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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB

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

                   For the fiscal year ended December 31, 2001

[ ]  TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                For the transition period from 1/1/01 to 12/31/01
                        Commission file number 000-32311

                             SURETY HOLDINGS CORP. .
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

              DELAWARE                                  52-222-9054
      (State of Organization                        IRS Employer ID No.

850 Fort Plains Road, Howell, New Jersey)                  07731
(Address of principal executive office)                 (Zip code)

                         Registrant's Telephone Number,
                      Including area code: (732) 886-0706

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

                              Title of each class:

                   Name of each exchange on which registered:

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

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 [x] yes [ ]No


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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ]

                         The issuer's revenues for the
                     most recent fiscal year was $6,831,000

The aggregate market value of Surety Holding Corp.'s voting common equity held
by non-affiliates was $3,802,500 at April 2, 2002 based on the average bid and
asked price.

As of April 1, 2002 6,738,000 shares of Surety Holdings Corp. Common Stock @
$.01 par value were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

None
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                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

(a)      BUSINESS DEVELOPMENT

         In June 1999, Surety Holdings Corp., a Florida corporation incorporated
in December 1995), merged with Surety Holdings Corp., a Delaware corporation
(incorporated in May 1999). The surviving Delaware corporation ("Surety")
continued the Florida corporation's endeavors of pursuing business
opportunities. Surety Kohala Corporation, ("Surety Kohala"), the sole subsidiary
of Surety, was incorporated in Hawaii in December 1988 under the name Chalon
International of Hawaii, Inc. for the primary purpose of real estate
development, including the acquisition of fee simple land or leaseholds, and the
construction of improvements thereon.

         In December 1999, Surety issued 2,000,000 shares (retroactively
restated to 6,000,000 shares to give effect to a February 2002 two hundred
percent (200%) stock dividend) of its common stock in exchange for 100% of
Surety Kohala's outstanding shares in a recapitalization transaction accounted
for as a reverse acquisition with a "shell" company. Surety Kohala was deemed
the accounting acquirer and Surety was deemed the legal acquirer. Control of a
shell company, Surety, the Florida corporation, was previously acquired from an
existing shareholder by Yoshihiro Kamon who received 90% of the then issued and
outstanding shares of Surety, the Florida corporation for $150,000. After the
issuance by Surety, the Delaware corporation of 2,000,000 shares (retroactively
restated to 6,000,000 shares as discussed above) of its common stock in December
1999 in exchange for 100% of Surety Kohala's outstanding shares, Yoshihiro Kamon
owned and currently owns directly 90,000 of Surety's issued and outstanding
shares (retroactively restated to 270,000 shares as discussed above) and
indirectly through Mahukona Holdings Corp. an additional 2,000,000 shares
(retroactively restated to 6,000,000 shares as discussed above). Accordingly,
Kamon may be deemed to own directly and indirectly 93% of the issued and
outstanding shares of Surety. The purpose of the acquisition was to facilitate
the entry of the Company into the public arena, as Surety was at the time a
public company, whose shares were included on the National Association of
Securities Dealers bulletin board.

         Surety and Surety Kohala (collectively, the "Company") is engaged in
the development of a property on approximately 642 acres of land in the North
Kahola district of Hawaii Island in the state of Hawaii (the "Mahukona
development project"). The development was initially intended to be a hotel,
18-hole golf course and resort homes. However, the Company is considering other
avenues of development for the 642 acres, most notably, an all-inclusive
fractional interest club community.

         During the past three (3) years, the Company's income was derived
primarily from real estate sales, with minimal revenues derived from rental
income of property and from cattle and other revenues. The Company has an
accumulated deficit, specifically $5.1 million as of December 31, 2001. In
addition, the Company refined the Mahukona development project, the approvals
for which had been obtained years


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earlier. In the future, however, the Company may not be able to maintain
compliance with all applicable conditions of the approvals. The Company has
twelve (12) full time employees and one (1) part time employee excluding
executive officers and directors. The Company does not have any franchises,
concessions, royalty agreements or labor contracts.

         The Company will, of course, be required to, and intends to seek to,
comply with federal and state regulations, if any, governing hotels, resorts and
golf courses in connection with the Company's proposed operations. The costs and
effects of compliance with environmental laws, federal, state and local are not
deemed to be material by the Company. In connection with the construction of the
hotel, resort and golf course, environmental issues may arise, as well as in
connection with the maintenance of the golf course. The Company will, of course,
seek to comply with such environmental laws or seek necessary alternatives. The
Company does not believe that compliance with existing or probable government
regulations will have a material affect on its proposed business.

         Although the Company believes that the Mahukona development project is
unique, it will, nevertheless, face competition from existing hotels, resorts
and golf courses, as well as any others that may be constructed in the future.
The competing hotels, resorts and golf courses will have been previously
established and may be better financed. In that context, it is difficult to
assess the impact on the Company's proposed Mahukona development project by the
existing and potential competition. The Company operates in a highly competitive
market with extremely high barriers to entry.

         In addition, the Company's business and its proposed development are
subject to various other risk factors including but not limited to general
economic conditions, available financing conditions specific to the property,
unfavorable local, regional, national and international developments, weather
condition, federal, state and local regulations pertaining to property
development.

(b)      BUSINESS OF SURETY

SURETY KOHALA

         Surety Kohala owns approximately 15,000 acres of fee simple land in
North Kahola district of Hawaii Island (The Big Island), in the State of Hawaii,
USA.

         In December 1988, Surety Kohala was established in Hawaii. Surety
Kohala was established to acquire, own and develop the vacant land in North
Kohala, (Kohala Land). The Kohala Land consisted of about 19,384 acres, the
majority which is zoned for agriculture. The land had been used for sugar cane
production for approximately 100 years until the early 1970's when the facility
was closed. After the cessation of the sugar cane operations there were no major
activities on the land, which was left vacant. In December 1988, Surety Kohala
acquired the Kohala Land. In addition, Surety Kohala acquired 235 acres in
September 1989, and 164 acres in December 1991 for the expansion of the Mahukona
Resort Development. Surety Kohala has, since 1989, worked with the


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local Kohala community for the master planning of the development and is
intending to develop a New Style Health community, utilizing eco-management of
the excellent natural environment. The plan is more than just building a resort
area; it is a plan to integrate an existing community with a new development
plan for the 15,000 acres of land, which is expected to include housing,
recreational facilities, farming, historical assets and commercial business
institutes.

         The Mahukona property consists of approximately 642 acres of land.
Surety Kohala has already acquired the necessary governmental permits for the
developments of a hotel and 18-hole golf course. Located on the leeward (dry)
side of the island, with resort permitting in place, and general community and
government acceptance as a resort location, Mahukona is a valuable and critical
component of the overall master plan strategy. In keeping focused on an
eco-based theme for the master plan, and working towards Surety Kohala corporate
goals, the Mahukona Resort will:

         1.  Emphasize sensitivity to the Hawaii environment, culture, human,
physical and spiritual health, practicality, comfort and quality accommodations.

