date	Name	Current Position	Number of Shares	Value
Jun-04	Rick Wall	CEO	1,900,000	$38,000
Jun-04	Jerry Ruthruff	Director and Secretary	300,000	$6,000
Jun-04	Roy Tukujo	Director	300,000	$6,000
Jun-04	Motoko Takahashi	Director	200,000	$4,000
Jun-04	Roger Moses	Director	350,000	$7,000
Jun-04	Other Employees and Consultants		460,000	$9,200
2004 Total			3,510,000	$70,200

During the year ended December 31, 2005, Castle issued 100,000 shares of common stock that were “restricted securities” as defined in Rule 144 of the Securities and Exchange Commission as

Page 20

compensation to an unrelated party for services that had been rendered for $2,000. This value approximated the fair value of the services that were rendered, as well as the fair value of the shares on the issuance date given the stock’s trading range in the prior six months.

During 2006, Castle voided 900,000 shares of common stock. The shares were issued as part of a compromise agreement reached in 2001 with the developer of a hotel that Castle previously leased. As a result of a final settlement agreement occurring in 2007, between Castle and the hotel developer, the compromise agreement signed in 2001 was rescinded, and therefore, Castle voided the 900,00 shares that were previously issued.

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.

Use of Proceeds of Registered Securities

There were no proceeds received by Castle from the sale of registered securities during the period from December 31, 2000 through December 31, 2006.

Purchases of Equity Securities by Us and Affiliated Purchasers

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. In exchange, the company made a partial assignment of the Company’s receivables from Hanalei Bay International Investors (“HBII”) as well as issuing debt in the form of a note, committing to monthly payments of a portion of net profits of the subsidiary, subject to minimum payment restrictions, and assuming certain advances and debt obligations of Mocles.

ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN 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.”

Page 21

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, 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.

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

General

Castle is a 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 owners and condo owners at the properties that it manages;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. In addition, Castle provides design services to properties that are furnishing, refurnishing or remodeling, as well as, pre-opening technical services for new hotel and resort properties being planned or under construction. Castle’s revenues are derived primarily from two sources: (1) the rental of hotel rooms and condominium accommodations; and 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.

Castle’s marketing efforts are focused toward potential guests for those properties that Castle manages. Castle does not own any hotels or resorts of its own; 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. Recently, Castle has expanded its sales and marketing staff and implemented a redesign of its interactive web site (www.Castleresorts.com). Unlike many other hotel and resort operators, Castle does not market the properties it manages under the Castle brand. Instead of emphasizing the “Flag” or chain name, the Company’s strategy is to promote the name and reputation of the individual properties under management. Castle believes that this allows the consumer to better choose the specific type of vacation experience desired based upon the specific attributes of the property selected.

Page 22

Currently Castle provides services to the following properties:


Hawaii	Location	Hotel and Resort	Since
	Kauai	Kaha Lani Resort	2004
		Kiahuna Plantation & The Beach Bungalows	1997
		Lanikai Resort	1997
		Lae Nani Resort	1997
		Makahuena at Poipu	1995
		Poipu Shores	1994

	Oahu	Hokele Suites Waikiki	2006
		Maile Sky Court	2007 ⁽¹⁾
		Pacific Marina Inn	1993
		Ocean Resort Waikiki Hotel	2007 ⁽²⁾
		Waikiki Shore	2003

	Maui	Diamond Hawaii Resort and Spa	2003
		Kamaole Sands	1994
		Maui Beach Hotel	1999

	Molokai	Kaluakoi Villas	1993

	Hawaii	Hilo Hawaiian Hotel	1993
		Kona Bali Kai	2005
		Kona Reef	1993
		Nomura Hawaii Village	2001
		Waimea Country Lodge	1995

Guam		Hotel Santa Fe	2007 ⁽³⁾
		Imperial Suites	2006

Thailand	Phuket	Kata Gardens	2007 ⁽⁴⁾
		Katamanda Villas	2007 ⁽⁴⁾

Micronesia	Saipan	Aquarius Beach Tower	1997

New Zealand	Auckland	Spencer on Byron	2001

(1) Beginning October 2007
(2) Beginning June 2007
(3) Beginning July 2007
(4) Beginning August 2007

Historically, Castle has contracted its full management services to property owners and condominium owners associations (“AOAO”) on either a Gross Contract or a Net Contract basis. Under the Gross Contract basis, the gross revenues for guest stays and other sources of revenue, are paid to Castle after a portion of the gross revenues are retained by the property or condominium owners. Castle then pays for the expenses of operating the property from its portion of the revenue. Castle recognizes this

Page 23

revenue as “Revenues Attributed from Properties” in its consolidated financial statements. Under the Net Contract basis, Castle receives a fixed percentage of the gross revenue collected by the property as a fee, and the property owners are responsible for paying the operating expenses from their portion. This revenue is included as “Revenues from Management and Services.” In either case, the company may be required to meet certain minimum service or operating performance levels, such as occupancy or daily rate, in order to achieve levels of compensation over and above base levels. In most full management contracts, Castle is responsible for setting prices, rates and for maintaining favorable occupancy levels in the units that it manages.

In addition to full management service contracts, the Company has contracted with some property owners or owner’s associations for selected services, such as, sales and marketing only, or reservations only. In these cases, the company receives its revenue on a fixed or variable fee basis. Hotel and resort properties in general undergo remodeling or redesign every few years, in order to provide a fresh and new experience for the guest. Frequently, the Company has entered into one time or restricted period contracts with property owners or associations, to provide technical operating or design advice, when a new property is being planned or built, or an existing property is in the process of a planned remodel or repositioning.

Due to the nature of the hotel management business, Castle’s revenues and profits from properties under management, tend to correlate with occupancy levels associated with the number of visitors selecting the destination location where the property is located, the room rates charged by the managed property, as well as by the occupancy levels achieved by Castle’s competitors in those markets. Accordingly, Castle’s ability to acquire management contracts for additional properties on acceptable terms, will be a dominant factor in Castle’s future revenues and profits.

As a result of the substantial investment the Company has made over the last 12 months in its marketing and sales departments, and the additional management staff it has allocated to its operations and training; the Company believes that it is well positioned to manage, sell and market additional properties both in its current geographic markets, as well as in new markets in the Pacific, Asia and the Americas.

Growth Strategy

Castle is focused on growing the number of management contracts within its existing portfolio by further expanding its geographic markets. The Company has recently implemented a strategic growth plan which addresses expansion within the regional Pacific markets of Hawaii; Micronesia and New Zealand; select Asian markets; and select Central American locales. An experienced acquisition team has been formed and strategic alliances are being pursued with various hospitality development companies and prominent investment banks, who wish to team up in pursuing growth opportunities within these key targeted geographic areas.

Existing Contracts . In the past few years, Castle has been very successful in improving the performance of the properties it manages. Further improvements in revenues and/or decreases in expenses for Castle’s current properties should result in higher management fees for Castle through increased incentive fees and/or fees based on a percentage of revenue.

Expansion in Hawaii . Castle is one of the leading hotel and resort management companies in the state of Hawaii. In the hotel and resort industry, management companies often acquire and lose management contracts for properties over time. Fortunately for Castle, its track record in maintaining

Page 24

contracts with its portfolio properties has remained consistently high. Significant opportunities for Castle to obtain additional contracts are available due to a myriad of factors that include sales of properties, foreclosures, underperformance and dissatisfaction with the current management of Castle’s competitors. The real estate boom experienced throughout the United States has also affected the hotel and resort condominium markets of Hawaii, as many properties have been sold or are now on the market. Castle’s history and experience of managing properties in Hawaii has positioned the Company as a market leader in new property acquisition. Most members of Castle’s executive management team are career hospitality industry executives, with big brand experience and strong ties to Hawaii and the Pacific Rim. Through decades of experience within its local markets, Castle’s management possesses market intelligence that is not easily available to others. The Company is closely involved with current efforts to support Hawaii’s visitor industry through their involvement and tenures with the Hawaii Visitors & Convention Bureau (HVCB), the American Society of Travel Agents (ASTA), the Hawaii Hotel & Lodging Association (HHLA), and other professional and trade organizations.

Castle strives to be more flexible and creative than its larger competitors, both in structuring agreements that meet the needs and goals of property owners and owner associations and its approach to marketing its properties. The Company has ramped up for expansion in the number and scope of properties it manages in Hawaii and its targeted new markets, and it intends to compete very aggressively for this new business.

Expansion Outside of Hawaii . The majority of the properties presently managed by Castle are located within the state of Hawaii. In addition, Castle manages properties in New Zealand, Guam, Micronesia, and most recently in Thailand. The Company’s management believes that there are significant opportunities to expand Castle’s operations both in the markets it currently serves, as well as in other Pacific Basin and Asian vacation destinations and Central American locales. Castle recently announced several new key management appointments and promotions as part of its strategic plan to position the company for significant growth within its current markets, and to capitalize on the emerging growth opportunities, particularly within the Asian markets. In 2007, the Company formed its Thailand division to support its new business initiatives in Thailand.

The Company has engaged in strategic alliances with partners such as the Anthology Marketing Group and others who have core competencies to support its global growth, plans. The Company is actively in discussions and/or negotiations with numerous companies and plans to expand its acquisition of property management contracts in these targeted areas.

Technology Improvements. The Company recently launched a redesigned website with a customized proprietary booking engine and intuitive functionality, that sets it apart from its competitors. Castle Resorts’ website (CastleResorts.com) offers state-of-the-art functionalities, user-friendly navigation, interactive features and rich content, while offering great rates, and a travel booking engine that can handle rate conversions for over 100 foreign currencies. The company’s proprietary Central Reservations System is customizable, and supports a dynamic pricing model to maximize revenues to the properties under management. The Company intends to continue to invest in optimizing its on-line presence directed towards its own website, since revenue derived through the Company’s branded website yields a higher margin.

Page 25

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 and 2006

Revenues

For the years ended December 31, 2006, 2005 and 2004, Castle had total revenues of $21,071,756, $20,696,442 and $18,044,384, respectively, representing increases of $375,314 or 2% and $2,652,058 or 15%, respectively as compared to prior years. The increase in revenue from 2005 to 2006 is primarily attributed to the overall increase in the strength of the tourism industry of Hawaii, where Castle has the majority of its properties. The increase in revenue from 2004 to 2005 is attributed to the New Zealand subsidiary increasing its revenues by $1.2 Million dollars and, the addition of additional properties in Hawaii, which provided an additional $1.4 million dollars in 2005 as compared to 2004.

Costs and Expenses

Total operating expenses were $20,004,022, $19,342,137 and $16,920,213 for the years ended December 31, 2006, 2005 and 2004, respectively, representing increases of $661,885, or 3% and $2,421,924, or 14%, respectively. The increase from 2004 to 2005 in property operating and depreciation expense is attributed to: (1) an additional $1.3 Million incurred in New Zealand related to the increase in guest stays, and related increase in revenues and depreciation expense of the Podium levels of the Spencer on Byron Hotel (more fully described in note 11 to the consolidated financial statements); and (2) $887,650 in incremental property expenses in Hawaii related to two incremental property contracts added in late 2004 and 2005. An additional increase of $184,436 was related to additional staffing and administrative costs to service the additional property management contracts. Castle has began investing in additional key staff and management beginning in the later part of 2006 and subsequently into 2007, in preparation for future growth.

The following table summarizes the revenues and operating expenses for the calendar years 2006, 2005 and 2004:


			(In Thousands)
		2006	2005	2004
Revenues:
Revenue Attributed from Properties		$ 17,315	$ 16,941	$14,517
Management services and other income		3,757	3,755	3,527
Total Revenues		21,072	20,696	18,044

Property operating expenses		16,023	16,065	13,952
Payroll & office Expenses:	3,250		2,610	2,488
Administrative & General Expenses	535		438	376
Total	3,785		3,048	2,864
EBITDA ^(1)-	$ 1,264		$ 1,583	$ 1,229

Depreciation and amortization	196		229	104
Net interest expense	338		293	182
Income Taxes	358		446	319

Page 26

⁽¹⁾ EBITDA - Earnings before interest, income taxes, depreciation, income taxes and amortization

For the year 2006 as compared to 2005, property revenues increased by $374,000, or 2%. Castle’s Hawaii operations experienced an increase in property revenues of $663,000, or 8%. Castle’s Hawaii operations benefited from the increase of the Hawaii tourism industry, where most of its managed properties are located. During the same period, Castle’s New Zealand operations experienced an increase in revenues of approximately $432,000, which was offset by a foreign exchange impact that decreased revenues as recorded in US Dollars by approximately $723,000, leading to a net decrease in reported revenue $289,000 for the New Zealand operation.

For the year 2005 as compared to 2004, property revenues increased by $2,424,000, or 17% as Castle’s New Zealand operation experienced a $1,072,000, or 14% increase in revenues. During 2005, the New Zealand property emerged from the lingering effects of 9/11 and the public’s concern with the SARS illness. A strengthening of the New Zealand dollar contributed to the increase in New Zealand revenues as the exchange rate increased by 6%, from $.66 in 2004 to $.70 in 2005. Property revenues in Hawaii also experienced a $1,203,000, or 18% increase, from $6,764,000 to $7,967,000, due to the addition of two property contracts in late 2004 and mid 2005.

Property expenses for 2006 when compared to 2005 decreased by $42,000. Hawaii property expenses increased primarily due to an increase in the number of properties managed. New Zealand property expenses decreased by a net $77,000. This is a result of an increase in expenses in New Zealand which were offset by exchange rate changes of the New Zealand dollar relative to the US dollar.

Comparing 2005 to 2004, property expenses increased by $2,091,000, or 17% as Castle’s New Zealand operation experienced a $1,042,000, or 14% increase in operating expenses, attributable to the increased costs of managing and servicing the additional guest stays which were reflected in the increased revenue for this operation. In addition, the appreciation of the New Zealand dollar in 2005 contributed to the increase in New Zealand property expenses as recorded in US Dollars. Property expenses in Hawaii also increased by $1,049,000, or 16%. These costs increases are attributable to the two additional Hawaii properties which were acquired in late 2004 and 2005.

Management and Service and Other Income for 2006 increased by $2,000 when compared to 2005. Management and Service income is charged by Castle based on a percentage of gross revenues or fixed fee basis for those properties managed by Castle. Gross property revenues for all of the properties represented by Castle in this way increased by $3.2 million, or 7% when compared to 2005. During 2006, Castle also diversified its revenue sources by entering into agreements with timeshare operators who pay a commission to Castle for the sale of timeshare tours from travel desks located in certain properties that are managed by Castle. In addition, Castle launched an interior design service for its clients to assist the property owners in the renovation and upgrading of their hotel or condominium units.

Page 27

Management and Service and Other Income for 2005 increased by $227,000 compared to 2004. Other income increased due to the incremental property contracts added in 2005 and 2004, which contributed $156,000 in additional fees as compared to 2004. During 2005 Castle received incremental management fees after the achievement of certain profit goals and additional fees from its New Zealand property.

Payroll and office expenses in 2006 increased by approximately $639,000, or 24% compared to 2005, as Castle increased its staffing in order to support the growth in the number of properties under contract, and to increase its back office and corporate staffing levels during the period. In addition, Castle invested in additional information systems and structure for efficiency gains, and to streamline processes and design new systems for future growth.

Comparing 2005 and 2004, payroll and office expenses increased by $122,000, or 5%, as Castle added operational positions to improve the services provided by the additional properties contracts and the then existing portfolio of properties under contract.

Administrative and general expenses in 2006 increased by $97,000, or 22% when compared to 2005, as Castle incurred incremental costs related to its geographic expansion into other areas of the Pacific Rim and professional services.

Administrative and general expenses in 2005 increased by $62,000, or 16% over 2004. The majority of this increase was related to professional services incurred during the year.

EBITDA reflects the Company’s earnings without the effect of depreciation, interest income or expense or taxes. Castle’s management believes that in many ways it is a good alternative indicator of the Company’s financial performance, as 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 and 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 is shown below. For the year ended 2006, EBITDA was $1,264,000 compared to $1,583,000 for 2005 and $1,229,000 for 2004. This reflects a decrease of $319,000, or 20% for 2006 as compared to 2005 due to investments which the company made in increased staffing and systems to support the growth in the number of properties and expansion into new geographic regions. An increase of EBITDA from 2004 to 2005 is primarily a result of an increase in Revenues and incremental gross profits from new property contracts during late 2004 and 2005.

Comparison of Net Income to EBITDA:


		(In Thousands)
	2006	2005	2004
Net Income	$ 372	$ 616	$ 624

Add Back:
Income Taxes	358	446	319
Net interest expense	338	293	182
Depreciation and amortization	196	229	104
EBITDA ^(1)-	$ 1,264	$ 1,583	$ 1,229

Page 28

Depreciation & amortization expense in 2006 decreased by $33,000, or 17% when compared to 2005, due to the decrease in the value of the NZ dollar exchange rate during the period. Depreciation and amortization expense for 2005 compared to 2004 increased by $125,000, due to depreciation of the assets at the Podium of the Spencer on Byron Hotel which the company did not operate in the prior year.

Net interest expense for 2006 increased by $45,000, or 15% compared to 2005 due to financing of the Podium purchase. Net interest expense for 2005 increased by $111,000, or 62% when compared to 2004, which is attributed to interest expense related to financing of the Podium level of the Spencer on Byron Hotel.

Income tax expense for 2006 decreased by $88,000, or 20% when compared to 2005 due to a decrease of Taxable income. Income taxes for 2005 increased by $127,000, or 40% when compared to 2004 due to increase of Taxable income.

Net income for the year ended December 31, 2006, was $371,000, a decrease of $244,000, or 40% compared to the year ended December 31, 2005. Net income for the years ended December 31, 2005, and 2004, was $616,000 and $624,000, respectively.

Other Borrowings

Until 2006, Castle met its financial obligations through operating cash flow and borrowings from related parties. In November, 2006, Castle obtained a term loan for $600,000 and lines of credit totaling $400,000 with a local bank, with the proceeds of the term loan being used to pay a debt to the former owner of the Podium at the Spencer on Byron, and the lines of credit available for use to provide working capital in connection with Castle’s present and newly acquired management contracts and for the purchase of equipment. Based on the profitability of Castle and future operating forecasts, management believes that Castle will have sufficient cash flows for its business operations during calendar 2007.

Off-Balance Sheet Arrangements

There are no off balance sheet arrangements as of December 31, 2006.

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 7. FINANCIAL STATEMENTS

Page 29


Report of Independent Registered Public Accounting Firm	Page 31
Consolidated Balance Sheets – December 31, 2006 and 2005	Page 32
Consolidated Statements of Operations and Comprehensive Income - Years Ending December 31, 2006, 2005 and 2004	Page 33
Consolidated Statements of Cash Flows – Years Ending December 31, 2006, 2005 and 2004	Page 34
Consolidated Statements of Stockholders’ Equity - Years Ending December 31, 2006, 2005 and 2004	Page 35
Notes to Consolidated Financial Statements	Page 36

Page 30

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

The Castle Group, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of The Castle Group, Inc. and Subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for the years ended December 31, 2006, 2005 and 2004. 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 Company 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, 2006 and 2005, and the results of operations and cash flows for the years ended December 31, 2006, 2005 and 2004, in conformity with accounting principles generally accepted in the United States of America.

/s/ Mantyla McReynolds LLC

Mantyla McReynolds LLC

Salt Lake City, Utah

July 23, 2007

Page 31

THE CASTLE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2006 AND 2005

ASSETS


	2006	2005
Current Asset
Cash and cash equivalents	1,100,302	1,031,492
Accounts receivable, net of allowance for bad debts	2,548,529	2,549,528
Deferred tax asset	130,000	150,000
Prepaids and other current assets	273,773	305,585
Total Current Assets	4,052,604	4,036,605
Property, plant & equipment, net	7,420,726	7,262,156
Goodwill	54,726	54,726
Deposits	28,070	27,644
Restricted cash	363,215	336,133
Deferred tax asset	1,460,127	1,797,940
Note Receivable - related party, net	4,269,151	4,096,106
TOTAL ASSETS	17,648,619	17,611,310
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	2,450,453	3,041,743
Deposits payable	429,164	328,542
Current portion of long term debt	1,144,715	896,534
Current portion of long term debt to related parties	35,250	27,090
Accrued salaries and wages	916,751	712,845
Accrued taxes	65,300	125,581
Accrued interest	95,311	356,528
Other current liabilities	17,064	101,054
Total Current Liabilities	5,154,008	5,589,917
Non Current Liabilities
Long term debt, net of current portion	5,174,172	4,645,039
Deposits payable	363,215	336,133
Notes payable to related parties	259,762	294,601
Other long term obligations, net	2,927,534	3,296,106
Total Non Current Liabilities	8,724,683	8,571,879
Total liabilities	13,878,691	14,161,796
Stockholders' Equity
Preferred stock, $100 par value, 50,000 shares authorized 11,050 shares issued and outstanding in 2006 and 2005	1,105,000	1,105,000
Common stock, $.02 par value, 20,000,000 shares authorized , 9,538,055 and 10,438,055 shares issued and outstanding in 2006 and 2005, respectively	190,761	208,761
Additional paid in capital	6,681,930	6,681,930
Retained deficit	(3,917,812)	(4,289,768)
Accumulated other comprehensive income (loss)	(289,951)	(256,409)
Total Stockholders' Equity	3,769,928	3,449,514
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	17,648,619	17,611,310

Page 32

THE CASTLE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME YEARS ENDING DECEMBER 31, 2006, 2005 & 2004


	2006	2005	2004
Revenues Revenue Attributed from Properties	17,314,971	16,941,492	14,516,715
Management & Service	3,430,441	3,619,437	3,254,826
Other Income	326,344	135,513	272,843
Total Revenues	21,071,756	20,696,442	18,044,384
Operating Expenses Property	16,022,752	16,064,961	13,952,465
Payroll & Office Expense	3,249,717	2,610,230	2,488,199
Administrative & General	535,576	438,269	375,872
Depreciation & amortization	195,977	228,677	103,677
Total Operating Expense	20,004,022	19,342,137	16,920,213
Operating Income	1,067,734	1,354,305	1,124,171
Interest Income	173,950	164,415	0
Interest Expense	(511,916)	(457,059)	(181,580)
Income before taxes	729,768	1,061,661	942,591
Income Taxes	357,812	446,107	318,564
Net Income	371,956	615,554	624,027
Other comprehensive income Foreign Currency Translation Adjustment	(33,542)	(22,932)	47,263
Total Comprehensive Income	338,414	592,622	671,290
EPS Basic	0.04	0.06	0.09
Diluted	0.03	0.06	0.09
Weighted Average Shares Basic	10,338,055	10,338,055	6,972,302
Diluted	10,756,388	10,756,388	7,340,635

Page 33

THE CASTLE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDING DECEMBER 31, 2006, 2005 & 2004


	2006	2005	2004
Cash flows from Operating Activities Net Income	371,956	615,554	624,027
Depreciation	195,977	228,677	103,677
Amortization of Discount	209,342	224,128	0
Stock Issued for Services	(18,000)	2,000	70,200
Forgiveness of Debt	0	(128,233)	0
(Increase) Decrease in Accounts Receivable	(36,000)	(574,420)	703,950
Other Current Assets	33,517	(95,307)	(17,085)
Deposits and Other Assets	(426)	0	3,782
Restricted Cash	(24,968)	(336,133)	0
Deferred Taxes	357,813	446,107	318,564
Increase (Decrease) in Settlement Agreement	260,000	0	0
Accounts Payable & Accrued Expenses	(707,212)	598,530	(1,688,897)
Net Change From Operating Activities	641,999	980,903	118,218
Cash Flows from Investing Activities Purchase of Assets	(143,248)	(34,472)	(18,768)
Proceeds from Notes Receivable	0	49,953	12,000
Net Change from Investing Activities	(143,248)	15,481	(6,768)
Cash Flows from Financing Activities Proceeds from Notes	600,000	0	140,000
Payments on Notes	(1,047,167)	(343,536)	(74,761)
Net Change from Financing Activities	(447,167)	(343,536)	65,239
Effect of exchange rate on changes in cash	17,226	(14,836)	3,645
Net Change in Cash	68,810	638,012	180,334
Beginning Balance	1,031,492	393,480	213,146
Ending Balance	1,100,302	1,031,492	393,480
Significant Noncash Transactions Podium Purchase in exchange for Note	0	0	(7,467,385)
Supplementary Information Cash Paid for Interest	(102,452)	(29,870)	(37,500)
Cash Paid for Income Taxes	0	0	0

Page 34

THE CASTLE GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDING DECEMBER 31, 2006, 2005 & 2004


	Preferred Stock		Common Stock		Additional Paid	Retained	Accumulated Other Comprehensive
	Shares	Amount	Shares	Amount	Capital	Deficit	Income(Loss)	Total
Balance December 31, 2003	11,050	1,105,000	6,828,055	136,561	6,681,930	(5,529,349)	(280,740)	2,113,402
Net Income December 31, 2004						624,027		624,027
Foreign currency translation adjustment							47,263	47,263
Stock issued for compensation			3,510,000	70,200				70,200
Balance December 31, 2004	11,050	1,105,000	10,338,055	206,761	6,681,930	(4,905,322)	(233,477)	2,854,892
Net Income December 31, 2005						615,554		615,554
Foreign cur _r ency translation adjustment							(22,932)	(22,932)
Stock issued for compensation			100,000	2,000				2,000
Balance December 31, 2005	11,050	1,105,000	10,438,055	208,761	6,681,930	(4,289,768)	(256,409)	3,449,514
Net Income December 31, 2006						371,956		371,956
Voided Stock December 31, 2006 See Note 13			(900,000)	(18,000)				(18,000)
Foreign currency translation adjustment							(33,542)	(33,542)
Balance December 31, 2006	11,050	1,105,000	9,538,055	190,761	6,681,930	(3,917,812)	(289,951)	3,769,928

Page 35

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, The Federated States of Micronesia, the Territory of Guam 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 practices 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., NZ Castle Resorts and Hotels Limited (a New Zealand Corporation), and NZ Castle Resorts and Hotels’ wholly-owned subsidiary, Mocles Holdings Limited (a New Zealand Corporation). All significant inter-company transactions have been eliminated in the consolidated financial statements.

New Accounting Pronouncements

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without being required to apply complex hedge accounting provisions. FAS 159 is effective for fiscal years beginning after November 15, 2007, and the Company is currently evaluating the impact that FAS 159 will have on its financial position and results of operations once adopted.

In June 2006, the Financial Accounting Standards Board (FASB) ratified the consensus of Emerging Issues Task Force Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (EITF 06-3). EITF 06-3 concluded that the presentation of taxes imposed on revenue-producing transactions (sales, use, value added, and excise taxes) on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy that should be disclosed. When we adopt EITF 06-3 in the first quarter of 2007, we do not anticipate that it will have any impact on our results of operations or financial condition.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment, and is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 had no impact on the Company’s financial statements in 2006.

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value, expands

disclosures about fair value measurements, and is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact this statement will have on our consolidated financial statements.

On July 13, 2006, the FASB issued FASB Interpretation 48 “Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No.109” (“FIN48”). FIN48 was issued to clarify the accounting for uncertain tax positions recognized in the financial statements by prescribing a recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. Castle is required to adopt FIN 48 as of January 1, 2007, and is in the process of evaluating the impact that FIN 48 will have on its financial statements. Any necessary transition adjustment will not affect net income in the period of adoption and will be reported as a change in accounting principle in the consolidated financial statements. The Company is currently evaluating the potential impact of this interpretation and cannot yet estimate such impact.

In June 2003, the Securities and Exchange Commission (“SEC”) adopted final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Commencing with the company’s Annual Report for the year ending December 31, 2007, the Company is required to include a report of management on the Company’s internal control over financial reporting. The internal control report must include a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting for the Company; of management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of year end; of the framework used by management to evaluate the effectiveness of the Company’s internal control over financial reporting; and for the year ending December 31, 2008, that the Company’s independent accounting firm has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting, which report is also required to be filed as part of the Annual Report on Form 10-KSB.

In December 2004, the FASB issued FASB SFAS No. 123 (revised 2004), Share-Based Payment , which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(r) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No.95, Statement of Cash Flows . Generally, the approach in SFAS No. 123(r) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(r) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard was effective for the Company beginning the first interim period after December 15, 2005. As of December 31, 2006, Castle has no outstanding options or warrants, and therefore, no significant impact from this pronouncement is expected.

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

Castle holds funds on the 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, 2006 & 2005, the Company had $363,215 and $336,133 of funds held for this purpose. The Company records an offsetting liability as a deposit payable.

Page 37

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 charged to operations as incurred. Renewals and betterments are capitalized and depreciated over their estimated useful lives.

At December 31, 2006 and 2005, property, furniture, and equipment consisted of the following:


	2006		2005
Real estate - Podium (see Note 11)	$	7,308,739	$	7,096,218
Equipment and furnishings		1,173,237		991,304
Less accumulated depreciation		(1,061,250)		(825,366)
	$	7,420,726	$	7,262,156

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, 2006, 2005 and 2004, depreciation expense was $195,977, $228,677 and $103,677, respectively.

Intangibles

Under SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill related to our historical acquisitions are 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.

Long-Lived Assets

The Company periodically reviews the carrying amount of its long-lived assets for impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow. 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 income “Revenue Attributed from Properties” which is based on a percentage of the gross rental proceeds ranging from 25% to 100% of the total amount received from the rental of hotel or condominium units. 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, and these incentive management fees are recorded when earned based upon

Page 38

the terms and conditions of the management contracts. Revenues received under the Gross Contract are recorded as Revenue Attributed from Properties, while 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.

Expense Recognition

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 basic difference between the Gross and Net contracts is that under a Gross Contract, all expenses, and therefore the covering of any operating loss, belong to and are the responsibility of the Company; under a Net Contract, the responsibility for covering expenses or any operating losses belong to and therefore remain with the owner of the property. The operating expenses of properties managed under a Gross Contract are recorded as Property operating expenses.

Advertising, Sales and Marketing Expenses

The Company incurs sales and marketing expenses in conjunction with the production of promotional materials, trade shows, retainers for out-of-state sales agents, and related travel costs. In accordance with the AICPA’s Statement of Position No. 93-7 “Reporting on Advertising Costs”, the Company expenses advertising and marketing costs as incurred or as the advertising takes place. For the years ended December 31, 2006, 2005 and 2004, total advertising expense was $1,371,032, $1,165,664 and $847,097, respectively.

Concentration of Credit Risks

The Company maintains its cash with several financial institutions in Hawaii. Balances maintained with these institutions are occasionally in excess of federally, insured limits. As of December 31, 2006 and 2005 the Company had balances of $714,949 and $608,389, respectively, in excess of federally insured, limits of $100,000 per financial institution.

Concentration in Market Area

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

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.

Financial Instruments

The Company’s financial instruments, when valued using market interest rates, would not be materially different from the amounts presented in the consolidated financial statements.

Page 39

Guarantees

The Company records 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.

Foreign Currency Translation

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, the Company translates 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 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.

Accounts Receivable

The Company records an account receivable for revenue earned but net yet collected. If the Company determines 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 $217,064 and $193,481 as of December 31, 2006 and 2005, respectively.

Income Taxes

Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled, as prescribed in Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” As changes in tax laws or rate are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be realized. Deferred income tax asset and liability balances are netted, as applicable, when they represent deferred amounts within the same taxing jurisdiction. Deferred tax assets are classified between current and non-current according to the estimated periods in which the deferred tax assets are expected to be realized.

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” under SFAS No. 128 “Earnings per Share.”

Page 40

2. Related Party Transactions

Hanalei Bay International Investors (“HBII”)

The Chairman and CEO of the Company is 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 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 ($3.3M) 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. The Company has received projections from the current owner of Hanalei Bay Resort and based on those projections the Company has determined, although no guaranty can be given, that it shall receive full payment of the note receivable in the future.

As part of the Company’s purchase of real estate in New Zealand (see Note 11), an assignment of $3,017,999 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, 2009.

During 2004, the Company also assigned another portion of the HBII receivable as a repayment of outstanding debt, amounting to $601,693. The note was subsequently refinanced through a bank and paid by the Company during the year ended December 31, 2006. The Company assigned $600,000 as security to the bank.

Based on these assignments, the entire receivable from HBII, net of discounts has been recorded on the books of the Company at $4,269,151 and $4,096,106 as of December 31, 2006 and 2005, respectively. See Note 4 for disclosures regarding the guarantor obligations relating to these assignments.

Subsequent to the date of this report, HBII and the current owner of Hanalei Bay Resort have entered into direct negotiations related to the settlement of this dispute. HBII believes that it will prevail in recovering the majority of their disputed amounts in this matter, which is expected to be in excess of the amounts receivable by the Company; however, no guaranty can be given that HBII will prevail.

Loan Fees

In 2006, the Company secured $600,000 financing from a bank (see note 6 to the financial statements) and the CEO of the Company acted as guarantor. As consideration for the guaranty, the Company pays a quarterly guaranty fee of 2% per annum to the CEO of the Company. During 2006, no fees were paid under this agreement, as the loan was consummated in late December of 2006.

Page 41

Related Party Loans

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 1/1/09.

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.

During 2004, a director of the Company advanced $125,000 to the Company for general working capital. The note calls for monthly payments of $520.83, plus interest on the unpaid balance at 10%. The unpaid principle balance is due on 1/1/09.

3. Notes Receivable

Notes receivable consist of the following:


	2006		2005
Note receivable from Hanalei Bay International Investors, secured by a direct assignment of Hanalei Bay International Investors right to receive future proceeds from its “Purchase and Participation Agreement” (Assigned - see Note 2)	$	4,269,151	$	4,096,106
Note Receivable, Non-current	$	4,269,151	$	4,096,106

4. Commitments and Contingencies

Leases

The Company leases two office spaces expiring March 1, 2008 and October 31, 2008 and for the years ended December 31, 2006, 2005 and 2004, the Company paid $269,247, $172,220 and $139,237, respectively, in lease expense for these leases.

As of December 31, 2006, the future minimum rental commitment under these leases was $286,218. As part of our NZ Castle Resorts and Hotels operations, the Company leases approximately 250 investment units, which are leased to and managed by the Company. Total lease expense for this lease for the year ending December 31, 2006, 2005 and 2004 was $2,219,493, $2,291,368 and $2,102,392, respectively.

As of December 31, 2006, the future lease commitments are as follows:


Year	Amount
2007	$	2,384,274
2008		2,322,196
2009		2,210,126
2010		1,176,701
Total	$	8,093,297

Page 42

The purchase of Mocles Holdings Limited (see Note 11) includes a requirement for monthly payments of the greater of $14,100 or Surplus Profits, as defined at Note 11. Using the monthly rate of $14,100, total annual payments will be approximately $169,200 per year, beginning in 2007. The Company has not yet determined whether the Surplus Profits will be greater than $14,100 per month. The approximate term is 4 years.

Guarantee

During 2004, the Company also assigned another portion of the HBII receivable as a repayment of outstanding debt, amounting to $601,693. The debt was subsequently refinanced through a bank and paid by the Company during the year ended December 31, 2006. The Company assigned $600,000 as security to the bank.

The Company has recognized a guarantor liability for these assignments, amounting to $2,927,534 net of discounts of $150,541 as of December 31, 2006 and $3,296,106 net of discounts of $323,586 as of December 31, 2005, which represents the present fair value of the obligation undertaken in becoming a guarantor of the payment of the assigned receivables. This obligation’s term is estimated to expire on or before December 31, 2009.

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 December 2007. 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.

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, 2006, 2005 and 2004 were $11,619, $16,201 and $6,730, respectively. Any employee with one-year 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, 2006, 2005 and 2004, the Company made no profit contributions.

The Company also has a Flexible 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.

Page 43

6. Notes Payable

Notes payable consisted of the following:


	2006		2005
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	$	65,842	$	89,271

Note dated 6/6/04 to a director, with interest at the rate of 8%, Monthly payments of interest plus $520.83, balance due 1/1/09, unsecured		108,854		115,104

Note dated 6/16/04 to unrelated party with interest at the rate of 15% due on 1/1/09 with monthly payments of NZ$3,225 (US$2,274), unsecured		181,890		176,601

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 or before 1/1/09, unsecured		117,316		117,316

Note dated 4/15/05 to an unrelated party, non-interest bearing with monthly payments of $10,000, due 12/31/06, unsecured		-		120,000

Note dated 12/31/04, payable in New Zealand, net of discount of $1.2 million and $1.1 million, as of 2006 and 2005, respectively, with a face value of $8.6 million and which is secured by a general security agreement including an assignment of $3.1 million, net of discounts of $151,000 in 2006 and $324,000 in 2005, 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 is 5.25% per annum. The maturity date is December 31, 2009.		7,368,410		7,506,309

Note dated 12/31/04 payable to unrelated party, with interest at 10% due 3/01/12 with monthly payments of $2,975 beginning on 1/1/07, unsecured		140,000		140,000

Note dated 12/14/06 payable to a bank, with interest at prime plus 1.25%, secured by up to $600,000 of the note receivable from Hanalei Bay Resort and personally guaranteed by the CEO of the Company. Balance is due 12/8/08		600,000		-

Page 44


Note payable to former developer of a hotel located in Guam, Which resulted from a settlement agreement reached between the Company and the developer. The note is non-interest bearing and is due on or before January 18, 2008 (See note 13).		500,000		240,000

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 1/1/08		447,121		642,769
Subtotal	$	9,541,433	$	9,159,370
Less Current Portion		1,179,965		923,624
Notes payable, non-current	$	8,361,468	$	8,235,746

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


Year	Amount
2007	$	1,179,965
2008		1,014,772
2009		7,282,254
2010		30,634
2011		33,808
2012		0
Total	$	9,541,433

As of December 31, 2006, the Company also had available two lines of credit with a bank as follows:

A $250,000 revolving credit agreement, secured by the Company’s property, contracts and equipment, with interest at the bank’s base rate plus 1%. The revolving credit agreement expires on December 11, 2007. Draws against the revolving credit agreement are due within 180 days. The Company made no draws against the revolving credit agreement.

A $150,000 equipment line of credit, secured by the equipment for which the line is used, with interest at the bank’s prevailing interest rate at the time of purchase. Repayment would be on a monthly basis including principal and interest. The equipment line of credit expires on December 11, 2007. The Company made no purchases or borrowings using the equipment line of credit.

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 various entities. 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, 2006, undeclared and unpaid dividends on these shares were $601,213 or $54.41 per 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

Page 45

of $3 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 the year ended December 31, 2005, the Company issued 100,000 shares of restricted common stock as compensation to an unrelated party for services that had been rendered. During the year ended December 31, 2004, the Company issued 3,510,000 shares of restricted common stock to employees, directors and consultants for past services rendered and for entering into Employment Contracts. The shares in each year were valued $.02 per share. These values approximated the fair value of the services that were rendered and the value of having these persons enter into employment contracts, as well as the fair value of the shares on the issuance date, given the stock’s trading range over the six months prior to issuance.

During 2006, the Company voided 900,000 shares of stock. The shares were issued as part of a compromise agreement reached in 2001 with the developer of a hotel that the Company previously leased. As a result of a final settlement agreement occurring in 2007, between the Company and the hotel developer, the compromise agreement signed in 2001 was voided, and therefore, the Company voided the 900,00 shares that were previously issued (See note 13).

Common Stock Options and Warrants

As of December 31, 2006 and 2005, there were no outstanding common stock options or warrants.

9. Income Taxes

The provision for income taxes consists of the following:


	2006	2005	2004
Deferred
Federal	$ 306,496	$ 375,437	$ 268,098
State	51,316	70,670	50,466
Foreign	-	-	-
Total deferred provision	$ 357,812	$ 446,107	$ 318,564

At December 31, 2006, the Company had a net operating loss carryforward, which expires on various dates through 2022. The following information describes the tax effects of the carryforward and the associated valuation allowance.

Page 46


2005	Balance	Tax %	Tax
Federal loss carryforward	$ 4,821,531	34.0%	$ 1,639,362
State loss carryforward	4,821,531	6.4%	308,578
Foreign loss carryforward	766,181	33.0%	252,840
Valuation allowance			(252,840)
Deferred Tax Asset			$ 1,947,940

2006	Balance	Tax %	Balance
Federal loss carryforward	$ 3,935,958	34.0%	$ 1,338,226
State loss carryforward	3,935,958	6.4%	251,901
Foreign loss carryforward	958,439	33.0%	316,285
Valuation allowance			(316,285)
Deferred Tax Asset			$ 1,590,127

The Company expects to utilize $320,000 of the loss carryforward for the year ended December 31, 2007, 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 increased by $63,445 to $316,285 during the period from 2005 to 2006.

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


	2006	2005	2004
Expected US Income Tax (Benefit) on Consolidated Income before Tax	$ 248,121	$ 360,964	$ 320,481
Effects of:
Expected State Income Tax (Benefit) on Consolidated Income before Tax	46,705	67,946	60,326
Change in valuation allowance	63,445	14,047	(50,842)
Other	(459)	3,150	(11,401)
Effective Tax Provision (Benefit)	$ 357,812	$ 446,107	$ 318,564

10. Litigation

There are various claims and lawsuits pending against the Company involving complaints, which 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 from these proceedings would have a material effect on the Company’s consolidated financial position, results of operations or liquidity (See note 13).

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):

Page 47

· Mocles owns the Podium levels (“Podium”) of the Spencer on Byron Hotel in Auckland, New Zealand. The Podium represents approximately the first two floors of the Spencer on Byron Hotel.

· 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).

· The purchase price is to be paid as follows:

1. Partial assignment of the Company’s receivables from Hanalei Bay International Investors (“HBII”) in the amount of US$3,017,999. In the event that this amount is not realized from HBII, the Company is obligated to make up the difference by December 31, 2009.

2. Monthly payments of the greater of NZ$20,000 (US$14,100), or Surplus Profits defined as 50% of net profits calculated in accordance with New Zealand’s Generally Accepted Accounting Principles or International Reporting Standards.

3. The remaining balance is due December 31, 2009. However, if the Company is current with its other obligations as set forth herein, and has paid not less than $7,183,260 toward the purchase price, an up to 18 month extension is available.

· 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.

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, 2009. There is no interest associated with this liability.

· 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 into 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$119,788) regularly available for the

Page 48

replacement of furniture, fixtures and equipment installed in the Podium. The fund must be expended and cannot be accumulated.

12. 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 managed 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 $8,494,364 in 2006, $8,972,782 in 2005 and $7,752,838 in 2004; results from operations of ($192,258) in 2006, $104,976 in 2005 and $304,322 in 2004; and fixed assets of $7,379,298 in 2006, $7,234,988 in 2005 and $7,837,496 in 2004.