         2.  Provide access to the unique, semi-exclusive Hawaiian
eco-activities on the Surety Kohala land.

         Although there is no assurance that this will, in fact, be the actual
total cost, it is expected that the total current cost for the Mahukona
Development will be approximately $93,000,000. This estimated cost includes 20
homesites, 15 large home estates, 80 upscale cottages, 60 condomniums, 40
studios and an 18 hole golf course and sports/related facilities which was the
initial plan for development. Alternatively, however, the Company is considering
the development of its property as a mix of whole ownership and fractional
interest residential real estate.

         The Company believes Kohala Coast Resort Area is one of the most
luxurious resort areas in the US. Mahukona Resort is approximately a 20 minute
drive from the north point of the Kohala Coast Resort Area. The relation between
Mahukona Resort and Kohala Coast Resort is similar to Kapalua Resort and
Kaanapali Resort in Maui. This means Mahukona is more isolated and an
eco-related facility compared to Kohala Coast Resort Area. Our strategy is to
utilize Kohala Coast's luxury image and price range without competing with their
resorts. We expect to emphasize a "New Style of Development", which is beyond
the regular resort development. Surety Kohala has acquired necessary zonings.
SMA (Special Management Area) Use permit and Golf Course Use Permits. In order
to complete the construction, Surety Kohala will, however, require various
governmental permits. It is anticipated, although there can be no assurance
because of various factors beyond the Company's control, that permits will be
obtained and construction may be completed in approximately four years. The
estimated completion date is predicated upon the satisfaction of a number of
contingencies which are beyond the Company's control including, but not limited
to financing etc. The following is an estimated time frame subject to the
fulfillment of various conditions.


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HOTEL/BUNGALOWS

Plan Approvals            6-18 months
Building Permits           2-4 months
Construction             12-24 months

GOLF COURSE

Grading Permits          Completed
Permit to utilize state lands for a cart underpass service: Discussion Stage:
Questionable
Construction             12-24 months

HOUSE LOTS

Engineering Drawings     10-12 months
Final Subdivision          3-4 months
Construction             12-24 months

LOCATION.

         The State of Hawaii (the Aloha State) was admitted as the nation's 50th
state in 1959. It consists of eight major islands and 124 minor islands which
form a chain extending over 1,600 miles across the mid-Pacific Ocean.

         With more than twice the landmass of all other Hawaiian Islands
combined, the nickname Hawaii's "Big Island" fits perfectly. At 4,028 square
miles in size, the Big Island is larger than the State of Connecticut, USA.
Hawaii is the youngest island in the chain (being 35 million years old) and the
southernmost point of the United States is on this island. The Big Island was
formed by five volcanoes, the world's most active and safest volcano, Kilauea,
which has become one of the island's most popular visitor attractions.

         Hawaii Island is almost a "Mini Continent" by itself, offering
everything from active volcanoes to quiet sandy beaches; from dense tropical
rainforests to verdant pasturelands. A huge variety of marine life flourishes
along Hawaii's Mauna Kea, the tallest mountain at 13,736 feet in the Pacific
Basin. The Big Island provides astronomers with the best stargazing on the
planet earth. The diverse background of the Big Island residents creates an
exciting blend of cultural heritage. The Company believes that the population's
ethnic makeup as of 1996 was 40% Caucasian, 58% Asian or Pacific Islander and
1.8% mixed non-Hawaiian.

         Between Kona Airport and Mahukona, the area is called "Kohala Coast
Resort Area". The destination resorts along the Kona Kohala Coast are located on
the northwestern shore of the island and begin six miles north of Kona
International Airport. Boundaries of the Kona Kohala Coast region are marked by
the Mauna Kea Resort to the north, Ka'upulehu to the south with the Mauna Lani
Resort and Waikoloa Beach Resort in between. There are 3,618 visitor units to
choose from, including condos, one and two bedroom oceanfront suites, oceanside
villas, bungalows, thatched huts and private vacation homes. Island wide, there
are 9,490 visitor facilities accommodations, including Bed & Breakfasts. Resort
sport and fitness facilities have over 55 tennis


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courts, 7 championship golf courses (126 holes), an executive putting course and
6 spas. Other resort activities include scuba, snorkeling, glass-bottom boating,
windsurfing, deep-sea fishing, hunting, horseback riding, sightseeing, whale
watching (in season), sailing and kayaking.

         The Mahukona project land is located on the west (leeward coast) of the
District of North Kohala with about an hour drive time from the Keahole-Kona
International Airport and 20 minutes from Mauna Kea Beach Hotel, which is
located on the north part of Kohala Coast Resort Area. The climate of the area
is generally warm, arid and savanna-like. Daytime temperatures range from about
89 degrees F. in the summer months to about 82 degrees F. in the winter months.
Rainfall in the project area averages approximately 14 inches per year.

SURETY KOHALA'S KOHALA LAND MASTER PLAN.

         Surety Kohala's Kohala Land is located at the northern end of the
island of Hawaii, in the District of North Kohala. This island jewel with its
mild weather, untouched natural features, unsurpassed scenery and deep
historical and culture values is becoming one of the world's leading health
resort area. Within half an hour drive of Surety Kohala's land is the famous
Kohala Resort Area. It was Lawrence Rockefeller who first realized the potential
of this area when he developed his favorite retreat at the Mauna Kea Beach Hotel
in the 1960's.

Surety Kohala's land in Kohala was formerly owned by Castle and Cooke, one of
Hawaii's largest corporations, whose Dole Food label is well-known across the
nation. A plantation existed for over 100 years on these lands before increased
competition and rising costs forced its closure in 1975. Since that time, little
economic activity has been developed within North Kohala. The various villages
of Kohala create an aggregate population of about 4,200 people. The principal
area of employment of Kohala residents is in the resort and support communities
of nearby South Kohala.

         Throughout today's world, the long range importance of solving
environmental issues is an ever increasing consideration and commitment. During
discussion of the global environment, land development is frequently thought to
be yet another of man's burdens placed on natural eco-systems. This idea was
anchored in past disorderly development, which generally did not include a
specific concern for future impacts. The main objective of Surety Kohala is not
only to pursue profit, but also to implement a clear vision of an improved
community that will continuously seek to maintain harmony with nature.

         In these regards, Surety Kohala decided the best method to understand
their land was to seek involvement from the local community through open
dialogue and exchange of ideas. A Citizens Participation Committee (CPC) was
formed to assist Surety Kohala. The CPC was formed by Surety Kohala to examine
existing plans and conditions in the North Kohala area. To facilitate the
evaluation and recommendation proceeds, the CPC was broken down into 6 different
sub-committees: Housing, Public Infrastructure/Recreation, Historic Sites, Land
Use -- Agriculture, Land Use -- Commercial/Industrial and Natural
Resources/Environmental Quality. The Citizen Participation Committee


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"CPC" was not formed as a result of any litigation. Rather, CPC was formed to
encourage and enhance communications with the local citizens of Kohala.