13. Subsequent Event

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 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 2001 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 is also required to pay $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. As a result of the terms of the Settlement Agreement, the Company accrued for the $500,000 note payable to the developer by increasing the payable balance by $260,000 (previously recorded at $240,000) as of December 31, 2006.

Page 49

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Castle appointed Endo & Company as its independent public accountants in November, 2000; however, Endo & Company never performed audit or accounting services for Castle, and Castle’s relationship with Endo & Company ended soon thereafter. See Castle’s 8-K Current Report dated November 16, 2000, that was filed with the Securities and Exchange Commission on December 11, 2000, and which is incorporated herein.

There were no disagreements between Castle and Endo & Company, whether resolved or not resolved, on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved, would have caused Endo & Company to make reference to the subject matter of the disagreement in connection with any reports of Castle. Castle did not audit its financial statements for the year ended December 31, 2000, and ceased filing reports with the Securities and Exchange Commission shortly thereafter.

Endo & Company had replaced PricewaterhouseCoopers LLP, terminated on September 19, 2000, as Castle’s independent public accountants. See Castle’s 8-K Current Report dated September 19, 2000, that was filed with the Securities and Exchange Commission on September 26, 2000, and which is incorporated herein by reference in Part III, Item 13.

The Board of Directors of Castle appointed its current audit and accounting firm of Mantyla McReynolds LLC in 2004, and this firm has been its primary accounting firm since then. Castle did not engage an accounting firm to audit its financial reports or records during the yearly periods ended December 31, 2003, 2002 or 2001.

During the Castle’s two most recent fiscal years prior to this appointment, and since then, Castle has not consulted Mantyla McReynolds LLC regarding the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on Castle’s financial statements or any other financial presentation whatsoever.

ITEM 8A(T). CONTROLS AND PROCEDURES.

Management’s Annual Report on Internal Control over Financial Reporting

As of the end of the period covered by this Annual Report, Castle carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Principal Accounting Officer, of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Principal Accounting Officer concluded that information required to be disclosed is recorded, processed, summarized and reported within the specified periods and is accumulated and communicated to management, including our Chief Executive Officer and Principal Accounting Officer, to allow for timely decisions regarding required disclosure of material information required to be included in our periodic Securities and Exchange Commission reports. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer and Principal Accounting Officer have concluded that our disclosure controls and procedures are effective to a reasonable assurance level of achieving such objectives. However, it should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of

Page 50

future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. In addition, we reviewed our internal controls over financial reporting, and there have been no changes in our internal controls or in other factors in the last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Changes in Internal Control over Financial Reporting

There have been no changes in Castle’s internal control over financial reporting identified in connection with the evaluation that occurred during Castle’s last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, Castle’s internal control over financial reporting.

ITEM 8B. OTHER INFORMATION.

On June 7, 2007, Castle entered into a Settlement Agreement with the developer of a hotel that was previously leased by Castle between 1999 and 2001. Castle and the developer previously entered into a Compromise Agreement in 2001, which called for Castle to make certain payments to the developer, and also to issue 900,000 shares of its restricted common stock to the developer. In 2001, Castle recorded the issuance of 900,000 shares of common stock to the developer. The Settlement Agreement reached in June 2007 rescinded the 2001 Compromise Agreement, and therefore as of December 31, 2006, Castle voided the 900,000 shares that were previously issued. Castle agreed to pay $500,000 to the developer, in monthly installments commencing in June 2007, with all amounts to be paid on or before January 18, 2008. As of August 20, 2007 Castle has paid $200,000, of this amount leaving a total of $300,000 remaining to be paid.

John Brogan joined Castle’s Board of Directors and Executive Committee in April, 2007.

Alan Mattson was appointed the Chief Operating Officer of Castle on May 2, 2007.

Howard Mendelsohn was appointed Chief Financial Officer of Castle on July 1, 2007

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The following table sets forth certain information concerning the directors and executive officers of Castle as of December 31, 2006. 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.

Page 51


Name	Age	Position
Rick Wall	64	Chief Executive Officer, Director and Chairman of the Board
Alan R. Mattson	51	Chief Operating Officer and Director, President of Castle Resorts & Hotels, Inc.
Motoko Takahashi	63	Director
Jerry Ruthruff	60	Secretary and Director
Stanley Mukai	74	Director
Eduardo A. Calvo Jr.	51	Director
Roy Tokujo	66	Director
Michael Irish	54	Director
Tony Vericella	54	Director
Rick Humphreys	64	Director
John Brogan	74	Director
Michael S. Nitta	48	CFO-Castle Resorts and Hotels
K. Roger Moses	65	Chairman of the Board, and Director, (CRH New Zealand)
Howard S. Mendelsohn	49	Chief Financial Officer

Rick Wall. Mr. Wall was appointed Castle’s Chief Executive Officer and Chairman of the Board in 1993. Mr. Wall is the founder of Castle, and continues to serve on the board of directors, and the executive committee of the Hawaii Visitors and Convention Bureau.

Alan R. Mattson. Mr. Mattson has over 25 years of experience in marketing and sales in the tourism industry. Mr. Mattson joined Castle in September of 1999, and 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 Dollar Rent a Car, Mr. Mattson was director of marketing for Avis Car Rental, operating out of the Avis worldwide headquarters in New York. Mr. Mattson also 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. Mr. Mattson was appointed the President of Castle’s principal subsidiary, Castle Resorts & Hotels, Inc. on July 27, 2005 and the Chief Operating Officer of Castle on June 12, 2007.

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 and completed her education in Tokyo, Japan and has resided in the United States for more than 30 years, the past six being in Hawaii.

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.

Stanley Mukai. Mr. Mukai is a graduate of the Harvard Law School and a partner in the law firm of McCorriston Miho Miller Mukai located in Honolulu, Hawaii. His expertise is in the area of taxation, and Mr. Mukai has held various positions such as Advisory Board Member, Hawaii Tax Institute; Trustee, Tax Foundation of Hawaii; Co-Chairman, Tax Subcommittee,

Page 52

American Bar Association; Chairman, Tax Subcommittee on U.S. District and Portfolio Investment by Foreigners; and Chairman, Section of Taxation, Hawaii Bar Association. He has been past Chairman of the Board of Regents of the University of Hawaii and a member of the Board of Governors of the East-West Center. He is presently the Chairman of the Board of Waterhouse, Inc., a member of the Board of Directors of AIG Hawaii and a member of the Board of Governors of Iolani School.

Eduardo A. Calvo, Jr. Mr. Calvo is a partner in the law firm of Calvo & Clark, LLC with offices in Guam, Saipan and San Francisco. He is active in a variety of business operations in Guam and Saipan. Mr. Calvo focuses on handling cross-border matters principally with Japan and United States based companies and clients from Taiwan, Hong Kong and Korea.

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.

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 president.

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 earned his Bachelor of Science degree in Biology and Chemistry from Purdue University, and achieved his MBA, in Marketing and Finance from UCLA. Tony 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 Hawaii Visitors and Convention bureau. He has served on, or is currently on, the boards of several business and community organizations as well as independent educational institutions.

Rick Humphreys. Mr. Humphreys has more than 40 years of financial management expertise and is the former president of First Federal Savings & loan in Hawaii and past chairman of Bank of America’s Hawaii subsidiary. He is currently president of Hawaii Receivables Management, LLC, and serves as a trustee of Menlo College and the State of Hawaii Employees Retirement System. He is also a board member of the Bishop Museum, Pantheon Corporation, and the Cancer Research Center of Hawaii.

John Brogan. 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 Association, American Heart Association-Hawaii, Blood Bank of Hawaii, Waikiki Improvement Association and Chaminade University.

Page 53

Michael S. Nitta. Mr. Nitta joined Castle in November, 1993 following its acquisition of KRI, Inc. Prior to joining Castle, Mr. Nitta served as secretary and treasurer of KRI, and was instrumental in the formation of KRI Inc. and the acquisition of Hawaiian Pacific Resorts in 1987, from its former founders. Prior to the formation of KRI, Inc., Mr. Nitta served as secretary and treasurer of Hawaiian Pacific Resort Hotels Inc. from 1982. He is a graduate of the University of Hawaii and holds a Masters of Accounting Degree.

K. Roger Moses. Mr. Moses has been an entrepreneur for nearly 40 years. He set up Australasia’s first independent financial planning practice in 1972, and has played a leading role in the development of that industry in New Zealand while developing numerous other investment activities. He currently serves as principal director for several organizations in New Zealand including VTL Group, Nathan Finance, Prevu Corporation, Grafton Investments Westgage, and Triceps Properties. Mr. Moses has also co-authored five top selling investment books with leading Australian financial commentator Noel Whittaker. Mr. Moses resides in New Zealand.

Howard Mendelsohn, Chief Financial Officer, The Castle Group. Mr. Mendelsohn joined Castle Resorts & Hotels as Chief Financial Officer in July 2007. He has over 25 years of experience in finance, strategy and business development for large and rapidly growing companies in the travel and technology sectors. He held the position of Vice President – Finance at Expedia Inc. and then led strategic and business development efforts for Expedia Corporate Travel before forming his own management consulting company, serving companies in Hawaii and on the mainland.

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 director, person nominated to become a director, executive officer, promoter or control person of Castle:

(1) was a general partner 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

(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,

Page 54

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 are required by SEC regulation to furnish Castle with copies of all Section 16(a) reports they file.

As of July 31, 2000, Castle ceased filing public reports and other documents which it was required to file with the Securities and Exchange Commission. No officer, director or 10% shareholder of Castle sold any of Castle’s equity securities during the period from July 31, 2000, to the date hereof. During that period from July 31, 2000, and continuing until September 1, 2007, no officer, director or 10% shareholder of Castle reported his or her acquisition of Castle common stock received in exchange of forgiveness of indebtedness and/or in exchange for services rendered. Appropriate beneficial ownership forms will be filed at or about the same time as the filing of this Annual Report.

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, 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. Humprheys, Mr. Mukai and Ms. Takahahi are independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.

Page 55

ITEM 10. EXECUTIVE COMPENSATION.

Executive Compensation

The following table shows for the fiscal years ended December 31, 2004, 2005 and 2006, the aggregate annual remuneration of all highly paid persons who are executive officers or directors of Castle:

SUMMARY COMPENSATION TABLE

Name and Principal Position

(a)

Year

(b)

Salary

($)

(c)

Bonus

($)

(d)

Stock Awards

($)

(e)

Option Awards

($)

(f)

Non-Equity Incentive Plan Compensation

($)

(g)

Nonqualified Deferred Compensation

($)

(h)

All Other Compensation

($)

(i)

Total

Earnings

($)

(j)

Rick Wall CEO & Director

12/31/06

12/31/05

12/31/04

$201,250

$198,105

$167,990

$201,250

$198,105

$167,990

Alan Mattson COO & Director

President CRH

12/31/06

12/31/05

12/31/04

$163,950

$141,325

$121,812

$163,950

$141,325

$121,812

Michael S. Nitta

CFO-CRH

12/31/06

12/31/05

12/31/04

$114,464

$124,534

$90,661

$114,464

$124,534

$90,661

Outstanding Equity Awards

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

________________________________________________________________________

Option Awards Stock Awards

________________________________________________________________________


Name	Number of Securities Underlying Unexercised Options (#) Exercisable	Number of Securities underlying Unexercised Options (#) Unexercisable	Equity Incentive Plan Awards Number of Securities Underlying Unexercised Unearned Options (#)	Option Exercise Price ($)	Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested (#)	Market Value of Shares or Units of Stock That Have Not Vested ($)	Equity Incentive Plan Awards: Number of Unearned Shares, Vested Units or Other Rights That Have Not Vested (#)	Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
(a)	(b)	(c)	(d)	(e)	(f)	(g)	(h)	(i)	(j)
None	None	None	None	None	None	None	None	None	None

Page 56

DIRECTOR COMPENSATION

_____________________________________________________________________


Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	Non-Equity Incentive Plan Compensation ($)	Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($)	Total ($)
(a)	(b)	(c)	(d)	(e)	(f)	(g)	(h)
None	None	None	None	None	None	None	None

Compensation of Directors

Non-employee Directors are paid $500 for each meeting of the Board which they attend. Members of the Executive Committee, Compensation Committee and Audit Committee are 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.

Employment Contracts

Castle has entered into a written employment contract with Alan Mattson effective as of January 1, 2006 and with Rick Wall effective as of January 1, 2004, which was subsequently amended on January 1, 2006, each of which is for the period ending December 31, 2010; each of these agreements are attached hereto. See Part III, Item 13.

The company has also entered into a written employment agreement with Michael Nitta as of November 10, 1993 for a period of 5 years, renewable annually. This agreement is incorporated herein by reference to Exhibit 6.5 to the Company’s Annual Report on Form 10KSB for the year ended July 31, 1994.

Long Term Incentive Plans

There were no options, awards, options or stock appreciation rights or long term incentive plan awards that were issued or granted to Castle’s management during the fiscal year ending December 31, 2006.

Castle has a 401(k) profit sharing plan generally available to all of its employees. Under the terms of the plan, Castle is required to match 100% of the amounts contributed by participants through payroll deductions, up to a maximum of 1% of their compensation. Any employee with one year of service who is at least 21 years of age is eligible to participate.

Stock Plans

There were no stock plans in effect by Castle as of December 31, 2006.

Page 57

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Security Ownership of Certain Beneficial Owners

The following table sets forth the number of shares of Castle’s common stock beneficially owned as of December 31, 2006 by: (i) each of the three 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 55% 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 (2)

Rick Wall

3 Waterfront Plaza, Suite 555

500 Ala Moana Boulevard

Honolulu, HI 96813

2,667,441

27.9%

Motoko Takahashi

3 Waterfront Plaza, Suite 555

500 Ala Moana Boulevard

Honolulu, HI 96813

1,138,900

11.9%

K. Roger Moses

3 Waterfront Plaza Suite 555

500 Ala Moana Boulevard

Honolulu, HI 96813

372,500

Roy Tokujo

1580 Makaloa St.

Honolulu, HI 96814

380,000

Jerry Ruthruff

700 Richards Street, Apt. 2709,

Honolulu, HI 96813

300,000

Stanley Mukai

500 Ala Moana Blvd 4th Floor

Honolulu, HI 96813

165,000

Michael S. Nitta

98-1722 Halakea St.

Aiea, Hawaii 96701

159,200

Alan R. Mattson

3 Waterfront Plaza, Suite 555

500 Ala Moana Boulevard

Honolulu, HI 96813

101,000

Directors and officers

as a group (8 persons)

5,284,041

50.6%

(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

Page 58

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) Determined on the basis of 9,538,055 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.

Securities Authorized for Issuance under Equity Compensation Plans


Plan Category	Number of Securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column (a)
	(a)	(b)	(c)
Equity compensation plans approved by security holders	None	None	None
Equity compensation plans not approved by security holders	None	None	None
Total	None	None	None

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, 2006, undeclared and unpaid dividends on these shares were $601,213 or $54.41 per share.

Other than the preferred shares, there were no outstanding options, warrants or rights to purchase common stock held by any of the officers or directors of Castle or its principal shareholders as of December 31, 2006.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Transactions with Related Persons

Hanalei Bay International Investors, a Hawaii limited partnership (“HBII”), was formed through the efforts of HBII Management Inc., owned by Mr. Wall, Chairman of the Board, Chief

Page 59

Executive Officer and a director of Castle. When HBII acquired a majority of the condominiums in the Hanalei Bay Resort condominium project, HBII entered into a management contract with Castle Group Hawaii, and later with its successor, Castle. In March of 1999, HBII sold its principal assets, which consisted of 88 condominium units in the Hanalei Bay Resort to Quintus (HBR), LLC. Upon the closing of the sale, Castle received $468,000, which was repayment of a note receivable and accrued interest due from HBII. The funds received by HBII upon the closing of the sale were insufficient to make full payment to Castle for its accounts receivable balance. HBII assigned Castle a partial interest in HBII’s share of the net cash flow HBII was entitled to receive from Quintus’ sale of time share interests in the Hanalei Bay Resort project, as more fully discussed in Part I, Item 3, herein above.

During the year ending December 31, 2004, Castle canceled the shares formerly held by the former Co-Chairman of Castle and issued 3,510,000 shares of its restricted and unregistered common stock, to various individuals in connection with compensation for past and future services. During the year ending December 31, 2004, Rick Wall, the Chairman and CEO of Castle received 1,900,000 shares in consideration of past services and as part of his employment agreement; Jerry Ruthruff received 300,000 shares in connection with an employment agreement; Roy Tokujo received 300,000 shares in consideration of past services; Motoko Takahashi received 200,000 shares in consideration of past services; Roger Moses received 350,000 shares in consideration of past services; and other officers and employees of Castle received 460,000 shares in consideration of past services. During the year ending December 31, 2005, a former director of Castle was awarded 100,000 shares for past services.

Except for the transactions with HBII, the issuance of stock described above, 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.

Page 60

ITEM 13. EXHIBITS.

Exhibit Index


Exhibit No.	Title of Document	Location if other than attached hereto
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, Part II, Item 7
10.2	Employment Agreement with Rick Wall, as amended	Part III, Item 10
10.3	Employment Agreement 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
31.2	302 Certification of Howard S. Mendelsohn
32	906 Certification
99.1	8-K Current Report dated September 19, 2000*	Part II, Item 8
99.2	8-K Current Report dated November 16, 2000*	Part II, Item 8

* Incorporated herein by reference.

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, 2006, 2005, and 2004:


Fee Category	2006		2005		2004
Audit Fees	$	83,468	$	51,018	$	24,599
Audit-related Fees		0		0		0
Tax Fees		5,960		0		0
All Other Fees		3,372		431		530
Total Fees	$	92,800	$	51,449	$	25,529

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 for 2006, 2005 and 2004 and reviews of the interim consolidated financial statements for 2006, 2005 and 2004 were $83,468, $51,018, and $24,599 respectively.

AUDIT-RELATED FEES

The 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 2006, 2005 and 2004 were $0 for all years.

Page 61

TAX FEES

The aggregate fees billed by Castle’s auditors for professional services for tax compliance, tax advice, and tax planning for 2006, 2005 and 2004 were $5,960, $0 and $0, 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 2006, 2005 and 2004 were $3,372, $431, and $530 respectively.

Page 62

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.

Date: September 17, 2007 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: /s/ Jerry Ruthruff Date:_______

Rick Wall Jerry Ruthruff

Chief Executive Officer and Secretary

Chairman of the Board and Director

/s/ Howard S. Mendelsohn Date: /s/ Alan R. Mattson Date:_______

Howard S. Mendelsohn Alan R. Mattson

Chief Financial Officer Director, and Chief Operating

Officer, President, Castle Resorts &

Hotels, Inc.

/s/ Motoko Takahashi Date: /s/ Stanley Mukai Date:

Motoko Takahashi Stanley Mukai

Director Director

/s/ Rick Humphreys Date: /s/ Eduardo A. Calvo, Jr. Date:

Rick Humphreys Eduardo A. Calvo, Jr.

Director Director

/s/ Tony Vericella Date: /s/ Roy Tokujo Date:

Tony Vericella Roy Tokujo

Director Director

/s/ Michael S. Nitta Date: /s/John Brogan Date Michael S. Nitta John Brogan

Principal Accounting Officer Director

/s/Mike Irish Date

Mike Irish

Page 63

Director

Page 64

ARTICLES OF INCORPORATION

(RESTATED)

THE CASTLE GROUP, INC.

Pursuant to section 16-10a-1007 of the Utah Business Corporation Act ("the Act") and a resolution adopted (by a written consent pursuant to section 16- 10a-821 of the Act) by its board of directors, The Castle Group, Inc. hereby restates its Articles of Incorporation ---as heretofore amended and without any further amendment to be effectuated hereby, to-wit:

Article I

The name of this corporation is "The Castle Group, Inc.".

Article II

The Corporation shall have perpetual existence.

Article III

The Corporation is organized to engage in any and all lawful acts and/or activities for which corporations may be organized under the Utah Revised Business Corporation Act.

Article IV

The Corporation is authorized to issue a total of Twenty Million shares, which shares are all of the same class, to-wit: $0.02 par value common stock, and when issued shall all have unlimited voting rights and be entitled to receive the net assets of the Corporation on dissolution.

Article V

The shareholders shall not have any preemptive right to acquire any additional shares of the Corporation and/or rights in respect of its shares.

Article VI

The board of directors of the Corporation shall consist of such number of individuals, not less than three, as shall be determined in accordance with the bylaws from time to time. As of the effective date of this article the number of directors of the corporation is three.

Article VII

Each outstanding share of common stock of the Corporation is entitled to one vote on each matter submitted to a vote at a meeting of shareholders. Shares of the Corporation represented in person or by proxy at a meeting of the shareholders shall constitute a quorum for the conduct of business, and the affirmative vote of a majority of a quorum shall constitute the act of the Corporation's shareholders.

Article VIII

The officers of the Corporation are and shall hereafter be a President, one or more Vice Presidents (as may be prescribed by the bylaws), a Secretary, a Treasurer and such other officers as may hereafter be designated by the board of directors in a manner not inconsistent with the bylaws.

Upon filing by the Division of Corporations and Commercial Code of the Utah Department of Commerce these restated Articles of Incorporation of The Castle Group, Inc. shall supersede the original articles of incorporation of said corporation and all prior amendments to them.

IN WITNESS-WHEREOF, the undersigned Secretary of The Castle Group, Inc. hereby makes and executes these restated Articles of Incorporation pursuant to specific authorization and direction from the board of directors of said corporation to do so, on this 29th day of April, 1993:

/s/Barbara Van Dine

Barbara Van Dine, Secretary

CERTIFICATE OF AMENDMENT

TO THE ARTICLES OF INCORPORATION OF

THE CASTLE GROUP, INC.

I, the undersigned, Motoko Takahashi, Secretary, of The Castle Group, Inc., a Utah corporation (the "Corporation"), do hereby certify:

Pursuant to the provisions of Section 16-10a-1003 of the Utah Revised Business Corporation Act, the undersigned Corporation hereby adopts the following Articles of Amendment to its Articles of Incorporation.

ARTICLE IV

The Corporation is authorized to issue Common Stock and, as approved by the Board of Directors, other classes of equity, as follows:

The Board is authorized to issue a total of twenty million shares of Common Stock, fully diluted, at $0.02 par value, and when issued shall all have unlimited voting rights and be entitled to participate in the net assets of the Corporation on dissolution; and

Other classes of Corporate Equity providing that such issuance does not impact the rights and privileges of the Common shareholders or provide the circumstances by which the total number of issued Common Shares shall exceed the authorized limit.

The Board of Directors has designated as Cumulative Convertible Exchangeable Series "A" Preferred Stock, with the following rights, preferences and privileges:

Series A Convertible Preferred Stock

50,000 shares of $7.50 Cumulative Convertible Exchangeable Series "A" Preferred Stock (the "Preferred Stock").

Face Value of $100.

Redemption Value is Face Value, plus any unpaid and accrued dividends.

Dividends: $7.50 per annum per share, subject to declaration by the Board of Directors.

Dividend Payment Dates: July 15 and January 15, commencing July 15, 1999, when, as and if declared by the Board of Directors of the Company.

Conversion: Convertible at any time, unless previously redeemed, into the Company's common stock, par value $0.02 per share (the "Common Stock"), at $3.00 per share of Common Stock, subject to adjustment under certain conditions.

Optional Redemption: At the Corporation's option, the Preferred Stock will be redeemable, in whole or in part, commencing January 15, 2001 at the redemption price set forth herein plus accrued and unpaid dividends.

Liquidation Preference: $100.00 per share, plus accrued and unpaid dividends.

Voting Rights: The Preferred Stock will be non-voting.

Ranking: The Preferred Stock will rank senior to the Corporation's Common Stock with respect to dividends and liquidating distributions and will rank pari passu with or senior to all existing and future preferred stock.

The amendment setting forth rights, privileges and preferences of a class or series of Preferred Stock designated as "Series A Convertible Preferred Stock" was adopted by the Board of Directors and by persons owning a majority of the outstanding voting securities of the Corporation pursuant to Section 16-10a-1003 of the Utah Revised Business Corporation Act, as follows:

The designation and number of outstanding shares of each class entitled to vote thereon as a class were as follows, to-wit:

CLASS NUMBER OF SHARES

Common 5,407,031

(b) The number of shares voted for the amendment to add Cumulative Convertible Exchangeable Series "A" Preferred Stock of the Corporation to Article 4 to the Articles of Incorporation, was 3,365,894, with no opposing and 5,468 abstaining.

IN WITNESS THEREOF, the undersigned officers of the Corporation, certifying that the foregoing is true and correct under penalty of perjury, have set their hands this 2 ^nd day of April, 2000.

/s/Motoko Takahashi

Motoko Takahashi, Secretary

BYLAWS

THE CASTLE GROUP, INC.

ARTICLE I

OFFICES

Section 1.01 Location of Offices . The corporation may maintain such offices within or without the State of Utah as the Board of Directors may from time to time designate or require.

Section 1.02 Principal Office . The address of the principal office of the corporation shall be at the address of the registered office of the corporation as so designated in the office of the Lieutenant Governor/Secretary of State of the state of incorporation, or at such other address as the Board of Directors shall from time to time determine.

ARTICLE II

SHAREHOLDERS

Section 2.01 Annual Meeting . The annual meeting of the shareholders shall be held in March of each year or at such other time designated by the Board of Directors and as is provided for in the notice of the meeting, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the election of directors shall not be held on the day designated for the annual meeting of the shareholders, or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as may be convenient.

Section 2.02 Special Meetings . Special meetings of the shareholders may be called at any time by the chairman of the board, the president, or by the Board of Directors, or in their absence or disability, by any vice president, and shall be called by the president or, in his or her absence or disability, by a vice president or by the secretary on the written request of the holders of not less than one-tenth of all the shares entitled to vote at the meeting, such written request to state the purpose or purposes of the meeting and to be delivered to the president, each vice-president, or secretary. In case of failure to call such meeting within 60 days after such request, such shareholder or shareholders may call the same.

Section 2.03 Place of Meetings . The Board of Directors may designate any place, either within or without the state of incorporation, as the place of meeting for any

annual meeting or for any special meeting called by the Board of Directors. A waiver of notice signed by all shareholders entitled to vote at a meeting may designate any place, either within or without the state of incorporation, as the place for the holding of such meeting. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be at the principal office of the corporation.

Section 2.04 Notice of Meetings . The secretary or assistant secretary, if any, shall cause notice of the time, place, and purpose or purposes of all meetings of the shareholders (whether annual or special), to be mailed at least ten days, but not more than 50 days, prior to the meeting, to each shareholder of record entitled to vote.

Section 2.05 Waiver of Notice . Any shareholder may waive notice of any meeting of shareholders (however called or noticed, whether or not called or noticed and whether before, during, or after the meeting), by signing a written waiver of notice or a consent to the holding of such meeting, or an approval of the minutes thereof. Attendance at a meeting, in person or by proxy, shall constitute waiver of all defects of call or notice regardless of whether waiver, consent, or approval is signed or any objections are made. All such waivers, consents, or approvals shall be made a part of the minutes of the meeting.

Section 2.06 Fixing Record Date . For the purpose of determining shareholders entitled to notice of or to vote at any annual meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the corporation may provide that the share transfer books shall be closed, for the purpose of determining shareholders entitled to notice of or to vote at such meeting, but not for a period exceeding fifty (50) days. If the share transfer books are closed for the purpose of determining shareholders entitled to notice of or to vote at such meeting, such books shall be closed for at least ten (10) days immediately preceding such meeting.

In lieu of closing the share transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than fifty (50) and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the share transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting or to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section, such determination shall apply to any adjournment thereof. Failure to comply with this Section shall not affect the validity of any action taken at a meeting of shareholders.

Section 2.07 Voting Lists . The officer or agent of the corporation having charge of the share transfer books for shares of the corporation shall make, at least ten (10) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of, and the number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the registered office of the corporation and shall be subject to inspection by any shareholder during the whole time of the meeting. The original share transfer book shall be prima facia evidence as to the shareholders who are entitled to examine such list or transfer books, or to vote at any meeting of shareholders.

Section 2.08 Quorum . One-half of the total voting power of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of the shareholders. If a quorum is present, the affirmative vote of the majority of the voting power represented by shares at the meeting and entitled to vote on the subject shall constitute action by the shareholders, unless the vote of a greater number or voting by classes is required by the laws of the state of incorporation of the corporation or the Articles of Incorporation. If less than one-half of the outstanding voting power is represented at a meeting, a majority of the voting power represented by shares so present may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed.

Section 2.09 Voting of Shares . Each outstanding share of the corporation entitled to vote shall be entitled to one vote on each matter submitted to vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class or series of stock are determined and specified as greater or lesser than one vote per share in the manner provided by the Articles of Incorporation.

Section 2.10 Proxies . At each meeting of the shareholders, each shareholder entitled to vote shall be entitled to vote in person or by proxy; provided , however, that the right to vote by proxy shall exist only in case the instrument authorizing such proxy to act shall have been executed in writing by the registered holder or holders of such shares, as the case may be, as shown on the share transfer of the corporation or by his or her or her attorney thereunto duly authorized in writing. Such instrument authorizing a proxy to act shall be delivered at the beginning of such meeting to the secretary of the corporation or to such other officer or person who may, in the absence of the secretary, be acting as secretary of the meeting. In the event that any such instrument shall designate two or more persons to act as proxies, a majority of such persons present at the meeting, or if only one be present, that one shall (unless the instrument shall otherwise provide) have all of the powers conferred by the instrument on all persons so designated. Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held and the persons whose shares are pledged shall be entitled to vote, unless in the transfer by the pledge or on the books of the corporation he or she shall have

expressly empowered the pledgee to vote thereon, in which case the pledgee, or his or her or her proxy, may represent such shares and vote thereon.

Section 2.11 Written Consent to Action by Shareholders . Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting, if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof.

ARTICLE III

DIRECTORS

Section 3.01 General Powers . The property, affairs, and business of the corporation shall be managed by its Board of Directors. The Board of Directors may exercise all the powers of the corporation whether derived from law or the Articles of Incorporation, except such powers as are by statute, by the Articles of Incorporation or by these Bylaws, vested solely in the shareholders of the corporation.

Section 3.02 Number, Term, and Qualifications . The Board of Directors shall consist of three to nine persons. Increases or decreases to said number may be made, within the numbers authorized by the Articles of Incorporation, as the Board of Directors shall from time to time determine by amendment to these Bylaws. An increase or a decrease in the number of the members of the Board of Directors may also be had upon amendment to these Bylaws by a majority vote of all of the shareholders, and the number of directors to be so increased or decreased shall be fixed upon a majority vote of all of the shareholders of the corporation. Each director shall hold office until the next annual meeting of shareholders of the corporation and until his or her successor shall have been elected and shall have qualified. Directors need not be residents of the state of incorporation or shareholders of the corporation.

Section 3.03 Classification of Directors . In lieu of electing the entire number of directors annually, the Board of Directors may provide that the directors be divided into either two or three classes, each class to be as nearly equal in number as possible, the term of office of the directors of the first class to expire at the first annual meeting of shareholders after their election, that of the second class to expire at the second annual meeting after their election, and that of the third class, if any, to expire at the third annual meeting after their election. At each annual meeting after such classification, the number of directors equal to the number of the class whose term expires at the time of such meeting shall be elected to hold office until the second succeeding annual meeting, if there be two classes, or until the third succeeding annual meeting, if there be three classes.

Section 3.04 Regular Meetings . A regular meeting of the Board of Directors shall be held without other notice than this bylaw immediately following, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide by

resolution the time and place, either within or without the state of incorporation, for the holding of additional regular meetings without other notice than such resolution.

Section 3.05 Special Meetings . Special meetings of the Board of Directors may be called by or at the request of the president, vice president, or any two directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the state of incorporation, as the place for holding any special meeting of the Board of Directors called by them.

Section 3.06 Meetings by Telephone Conference Call . Members of the Board of Directors may participate in a meeting of the Board of Directors or a committee of the Board of Directors by means of conference telephone or similar communication equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section shall constitute presence in person at such meeting.

Section 3.07 Notice . Notice of any special meeting shall be given at least ten (10) days prior thereto by written notice delivered personally or mailed to each director at his or her regular business address or residence, or by telegram. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. Any director may waive notice of any meeting. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting solely for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened.

Section 3.08 Quorum . A majority of the number of directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than a majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice.

Section 3.09 Manner of Acting . The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, and the individual directors shall have no power as such.

Section 3.10 Vacancies and Newly Created Directorship . If any vacancies shall occur in the Board of Directors by reason of death, resignation or otherwise, or if the number of directors shall be increased, the directors then in office shall continue to act and such vacancies or newly created directorships shall be filled by a vote of the directors then in office, though less than a quorum, in any way approved by the meeting. Any directorship to be filled by reason of removal of one or more directors by the shareholders may be filled by election by the shareholders at the meeting at which the director or directors are removed.

Section 3.11 Compensation . By resolution of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors, and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor.

Section 3.12 Presumption of Assent . A director of the corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his or her or her dissent shall be entered in the minutes of the meeting, unless he or she shall file his or her or her written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof, or shall forward such dissent by registered or certified mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.

Section 3.13 Resignations . A director may resign at any time by delivering a written resignation to either the president, a vice president, the secretary, or assistant secretary, if any. The resignation shall become effective on its acceptance by the Board of Directors; provided , that if the board has not acted thereon within ten days from the date presented, the resignation shall be deemed accepted.

Section 3.14 Written Consent to Action by Directors . Any action required to be taken at a meeting of the directors of the corporation or any other action which may be taken at a meeting of the directors or of a committee, may be taken without a meeting, if a consent in writing, setting forth the action so taken, shall be signed by all of the directors, or all of the members of the committee, as the case may be. Such consent shall have the same legal effect as a unanimous vote of all the directors or members of the committee.

Section 3.15 Removal . At a meeting expressly called for that purpose, one or more directors may be removed by a vote of a majority of the shares of outstanding stock of the corporation entitled to vote at an election of directors.

ARTICLE IV

OFFICERS

Section 4.01 Number . The officers of the corporation shall be a president, one or more vice-presidents, as shall be determined by resolution of the Board of Directors, a secretary, a treasurer, and such other officers as may be appointed by the Board of Directors. The Board of Directors may elect, but shall not be required to elect, a chairman of the board and the Board of Directors may appoint a general manager.

Section 4.02 Election, Term of Office, and Qualifications . The officers shall be chosen by the Board of Directors annually at its annual meeting. In the event of failure

to choose officers at an annual meeting of the Board of Directors, officers may be chosen at any regular or special meeting of the Board of Directors. Each such officer (whether chosen at an annual meeting of the Board of Directors to fill a vacancy or otherwise) shall hold his or her office until the next ensuing annual meeting of the Board of Directors and until his or her successor shall have been chosen and qualified, or until his or her death, or until his or her resignation or removal in the manner provided in these Bylaws. Any one person may hold any two or more of such offices, except that the president shall not also be the secretary. No person holding two or more offices shall act in or execute any instrument in the capacity of more than one office. The chairman of the board, if any, shall be and remain a director of the corporation during the term of his or her office. No other officer need be a director.

Section 4.03 Subordinate Officers, Etc . The Board of Directors from time to time may appoint such other officers or agents as it may deem advisable, each of whom shall have such title, hold office for such period, have such authority, and perform such duties as the Board of Directors from time to time may determine. The Board of Directors from time to time may delegate to any officer or agent the power to appoint any such subordinate officer or agents and to prescribe their respective titles, terms of office, authorities, and duties. Subordinate officers need not be shareholders or directors.

Section 4.04 Resignations . Any officer may resign at any time by delivering a written resignation to the Board of Directors, the president, or the secretary. Unless otherwise specified therein, such resignation shall take effect on delivery.

Section 4.05 Removal . Any officer may be removed from office at any special meeting of the Board of Directors called for that purpose or at a regular meeting, by vote of a majority of the directors, with or without cause. Any officer or agent appointed in accordance with the provisions of Section 4.03 hereof may also be removed, either with or without cause, by any officer on whom such power of removal shall have been conferred by the Board of Directors.

Section 4.06 Vacancies and Newly Created Offices . If any vacancy shall occur in any office by reason of death, resignation, removal, disqualification, or any other cause, or if a new office shall be created, then such vacancies or new created offices may be filled by the Board of Directors at any regular or special meeting.

Section 4.07 The Chairman of the Board . The Chairman of the Board, if there be such an officer, shall have the following powers and duties.

(a) He or she shall preside at all shareholders' meetings;

(b) He or she shall preside at all meetings of the Board of Directors; and

Section 4.08 The President . The president shall have the following powers and duties:

(a) If no general manager has been appointed, he or she shall be the chief executive officer of the corporation, and, subject to the direction of the Board of Directors, shall have general charge of the business, affairs, and property of the corporation and general supervision over its officers, employees, and agents;

(b) If no chairman of the board has been chosen, or if such officer is absent or disabled, he or she shall preside at meetings of the shareholders and Board of Directors;

(d) He or she shall be empowered to sign certificates representing shares of the corporation, the issuance of which shall have been authorized by the Board of Directors; and

(e) He or she shall have all power and shall perform all duties normally incident to the office of a president of a corporation, and shall exercise such other powers and perform such other duties as from time to time may be assigned to him or her by the Board of Directors.

Section 4.09 The Vice Presidents . The Board of Directors may, from time to time, designate and elect one or more vice presidents, one of whom may be designated to serve as executive vice president. Each vice president shall have such powers and perform such duties as from time to time may be assigned to him or her by the Board of Directors or the president. At the request or in the absence or disability of the president, the executive vice president or, in the absence or disability of the executive vice president, the vice president designated by the Board of Directors or (in the absence of such designation by the Board of Directors) by the president, the senior vice president, may perform all the duties of the president, and when so acting, shall have all the powers of, and be subject to all the restrictions upon, the president.

Section 4.10 The Secretary . The secretary shall have the following powers and duties:

(a) He or she shall keep or cause to be kept a record of all of the proceedings of the meetings of the shareholders and of the board or directors in books provided for that purpose;

(b) He or she shall cause all notices to be duly given in accordance with the provisions of these Bylaws and as required by statute;

(c) He or she shall be the custodian of the records and of the seal of the corporation, and shall cause such seal (or a facsimile thereof) to be affixed to all certificates representing shares of the corporation prior to the issuance thereof and to all

instruments, the execution of which on behalf of the corporation under its seal shall have been duly authorized in accordance with these Bylaws, and when so affixed, he or she may attest the same;

(d) He or she shall assume that the books, reports, statements, certificates, and other documents and records required by statute are properly kept and filed;

(e) He or she shall have charge of the share books of the corporation and cause the share transfer books to be kept in such manner as to show at any time the amount of the shares of the corporation of each class issued and outstanding, the manner in which and the time when such stock was paid for, the names alphabetically arranged and the addresses of the holders of record thereof, the number of shares held by each holder and time when each became such holder or record; and he or she shall exhibit at all reasonable times to any director, upon application, the original or duplicate share register. He or she shall cause the share book referred to in Section 6.04 hereof to be kept and exhibited at the principal office of the corporation, or at such other place as the Board of Directors shall determine, in the manner and for the purposes provided in such Section;

(f) He or she shall be empowered to sign certificates representing shares of the corporation, the issuance of which shall have been authorized by the Board of Directors; and

(g) He or she shall perform in general all duties incident to the office of secretary and such other duties as are given to him or her by these Bylaws or as from time to time may be assigned to him or her by the Board of Directors or the president.

Section 4.11 The Treasurer . The treasurer shall have the following powers and duties:

(a) He or she shall have charge and supervision over and be responsible for the monies, securities, receipts, and disbursements of the corporation;

(b) He or she shall cause the monies and other valuable effects of the corporation to be deposited in the name and to the credit of the corporation in such banks or trust companies or with such banks or other depositories as shall be selected in accordance with Section 5.03 hereof;

(c) He or she shall cause the monies of the corporation to be disbursed by checks or drafts (signed as provided in Section 5.04 hereof) drawn on the authorized depositories of the corporation, and cause to be taken and preserved property vouchers for all monies disbursed;

(d) He or she shall render to the Board of Directors or the president, whenever requested, a statement of the financial condition of the corporation and of all of this

transactions as treasurer, and render a full financial report at the annual meeting of the shareholders, if called upon to do so;

(e) He or she shall cause to be kept correct books of account of all the business and transactions of the corporation and exhibit such books to any director on request during business hours;

(f) He or she shall be empowered from time to time to require from all officers or agents of the corporation reports or statements given such information as he or she may desire with respect to any and all financial transactions of the corporation; and

(g) He or she shall perform in general all duties incident to the office of treasurer and such other duties as are given to him or her by these Bylaws or as from time to time may be assigned to him or her by the Board of Directors or the president.

Section 4.12 General Manager . The Board of Directors may employ and appoint a general manager who may, or may not, be one of the officers or directors of the corporation. The general manager, if any shall have the following powers and duties:

(a) He or she shall be the chief executive officer of the corporation and, subject to the directions of the Board of Directors, shall have general charge of the business affairs and property of the corporation and general supervision over its officers, employees, and agents:

(b) He or she shall be charged with the exclusive management of the business of the corporation and of all of its dealings, but at all times subject to the control of the Board of Directors;

(c) Subject to the approval of the Board of Directors or the executive committee, if any, he or she shall employ all employees of the corporation, or delegate such employment to subordinate officers, and shall have authority to discharge any person so employed; and

(d) He or she shall make a report to the president and directors as often as required, setting forth the results of the operations under his or her charge, together with suggestions looking toward improvement and betterment of the condition of the corporation, and shall perform such other duties as the Board of Directors may require.

Section 4.13 Salaries . The salaries and other compensation of the officers of the corporation shall be fixed from time to time by the Board of Directors, except that the Board of Directors may delegate to any person or group of persons the power to fix the salaries or other compensation of any subordinate officers or agents appointed in accordance with the provisions of Section 4.03 hereof. No officer shall be prevented from receiving any such salary or compensation by reason of the fact that he or she is also a director of the corporation.

Section 4.14 Surety Bonds . In case the Board of Directors shall so require, any officer or agent of the corporation shall execute to the corporation a bond in such sums and with such surety or sureties as the Board of Directors may direct, conditioned upon the faithful performance of his or her duties to the corporation, including responsibility for negligence and for the accounting of all property, monies, or securities of the corporation which may come into his or her hands.