         Surety Kohala may develop a new type community utilizing eco-management
of the excellent natural environment of Kohala. In essence, this plan means more
than just building a resort area. Currently, it may integrate an existing
community with a new development plan for the approximately 15,000 acres of
land, which may include housing, recreational facilities, farming, historical
assets and commercial business institutes. Simultaneously, however, the Company
continues to sell parcels of land to the public. Historically, new developments
were isolated from the existing community, i.e., gated community, private beach,
etc. Surety's concept of development is not to "isolate" but to "integrate" the
resources of the existing community. Surety has not decided how many acres will
be set aside for farming, historical assets and commercial business
institutions, the detail plan will be decided based on Bulk Land Sales
procedures. With respect to historical sites, in the Mahukona development
project, about 11 acres were set aside for historical purposes, zoned "open".
Some of the land, may, however, be sold, under the appropriate circumstances.

         Surety Kohala has already acquired the necessary governmental
development approvals, as discussed later, in the Mahukona area for the Kohala
Land. This will be the flagship facility for the master plan of the area
community. The tourist and owners of the Surety Kohala land may expect to enjoy
sophisticated facilities for dining, sports and relaxation during their stay in
Kohala. The Company has not, however, entered into any agreements with any
restaurants at this time.

         It is anticipated that the land values will be enhanced by the
multi-purpose uses, i.e., land sales, resort, residential lots, bulk land, and
timeshares.

MAHUKONA RESORT DEVELOPMENT.

    Concept of Development

         In response to changes in the economic conditions on the Big Island of
Hawaii, Surety Kohala is considering amending the existing development master
plan for Mahukona.

         Accordingly, Surety Kohala retained a marketing assessment and
feasibility consultant with extensive knowledge and experience in the resort and
second home market on the island.

         As a result, Surety Kohala believes that the highest and best use for
the property is as a golf-oriented result with a mix of whole ownership and
fractional interest residential real estate products. The new concept for the
development and plan is intended to create significant value for the property
under consideration which includes two main parcels. One is the Mahukona parcel
located on the west shore of North Kohala coast, which has zoning approvals for
resort development. The other is large parcels of ranch land and forest preserve
encompassing approximately 3,000 acres. The two pieces are


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not connected, but are situated within a 20-minute drive of each other.

MAHUKONA: Mahukona includes 642 acres on the western coast of North Kohala with
1.4 miles of oceanfront which maintains a warm, dry, "rain shadow" climate
similar to that of the resorts along the Kona/Kohala coast. It is located about
20 minutes north of the Mauna Kea resort and 45 minutes north of the
Keahole-Kona International Airport.

MAUKA RANCH AND FOREST LANDS: The ranch and forest preserve land encompasses
approximately 3,000 acres, located northeast of the town of Hawi. It includes
lands that was previously used for sugar cane production. It is now used for
cattle ranching, limited macadamia nut orchards and large amounts of open space.
It is situated primarily on the windward side of the island, and receives
significantly more rainfall than Mahukona. It is, therefore, green, lush and
partially forested.

         The above property may be developed to include a combination of
whole-ownership and fractional interest units, (both attached and detached) with
very attractive and extensive recreation amenities for club members, who would
include and be limited to whole-ownership and fractional property owners at the
resort.

         Residential units may include: Twenty (20) premier whole ownership
custom home sites and twenty (20) cabins sold as finished units. In addition,
fifteen (15) large, high-end "estate" homes, sixty (60) smaller condominium or
studio units may be marketed as fractional components, which would represent
ownership interests for portions of the year.

Recreation amenities may include:

         An attractive central lodge building, with up to 50 lodge units and
housing the central check-in/administrative center for the resort as well as
several restaurants (one find dining, one casual), along with a small
convenience store/bakery and possible other uses;

         A first class 18-hole regulation golf course with an attractive
clubhouse and associated practice facilities;

         An attractive "beach club" facility overlooking the ocean, with an
outdoor poll, hot tubs, spa facilities, and other amenities;

         A high quality tennis complex located either at the golf course
clubhouse or lodge;

         Extensive trails and attractive waterfront areas landscaped and
maintained for member use;

         A club boat (a large catamaran for snorkel trips, sunset cruises, etc.

         A variety of improvements to the ranch, including development of
central "ranch house" building, used primarily as a day-lodge for the ranch
lands area, with a small food and beverage kitchen and a variety of amenities
for club member (such as equestrian facilities. ATV's,


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mountain bikes, and possible limited overnight bedroom facilities for occasional
overnight use) and improvement of trails throughout the property for use by
members (horseback, mountain biking, ATV, or SUV).


    Governmental Permits for Development

         The Company believes that the average occupancy rate in the Kohala area
was 68.00% in 1999 according to a published industry source, but may be lower at
this time as a result of a decline in tourism after the terrorist attack of
September 11, 2001.

         Surety Kohala has acquired the following necessary governmental
approvals for the development of its projects:

         State Land Boundary Amendment: Amendment to the State Land Use Boundary
Map from Agricultural to Urban, 14.3 Acres. (SLU 853 dated November 17, 1993).

         County Zoning Code: Amendment to the County Zoning Code, changing the
district classification from Unplanned (U) to Agriculture (A-1a), resort-Hotel
(V 2.0) and Open (O). (REZ 747 dated November 17, 1993)

         Special Management Area (SMA) Use Permit: The Planning Commission
approved SMA Use Permit No. 341, dated June 24, 1993.

         Golf Course Use Permit: The Planning Commission approved Golf Course
Use Permit No. 111, dated June 24, 1993.

         The prior approvals obtained for the Mahukona Development project in
1993 were conditional; that is, each approval was subject to various conditions
of approval. Certain of these conditions of approval contain time limits or
financial compliance requirements, which if not met, may ultimately result in
legislative and/or administrative actions to void or revoke the prior approvals.
The effect of such adverse actions would be to return the land entitlements to
the former zoning, or more appropriate zoning as determined by the County of
Hawaii. Surety Kohala has continued to maintain the prior approvals through
compliance with all applicable conditions. In the future, however, the Company
may not be able to maintain compliance with all applicable conditions.

         After the approvals, the zoning acreage breakdown is for the 642 acres
is:

V2.o (Resort)                          14 Acres
Ag.1                                  267 Acres
Ag.5                                  307 Acres
Conservation District                  43.Acres
Open                                   11 Acres

Summary: A description of the significance of each type of zoning referred to
above is as follows:


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V2.0: "V" stands for resort zoning. The number following the "V" indicates the
density allowed for that zoning category. For Mahukona, the "2.0" means the
required land area, in thousands of square feet, for each rentable unit.
Therefore, at 14.324 acres, the Mahukona resort zoned area is permitted 312
units. The height limit in this zone is 45 feet. The minimum building area is
15,000 square feet, requiring residential lots be at least 15,000 square feet in
size.

Ag.1: "A" stands for agriculture zoning. The number following the "A" together
with the lower letter "a" indicates the minimum number of areas for each
building site. For Mahukona, A-1a and A-5a means zoning for 1 acre and 5 acre
sized lots. The height limits for residential structures is 35 feet and 45 feet
for all other structures. Hotels, condos or other commercial or industrial uses
are not permitted in this zone.

Conservation District: The "Conservation District" is not a County Zoning
designation; it is a designation by the State of Hawaii. The State of Hawaii
zones the Counties then zone lands to fit each category except for the
Conservation District which is under the jurisdiction of the State Board of Land
Natural Resources as provided in State law.

Open: "O" stands for Open zoned district. Permitted uses are parks,
historical/cultural areas, and other open natural features.

    Infrastructure System

         Water. Although other developments in west Hawaii suffer from shortage
of both portable and irrigation water, North Kohala is very rich with water
resources. Portable water will be supplied to the site from wells in the
northern part of Kohala through pipelines. Irrigation water will be supplied by
Kahola Ditch Water System that was developed about 100 years ago for sugar cane.

         Electricity. Surety Kohala has been conducting research for electricity
system alternatives. Cogeneration System is one of the options and Surety Kohala
will decide the most cost efficient system.

Final water plan for Mahukona is under negotiation with County Water Department.

Expected Construction Cost (US$)

         Based on the preliminary assessment of its consultants, the revised
Mahukona development project cost (excluding on-going costs and maintenance)
would be approximately $93 million and completed substantially over a three-year
period. Based on information provided by its consultants, the Company
anticipates the timing and details of the $93 million to be as follows (in
thousands):

Initial Infrastructure
Development Costs

                                      Year 1      Year 2     Year 3

Infrastructure (roads, water
 Sewer, etc.)                        $10,000     $10,000    $10,000


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Golf course, range clubhouse, etc.    10,000     10,000
Tennis Complex                                    1,000
Central Lodge facility (lobby
 restaurants, etc.)                              10,500
Beach Club                                       10,000
Recreational trails/improvements                    500        500
Ranch Improvements/amenities             500      2,000      1,000
Clubs boats/marina improvements                   1,500      1,000
Other amenities/improvements                      2,000
Entrance/gatehouse                                  500
Design, permits, engineering
 Contingency                           3,075      7,200      2,012
                                      ------    -------     ------

                                     $23,575    $55,200    $14,512

         There is of course no assurance that the project can or will be
completed at the estimate cost, which is based on many variables which can and
will change.

    Existing Luxury Facilities in Kohala Coast

         Although the Company believes its proposed Mahukona development project
will be unique, the Company will face significant competition in each of its
proposed business operations, i.e., hotel, resort, golf courses and land sales.
Numerous competitors are larger, well known and have greater resources than the
Company. There can be no assurance that the Company will be able to compete
successfully or that the Competition will not have an adverse effect on the
Company's operating results. Moreover, the Mahukona development project may
suffer as a result of its isolation, lack of Sandy Beach, lack of commercial
facilities, lack of area restaurants, lack of critical supporting commercial
facilities.

         However, a strength of the Mahukona development project is its
excellent location, dramatic coastline and ocean view and that it is distinctly
separate from the hustle and bustle typical of the populous resorts.

         The following is a brief description of some of the competition that
the Company will face in its proposed business:

    Hotels

         Mauna Kea Beach Hotel -- (310 Rooms). The very first resort to open
along the Kona Kohala Coast. This was Lawrence S. Rockefeller's retreat and now
houses a portion of his Asian art and Hawaiian quilt collection. Recently
remodeled, overlooking a crescent of white sandy beach and Kauna Koa Bay, all
rooms have lanais, Cable television (available on request), swimming pool, 13
tennis courts, beach and 6 shops. Shuttle service and reciprocal charging
privileges with the adjacent Hapuna Beach Prince Hotel.

         Hapuna Beach Hotel -- (350 Rooms). Opened in 1994 on the island's best
beach, this is Mauna Kea's sister hotel and the two properties are adjacent,
with reciprocal privileges. Carpeted guest rooms with marble bathrooms, 36
suites, with all rooms overlooking the ocean, hotel pool,


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hot tub and five restaurants. The showpiece of this hotel is an 8,000 square
foot, four-bedroom suite with its own swimming pool.

         Mauna Lani Bay Hotel -- (350 Rooms). A refined atmosphere permeates
this hotel whose rooms have recently been redecorated in shades of white with
linen and cotton, along with teak furnishings. If money is no object, the $3,000
to $4,000 per night bungalows come with a butler, limo and private pool. This is
the home of the annual Senior Skins Game. There are two spectacular golf
courses. The signature hole is the 15th on the South Course where golfers tee
off over a wide expanse of ocean. Mauna Lani is also home to the annual event of
the Sun Food Celebration in July, a four-day event featuring renowned chefs and
vintners from sunny climes.

         Hilton Waikoloa -- (1,240 Rooms). Children especially love this resort
hotel, whose 62 acres are navigated by monorail or boat. There is a swimming
pool nearly an acre in size with a 175 foot water slide, several smaller pools,
a lazy river, man-made beach and a four-acre lagoon where a chosen few (drawn by
lottery) can experience an encounter with dolphins. The three buildings of the
resort are elaborately landscaped and a multi-million dollar Pacific Island Art
Collections housed in the corridors of the hotel. In addition, guests may enjoy
privileges at 2 golf courses, 3 pools, 8 tennis courts, a spa, 7 restaurants, 6
bars and a lively disco.

         Four Seasons Hotel -- (243 Units). The Big Island's newest resort
features 32 low-rise bungalows along the ocean, each housing six or eight guest
rooms and four golf club bungalows along the golf course. The rooms breathe the
tropical elegance with sisal carpeting, natural slate floors, Hawaiian artwork
from an earlier era and louvered sliding doors of dark wood. Some suites have
outdoor garden baths with showers that fall from lava ledges, private plunge
pools and whirlpools.

    Golf Courses

         Seven Championship courses, all on the Kona Kohala Coast, offer
visitors a total of 126 holes with a view. The Mauna Lani's Francis H. Brown
Golf Courses are home to the annual Senior Skins Game. The Waikoloa Resort hosts
the Kings' Cup and Tiebreaker and the newest, Hualalai, is the home of the PGA's
MasterCard Championship.

         Mauna Kea Golf Course. The Mauna Kea Golf Course offers dramatic
elevation changes and spectacular views. Consistently top rated, this 18-hole
championship golf course is one of Hawaii's most unique challenges. Amenities
include a pro shop, driving range, practice green, restaurant and fitness
center.

         Hapuna Golf Course. A unique, environmentally sensitive golf course,
the Hapuna Golf Course is a link-style 18-hole championship course. It offers
the golfer an ultimate challenge with sweeping panoramic views of the Kohala
Coast and the volcanic peaks of the Big Island. Amenities include a pro shop,
driving range, practice green, restaurant and fitness center.

         Muana Lani Golf Course. Characterized by rolling terrain and groves of
kiawe trees, the North Course is built on an ancient lava flow. Feral goats
frequent the fairways and the course's signature hole

                                       13
<PAGE>

is a par three which hits from an elevated tee into a natural amphitheatre of
lava. Amenities include a pro shop, two driving ranges, practice green, lessons,
rentals, on-course refreshment cart and restaurant.