ARTICLE V

EXECUTION OF INSTRUMENTS, BORROWING OF MONEY,

AND DEPOSIT OF CORPORATE FUNDS

Section 5.01 Execution of Instruments . Subject to any limitation contained in the Articles of Incorporation or these Bylaws, the president or any vice president or the general manager, if any, may, in the name and on behalf of the corporation, execute and deliver any contract or other instrument authorized in writing by the Board of Directors. The Board of Directors may, subject to any limitation contained in the Articles of Incorporation or in these Bylaws, authorize in writing any officer or agent to execute and delivery any contract or other instrument in the name and on behalf of the corporation; any such authorization may be general or confined to specific instances.

Section 5.02 Loans . No loans or advances shall be contracted on behalf of the corporation, no negotiable paper or other evidence of its obligation under any loan or advance shall be issued in its name, and no property of the corporation shall be mortgaged, pledged, hypothecated, transferred, or conveyed as security for the payment of any loan, advance, indebtedness, or liability of the corporation, unless and except as authorized by the Board of Directors. Any such authorization may be general or confined to specific instances.

Section 5.03 Deposits . All monies of the corporation not otherwise employed shall be deposited from time to time to its credit in such banks and or trust companies or with such bankers or other depositories as the Board of Directors may select, or as from time to time may be selected by any officer or agent authorized to do so by the Board of Directors.

Section 5.04 Checks, Drafts, Etc. All notes, drafts, acceptances, checks, endorsements, and, subject to the provisions of these Bylaws, evidences of indebtedness of the corporation, shall be signed by such officer or officers or such agent or agents of the corporation and in such manner as the Board of Directors from time to time may determine. Endorsements for deposit to the credit of the corporation in any of its duly authorized depositories shall be in such manner as the Board of Directors from time to time may determine.

Section 5.05 Bonds and Debentures . Every bond or debenture issued by the corporation shall be evidenced by an appropriate instrument which shall be signed by

the president or a vice president and by the secretary and sealed with the seal of the corporation. The seal may be a facsimile, engraved or printed. Where such bond or debenture is authenticated with the manual signature of an authorized officer of the corporation or other trustee designated by the indenture of trust or other agreement under which such security is issued, the signature of any of the corporation's officers named thereon may be a facsimile. In case any officer who signed, or whose facsimile signature has been used on any such bond or debenture, should cease to be an officer of the corporation for any reason before the same has been delivered by the corporation, such bond or debenture may nevertheless be adopted by the corporation and issued and delivered as through the person who signed it or whose facsimile signature has been used thereon had not ceased to be such officer.

Section 5.06 Sale, Transfer, Etc. of Securities . Sales, transfers, endorsements, and assignments of stocks, bonds, and other securities owned by or standing in the name of the corporation, and the execution and delivery on behalf of the corporation of any and all instruments in writing incident to any such sale, transfer, endorsement, or assignment, shall be effected by the president, or by any vice president, together with the secretary, or by any officer or agent thereunto authorized by the Board of Directors.

Section 5.07 Proxies . Proxies to vote with respect to shares of other corporations owned by or standing in the name of the corporation shall be executed and delivered on behalf of the corporation by the president or any vice president and the secretary or assistant secretary of the corporation, or by any officer or agent thereunder authorized by the Board of Directors.

ARTICLE VI

CAPITAL SHARES

Section 6.01 Share Certificates . Every holder of shares in the corporation shall be entitled to have a certificate, signed by the president or any vice president and the secretary or assistant secretary, and sealed with the seal (which may be a facsimile, engraved or printed) of the corporation, certifying the number and kind, class or series of shares owned by him or her in the corporation; provided , however, that where such a certificate is countersigned by (a) a transfer agent or an assistant transfer agent, or (b) registered by a registrar, the signature of any such president, vice president, secretary, or assistant secretary may be a facsimile. In case any officer who shall have signed, or whose facsimile signature or signatures shall have been used on any such certificate, shall cease to be such officer of the corporation, for any reason, before the delivery of such certificate by the corporation, such certificate may nevertheless be adopted by the corporation and be issued and delivered as though the person who signed it, or whose facsimile signature or signatures shall have been used thereon, has not ceased to be such officer. Certificates representing shares of the corporation shall be in such form as provided by the statutes of the state of incorporation. There shall be entered on the share books of the corporation at the time of issuance of each share, the number of the certificate issued, the name and address of the person owning the shares represented

thereby, the number and kind, class or series of such shares, and the date of issuance thereof. Every certificate exchanged or returned to the corporation shall be marked "Canceled" with the date of cancellation.

Section 6.02 Transfer of Shares . Transfers of shares of the corporation shall be made on the books of the corporation by the holder of record thereof, or by his or her attorney thereunto duly authorized by a power of attorney duly executed in writing and filed with the secretary of the corporation or any of its transfer agents, and on surrender of the certificate or certificates, properly endorsed or accompanied by proper instruments of transfer, representing such shares. Except as provided by law, the corporation and transfer agents and registrars, if any, shall be entitled to treat the holder of record of any stock as the absolute owner thereof for all purposes, and accordingly, shall not be bound to recognize any legal, equitable, or other claim to or interest in such shares on the part of any other person whether or not it or they shall have express or other notice thereof.

Section 6.03 Regulations . Subject to the provisions of this Article VI and of the Articles of Incorporation, the Board of Directors may make such rules and regulations as they may deem expedient concerning the issuance, transfer, redemption, and registration of certificates for shares of the corporation.

Section 6.04 Maintenance of Stock Ledger at Principal Place of Business . A share book (or books where more than one kind, class, or series of stock is outstanding) shall be kept at the principal place of business of the corporation, or at such other place as the Board of Directors shall determine, containing the names, alphabetically arranged, of original shareholders of the corporation, their addresses, their interest, the amount paid on their shares, and all transfers thereof and the number and class of shares held by each. Such share books shall at all reasonable hours be subject to inspection by persons entitled by law to inspect the same.

Section 6.05 Transfer Agents and Registrars . The Board of Directors may appoint one or more transfer agents and one or more registrars with respect to the certificates representing shares of the corporation, and may require all such certificates to bear the signature of either or both. The Board of Directors may from time to time define the respective duties of such transfer agents and registrars. No certificate for shares shall be valid until countersigned by a transfer agent, if at the date appearing thereon the corporation had a transfer agent for such shares, and until registered by a registrar, if at such date the corporation had a registrar for such shares.

Section 6.06 Closing of Transfer Books and Fixing of Record Date .

(a) The Board of Directors shall have power to close the share books of the corporation for a period of not to exceed 50 days preceding the date of any meeting of shareholders, or the date for payment of any dividend, or the date for the allotment of

rights, or capital shares shall go into effect, or a date in connection with obtaining the consent of shareholders for any purpose.

(b) In lieu of closing the share transfer books as aforesaid, the Board of Directors may fix in advance a date, not exceeding 50 days preceding the date of any meeting of shareholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital shares shall go into effect, or a date in connection with obtaining any such consent, as a record date for the determination of the shareholders entitled to a notice of, and to vote at, any such meeting and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to give such consent.

(c) If the share transfer books shall be closed or a record date set for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for, or such record date shall be, at least ten (10) days immediately preceding such meeting.

Section 6.07 Lost or Destroyed Certificates . The corporation may issue a new certificate for shares of the corporation in place of any certificate theretofore issued by it, alleged to have been lost or destroyed, and the Board of Directors may, in its discretion, require the owner of the lost or destroyed certificate or his or her legal representatives, to give the corporation a bond in such form and amount as the Board of Directors may direct, and with such surety or sureties as may be satisfactory to the board, to indemnify the corporation and its transfer agents and registrars, if any, against any claims that may be made against it or any such transfer agent or registrar on account of the issuance of such new certificate. A new certificate may be issued without requiring any bond when, in the judgment of the Board of Directors, it is proper to do so.

Section 6.08 No Limitation on Voting Rights; Limitation on Dissenter's Rights . To the extent permissible under the applicable law of any jurisdiction to which the corporation may become subject by reason of the conduct of business, the ownership of assets, the residence of shareholders, the location of offices or facilities, or any other item, the corporation elects not to be governed by the provisions of any statute that (i) limits, restricts, modified, suspends, terminates, or otherwise affects the rights of any shareholder to cast one vote for each share of common stock registered in the name of such shareholder on the books of the corporation, without regard to whether such shares were acquired directly from the corporation or from any other person and without regard to whether such shareholder has the power to exercise or direct the exercise of voting power over any specific fraction of the shares of common stock of the corporation issued and outstanding or (ii) grants to any shareholder the right to have his or her stock redeemed or purchased by the corporation or any other shareholder on the acquisition by any person or group of persons of shares of the corporation. In particular, to the extent permitted under the laws of the state of incorporation, the

corporation elects not to be governed by any such provision, including the provisions of the Utah Control Shares Acquisitions Act, Section 61-6-1 et seq ., of the Utah Code Annotated, as amended, or any statute of similar effect or tenor.

ARTICLE VII

EXECUTIVE COMMITTEE AND OTHER COMMITTEES

Section 7.01 How Constituted . The Board of Directors may designate an executive committee and such other committees as the Board of Directors may deem appropriate, each of which committees shall consist of two or more directors. Members of the executive committee and of any such other committees shall be designated annually at the annual meeting of the Board of Directors; provided , however, that at any time the Board of Directors may abolish or reconstitute the executive committee or any other committee. Each member of the executive committee and of any other committee shall hold office until his or her successor shall have been designated or until his or her resignation or removal in the manner provided in these Bylaws.

Section 7.02 Powers . During the intervals between meetings of the Board of Directors, the executive committee shall have and may exercise all powers of the Board of Directors in the management of the business and affairs of the corporation, except for the power to fill vacancies in the Board of Directors or to amend these Bylaws, and except for such powers as by law may not be delegated by the Board of Directors to an executive committee.

Section 7.03 Proceedings . The executive committee, and such other committees as may be designated hereunder by the Board of Directors, may fix its own presiding and recording officer or officers, and may meet at such place or places, at such time or times and on such notice (or without notice) as it shall determine from time to time. It will keep a record of its proceedings and shall report such proceedings to the Board of Directors at the meeting of the Board of Directors next following.

Section 7.04 Quorum and Manner of Acting . At all meeting of the executive committee, and of such other committees as may be designated hereunder by the Board of Directors, the presence of members constituting a majority of the total authorized membership of the committee shall be necessary and sufficient to constitute a quorum for the transaction of business, and the act of a majority of the members present at any meeting at which a quorum is present shall be the act of such committee. The members of the executive committee, and of such other committees as may be designated hereunder by the Board of Directors, shall act only as a committee and the individual members thereof shall have no powers as such.

Section 7.05 Resignations . Any member of the executive committee, and of such other committees as may be designated hereunder by the Board of Directors, may resign at any time by delivering a written resignation to either the president, the secretary, or assistant secretary, or to the presiding officer of the committee of which he or she is a

member, if any shall have been appointed and shall be in office. Unless otherwise specified herein, such resignation shall take effect on delivery.

Section 7.06 Removal . The Board of Directors may at any time remove any member of the executive committee or of any other committee designated by it hereunder either for or without cause.

Section 7.07 Vacancies . If any vacancies shall occur in the executive committee or of any other committee designated by the Board of Directors hereunder, by reason of disqualification, death, resignation, removal, or otherwise, the remaining members shall, until the filling of such vacancy, constitute the then total authorized membership of the committee and, provided that two or more members are remaining, continue to act. Such vacancy may be filled at any meeting of the Board of Directors.

Section 7.08 Compensation . The Board of Directors may allow a fixed sum and expenses of attendance to any member of the executive committee, or of any other committee designated by it hereunder, who is not an active salaried employee of the corporation for attendance at each meeting of said committee.

ARTICLE VIII

INDEMNIFICATION, INSURANCE, AND

OFFICER AND DIRECTOR CONTRACTS

Section 8.01 Indemnification: Third Party Actions . The corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he or she is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees) judgments, fines, and amounts paid in settlement actually and reasonably incurred by him or her in connection with any such action, suit or proceeding, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, he or she had reasonable cause to believe that his or her conduct was unlawful.

Section 8.02 Indemnification: Corporate Actions . The corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the

corporation to procure a judgment in its favor by reason of the fact that he or she is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection with the defense or settlement of such action or suit, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue, or matter as to which such a person shall have been adjudged to be liable for negligence or misconduct in the performance of his or her duty to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine on application that, despite the adjudication of liability but in view of all circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.

Section 8.03 Determination . To the extent that a director, officer, employee, or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Sections 8.01 and 8.02 hereof, or in defense of any claim, issue, or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith. Any other indemnification under Sections 8.01 and 8.02 hereof, shall be made by the corporation upon a determination that indemnification of the officer, director, employee, or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Sections 8.01 and 8.02 hereof. Such determination shall be made either (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit, or proceeding; or (ii) by independent legal counsel on a written opinion; or (iii) by the shareholders by a majority vote of a quorum of shareholders at any meeting duly called for such purpose.

Section 8.04 General Indemnification . The indemnification provided by this Section shall not be deemed exclusive of any other indemnification granted under any provision of any statute, in the corporation's Articles of Incorporation, these Bylaws, agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent, and shall inure to the benefit of the heirs and legal representatives of such a person.

Section 8.05 Advances . Expenses incurred in defending a civil or criminal action, suit, or proceeding as contemplated in this Section may be paid by the corporation in advance of the final disposition of such action, suit, or proceeding upon a majority vote of a quorum of the Board of Directors and upon receipt of an undertaking by or on behalf of the director, officers, employee, or agent to repay such amount or amounts unless if it is ultimately determined that he or she is to indemnified by the corporation as authorized by this Section.

Section 8.06 Scope of Indemnification . The indemnification authorized by this Section shall apply to all present and future directors, officers, employees, and agents of the corporation and shall continue as to such persons who ceases to be directors, officers, employees, or agents of the corporation, and shall inure to the benefit of the heirs, executors, and administrators of all such persons and shall be in addition to all other indemnification permitted by law.

8.07. Insurance . The corporation may purchase and maintain insurance on behalf of any person who is or was a director, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against any such liability and under the laws of the state of incorporation, as the same may hereafter be amended or modified.

ARTICLE IX

FISCAL YEAR

The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.

ARTICLE X

DIVIDENDS

The Board of Directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares in the manner and on the terms and conditions provided by the Articles of Incorporation and these Bylaws.

ARTICLE XI

AMENDMENTS

All Bylaws of the corporation, whether adopted by the Board of Directors or the shareholders, shall be subject to amendment, alteration, or repeal, and new Bylaws may be made, except that:

(a) No Bylaws adopted or amended by the shareholders shall be altered or repealed by the Board of Directors.

(b) No Bylaws shall be adopted by the Board of Directors which shall require more than a majority of the voting shares for a quorum at a meeting of shareholders, or more than a majority of the votes cast to constitute action by the shareholders, except where higher percentages are required by law; provided , however that (i) if any Bylaw regulating an impending election of directors is adopted or amended or repealed by the

Board of Directors, there shall be set forth in the notice of the next meeting of shareholders for the election of directors, the Bylaws so adopted or amended or repealed, together with a concise statement of the changes made; and (ii) no amendment, alteration or repeal of this Article XI shall be made except by the shareholders.

C ERTIFICATE OF SECRETARY

The undersigned does hereby certify that he or she is the secretary of The Castle Group, Inc., a corporation duly organized and existing under and by virtue of the laws of the State of Utah; that the above and foregoing Bylaws of said corporation were duly and regularly adopted as such by the Board of Directors of the corporation at a meeting of the Board of Directors, which was duly and regularly held on the 1st day of February, 1995, and that the above and foregoing Bylaws are now in full force and effect.

DATED THIS 1st day of February, 1995.

/s/Motoko Takahasi

Secretary

AMENDMENT TO BYLAWS OF

THE CASTLE GROUP, INC.

The following amendments to the Bylaws of the Company were duly adopted by the Board of Directors of the Company on March 12, 1998, to-wit:

1. Subject to compliance with the applicable proxy or information statement, rules and regulations of the United States Securities and Exchange Commission or any similar state regulatory agency, stockholders owning at least 50% of the Company = s outstanding voting securities may call a special meeting of the stockholders of the Company at which the affirmative vote of such persons may remove any director, without cause;

2. The Bylaws of the Company may be amended by the affirmative vote of persons owning not less than 50% of the outstanding voting securities of the Company.

Date: March 12, 1998 /s/Motoko Takahashi

_____________________________________

Motoko Takahashi, Corporate Secretary

SETTLEMENT AGREEMENT

THIS AGREEMENT is entered into this 7 ^th day of June, 2007, by and between MANHATTAN (GUAM), INC. (“MGI”) and THE CASTLE GROUP, INC. and CASTLE RESORTS & HOTELS GUAM, LLC (collectively “Castle”).

WHEREAS, the parties are adversaries in a lawsuit pending in the Superior Court of Guam captioned The Castle Group, Inc., Plaintiff vs. Manhattan (Guam), Inc., Defendant and Manhattan (Guam), Inc., Counter/Cross-Claimant v. The Castle Group, Inc. and Castle Resorts & Hotels Guam, LLC , Counter and Cross-Claim Defendants , Civil Case No. CV1542-02 (“Lawsuit”); and

WHEREAS, the parties have submitted their dispute in the Lawsuit to mediation before the Hon. Edward Manibusan (Ret.); and

WHEREAS, as a result of such mediation the parties have reached an agreement for a full and final resolution of all claims at issue in the Lawsuit;

NOW THEREFORE, in consideration of the mutual promises and covenants set forth herein, it is hereby agreed:

1. Castle shall pay to MGI the sum of Five Hundred Thousand Dollars ($500,000) (“Settlement Amount”) in accordance with the payment schedule set forth in Paragraph 2.

2. Castle shall pay the Settlement Amount to MGI as follows:

(a) $100,000 on or before June 18, 2007 (“First Payment”);

(b) $100,000 on or before July 18, 2007 (“Second Payment”); and

The Closing Date shall be September 18, 2007 (“Closing Date”).

3. In the event Castle pays the First Payment and Second Payment, but is unable to pay the entire amount of the Final Payment according to the payment schedule set forth in Paragraph 2 hereinabove, Castle shall have the option to extend the Closing Date by making the following payments:

(a) If an additional payment of $100,000 is made on or before September 18, 2007, the Closing Date will be extended to November 18, 2007; and

(b) If an additional payment of $100,000 is made on or before November 18, 2007, the Closing Date will be extended to January 18, 2008; and

The Settlement Amount may be prepaid at any time without any prepayment penalty. No interest shall apply except as stated in Paragraph 7 below.

4. Payments shall be made by Cashier’s check or wire to Civille & Tang Client Trust Account. Payments required under this Agreement shall be deemed paid upon delivery of a Cashier’s Check in the amount of the payment to the offices of Civille & Tang, or upon receipt of funds by wire transfer into the Civille & Tang Client Trust Account.

5. Concomitant with the execution of this Agreement, the parties shall also execute the following documents, the form and content of which the parties have agreed upon, which are hereby incorporated by reference:

(a) Stipulation and Order dismissing all claims in the Lawsuit with prejudice, but reserving to the Court jurisdiction to enforce this Agreement ( Exhibit A hereto);

(b) Mutual Releases ( Exhibit B hereto); and

6. In the event that Castle makes each payment required of it under this Agreement by the due date for each payment, upon full payment of the Settlement Amount in accordance with paragraph 2 and 3 hereinabove and subject to any applicable three (3) day cure periods under Paragraph 7, MGI will transfer to Castle, through its attorneys Calvo & Clark, the stock certificate(s) issued to MGI for 900,000 unregistered common shares of stock of Castle Group, Inc. (“Castle Shares”). In the event that MGI is unable to locate its share certificate, it shall execute a lost share declaration or such other similar document as may be required by Castle.

7. Default. The failure by Castle to make any payment required under this Agreement shall constitute a Default. Upon default, MGI shall notify Castle in writing, and through its attorneys Calvo & Clark, of the default. Castle shall have three (3) business days to cure the default from date notice of default is received by Calvo & Clark. In the event that Castle fails to cure the default within three (3) business days, MGI may enforce or otherwise sue for breach of this Agreement through the Court in this case, or by separate proceeding , to seek enforcement of this Agreement and to obtain the following remedies:

a. If Castle has not paid the First Payment by June 18, 2007, MGI shall be entitled to file the Stipulated Judgment in the amount of $500,000, which shall bear interest at the rate of 18% per annum from the date of default, plus attorneys fees and costs, and MGI shall not have any obligation to transfer the 900,000 Castle Shares, and shall keep the 900,000 Castle shares free and clear of all claims by Castle.

b. If Castle timely pays the First Payment but fails to pay the Second Payment or any other subsequent payments by the due date, MGI shall be entitled to keep the full amount of the First Payment, which shall be not be applied as a credit or offset against the amount of the Stipulated Judgment or any judgment rendered in connection with this Agreement. MGI shall be entitled to file the Stipulated Judgment in the amount of $500,000, which amount shall bear interest at the rate of 18% per annum from the date of default, plus attorneys fees and costs, and MGI shall not have any obligation to

transfer the 900,000 Castle Shares, and shall keep the 900,000 Castle shares free and clear of all claims by Castle.

c. If Castle pays the First Payment and Second Payment, and fails to pay the Final Payment, and unless time is extended in accordance with Paragraph 3 hereinabove, MGI shall be entitled to keep the full amount of the First Payment,

but the amount of the First Payment shall be not be applied as a credit or offset against the amount of the Stipulated Judgment or any judgment rendered in connection with this Agreement. MGI shall be entitled to file the Stipulated Judgment in the amount of $500,000 with a setoff for payments made to MGI after the First Payment (“Judgment Amount”), which Judgment Amount shall bear interest at the rate of 18% per annum from the date of default, plus attorneys’ fees and costs, and MGI shall not have any obligation to transfer the 900,000 Castle Shares, and shall keep the 900,000 Castle shares free and clear of all claims by Castle.