         Waikoloa Kings Course. Designed by Tom Weiskopf and Jay Morrish, the
Par 72 link, 7,000 yard layout of Waikoloa's Kings' Course features six major
lakes and approximately 75 bunkers. The sophisticated bunker strategy and
multiple tee placements work together to create challenging and fun course.
Amenities include a golf shop, complete practice facility, golf academy, hotels,
condominiums, restaurant and lounge.

         Four Seasons Golf Course. This 18-hole Jack Nicklaus golf course was
crafted with extreme sensitivity to the land. Winding over 7,100 yards, this
carefully groomed course flows across brilliant green fairways contoured against
black lava, ending at the ocean where the finishing holes capture the drama and
beauty of direct seaside golf. Amenities include a short game practice area,
30-station driving range, sand bunker, golf shop, men and women's locker rooms
and restaurant.

MARINE FOREST RESORT, INC.

         Pursuant to uncollateralized promissory notes, the Company advanced
Marine Forest Resort, Inc. ("Marine Forest"), a related Japanese corporation
that owns approximately 400 acres of land in Okinawa, Japan, $9.75 million. The
notes bear interest at the U.S. prime rate, at date of issuance, plus one
percent. Under their original terms, the notes were due six months after date of
issuance. However, all notes were extended an additional six months and
subsequently extended to December 31, 2002, as a concession to Marine Forest to
advance Marine Forest's development projects. In connection therewith, the
Company continues to discuss the possibility of a strategic arrangement with
Marine Forest, including the Company acquiring Marine Forest. However, the
parties are waiting the completion of the revised Mahukona development plan
(expected in the second quarter of 2002) to further its discussion in this
regard. Related interest income for 2001 and 2000 is approximately $1,054,000
and $210,000, respectively. Through December 31, 2001, no interest has been
paid, however, management anticipates that all accrued interest receivable will
be reclassified to principal and settled in connection with the parties'
contemplated strategic arrangements.

         At December 31, 2001, in light of the speculative nature of Marine
Forest's contemplated development projects among other reasons and in accordance
with its compliance with the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 114, the Company recorded an impairment charge of
approximately $7.2 million.

The following schedule of notes reflects the details of each of the
uncollateralized loans made by the Company to Marine Forest:

                                       14
<PAGE>

                           Original      Extended        Interest
       Date      Amount     Due Date        Date           Rate
--------------------------------------------------------------------------------

1.    8-Jun-00    $1,900,000    7-Dec-00    31-Dec-02       10.5%
2.   24-Aug-00    $1,000,000   23-Feb-01    31-Dec-02       10.5%
3.   11-Oct-00    $  400,000   10-Apr-01    31-Dec-02       10.5%
4.    9-Nov-00    $  500,000    9-May-01    31-Dec-02       10.5%
5.   14-Nov-00    $3,000,000   16-May-01    31-Dec-02       10.5%
6.   19-Dec-00    $1,000,000   18-Jun-01    31-Dec-02       10.5%
7.   24 Jan-01    $1,000,000   24-Jul-01    31-Dec-02       10.5%
8.   23-Feb-01    $  500,000   23-Aug-01    31-Dec-02        9.5%
9.   23-Mar-01    $  200,000   23-Sep-01    31-Dec-02        9.0%
10.  230May-01    $  250,000   23-Nov-01     2-May-02(A)     8.0%


(A)  Expected to be extended to December 31, 2002

         Marine Forest presently operates two restaurants and a convenience
store in the Okinawa Airport. In addition, it has undertaken a resort project
and has obtained government approvals in 1995 for construction of a hotel and 18
hole golf course on property it owns and/or leases for that purpose. The project
is at the very earliest stages with the beginning of the construction of the
entry road and mass grading of the property for future construction of the
hotel. The site is located in Sedaka of Nago City which is about one hour drive
from Okinawa International Airport.

ITEM 2.  DESCRIPTION OF PROPERTY.

         The lands owned by Surety Kohala in North Kohala, Hawaii comprise, as
of this  date,  approximately  15,000  acres,  (a  reduction  from the  original
aggregate  holdings  after giving  effect to sales of acreage),  which land area
includes the Mahukona development project area. Surety Kohala's primary focus is
the development of approximately 642 acres of land at Mahukona.

         The Surety Kohala real property is subject to two levels of land use
regulation. The first level is through the State Land Use Commission which is
the state agency charged with the responsibility of establishing the four (4)
district boundaries for lands within the State of Hawaii as Urban District,
Agricultural District, Rural District and Conservation District. Pursuant to
Hawaii Revised Statutes Chapter 205, the State Land Use Law, the County of
Hawaii is delegated the responsibility for implementing zoning regulations and
enforcement of the State Land Use Law within all the districts except for the
Conservation District. The State of Hawaii Department of Land and Natural
Resources ("DLNR") and its Board of Land and Natural Resources ("BLNR") are
charged with the responsibility of implementing and enforcing the rules and
regulations relating to uses proposed within the Conservation District. As a
general rule, the Surety Kohala lands at the shoreline are typically designated
as Conservation District or Agricultural District, the lands at the mid-level
are designated Agricultural District or Urban District, and the lands at the
upper


                                       15
<PAGE>

forest reserve areas are designated as Agricultural District or Conservation
District.

         At the County of Hawaii level, all uses and activities are regulated
through the provisions of Hawaii County Code Chapter 25, Zoning Code, with
additional regulations for lands near the ocean in the County's Special
Management Area pursuant to Hawaii Revised Statutes Chapter 205A, and the
structural setback requirements in the shoreline setback area prescribed in HRS
Section 205A-41, et seq. for the shoreline areas. As noted above, the
Conservation District lands and activities therein are controlled by the State
DLNR and BLNR.

         The specific use and sale of the Surety Kohala real property is also
regulated by other provisions of the Hawaii Revised Statutes (State law) and
Hawaii County Code (County law) which relate to the use, development and sale of
real property within the County, to include without limitation, under State law
-- Hawaii Revised Statues Chapter 6E relating to Historic Preservation, Hawaii
Revised Statutes Chapter 343, relating to Environmental Assessments and
Environmental Impact Statements, Hawaii Revised Statutes Chapter 484 relating to
Uniform Land Sales Practices Act, and Hawaii Revised Statutes Chapter 514a
relating to Condominium Property Act, and under County law -- Hawaii County Code
Chapter 23 relating to Subdivisions, Hawaii County Code Chapter 27 relating to
Flood Control, and the Hawaii County General Plan designations for the lands.
The specific development regulations applicable to each individual parcel are
primarily determined by the County zoning designation, archeological
preservation requirements, flood zone regulations and the subdivision,
condominium, building, plumbing and electrical codes applicable to each parcel.