8. The Superior Court shall retain jurisdiction to enforce the terms of this Settlement Agreement and to enter the stipulated judgment as described above. In submitting the Stipulated Judgment to the Court under this Agreement, MGI shall serve Castle a notice of the judgment submitted. Castle shall not oppose such submission except that it may assert that it is not in default under this Agreement, or challenge the amount of attorney’s fees or the computation of principal or interest.

9. The parties to this Agreement have been represented by counsel at all stages of proceedings and this Agreement shall be deemed to have been drafted by the mutual effort of the parties.

10. This Agreement represents the entire agreement between the parties and no other agreement or representation shall be binding unless set forth in this Agreement. This Agreement can only be amended by a written amendment signed by both parties.

11. This Agreement shall be governed by and construed in accordance with the laws of Guam and the laws of the United States pertaining to transactions in Guam.

12. This Agreement shall bind and inure to the benefit of the parties and their respective heirs, executors, administrators, personal and legal representatives. The parties may not assign their rights or obligations under this Agreement without the prior written consent of the other party.

13. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement; and, the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by such illegal, invalid, or unenforceable provision or by its severance from this Agreement.

14. In the event it becomes necessary for either party hereto to file suit to enforce this Agreement or any provision contained herein, the party prevailing in such suit shall be

entitled to recover, in addition to all other remedies or damages, as provided herein, reasonable attorneys' fees incurred in such suit.

15. Notice to Castle shall be sent to it at:

3 Waterfront Plaza, 500 Ala Moana Blvd., Suite 555,

Honolulu, HI 96813

Attn: Alan Mattson

and e-mailed to: Jerry Ruthruff at jrthruff@yahoo.com.

[Signatures on following page]

SETTLEMENT AGREEMENT

The Castle Group, Inc., Plaintiff vs. Manhattan (Guam), Inc.

Dated this 7th day of June 2007.

MANHATTAN GUAM, INC. CASTLE GROUP, INC.

/s/ David Su /s/Jerry Ruthruff

By: DAVID SU By: JERRY RUTHRUFF

Its: Vice-president Its duly authorized representative

CASTLE RESORTS & HOTELS

GUAM, LLC

/s/ Jerry Ruthruff

By: JERRY RUTHRUFF

Its duly authorized representative

APPROVED AS TO FORM:

CALVO & CLARK, LLP CIVILLE & TANG, PLLC

/s/Daniel M. Benjamin /s/G. Patrick Civille

By: DANIEL M. BENJAMIN By: G. PATRICK CIVILLE

Attorneys for Plaintiff/Counter Attorneys for Defendants/

and Cross-Claim Defendants Counter/Cross-Claimant

CIVILLE & TANG, PLLC

330 HERNAN CORTEZ AVENUE, SUITE 200

HAGÅTÑA, GUAM 96910

TELEPHONE: (671) 472-8868/69

FACSIMILE: (671) 477-2511

Attorneys for Counter/Cross-Claimant

Manhattan (Guam), Inc.

IN THE SUPERIOR COURT OF GUAM


THE CASTLE GROUP, INC., Plaintiff, vs. MANHATTAN (GUAM), INC., Defendant MANHATTAN (GUAM), INC., Counter/Cross-Claimant, vs. THE CASTLE GROUP, INC. and CASTLE RESORTS & HOTELS GUAM, LLC, Counter and Cross-Claim Defendants.	) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )	CIVIL CASE NO. CV1542-02 STIPULATION AND ORDER OF DISMISSAL

IT IS STIPULATED by and between the parties, through their respective counsel of record, that all claims in the above-entitled matter, including the complaint, counterclaims and

cross-claims shall be dismissed with prejudice, the parties to bear their respective attorneys = fees and costs. This stipulation is subject to the Court retaining jurisdiction to enforce the unfiled Settlement Agreement between the parties dated June 7, 2007, including jurisdiction to enter a Stipulated Judgment in the event of a default under the Settlement Agreement.

SO STIPULATED.

CALVO & CLARK, LLP

By:/s/Daniel M. Benjamin

DANIEL M. BENJAMIN

Attorneys for Plaintiff/Counter

and Cross-Claim Defendants

DATE: June 7, 2007

CIVILLE & TANG, PLLC

By:/s/G. Patrick Civille

G. PATRICK CIVILLE

Attorneys for Defendants/

Counter/Cross-Claimant

DATE: June 7, 2007

ORDER

Based on the stipulation of parties,

IT IS HEREBY ORDERED that all claims in the above-captioned matter are dismissed with prejudice, with each party bearing their respective attorneys = fees and costs incurred in this matter. The Court hereby expressly reserves and retains jurisdiction over the parties and this matter to enforce the unfiled Settlement Agreement between the parties dated June 7, 2007, including jurisdiction to enter a Stipulated Judgment in the event of a default under the Settlement Agreement.

SO ORDERED this ______ day of _________________, 2007.

/S/

HONORABLE ALBERTO C. LAMORENA, III

PRESIDING JUDGE

MUTUAL RELEASE AGREEMENT

This Mutual Release Agreement (“Agreement”) is entered into as of June 7, 2007 by and among Castle Group, Inc. and Castle Resorts & Hotels Guam, LLC (collectively “Castle”), and Manhattan (Guam) Inc. (“Manhattan”). The term “Parties” or “Party” refers to these parties identified above.

WHEREAS , the Parties wish to resolve a pending lawsuit between Castle and Manhattan, Castle Group, Inc. v. Manhattan (Guam) Inc. , Guam Super. Ct. Civ. Case No. CV1542-02 (the “Lawsuit”), and all other claims between Castle and Manhattan on the following terms and conditions;

NOW THEREFORE , for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

1. Except as stated in the Settlement Agreement and Stipulated Judgment executed by the Parties concurrently herewith, Castle, on its own behalf and on behalf of its shareholders, officers, and directors, generally releases Manhattan and each of its respective past and present officers, directors, employees, representatives, principals, attorneys and/or agents, from any and all claims, whether known, unknown, asserted, unasserted, direct or indirect, suspected or unsuspected, including but not limited to all claims, counterclaims, and defenses in the Lawsuit.

2. Except as stated in the Settlement Agreement and Stipulated Judgment executed by the Parties concurrently herewith, below, Manhattan, on its own behalf and on behalf of its shareholders, officers, and directors, generally releases Castle and each of its respective past and present officers, directors, employees, representatives, principals, attorneys and/or agents, from any and all claims, whether known, unknown, asserted, unasserted, direct or indirect, suspected or unsuspected, including but not limited to all claims, counterclaims, and defenses in the Lawsuit.

3. The Parties hereby waive their rights under 18 G.C.A. § 82602 or any principle of common or civil law that are similar to or analogous to 18 G.C.A. § 82602, which provides: “A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE

RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.”

4. This Agreement and the Settlement Agreement executed by the Parties concurrently herewith hereby void and supersede: (1) the January 31, 2001 Compromise Agreement between Castle Group, Inc. and Manhattan (Guam) Inc.; (2) the January 31, 2001 Compromise Agreement between Castle Resorts & Hotels Guam, LLC and Manhattan (Guam) Inc.; and (3) any other previous agreements by and between, on the one hand, Castle Group, Inc. and Castle Resorts & Hotels Guam, LLC, and on the other hand, Manhattan (Guam) Inc.

5. Castle, on the one hand, and Manhattan, on the other hand, each represent that it presently holds the claims, counterclaims, or defenses it has asserted in the Lawsuit and that it has not assigned any of those claims or any other claims it may hold against the other.

6. There shall be no third party beneficiaries to this agreement except as expressly stated herein. No Party is relying on any representations or agreements not contained herein and any such reliance is hereby disclaimed. All Parties contributed to the drafting of this Agreement with the assistance of their counsel and it shall not be construed against any Party.

7. This Agreement may be executed in counterparts with the same force and effect as if executed in one complete document and, when so executed, all such counterparts shall together constitute a single agreement.

8. This Agreement can only be modified or altered in writing, signed by all Parties.

9. This Agreement shall be governed by and construed in accordance with the laws of the Territory of Guam and any disputes of any sort whatsoever with regard to its enforcement, validity, interpretation, or construction shall be heard exclusively in the Superior and Supreme Courts of Guam, to which courts’ jurisdiction all parties hereby consent.

10. Nothing in this Agreement or the Settlement Agreement executed by the Parties concurrently herewith is or shall be construed to be an admission of liability by any Party.

IT IS HEREBY AGREED:

CASTLE GROUP, INC. AND

CASTLE RESORTS & HOTELS GUAM, LLC

/s/Jerry Ruthruff Date: _______________

by: JERRY RUTHRUFF

Their Authorized Representative

MANHATTAN (GUAM) INC.

/s/ Date: 6/7/07_______________

by:

Its Authorized Representative

APPROVED AS TO FORM AND CONTENT:

/s/Daniel M. Benjamin Date: 6/7/07_______________

DANIEL M. BENJAMIN

Counsel for Castle Group, Inc. and

Castle Resorts & Hotels Guam, LLC

/s/Patrick Civille Date: 6/7/07_______________

PATRICK CIVILLE

Counsel for Manhattan (Guam) Inc.

CIVILLE & TANG, PLLC

330 HERNAN CORTEZ AVENUE, SUITE 200

HAGÅTÑA, GUAM 96910

TELEPHONE: (671) 472-8868

FACSIMILE: (671) 477-2511

Attorneys for Manhattan (Guam), Inc.

IN THE SUPERIOR COURT OF GUAM

THE CASTLE GROUP, INC.,

Plaintiff,

vs.

MANHATTAN (GUAM), INC.,

Defendant.

_________________________________

MANHATTAN (GUAM), INC.,

Counterclaimant,

vs.

THE CASTLE GROUP, INC.,

Counterclaim Defendant.

)

CIVIL CASE NO. CV1542-02

STIPULATED JUDGMENT

Pursuant to and in accordance with the stipulation of the Parties, and good cause appearing,

IT IS ORDERED that the Dismissal with Prejudice entered in this action on June _____, 2007 be and hereby is vacated solely for the purpose of enforcing the Settlement Agreement between the parties and entering this Stipulated Judgment; and

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that defendant/counterclaimant Manhattan (Guam), Inc. have and recover of and from Plaintiff/Counter and Cross-Defendants The Castle Group, Inc . and Castle Resorts & Hotels Guam, LLC , jointly and

severally, judgment in the total sum of $____________________, which includes Plaintiff's principal claim of $______________ and interest at the rate of $_________ per day, calculated as of __________________, 200___, in accordance with the terms of the Settlement Agreement of 18% per annum from the date of default, which interest shall continue to accrue until the Judgment is paid in full, attorneys' fees of $_____________, which shall also continue to be incurred until the Judgment is paid in full, and Manhattan’s costs incurred in connection with the enforcement of the Settlement Agreement of $__________________.

IT IS SO STIPULATED this 7 ^th day of June 2007.

CIVILLE & TANG, PLLC CALVO & CLARK, LLP

/s/Patrick Civille /s/Daniel Benjamin

PATRICK CIVILLE DANIEL BENJAMIN

Attorneys for Manhattan (Guam), Inc. Attorneys for The Castle Group, Inc. &

Castle Resorts & Hotels, LLC

SO ORDERED this _____ day of ________________, 200_.

HONORABLE ALBERTO C. LAMORENA, III

Presiding Judge, Superior Court of Guam

Exhibit 10.2

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT ("Agreement") executed on June 28, 2004 to be effective as of July 1, 2004 (the "Effective Date"), by and between THE CASTLE GROUP, INC., a Utah corporation (the "Company"), and RICK S. WALL ("Executive"), as Chairman and Chief Executive Officer of Company. The Company desires to employ the services of Executive on the terms and subject to the conditions of this Agreement, and Executive desires to accept such employment.

In consideration of the terms and mutual covenants contained in this Agreement, the Company and Executive agree as follows:

1. Employment. The Company hereby engages the services of Executive as its Chief Executive Officer to perform all duties consistent with such offices, and Executive hereby accepts such employment. During the term of this Agreement, Executive shall perform such additional duties and accept appointment to such additional positions of the Company, or its subsidiaries and/or its parent company as may be specified by the Board of Directors of the Company. Executive shall perform his obligations to the Company pursuant to this Agreement under the direction of the Board of Directors of the Company and Executive shall devote his full time and efforts to such performance.

2. Term. This Agreement shall continue in full force and effect for a term beginning on the Effective Date and ending five years from the date hereof, unless sooner terminated pursuant to this Agreement.

3. Compensation. As compensation for his services rendered pursuant to this Agreement, Executive shall receive from the Company a base salary of $180,000 per year commencing with the Effective Date. All base salary shall be payable in equal installments at least monthly on the last day of each month or at more frequent intervals in accordance with the company's customary pay schedule.

4. Bonuses. In addition to his base salary, Executive shall be entitled to participate fully in any bonus or annual incentive plan which may be hereafter authorized by the Board of Directors and provided to other members of senior management of the Company.

5. Employment Benefits. In addition to his base salary and bonuses, Executive shall be entitled to, participate in and receive benefits from all of the Company's compensation, pension, retirement, life insurance, health, accident, disability and other employee benefits plans, arrangements and programs (the "Company's benefit programs"), if and to the extent such benefits are provided to similarly situated executive officers of the Company, and shall be eligible to participate in all other plans now or hereafter maintained by the Company for which senior executive officers of the Company are eligible. Unless otherwise provided therein, the Company's benefits programs may change from time to time or be discontinued as determined by the Company to be appropriate to changing business situations. Without limiting the foregoing, Executive shall also receive the following benefits:

(a) Medical, Dental, Drug and Vision Insurance. Medical, dental, drug and vision insurance shall be provided to Executive and any eligible dependents at the Company's expense to the extent provided to senior members of management in accordance with the Company's health insurance benefit contracts.

(b) Vacation. Executive shall accrue twenty (20) days of paid vacation per annum, prorated from the Effective Date of this Agreement for the remainder of the first year of this agreement. In addition, Executive shall be entitled to all holidays extended to Company employees. Vacation not used in any year may be carried over to the next year but no more than ten (10) vacation days may be accumulated. In the event of termination of Executive's employment under this Agreement, Executive shall be paid for all unused, accumulated vacation days he may have as of the date of termination.

(c) Group Benefit and Group Insurance Plans. Executive shall participate in group' benefit and insurance plans, with benefits and coverage equal to, or greater than, those offered to other members of senior management of the Company if and to the extent that the Company now or hereafter provides such plans. The Company retains the right to modify such plans but shall provide Executive with thirty (30) days advance notice of such modifications. The Company shall pay all premiums on any such group insurance policies during the term hereof.

(e) Vehicle and Parking. Executive shall be provided with a leased vehicle at Company expense at the CEO level in accordance with the Company's leased vehicle policy. Executive shall be provided with a parking stall at the Company's office.

(f) Club Memberships. The Company shall pay all monthly dues for Executive's membership at Oahu Country Club.

(h) Business Expenses. The Company shall reimburse Executive for all reasonable out-of-pocket business expenses he incurs in fulfilling his duties hereunder, in accordance with the general policies of the Company in effect from time to time, provided that Executive furnishes to the Company with adequate records and other documentary evidence required by all federal and state statutes and regulations issued by the appropriate taxing authorities for the substantiation of such business expenses as a deduction on the federal or state tax returns of the Company.

(i) Directors and Officers Liability Insurance. The Company shall indemnify Executive against any claims, liabilities, costs and expenses which may be incurred or asserted against Executive in connection with or relating to his employment by the Company, to the fullest extent permitted by law.

(j) Compliance with Laws. The Company shall exercise diligent efforts to come into compliance with its reporting obligations under the Securities and Exchange Act of 1934, and other applicable securities and corporate governance statutes applicable to publicly held companies.

6. Termination.

(a) Termination by the Company for Cause. The Company may terminate Executive's employment hereunder at any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) conviction of a felony or other crime bearing a rational relationship to Executive's duties to the Company hereunder; (ii) commission of any act involving dishonesty, disloyalty, or fraud with respect to the Company; (iii) willful and continued failure to substantially perform his duties to the Company hereunder (other than any such failure resulting from his incapacity due to physical or mental illness) which is not cured or remedied within sixty (60) days after written notice thereof to Executive; (iv) any other material breach of this Agreement or any other agreement to which Executive and the Company are parties which is not cured or remedied within sixty (60) days after written notice thereof to the Executive or (v) any willful misconduct by Employee which materially and adversely interferes with the Company's ability to increase the number of units under its management.

For purposes of determining whether Cause exists hereunder, no act, or failure to act, on Executive's part, shall be considered "willful" unless done, or omitted to be done, by Executive without good faith and without reasonable belief that Executive's action or omission was in the best interests of the Company.

Termination for Cause shall cause Executive to forfeit all employment benefits and all compensation not yet due as of the effective date of such termination for Cause. Termination for Cause under this subparagraph shall also cause Executive to forfeit all severance payments otherwise payable pursuant to Paragraph 8 below.

(b) Termination in the Event of Executive's Disability. The Company may terminate Executive's employment hereunder if he becomes Disabled (as defined herein). For purposes of this Agreement, Executive shall be "Disabled" if: (i) Executive has substantially failed to perform the essential functions of his duties hereunder for a period or periods totaling twelve (12) full calendar months (notwithstanding reasonable accommodation by the Company) because of a medically determinable disease, injury or other mental or physical disability and Executive has been declared by the insurer to be "totally disabled" and qualified for benefits under any disability income insurance policy maintained by the Company, or (ii) if an independent physician selected in good faith by the Company examines Executive (and Executive hereby agrees to permit such examination at the Company's expense) and advises the Company that because of a medically determinable disease, injury or other mental or physical disability, Executive will not be able to perform the essential functions of his duties hereunder, notwithstanding reasonable accommodations by the Company, and that such disability is determined or reasonably expected to last at least twelve (12) calendar months. The physician shall be board-certified in the specialty most closely related to the nature of the disability alleged to exist.

If the Company terminates Executive's employment because he is Disabled, Executive shall receive the compensation due under Paragraph 3, bonuses due under Paragraph 4 and benefits due under Paragraph 5 of this Agreement through the Date of Termination, and twelve monthly installments in the amount of the base salary (calculated on a monthly basis) which he is earning at the time of termination.

Notwithstanding anything else in this Paragraph 6 to the contrary, Executive does not waive any rights, nor does the Company consider that he has waived any rights he may have under the Family and Medical Leave Act, the Americans with Disabilities Act, or any similar applicable state law.

(c) Termination Upon Death. In the event of Executive's death, his employment hereunder shall terminate. Executive's estate shall receive compensation, reimbursement of expenses, bonuses and benefits due to Executive under Paragraphs 3, 4 and 5 through the date of death.

(d) Termination by Executive for Good Reason. Notwithstanding any other provision of this Agreement, Executive shall be entitled to terminate his employment for Good Reason. For the purposes of this Agreement, "Good Reason" shall mean, without Executive's express prior written consent, any of the following:

(i) The assignment to Executive of any duties inconsistent with Executive's position and duties with the Company as CEO; the failure to provide Executive with a suitable office; or an adverse change in Executive's titles or offices as in effect on the date hereof, or any removal of Executive from or any failure to reappoint Executive to any of such positions;

(ii) A reduction by the Company in Executive's base salary except as part of a comparable percentage deferment of the payment of the salaries of other members of senior management of the Company applied to Executive in a non-discriminatory manner;

(iii) The Company's requiring Executive to be based anywhere other than the Honolulu, Hawaii metropolitan area in which Executive's office is located on the date of this Agreement, except for required travel on the Company's business to an extent substantially consistent with Executive's present business travel obligations;

(iv) The failure by the Company to provide through the term hereof (to the extent required by Paragraph 5) any compensation, benefit, pension, profit-sharing or retirement plan (including a deferred compensation plan), life insurance plan, medical insurance plan, health-and-accident plan or other employee benefit or executive benefit plan or program in which Executive is entitled to participate (or plans providing Executive with substantially similar benefits in the aggregate), or the taking of any action by the Company which would adversely affect Executive's participation in or materially reduce Executive's benefits under any of such plans or program or deprive Executive of any material fringe benefit enjoyed by Executive or to which Executive is entitled on the date hereof, unless the discontinuance of any of such plans or a reduction in benefits thereunder is nondiscriminatory as to Executive and is applied to senior management of the Company, its subsidiaries and affiliates, and any parent or successor of the Company; or the failure by the Company to provide Executive with the number of paid vacation days to which Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy or special arrangement with Executive;

(v) A material breach of this Agreement by the Company; or

(vi) Any purported termination of Executive's employment by the Company which is not effected pursuant to a Notice of Termination satisfying the requirements of Paragraph 7 below (and, if applicable, Paragraph 6(b) above); and for purposes of this Agreement, no such purported termination shall be effective.

Executive's right to terminate his employment pursuant to this Paragraph 6(d) shall not be affected by Executive's incapacity due to physical or mental illness. Notwithstanding any other term or condition of this Agreement, Executive shall not be entitled to terminate his employment for Good Reason, unless he has provided the Company with written notice of the action or omission which Executive contends entitles Executive to terminate his employment for Good Reason and such action or omission is not cured or remedied within sixty (60) days after written notice thereof to the Company; provided that any nonpayment of Executive's base salary must be cured within ten (10) days, and the 60-day cure period shall not apply to (i) the matters set forth in Section 6(d)(ii), Section 6(d)(iii), and Section 6(d)(vi).