         The zoning and use regulations specifically relating to the Mahukona
development project are subject to the above, and are more particularly
expressed in the governmental approvals issued to date which include, without
limitation, the following:

         1.  State Land Use District Boundary Amendment from Agricultural to
Urban for 14.3+/- acres, Ordinance No. 93-113, effective November 8, 1993;

         2 . County Zoning Ordinance No. 93-109, effective November 8, 1993;

         3.  Special Management Area Use Permit No. 341, effective June 24,
1993; and

         4.  Golf Course Use Permit No. 111, effective June 24, 1993.

         The prior approvals obtained for the Mahukona development project in
1993 were conditional, that is, each approval was subject to various conditions
of approval. Certain of these conditions of approval contain time limits or
financial compliance requirements, which if not met, may ultimately result in
legislative and/or administrative actions to void or revoke the prior approvals.
The effect of such adverse actions would be to return the land entitlements to
the former zoning,


                                       16
<PAGE>

or more appropriate zoning as determined by the County of Hawaii. Surety Kohala
has continued to maintain the prior approvals through compliance with all
applicable conditions. In the future, however, the Company may not be able to
maintain compliance with all applicable conditions.

         The Hawaii Supreme Court remanded the processing of any further agency
actions for proceedings consistent with its opinion in the Citizens for the
Protection of the North Kohala Coastline v. County of Hawaii, 91 Haw 94; p.2d
1120 (1999). The Mahukona development environmental impact statement requirement
was triggered by the proposal to construct two golf cart underpasses under the
State highway. In Hawaii, litigation over the requirements for environmental
assessments/environmental impact statements and their effect on existing and
proposed permit approvals is an evolving area of law. In light of past
litigation, it is probable that a challenge will be made against the project
whether an environmental impact statement is conducted or not. Because of the
evolving state of the law in this area, there may also be an attempt to again
invalidate the prior 1993 permit and legislative approvals. Surety Kohala has
initiated a redesign of the Mahukona development project to avert or mitigate
the need for an environmental impact statement. Surety Kohala is fully aware of
the situation and is taking all feasible actions to mitigate the risk to the
prior approvals in its redesign effort.

         For a more detailed recitation of the properties owned by Surety
Kohala, please refer to previous discussions under Item 1, "Business".

         From a business perspective, Surety Kohala's property may be divided
into two categories. The majority of the Kohala property is zoned agricultural.
The Company intends to sell the property in parcels. The details and terms of
each of the land sales will be on a transaction by transaction basis. Until such
time as the acreage is sold, the parcels are leased on a short-term basis or
used for the Company's cattle ranch operation. The Kohala property consists of
approximately 15,386 acres, zoned as follows: Agricultural -- 76.46%;
Conservation -- 23.09%; Industrial -- .44% and Commercial -- .02%. In connection
with the sales, it may be necessary to subdivide the property. Contract
purchasers have the right to terminate their agreement prior to the Company
subdividing the property and prior to the closing of the transaction. The
Company intends to develop the Mahukona property of approximately 642 acres as
previously discussed as hotel, resort, golf course and residential lots.

         The Company has a mortgage note, which is collateralized by property
located in the Mauna Kea Fairways (see Existing Luxury Facilities in Kohala
Coast). The mortgage note is payable in monthly installments of principal and
interest through 2019. The mortgage note bears interest based on an adjustable
rate (7.75% at December 31, 2001) not to exceed 15%, adjusted annually. The
mortgage note payable at December 31, 2001 was approximately $415,000.

         There are no limitations on the percentage of assets which may be
invested in a single investment. Further, there are no restrictions on the types
of investments the Company may make or the type of properties in which the
Company may invest. Moreover, there is no


                                       17
<PAGE>

limitations on the number of mortgages which may be placed on one piece of
property.

         Surety Kohala leases two (2) parcels of land from the Bishop Estate.
One parcel of 5159 acres is leased for watershed purposes at an annual rental of
$28,000. The other parcel of 44 acres is leased for pasture purposes at an
annual rental of $9,346.

         The Company maintains liability insurance to a maximum of $10,000,000
which it believes is adequate insurance.

         For the proposed development of the property and general competitive
conditions to which the properties are or may be subject, See Item 1,
"Business".

         Surety Kohala maintains offices at 55-515 Hawi Road, Hawi, Hawaii. The
building, containing approximately 12,000 square feet, is owned by Surety
Kohala.

         The Company's offices in Howell, New Jersey are provided without charge
by an officer who also resides at the location.

ITEM 3.  LEGAL PROCEEDINGS.

MAHUKONA DEVELOPMENT PROCEEDINGS

         In the Civil No. 93-418/Hawaii Supreme Court No. 19051 matter, the
Hawaii Supreme Court upheld the validity of the Special Management Area Use
Permit No. 341 for the Mahukona Development Project. No further appeal was taken
on this matter.

         In Civil No. 93-417/Hawaii Supreme Court No. 20723 matter, the Hawaii
Supreme Court remanded the processing of any further agency actions for
proceedings consistent with its opinion in the Citizens for the Protection of
the North Kohala Coastline v. County of Hawaii, 91 Haw. 94;979 P.2d 1120 (1999).
The Court held that an Environmental Impact Statement ("EIS") should have been
processed for the project because it involved the use of State lands, (i.e., use
of the State highway right-of-way for golf cart underpasses). The nature and
extent of further EIS processing will depend on the current Mahukona development
project master plan and timeframe for buildout.

         In Hawaii, litigation over the requirements for environmental
assessments/environmental impact statements and their effect on existing and
proposed permit approvals is an evolving area of law. In light of past
litigation, it is probable that a challenge will be made against the project
whether an environmental impact statement is conducted or not. Because of the
evolving state of the law in this area, there may also be an attempt to again
invalidate the prior 1993 permit and legislative approvals. Surety Kohala
initiated a redesign of the Mahukona Development Project to avert or mitigate
the need for an environmental impact statement. Surety Kohala is fully aware of
the situation and is taking all feasible actions to mitigate the risk to the
prior approvals in its re design effort.


                                       18
<PAGE>

ACTIONS TO QUIET TITLE

         The Company is the plaintiff in approximately twenty (20) actions to
quiet title on parcels of land in the North Kohala district. These actions which
are at various stages of the proceedings involve a total of 599 acres ranging
from as small as a one-half acre parcel to as large as a 118 acre parcel. In
addition, the Company is appealing a Planning Director's Decision in connection
with a final sub-division which action may be settled.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were
submitted to a vote of security holders.

                                     PART II

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

         Our common stock is quoted on in the Over-The-Counter Bulletin Board
(OTC-BB) under the Symbol "SHDC". Over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not represent actual transactions. During the year ending December 31, 2001
there had been no trading. Trading began in March 2002. In the limited period of
trading the price has ranged from 16 high ask, to 3-1/2 low ask, to 13-1/2 high
bid, to 3-1/4 low bid.

         The Company has approximately 40 shareholders of record as of December
31, 2001.

         On February 4, 2002, the Company declared a 200 percent stock dividend
on its common stock payable on February 15, 2002. The Company does not
anticipate paying any dividends on its common stock in the foreseeable future.


Item 6 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

OVERVIEW

Surety Holdings Corp. (the "Company"), through its wholly-owned subsidiary,
Surety Kohala Corporation ("Surety Kohala") (formerly Chalon International of
Hawaii, Inc.), is primarily engaged in the development of a property on 642
acres of land in the North Kohala district of Hawaii Island in the state of
Hawaii. This development, referred to as the Mahukona development project, was
initially slated to be a hotel, 18-hole golf course and resort homes. However,
the Company is exploring other avenues of development for the 642 acres most
notably, an all-inclusive fractional interest club community (see MAHUKONA
DEVELOPMENT in Liquidity and Capital Resources).

The current  operations of the Company (discussed below) include the sale of its
non-Mahukona  development  project real estate and other  ancillary  activities,
many of which are not deemed to be the future of the Company's business.

RESULTS OF OPERATIONS

The following  table sets forth the  statements of operations of the Company for
the years ended December 31, 2001 and 2000: 2001 2000

Real estate sales                               $ 5,835,000     $14,145,000
Rentals                                             346,000         336,000
Cattle sales                                        393,000         488,000
Other                                               257,000         251,000
                                               -------------   -------------

     Total revenues                               6,831,000      15,220,000
                                               -------------   -------------

Cost of real estate sales                         2,362,000       4,954,000
Cost of rentals                                     130,000         133,000
Cost of cattle sales                                219,000         163,000
Cost of other                                       233,000         200,000
                                               -------------   -------------

     Total cost of revenues                       2,944,000       5,450,000
                                               -------------   -------------

Gross profit                                      3,887,000       9,770,000

General and administrative expenses               1,268,000       1,257,000
                                               -------------   -------------

Income from operations                            2,619,000       8,513,000
                                               -------------   -------------

Interest income                                   1,377,000         547,000
Interest expense                                   (82,000)        (44,000)
Impairment charge                               (7,200,000)
Income (taxes) benefit                            1,352,000       (822,000)
                                               -------------   -------------

                                                (4,553,000)       (319,000)
                                               -------------   -------------

Net income (loss)                              $(1,934,000)    $ 8,194,000
                                               =============   =============

                                       19
<PAGE>

REAL ESTATE SALES --

In 2001,  the Company sold nine  properties for proceeds of  approximately  $5.8
million as compared  to 2000 where the Company  sold  seventeen  properties  for
proceeds of approximately  $14.1 million,  an approximate $8.3 million decrease.
The  decrease in real  estate  sales and related  margins  experienced  in 2001,
resulted from delays caused by the Company's survey company,  the largest survey
company on the Big Island of Hawaii and probably the only survey  company  large
enough  to handle  the  Company's  PCRS  (Parcel  Consolidation  Re-Subdivision)
parcels and subdivisions,  being backlogged with work. This surveying backlog is
a result of  increasing  demand of the  Company's  North  Kohala  property  in a
favorable economic time. Further,  many of the properties the Company is selling
have never been surveyed and the  topography  and terrain are very difficult for
surveyors.  To address the backlog,  the Company recently switched  surveyors on
several  projects.  Once the surveyors have finished,  certain  parcels that are
subject to the land court  system go through the land court  process  (generally
three months).

Further,  the events of September 11, 2001 ("September 11th") contributed to the
deteriorated sales of 2001  (approximately  $4.3 million of the approximate $8.3
million  revenue   decrease   occurred  during  the  fourth  quarter  of  2001).
Specifically,  the Big Island of Hawaii  experienced  a sharp decline in tourism
and second home markets immediately after September 11th.  However,  the Company
believes  these markets are gradually  recovering  and at December 31, 2001, the
Company  had   approximately   sixty   contracts  to  sell  land  consisting  of
approximately   3,000  acres  for   proceeds  of   approximately   $31  million.
Additionally, the Company did not experience any land contract terminations as a
result of September  11th.  As of date hereof,  the  obstacles  discussed in the
preceding  paragraph  bottleneck  a majority of these  contracts.  Further,  the
Company is awaiting  the results of the  Company's  appeal of the  County's  new
Planning  Director's  initiative  to  condition  certain  PCRS  with  additional
requirements. A draft settlement has been submitted to the Planning Director and
he should have a decision by late April 2002.

RENTAL REVENUES --

The  slight  increase  in rental  revenue is  attributable  to the rental of the
Sandalwood  property,  a new home built on the  island  during  2001,  which was
rented to Surety Kohala's President for the last eleven months of 2001. In 2002,
the Company  sold the  Sandalwood  property  to Surety  Kohala's  President  for
approximately $575,000.

CATTLE SALES --

The  approximate  19% decrease in cattle sales is attributable to the net effect
of (i) an approximate  37% decrease in number of head of cattle sold  (partially
attributable  to the  Company  reducing  its cattle head count by 10% in 2000 in
anticipation of land sales) and (ii) an approximate 10% increase in the price of
cattle.  The  deteriorated  cattle sales margins are  attributable  to decreased
cattle sales coupled with the fixed cost nature of the cattle sales  operations.
Processes and tasks such as branding,  culling, moving, fence repairs,  medicine
and labor costs are required regardless of sales. Additionally, during 2001, the
Company  leased  previously  owned  pasture and undertook  major fence  repairs.
Although difficult to predict,  the Company  anticipates that 2002 annual cattle
revenues will approximate 2001 annual cattle revenues.

                                       20
<PAGE>

OTHER REVENUES --

Other revenues  experienced  no significant  change in 2001 as compared to 2000.
However,  margins for other revenues fell during 2001 as a result of an increase
in depreciation  expense. The Company anticipates 2002 other revenues to surpass
2001 other revenues due to recovery from September 11th induced downturn.

GENERAL AND ADMINISTRATIVE EXPENSES --

On an overall  basis,  general  and  administrative  expenses  in 2001  remained
relatively  consistent  with 2000. The components of general and  administrative
expenses for 2001 include salaries and related costs of approximately  $522,000;
professional  fees (legal,  auditing and consulting) of approximately  $264,000;
franchise  and  other  taxes  of   approximately   $127,000;   depreciation   of
approximately  $59,000;  insurance of approximately  $53,000; and other expenses
aggregating approximately $243,000. The components of general and administrative
expenses for 2000 include salaries and related costs of approximately  $536,000;
professional  fees (legal,  auditing and consulting) of approximately  $288,000;
franchise  and  other  taxes  of   approximately   $155,000;   depreciation   of
approximately  $60,000;  insurance of approximately  $45,000; and other expenses
aggregating approximately $173,000.

OTHER INCOME AND EXPENSE --

Interest  income  has  increased  substantially  as a result of (i)  outstanding
promissory  notes  receivable  ($9.75  million at December 31, 2001) from Marine
Forest Resort,  Inc. ("Marine Forest") that accrues interest at U.S. prime rate,
at date of issuance,  plus one percent and (ii) the Company's  high cash balance
generated  from the March 2000  private  placement  (see  Liquidity  and Capital
Resources).  The weighted average  outstanding  principal balance for the Marine
Notes  for  2001  and  2000  was  approximately  $9.5  million  and  $2  million
respectively.  Interest  expense  increased  approximately  86% as a  result  of
outstanding  indebtedness  ($375,000  at  December  31,  2001) to the  Company's
President  that  accrues  interest  at 5% per  annum.  The  average  outstanding
principal  balance  for the  Company's  President's  notes for 2001 and 2000 was
$355,000 and $63,000, respectively.