7. Notice and Date of Termination. Any termination of Executive's employment under this Agreement, either by the Company for Cause or by the Employee for Good Reason, shall be communicated by a written Notice of Termination (the "Notice") to the other party hereto. The Notice shall specify the particular termination provision in this Agreement relied upon by the terminating party, recite the facts and circumstances claimed to provide the basis for such termination, and specify the Date of Termination. Any such Notice to Executive shall be delivered personally to Executive or delivered to his residence address listed in the Company's personnel records. For purposes of this Agreement, "Date of Teimination" shall mean (i) if Executive's employment is terminated for disability, thirty (30) days after Notice of Termination is given (provided that the Employee shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period; (ii) if Executive's employment is terminated due to his death, the date of death; or (iii) if Executive's employment is terminated pursuant to Paragraph 6(a) or 6(d), the date specified in the Notice of Termination.

8. Payments on Termination.

(a) Termination by the Company for Cause. If Executive's employment is terminated by the Company for Cause pursuant to Paragraph 6(a), or if Executive terminates his employment other than for Good Reason pursuant to Paragraph 6(d), the Company shall pay Executive's base salary through the Date of Termination at the rate then in effect at the time the Notice of Termination is given, (ii) the Company shall pay all accrued paid vacation days to which Executive is entitled hereunder, (iii) the Company shall reimburse Executive for any expenses for which he is entitled to reimbursement hereunder as of the Date of Termination, and (iv) Executive shall forfeit all unaccrued compensation and employment benefits as of the Date of Termination as well as all rights to severance payments. Such termination shall not affect any of Executive's retirement rights or other benefits to the extent such rights or benefits are legally vested at the time of termination under applicable law and the terms of the relevant plan or program, excluding any severance payments provided hereunder.

(b) Termination by the Company without Cause or by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause, or if Executive terminates his employment for Good Reason pursuant to Paragraph 6(d), prior to the expiration of the term of this Agreement, the Company will pay _. Executive in a single payment the following amount on the fifth day following the Date of Termination, which payment shall be in lieu of any further compensation to Executive under this Agreement for periods subsequent to the Date of Termination (other than accrued vacation days, thrift, pension, retirement, and any applicable disability benefits, including coverage under the Company's life, medical, dental, vision, health insurance plans or equivalent coverage, during the period Executive receives disability benefits, which shall be paid in accordance with the plans, programs and policies relating thereto, notwithstanding termination of employment):

(i) Executive's base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given; all accrued paid vacation days to which Executive is entitled hereunder; any expenses for which Executive is entitled to reimbursement hereunder as of the Date of Termination, and

(ii) One-twelfth (1/12th) of Executive's base salary at the rate in effect at the time Notice of Termination is given, multiplied by the number of months (including partial months) until the then scheduled end of the term of this Agreement, if such termination had not occurred, or 100% of Executive's base salary at the rate in effect at the time Notice of Termination is given, whichever is greater.

In addition, the following payments shall be made as soon as practicable after the Date of Termination but in no event later than 30 days thereafter:

(iii) Notwithstanding any provision of any deferred compensation plan then in effect delaying or making conditional any such payments, the sum of all amounts to which Executive is entitled under any such deferred compensation plan whether upon termination of Executive's employment or otherwise; and

(iv) Notwithstanding any provision of any management incentive plan or any other incentive compensation plan then in effect, an amount equal to the sum of (a) any incentive compensation which has been allocated for the fiscal year preceding that in which the Date of Termination occurs but has not yet been paid, and (b) any award under an incentive compensation plan which has not yet been paid for any period which has been closed prior to the Date of Termination.

In addition, the Company shall maintain coverage and pay all premiums for Executive and his family under the life, medical, health, dental, vision and disability insurance plans in which Executive participated immediately prior to termination of his employment for the remainder of the term of this Agreement as if Executive had not been terminated.

transaction resulting in the replacement of a majority of members of the Board of Directors of the Company, (a) the payment of Executive's base salary referred to in paragraph 8(b)(ii), shall be limited to a maximum of twenty-four (24) months, (b) the Company may elect to pay Executive's base salary in equal semi-monthly installments on the first and fifteen day of each month and (c) the amount of each monthly payment shall be reduced by fifty per cent (50%) of the amount of gross income which Executive receives from any other employment or consulting during the prior month ("Replacement Income"). In the event of any dispute or controversy concerning the amount of Executive's Replacement Income for a month, Company shall pay Executive the full amount of Executive's base salary, less the amount of Replacement Income which Executive acknowledges receiving for that month and shall submit a claim for the disputed amount to the dispute resolution process set forth in paragraph 17 herein.

The foregoing payment obligations shall be Executive's sole remedy in the event of the Company's termination of Executive's employment other than for Cause, Executive's termination of his employment for Good Reason or the termination of his employment by reason of expiration of this Agreement.

(c) Failure to Make Payments. If at any time the Company fails to pay any payments specified in Paragraph 8 (b) above, within thirty days after the date such payment was due, Executive's obligations under Paragraphs 11(a) and 11(b) below shall terminate. Notwithstanding the termination of such obligation, Executive shall retain the right to full payment of the amounts owed, together with interest thereon at the rate of 8% per annum and collection costs, if any, including reasonable attorney's fees. The failure to pay the amounts specified in Paragraph 8(b) shall not relieve Executive of the restrictions specified in Paragraphs 9 and 10 of this Agreement.

9. Inventions and Improvements. Executive agrees that all inventions, innovations or improvements in the Company's software products or methods of conducting its business (including new combinations, applications, improvements, ideas and discoveries, whether or not copyrightable or patentable) conceived or made by him while employed by the Company or using the Company's equipment and all reports, data, writings or technical information prepared by him in connection with his employment by the Company or using the Company's equipment shall be "work made for hire" within the meaning of Section 101 of the United States Copyright Act and shall belong to the Company. Executive will promptly disclose such software, inventions, innovations or improvements to the Company and perform all actions reasonably requested to establish or confirm the ownership of the Company thereof, including but not limited to providing the Company with copies of any programs constituting software used or developed by Executive in connection with his employment with the Company or using the Company's equipment.

10. Ownership, Non-Disclosure and Non-Use of Confidential or Proprietary Information.

(a) Executive covenants and agrees that while employed by the Company and after the termination of such employment he will not, directly or indirectly:

(i) give to any person not authorized by the Company to receive it or use it, except or the sole benefit of the Company, any of the Company's proprietary data or information whether relating to products

(ii) ideas, designs, processes, research, marketing, customers, management know-how, finances or otherwise; or give to any person not authorized by the Company to receive it any specifications, reports or technical information, or the like, owned by the Company; or

(iii) give to any person not authorized by the Company to receive it, any information that is not generally known outside the Company or that is designated by the Company as limited, private or confidential.

(b) Executive covenants and agrees that he will keep informed of the Company's policies and procedures for safeguarding the Company's property including proprietary data and information and will strictly comply therewith at all times during his employment by the Company. Executive will not, except when authorized by the Company; remove any Company property from the Company's premises. Executive will return to the Company immediately upon termination of his employment all Company property in his possession or control.

11. Additional Covenants of Executive.

(a) Executive covenants and agrees that, for a period of two years after the termination of his employment by the Company for Cause, he will not directly or indirectly (whether as employee, director, owner, 5% or greater stockholder, consultant, partner (limited or otherwise)) engage in or have any interest in, any business that directly competes with any business which the Company engaged in during the term of his employment in Hawaii or the Pacific islands (the "Restricted Area"); provided, however, that nothing herein will prevent Executive from owning up to 5% of the outstanding stock of the corporation, so long as Executive does not participate in the business of such corporation other than as a passive investor. The Company may, in its reasonable discretion, give Executive written approval(s) to personally engage in any activity or render any services referred to in this paragraph if the Company secures written assurances (reasonably satisfactory to the Company and its counsel) from Executive and any prospective employer(s) of Executive that the integrity of the Company's confidential or proprietary information will not in any way be jeopardized by such activities.

(b) Executive covenants and agrees that, for a period of two years after termination of his employment by the Company for Cause, he will not, directly or indirectly, (i) solicit, induce or hire away, or assist any third party in soliciting, diverting or hiring away, any employee of the Company, whether or not the employee's employment is pursuant to a written agreement and whether or not such employment is for a specified term or is at will, or (ii) induce or attempt to induce any customer of the Company or prospective customer with whom the Company has had substantial contact during the term of Executive's employment to cease doing business with the Company and do business with Executive in competition with the Company in the Restricted Area.

(c) Executive covenants and agrees that should (i) the Company elect to terminate him with Cause, or (ii) Executive elects to terminate this Agreement without Good Reason, Executive shall still be bound by the Additional Covenants set forth in Paragraphs 11(a) and 11(b), except as expressly excused by Paragraph 8(c). Executive agrees and acknowledges that, by receiving the compensation due from the Effective Date of this Agreement until the date of termination, resignation, or expiration of Agreement, by being granted access to the Company's confidential and proprietary information, and by being granted the opportunity to receive the payments set forth in Paragraph 8 above, he has received sufficient consideration for these Additional Covenants.

11. Grant of Stock. Executive is granted one million nine hundred thousand (1,900,000) shares of the common stock of the Company in consideration of this agreement. Executive shall file an election under Section 83(a) of the Internal Revenue Code, to include all of the shares granted hereunder as income upon receipt. The Company and Executive agree that the value of such shares is less than one cent per share. The Company shall be authorized to deduct from Executive's base salary, withholding and employment taxes resulting from such election and recognition of income.

12. Indemnity. The Company shall indemnify and hold Executive harmless, to the fullest extent allowed by law, from any claim, cause of action, litigation or allegation arising from any acts, omissions or decisions taken or made by Executive while performing services for the Company or in connection with his employment with the Company, including any acts or omissions while serving as a director or officer of the Company or its affiliates or as the Company's representative on any non-profit board of directors or similar organization. The Company may, subject to the reasonable consent of Executive, select counsel to represent Executive in connection with such proceedings. The Company shall provide liability insurance covering Executive with respect to actions and omissions in connection with his employment with the Company on terms no less favorable than such insurance maintained in effect by the Company on the date hereof, in terms of the extent and the amounts of coverage.

13. Substance Abuse Testing. Executive may be required to submit to a urinalysis or other drug test on a random or annual basis. Failure to submit to a properly requested drug test may constitute grounds for termination. Detection of the presence of illegal drugs as a result of such testing may also constitute grounds for termination.

14. Complete Agreement. This Agreement together with any attached Exhibits embodies the complete agreement and understanding between the parties and supersedes any prior understandings, agreements or representations by or among the parties, whether written or oral, concerning the subject matter hereof in any way.

15. Amendments; Waivers. This Agreement may not be amended except by a writing signed by the Company and Executive. Any waiver by a party hereof of any right hereunder shall be effective only if evidenced by a signed writing, and only to the extent set forth in such writing.

16. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of, and be enforceable by the parties hereto and their respective successors, heirs and

assigns, except that Executive may not assign any of his obligations hereunder without the prior written consent of the Company.

17. Remedies.

(a) With the exception of claims arising under Paragraphs 9, 10, and 11 of this Agreement, any other claim arising out of or relating to the provisions of this Agreement, or its breach, shall first be submitted to mediation by a mediator selected by the parties, or if the parties cannot agree on a mediator, the mediator shall be appointed by Dispute Resolution Inc. If the parties are unable to resolve any claim through mediation, the claim shall settled by arbitration by a panel of three arbitrators in the City and County of Honolulu, State of Hawaii, in accordance with the then governing rules for the resolution of Employment Disputes of Dispute Resolution, Inc. or a similar organization mutually acceptable to the parties. The Arbitrator shall award attorney's fees and costs to the prevailing parties. Judgment upon the award rendered by the Arbitrator may be entered and enforced in any court of competent jurisdiction.

(b) Each of the parties to this Agreement will be entitled to specifically enforce its rights under Paragraphs 9, 10, and 11 of this Agreement, to recover damages by reason of any breach of those provisions of this Agreement, and to exercise all other rights to which it may be entitled under these Paragraphs in a court of law or equity. The parties agree and acknowledge that money damages may not be an adequate remedy for breach of the Paragraphs 9, 10, and 11 of this Agreement, and accordingly, each party hereby agrees and consents that in the event of any material breach of Paragraphs 9, 10, and 11 of this Agreement by it, the non-breaching party may obtain appropriate injunctive relief or an order for specific performance, in order to enforce or prevent any violations of those provisions of this Agreement.

18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Hawaii.

19. Notices. Any notice to be given hereunder shall be in writing and shall be effective when personally delivered or sent to the other party by registered or certified mail, return receipt requested, or overnight carrier, postage prepaid, or otherwise when received by the other party, at the address set forth at the end of this Agreement.

20. Severability. Any provision of this Agreement that is deemed invalid, illegal, or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity, illegality, or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction, or rendering that or any other provisions of this Agreement invalid, illegal or unenforceable in any other jurisdiction. If the covenant should be deemed invalid, illegal, or unenforceable because its scope is considered excessive, such covenant shall be modified so that the scope of the covenant is reduced only to the minimum extent necessary to render the modified covenant valid, legal, and enforceable.

IN WITNESS WHEREOF, the parties have executed this Agreement on the date first set forth above to be effective as of the Effective Date.

THE CASTLE GROUP, INC.

By:/s/Roy Tokujo

By:/s/Jerry Ruthruff

/s/Rick Wall

Rick Wall

AMENDMENT TO EMPLOYMENT AGREEMENT

This AMENDMENT TO EMPLOYMENT AGREEMENT is executed on January 1, 2006, by and between THE CASTLE GROUP, INC., a Utah corporation (the ^" Company ^" ), and RICK S. WALL ("Executive"), as Chairman and Chief Executive Officer of Company.

WHEREAS, the Company and Executive entered into an Employment Agreement effective July 1, 2004 (the "Employment Agreement");

WHEREAS, Executive plays a key role in the Company ^' s plan to substantially increase its revenues and profits by obtaining contracts for the Company to supply management and/or sales and marketing services to additional hotels and condominium properties;

WHEREAS, the Company wishes to extend the term of the Employment Agreement and provide a significant incentive for Executive to substantially increase the Company's revenues and profits and to reward Executive for his services based on the Company's ability to meet and exceed its projected net income each year;

WHEREAS, pursuant to the Employment Agreement, Executive is entitled to participate in the bonus plan for senior management adopted by the Board of Directors;

NOW THEREFORE, the Company and Executive agree to amend the Employment Agreement by deleting paragraphs 2, 3 and 4 of the Employment Agreement and adding the following to replace those paragraphs:

2. Term. This Agreement shall continue in full force and effect for a term beginning on the Effective Date of the Employment Agreement (July 1, 2004) and ending on December 31, 2010, unless sooner terminated pursuant to this Agreement.

3. Compensation. As compensation for his services rendered pursuant to this Agreement, Executive shall receive from the Company a base salary of $18o,ooo per year commencing with the Effective Date, which base salary shall be increased to $190,000 effective August 1, 2005, to $200,000 effective January 1, 2006, to $210,000 effective January 1, 2007, to $220,000 effective January 1, 2008, to $230,000 effective January 1, 2009 and to $240,000 effective January 1, 2010. - All base salary shall be payable in equal installments at least monthly on the last ^- day of each month or at more frequent intervals in accordance with the company's customary pay schedule.

4. Bonus Plan. Executive shall receive a "Budget Achievement Bonus" and a "Stock Incentive Bonus Award" for each of the years ending on December 31, 2006, 2007, 2008, 2009 and 2010 in which he is employed by the Company on the last day of said year and in which the Company's net income exceeds the net income in the approved budget for that year, calculated according to the terms and conditions set forth in Exhibit "A."

IN WITNESS WHEREOF, the parties have executed this Agreement on the date first set forth above to be effective as of the Effective Date of the Employment Agreement.

THE CASTLE GROUP, INC.

By:/s/Jerry A. Ruthruff

By:/s/

/s/Rick Wall

RICK WALL

BUDGET ACHIEVEMENT BONUS AND STOCK INCENTIVE BONUS AWARD PROGRAM

I. Definitions. Capitalized terms shall be defined as follows:

(A) "Net Income" shall mean the net income of The Castle Group, Inc. (the "Company") under generally accepted accounting principles consistently followed by the Company, as determined by the Company's auditors, adjusted, if and to the extent deemed appropriate by the Board of Directors, for any extraordinary transactions or events which, in the judgment of the Board of Directors, materially affected Net Income in a way which should not affect the bonuses to be paid to Executive and the President of the Company.

(B) "Budgeted Net Income" shall mean the estimated Net Income which the Company anticipates earning in a year as set forth in the annual budget approved by the Board of Directors;

(D) "Bonus Percentage" shall be determined based on the amount of the Company's Income Over Budget according to the following table:


(i)	Less than $500,000:	5%;
(ii)	Between $500,000 and $1,000,000	6%;
(iii).	Between $1,000,001 and $1,500,000:	7 ^%
(iv)	$1,500,001 or more:	8%

(E) "Common Stock" shall mean fully paid, non-assessable shares of the common stock of the Company, adjusted as determined by the Board of Directors for any stock splits or similar transactions; and

(F) "Year End Value of the Common Stock" for the calendar year ending on December 31, 2006 shall be fixed at $2.00 per share of Common Stock. For the years ending on December 21, 2007, 2008 and 2009, and 2010, the "Year End Value of the Common Stock" shall mean the lower of:

(i) the fair value of the Common Stock as of the end of the prior year, as determined by the Board of Directors at the first meeting of the Board of Directors each year, reduced by 15%; or

(ii) if during December of the year for which the bonus is being calculated, the Common Stock was being traded on or through a recognized securities market or exchange in sufficient volume in the judgment of the Board of Directors to establish fair market value, the average price at which the Company's Common Stock traded in such market or exchanges as determined by the Board of Directors, reduced by 15%.

II. Budget Achievement Bonus. For each of the years ending December 31, 2006, 2007, 2008, 2009 and 2010 in which the Company has Income Over Budget, Executive shall receive a Budget Achievement Bonus of 15,000 shares of Common Stock, provided, however, that for each of the years ending on December 31, 2007, 2008, 2009 and 2010, in which Executive earns a Budget Achievement Bonus, he may elect to receive a bonus of $30,000.00 in cash in lieu of 15,000 shares of Common Stock. For the calendar year ending on December 31, 2006, if the Company's stock is not actively traded in a recognized securities market, Executive may elect to receive a bonus of $30,000.00 in cash in lieu of 15,000 shares of Common Stock.

III. Stock Incentive Bonus Award. For each of the years ending December 31, 2006, 2007, 2008, 2009 and 2010 in which the Company ^' s has Income Over Budget, executive shall receive a Stock Incentive Bonus Award of Common Stock equal to:

(A) the Bonus Percentage;

(B) multiplied by the Income Over Budget;

Example:

If the Budgeted Net Income for a year was $2,000,000 and the realized Net Income was $3,200,000, "Income Over Budget" would be $1,200,000.

The "Bonus Percentage" for a year with `Income Over Budget" of between $1,000,001 and $1,500,000 is 7%.

If and the Company's stock was trading at $4.00 at the end of the prior year, and at an average of $5.00 during December of the year for which the bonus is being calculated, the "Year End Value of the Common Stock" is based on the lower of two prices. $4.00 per share (the value per share at the end of the prior year) less 15% results in a Year End Value of the Common Stock of $3.60 per share.

Multiplying the Bonus Percentage (7%) by the Income Over Budget ($1,200,000)

equals $84,000. Dividing $84,000 by $3.60 (the "Year End Value of the Common Stock") results in a "Stock Incentive Bonus Award" of 23,333 shares of the Company's common stock.

Exhibit 10.3

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT ("Agreement ^" ) executed on to __________ be effective as of January 1, 2006 (the "Effective Date"), by and between CASTLE RESORTS & HOTELS, INC., a Hawaii corporation, (the "Company ^" ), and ALAN MATTSON ("Executive ^" ), as President of Company. The Company desires to employ the services of Executive on the terms and subject to the conditions of this Agreement, and Executive desires to accept such employment.

In consideration of the terms and mutual covenants contained in this Agreement, the Company and Executive agree as follows:

1. Employment. The Company hereby engages the services of Executive as its President to perform all duties consistent with such offices, and Executive hereby accepts such employment. During the term of this Agreement, Executive shall perform such additional duties and accept appointment to such additional positions of the Company, or its subsidiaries and/or its parent company as may be specified by the Board of Directors of the Company. Executive shall perform his obligations to the Company pursuant to this Agreement under the direction of the Board of Directors of the Company and Executive shall devote his full time and efforts to such performance.

2. Term. This Agreement shall continue in full force and effect for a term beginning on the Effective Date and ending on December 31, 2010, unless sooner terminated pursuant to this Agreement.

3. Compensation. As compensation for his services rendered pursuant to this Agreement, Executive shall receive from the Company a base salary of $160,000 per year commencing with the Effective Date, increased to $170,000 per year on January 1, 2007, to $180,000 on January 1, 2008, to $190,000 effective January 1, 2009 and to $200,000 on January 1, 2010. All base salary shall be payable in equal installments at least monthly on the last day of each month or at more frequent intervals in accordance with the company's customary pay schedule.

5. Employment Benefits. In addition to his base salary and bonuses, Executive shall be entitled to participate in and receive benefits from all of the Company's compensation, pension, retirement, life insurance, health, accident, disability and other employee benefits plans, arrangements and programs (the "Company's benefit programs"), if

and to the extent such benefits are provided to similarly situated executive officers of the Company, and shall be eligible to participate in all other plans now or hereafter maintained by the Company for which senior executive officers of the Company are eligible. Unless otherwise provided therein, the Company's benefits programs may change from time to time or be discontinued as determined by the Company to be appropriate to changing business situations. Without limiting the foregoing, Executive shall also receive the following benefits:

(a) Medical, Dental, Drug and Vision Insurance. Medical, dental, drug and vision insurance shall be provided to Executive and any eligible dependents at the Company ^' s expense to the extent provided to senior executive officers of the Company in accordance with the Company's health insurance benefit contracts.

(c) Group Benefit and Group Insurance Plans. Executive shall participate in group benefit and insurance plans, with benefits and coverage equal to, or greater than, those offered to other members of senior management of the Company if and to the extent that the Company now or hereafter provides such plans. The Company retains the right to modify such plans but shall provide Executive with thirty (30) days advance notice of such modifications. The Company shall pay all premiums on any such group insurance policies during the term hereof.

(d) Vehicle and Parking. Executive shall be provided with car allowance of a $250 per semi-monthly pay period. Executive shall be provided with a parking stall at the Company's office.

(e) Business Expenses. The Company shall reimburse Executive for all reasonable out-of-pocket business expenses he incurs in fulfilling his duties hereunder, in accordance with the general policies of the Company in effect from time to time, provided that Executive furnishes to the Company with adequate records and other documentary evidence required by all federal and state statutes and regulations issued by the appropriate taxing authorities for the substantiation of such business expenses as a deduction on the federal or state tax returns of the Company.

(f) Directors and Officers Liability Insurance. The Company shall indemnify Executive against any claims, liabilities, costs and expenses which may be incurred or asserted against Executive in connection with or relating to his employment by the Company, to the fullest extent permitted by law.

(g) Compliance with Laws. The Company shall exercise diligent efforts to come into compliance with its reporting obligations under the Securities and Exchange

Act of 1934, and other applicable securities and corporate governance statutes applicable to publicly held companies.

6. Termination.

(a) Termination by the Company for Cause. The Company may terminate Executive ^' s employment hereunder at any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) conviction of a felony or other crime bearing a rational relationship to Executive's duties to the Company hereunder; (ii) commission of any act involving dishonesty, disloyalty, or fraud with respect to the Company; (iii) willful and continued failure to substantially perform his duties to the Company hereunder (other than any such failure resulting from his incapacity due to physical or mental illness) which is not cured or remedied within sixty (6o) days after written notice thereof to Executive; (iv) any other material breach of this Agreement or any other agreement to which Executive and the Company are parties which is not cured or remedied within sixty (6o) days after written notice thereof to the Executive or (v) any willful misconduct by Employee which materially and adversely interferes with the Company ^' s ability to increase the number of units under its management.

(b) Termination in the Event of Executive's Disability. The Company may terminate Executive's employment hereunder if he becomes Disabled (as defined herein). For purposes of this Agreement, Executive shall be "Disabled" if: (i) Executive has substantially failed to perform the essential functions of his duties hereunder for a period or periods totaling twelve (12) full calendar months (notwithstanding reasonable accommodation by the Company) because of a medically determinable disease, injury or other mental or physical disability and Executive has been declared by the insurer to be "totally disabled" and qualified for benefits under any disability income insurance policy maintained by the Company, or (ii) if an independent physician selected in good faith by the Company examines Executive (and Executive hereby agrees to permit such examination at the Company ^' s expense) and advises the Company that because of a medically determinable disease, injury or other mental or physical disability, Executive will not be able to perform the essential functions of his duties hereunder, notwithstanding reasonable accommodations by the Company, and that such disability is determined or reasonably expected to last at least twelve (12) calendar months. The physician shall be board-certified in the specialty most closely related to the nature of the disability alleged to exist.

(i) The assignment to Executive of any duties inconsistent with Executive's position and duties with the Company as President; the failure to provide Executive with a suitable office; or an adverse change in Executive's titles or offices as in effect on the date hereof, or any removal of Executive from or any failure to reappoint Executive to any of such positions;

(iv) The failure by the Company to provide through the term hereof (to the extent required by Paragraph 5) any compensation, benefit, pension, profit sharing or retirement plan (including a deferred compensation plan), life insurance plan, medical insurance plan, health-and-accident plan or other employee benefit or executive benefit plan or program in which Executive is entitled to participate (or plans providing Executive with substantially similar benefits in the aggregate), or the taking of any action by the Company which would adversely affect Executive's participation in or materially reduce Executive's benefits under any of such plans or program or deprive Executive of any material fringe benefit enjoyed by Executive or to which Executive is entitled on the date hereof, unless the discontinuance of any of such plans or a reduction in benefits thereunder is nondiscriminatory as to Executive and is applied to

senior management of the Company, its subsidiaries and affiliates, and any parent or successor of the Company; or the failure by the Company to provide Executive with the number of paid vacation days to which Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy or special arrangement with Executive;

(v) A material breach of this Agreement by the Company; or

7. Notice and Date of Termination. Any termination of Executive's employment under this Agreement, either by the Company for Cause or by the Employee for Good Reason, shall be communicated by a written Notice of Termination (the "Notice ^" ) to the other party hereto. The Notice shall specify the particular termination provision in this Agreement relied upon by the terminating party, recite the facts and circumstances claimed to provide the basis for such termination, and specify the Date of Termination. Any such Notice to Executive shall be delivered personally to Executive or delivered to his residence address listed in the Company's personnel records. For purposes of this Agreement, "Date of Termination ^" shall mean (i) if Executive's employment is terminated for disability, thirty (30) days after Notice of Termination is given (provided that the Employee shall not have returned to the performance of his duties on a full-time basis during such thirty (30) day period; (ii) if Executive's employment is terminated due to his death, the date of death; or (iii) if Executive's employment is terminated pursuant to Paragraph 6(a) or 6(d), the date specified in the Notice of Termination.

8. Payments on Termination.

hereunder as of the Date of Termination, and (iv) Executive shall forfeit all unaccrued compensation and employment benefits as of the Date of Termination as well as all rights to severance payments. Such termination shall not affect any of Executive's retirement rights or other benefits to the extent such rights or benefits are legally vested at the time of termination under applicable law and the terms of the relevant plan or program, excluding any severance payments provided hereunder.

(b) Termination by the Company without Cause or by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause, or if Executive terminates his employment for Good Reason pursuant to Paragraph 6(d), prior to the expiration of the term of this Agreement, the Company will pay Executive in a single payment the following amount on the fifth day following the Date of Termination, which payment shall be in lieu of any further compensation to Executive under this Agreement for periods subsequent to the Date of Termination (other than accrued vacation days, thrift, pension, retirement, and any applicable disability benefits, including coverage under the Company's life, medical, dental, vision, health insurance plans or equivalent coverage, during the period Executive receives disability benefits, which shall be paid in accordance with the plans, programs and policies relating thereto, notwithstanding termination of employment):

(ii) One-twelfth (1/12th) of Executive's base salary at the rate in effect at the time Notice of Termination is given, multiplied by the number of months (including partial months) until the then scheduled end of the term of this Agreement, if such termination had not occurred, or 1oo% of Executive's base salary at the rate in effect at the time Notice of Termination is given, whichever is greater.

In addition, the following payments shall be made as soon as practicable after the Date of Termination but in no event later than 30 days thereafter:

Notwithstanding any other term or condition of this Agreement, unless the termination arises out of or in connection with or subsequent to the sale or merger of the Company, the sale of a controlling block of shares in the Company, a sale of the Company's assets or other similar transaction resulting in the replacement of a majority of members of the Board of Directors of the Company, (a) the payment of Executive's base salary referred to in paragraph 8(b)(ii), shall be limited to a maximum of twenty four (24) months, (b) the Company may elect to pay Executive's base salary in equal semi-monthly installments on the first and fifteen day of each month and (c) the amount of each monthly payment shall be reduced by fifty per cent (50%) of the amount of gross income which Executive receives from any other employment or consulting during the prior month ("Replacement Income"). In the event of any dispute or controversy concerning the amount of Executive ^' s Replacement Income for a month, Company shall pay Executive the full amount of Executive's base salary, less the amount of Replacement Income which Executive acknowledges receiving for that month and shall submit a claim for the disputed amount to the dispute resolution process set forth in paragraph 17 herein.

of 8% per annum and collection costs, if any, including reasonable attorney's fees. The failure to pay the amounts specified in Paragraph 8(b) shall not relieve Executive of the restrictions specified in Paragraphs 9 and 10 of this Agreement.

9. Inventions and Improvements. Executive agrees that all inventions, innovations or improvements in the Company's software products or methods of conducting its business (including new combinations, applications, improvements, ideas and discoveries, whether or not copyrightable or patentable) conceived or made by him while employed by the Company or using the Company's equipment and all reports, data, writings or technical information prepared by him in connection with his employment by the Company or using the Company's equipment shall be "work made for hire" within the meaning of Section lox of the United States Copyright Act and shall belong to the Company. Executive will promptly disclose such software, inventions, innovations or improvements to the Company and perform all actions reasonably requested to establish or confirm the ownership of the Company thereof, including but not limited to providing the Company with copies of any programs constituting software used or developed by Executive in connection with his employment with the Company or using the Company's equipment.

10. Ownership, Non-Disclosure and Non-Use of Confidential or Proprietary Information.

(a) Executive covenants and agrees that while employed by the Company and after the termination of such employment he will not, directly or indirectly:

(i) give to any person not authorized by the Company to receive it. or use it, except for the sole benefit of the Company, any of the Company's proprietary data or information whether relating to products

(iii) give to any person not authorized by the Company to receive it, any

information that is not generally known outside the Company or

that is designated by the Company as limited, private or

confidential.

Company; remove any Company property from the Company ^' s premises. Executive will return to the Company immediately upon termination of his employment all Company property in his possession or control.

11. Additional Covenants of Executive.

(c) Executive covenants and agrees that should (i) the Company elect to terminate him with Cause, or (ii) Executive elects to terminate this Agreement without Good Reason, Executive shall still be bound by the Additional Covenants set forth in Paragraphs 11(a) and ii(b), except as expressly excused by Paragraph 8(c). Executive agrees and acknowledges that, by receiving the compensation due from the Effective Date of this Agreement until the date of termination, resignation, or expiration of Agreement, by being granted access to the Company ^' s confidential and proprietary information, and by being granted the opportunity to receive the payments set forth in Paragraph 8 above, he has received sufficient consideration for these Additional Covenants.

12. Indemnity. The Company shall indemnify and hold Executive harmless, to the fullest extent allowed by law, from any claim, cause of action, litigation or allegation

arising from any acts, omissions or decisions taken or made by Executive while performing services for the Company or in connection with his employment with the Company, including any acts or omissions while serving as a director or officer of the Company or its affiliates or as the Company's representative on any non-profit board of directors or similar organization. The Company may, subject to the reasonable consent of Executive, select counsel to represent Executive in connection with such proceedings. The Company shall provide liability insurance covering Executive with respect to actions and omissions in connection with his employment with the Company on terms no less favorable than such insurance maintained in effect by the Company on the date hereof, in terms of the extent and the amounts of coverage.

16. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of, and be enforceable by the parties hereto and their respective successors, heirs and assigns, except that Executive may not assign any of his obligations hereunder without the prior written consent of the Company.

17 . Remedies.

(a) With the exception of claims arising under Paragraphs 9, 10, and II of this Agreement, any other claim arising out of or relating to the provisions of this Agreement, or its breach, shall first be submitted to mediation by a mediator selected by the parties, or if the parties cannot agree on a mediator, the mediator shall be appointed by Dispute Resolution Inc. If the parties are unable to resolve any claim through mediation, the claim shall settled by arbitration by a panel of three arbitrators in the City and County of Honolulu, State of Hawaii, in accordance with the then governing rules for the resolution of Employment Disputes of Dispute Resolution, Inc. or a similar organization mutually acceptable to the parties. The majority of the panel of arbitrators shall award attorney's fees and cost to the prevailing parties. Judgment upon the award rendered by the panel of arbitrators may be entered and enforced in any court of competent jurisdiction.

(b) Each of the parties to this Agreement will be entitled to specifically enforce its rights under Paragraphs 9, 10, and ii of this Agreement, to recover damages by reason of any breach of those provisions of this Agreement, and to exercise all other rights to which it may be entitled under these Paragraphs in a court of law or equity. The parties agree and acknowledge that money damages may not be an adequate remedy for breach of the Paragraphs 9, 10, and it of this Agreement, and accordingly, each party hereby agrees and consents that in the event of any material breach of Paragraphs 9, 10, and 11 of this Agreement by it, the non-breaching party may obtain appropriate injunctive relief or an order for specific performance, in order to enforce or prevent any violations of those provisions of this Agreement.

18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Hawaii.

IN WITNESS WHEREOF, the parties have executed this Agreement on the date first set forth above to be effective as of the Effective Date.

CASTLE RESORTS & HOTELS, INC.

By:/s/Rick Wall

By:/s/Jerry Ruthruff

/s/Alan Mattson

ALAN MATTSON

BUDGET ACHIEVEMENT BONUS AND STOCK INCENTIVE BONUS AWARD PROGRAM

I. Definitions. Capitalized terms shall be defined as follows:

(A) "Net Income ^" shall mean the Company's net income under generally accepted accounting principles consistently followed by the Company, as determined by the Company's auditors, adjusted, if and to the extent deemed appropriate by the Board of Directors, for any extraordinary transactions or events which, in the judgment of the Board of Directors, materially affected Net Income in a way which should not affect the bonuses to be paid to Executive and the President of the Company.

(B) "Budgeted Net Income" shall mean the estimated Net Income which the Company anticipates earning in a year as set forth in the annual budget approved by the Board of Directors.

(D) "Bonus Percentage" shall be determined based on the amount of the Company's Income Over Budget according to the following table:


(i)	Less than $500,000:	5 ^% ;
(ii)	Between $500,000 and $1,000,000	6%;
(iii).	Between $1,000,001 and $1,500,000:	7 ^%
(iv)	$1,500,001 or more:	8%

(E) "Common Stock" shall mean fully paid, non-assessable shares of the common stock of the Company, adjusted as determined by the Board of Directors for any stock splits or similar transactions; and

(i) the fair value of the Common Stock as of the end of the prior year, as determined by the Board of Directors at the first meeting of the Board of Directors each year, reduced by 15%; or

15%.

II _. Budget Achievement Bonus. For each of the years ending December 31, 2006, 2007, 2008, 2009 and 2010 in which the Company has Income Over Budget, Executive shall receive a Budget Achievement Bonus of 15,000 shares of Common Stock, provided, however, that for each of the years ending on December 31, 2007, 2008, 2009 and 2010, in which Executive earns a Budget Achievement Bonus, he may elect to receive a bonus of $30,000.00 in cash in lieu of 15,000 shares of Common Stock. For the calendar year ending on December 31, 2006, if the Company's stock is not actively traded in a recognized securities market, Executive may elect to receive a bonus of $30,000.00 in cash in lieu of 15,000 shares of Common Stock.

III. Stock Incentive Bonus Award. For each of the years ending December 31, 2006, 2007, 2008, 2009 and 2010 in which the Company's has Income Over Budget, executive shall receive a Stock Incentive Bonus Award of Common Stock equal to:

(A) the Bonus Percentage;

(B) multiplied by the Income Over Budget;

Example:

If the Budgeted Net Income for a year was $2,000,000 and the realized Net Income was $3,200,000, "Income Over Budget" would be $1,200,000.

The "Bonus Percentage" for a year with `Income Over Budget" of between $1,000,001 and $1,500,000 is 7%.

If and the Company ^' s stock was trading at $4.00 at the end of the prior year, and at an average of $5.00 during December of the year for which the bonus is being calculated, the "Year End Value of the Common Stock" is based on the lower of two prices. $4.00 per share (the value per share at the end of the prior year) less 15% results in a Year End Value of the Common Stock of $3.60 per share.

Multiplying the Bonus Percentage (7%) by the Income Over Budget ($1,200,000) equals $84,000. Dividing $84,000 by $3.60 (the "Year End Value of the Common Stock")

results in a "Stock Incentive Bonus Award" of 23,333 shares of the Company's common stock.

Exhibit A

THE CASTLE GROUP, INC.

CODE OF CONDUCT

_______________

INTRODUCTION

This Code of Conduct (this "Code") is applicable to the (1) Chairman of the Board, (2) President and/or Chief Executive Officer, (2) Chief Financial Officer, (3) Chief Accounting Officer or Controller and (4) other persons performing similar functions (collectively, the "Covered Executives") of THE CASTLE GROUP, INC., a Utah corporation (“Castle”). As used in this Code, "we", "our", "us" or "Castle”, and "you" means a Covered Executive. The Covered Executives hold an important and elevated role in corporate governance, and are uniquely positioned and empowered to ensure that Castle’s interests are appropriately balanced, protected and preserved. Castle’s Board of Directors (the "Board") has adopted this Code to deter wrongdoing and to promote honest and ethical conduct, proper disclosure of financial information in Castle’s periodic reports and compliance with applicable laws, rules and regulations by Castle’s senior officers who have financial responsibilities.

GENERAL OBLIGATIONS

In performing your duties, we expect you to:

* Conduct yourself honestly and ethically, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. Refrain from using your position for personal gain or competing directly or indirectly with Castle.

* Provide, or cause to be provided, full, fair, accurate, timely and understandable disclosures in (i) reports and documents that we file with the Securities and Exchange Commission (the "SEC") and (ii) in other public communications made by us.

* Comply, and encourage others reporting to you to comply, in all material respects to all applicable rules and regulations of federal, state and local governments, the SEC and other appropriate private and public regulatory agencies.

* Comply, and encourage others reporting to you to comply, with this Code and all other codes of business conduct or ethics adopted by us from time to time.

* Promptly report, and encourage others reporting to you to report, any known waiver or violation of this Code to Jerry Ruthruff or a member of the Board.

-1-

WAIVERS FROM OR CHANGES TO THE CODE

The Board will have the sole and absolute discretionary authority to approve any changes to this Code and any waivers from this Code. Any waiver from this Code, including an implicit waiver, for a Covered Executive will be promptly disclosed on a Form 8-K or any other means approved by the SEC. Such disclosure will include the nature of the waiver, the name of the Covered Executive to whom the Board granted the waiver and the date of the waiver. Any change to this Code will be promptly disclosed as required by law or regulation of the SEC.

ADMINISTRATION OF AND COMPLIANCE WITH THIS CODE

Procedures for Raising Concerns . You are expected to comply with this Code and to report any possible violation of this Code, so that it can be investigated and evaluated. Concerns may be presented in person or in writing to Jerry Ruthruff or a member of the Board. Concerns may be reported on a confidential and anonymous basis. Written concerns should be addressed to Jerry Ruthruff or a member of the Board at The Castle Group, Inc., Attention: Board of Directors, 3 Waterfront Plaza, 500 Ala Moana Blvd., Suite 555, Honolulu, Hawaii 96813.

Procedures for Investigating and Resolving Concerns . Reports of possible violations will be forwarded to a member of the Board, who may, in their discretion, assume responsibility for evaluating any possible violation and directing or conducting any investigation or may delegate any portion of such responsibility to a committee of the Board or another person or entity. The Board will have the authority to engage independent counsel and other advisers, as it deems necessary, to assist in its investigation and decision process.

After conducting the investigation, the results will be evaluated and the Board will authorize such response, follow-up and preventive actions, if any, as are deemed necessary and appropriate to address the substance of the reported possible violation. We reserve the right to take whatever action it believes appropriate, up to and including discharge of any Covered Executive determined to have engaged in improper conduct.

We will not penalize or retaliate against any person or entity for reporting a possible violation in good faith. We will not tolerate retaliation against any person or entity for submitting, or for cooperating in the investigation of, a possible violation. Any retaliation will warrant disciplinary action against the person who wrongfully retaliates, up to and including termination of employment.

- 2 -

Exhibit 21 - Subsidiaries

Hawaii Reservations Center Corp.

HPR Advertising, Inc.

Castle Resorts & Hotels, Inc.

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).

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Rick Wall, certify that:

1. I have reviewed this Annual Report (the “Report”) on Form 10-KSB of the small business issuer;

2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this Report;

4. The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this Report is being prepared;

b) evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

c) disclosed in this Report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5. The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions);

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.


Date:	September 17, 2007	By:	/s/Rick Wall
			Rick Wall, Chief Executive Officer and Director

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael S. Nitta, certify that:

1. I have reviewed this Annual Report (the “Report”) on Form 10-KSB of the small business issuer;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.


Date:	September 17, 2007	By:	/s/Michael S. Nitta
			Michael S. Nitta, Principal Accounting Officer

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Castle Group, Inc. (the “Registrant”) on Form 10-KSB for the period ending December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Rick Wall, CEO and Michael S. Nitta, Principal Accounting Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Registrant.


Date:	September 17, 2007	By:	/s/Rick Wall
			Rick Wall, Chief Executive Officer and Director

Date:	September 17, 2007	By:	/s/Michael S. Nitta
			Michael S. Nitta, Principal Accounting Officer