At December  31, 2001,  in light of the  speculative  nature of Marine  Forest's
contemplated development projects among other reasons and in accordance with its
compliance  with the  requirements  of SFAS No. 114, the Company has recorded an
impairment charge of approximately  $7.2 million (see MARINE FOREST in Liquidity
and Capital Resources).

                                       21
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

For the years ended  December 31, 2001 and 2000,  the Company's net cash used in
operating activities of approximately  $1,260,000 and $1,265,000,  respectively,
is comprised of the following:

Net income (loss)                             $(1,934,000)       $  8,194,000

Depreciation and amortization                     147,000             121,000

Deferred income taxes                          (1,391,000)            675,000

Impairment charge, Marine Forest                7,200,000

Accrued interest receivable, Marine Forest     (1,054,000)           (210,000)

Gain on sales and disposition of property
  and assets                                   (3,944,000)       (10,418,000)

Changes in operating assets
 and liabilities                                 (284,000)          373,000
                                             --------------     -------------

                                              $(1,260,000)      $ (1,265,000)
                                             ==============     =============

For the years ended  December 31, 2001 and 2000, the Company's net cash provided
by investing activities of approximately $913,000 and $1,944,000,  respectively,
is comprised of the following: 2001 2000

                                                   2001                2000

Capital expenditures including
  real estate development                     $(3,165,000)      $ (2,502,000)

Proceeds from sales of property                 4,941,000         11,853,000

Proceeds from notes receivable                  1,087,000            393,000

Advances to Marine Forest                      (1,950,000)        (7,800,000)
                                              ------------      -------------

                                              $   913,000       $  1,944,000
                                              ============      =============

                                       22
<PAGE>

Approximately  $2,571,000 of the $3,165,000 of the 2001 capital expenditures was
made  to  progress  the  Company's   Mahukona   development   endeavors.   These
expenditures include  approximately  $1,465,000 for land-clearing,  leveling and
grading and  approximately  $1,106,000  for design,  engineering  and surveying.
Increased  proceeds from notes  receivable  are  attributable  to early mortgage
redemptions.  During the year ended December 31, 2001, the Company  continued to
advance  Marine  Forest  monies  pursuant to  short-term  promissory  notes (see
separate liquidity discussion on pages 25-26).

For the years ended  December 31, 2001 and 2000, the Company's net cash provided
by financing activities of approximately $108,000 and $7,533,000,  respectively,
is comprised of the following:

                                                  2001                 2000

Debt proceeds (from President)                 $217,000           $  230,000

Repayment of debt (to President)                (93,000)

Capital contributions                                                 72,000

Debt repayments, net                            (16,000)              (9,000)

Proceeds from stock sales                                          7,240,000
                                               ---------          -----------

                                               $108,000           $7,533,000
                                               =========          ==========

The debt  repayments  are net of  $1,000,000  and  $400,000  in 2001  and  2000,
respectively, of borrowings (and repayments) pursuant to a $500,000 bank line of
credit.  At December 31, 2001 and 2000, no borrowings were  outstanding  against
the bank line of credit. In 2002, the bank line of credit was terminated.

In March 2000, the Company raised  approximately  $7.2 million,  net of offering
costs, pursuant to a private placement of 146,000 shares (retroactively restated
to 438,000  shares to give effect to a February  2002 two hundred  percent stock
dividend)  of its common stock at $50 per share.  The proceeds  will be used for
development  of the  properties in Hawaii  including soft costs of approvals and
development   (i.e.   engineering,   architecture,   professional   fee,  etc.),
construction,  advertising  and marketing,  offices  expense and general working
capital purposes.

As of December 31, 2001, the Company has total current  assets of  approximately
$13.1 million and total current  liabilities of approximately  $1.0 million or a
working capital of approximately  $12.1 million.  As previously  discussed,  the
Company  anticipates  2002 revenue  levels to be higher than levels  experienced
during 2001.  However,  given the Company's  anticipated  cash  requirements  to
complete  the  revised  Mahukona  development  project  and  plans to  execute a
strategic  arrangement with Marine Forest (both discussed below), future capital
raising or debt financing activities may be required

                                       23
<PAGE>

In an effort to increase the marketability of the Company's common stock,  among
other reasons,  in February 2002, the Company's board of directors  authorized a
three-for-one  stock split  effected in the form of a two hundred  percent stock
dividend which was distributed on February 15, 2002 to stockholders of record on
February 4, 2002.

MAHUKONA DEVELOPMENT

As previously  discussed,  the events of September 11th had an impact on tourism
and hence, temporarily curtailed the Company's development activities.  However,
the Company believes that the tourist market and the high-end second home market
are  gradually  recovering.   In  this  regard,  the  Company  has  resumed  its
development  strategies  however it has  focused  on a revised  plan for the 642
acres of land in the North  Kohala  district  of  Hawaii  Island in the state of
Hawaii (known as the Mahukona development project). As previously reported,  the
plan for this valuable  parcel of land was the  development of a hotel,  18-hole
golf course and resort  homes.  However,  the  Company  recently  hired  several
consultants,  with  extensive  experience  in high-end  resort  development  and
marketing,  to  reassess  its  development  strategy  with  respect to  Mahukona
property, the goal of which is to provide the Company guidance in determining an
effective  development  strategy  that will  optimize  the  property's  economic
potential.  The  preliminary  assessment  of the  consultants  for the  Mahukona
property  is  the  development  of an  all-inclusive  fractional  interest  club
community  structured as an undivided  interest  ("UDI").  A UDI would allow the
prospective  buyer to use the Mahukona  facility  plus the  eco-ranch  lands and
would  provide  an  ownership  interest  in both.  A UDI  would  not  allow  the
prospective  buyer to own a specific parcel of land, but only a fraction of each
square foot of property.  The revised Mahukona development project is subject to
further  Company  and  consultant  review and  analysis  that is  expected to be
completed during the second quarter of 2002.

                                       24
<PAGE>

Based on the preliminary  assessment of its  consultants,  the revised  Mahukona
development  project cost  (excluding  ongoing costs and  maintenance)  would be
approximately $93 million and completed  substantially over a three-year period.
Based on information  provided by its consultants,  the Company  anticipates the
timing and details of the $93 million to be as follows (in thousands):

                                                    YEAR 1    YEAR 2    YEAR 3

INITIAL INFRASTRUCTURE AND DEVELOPMENT COSTS
Infrastructure (roads, water, sewer, etc.)         $10,000   $10,000   $10,000
Golf course, range, clubhouse, etc.                 10,000    10,000
Tennis complex                                                 1,000
Central lodge facility (lobby, restaurants, etc.)             10,500
Beach club                                                    10,000
Recreational trails/improvements                                 500       500
Ranch Improvements/amenities                           500     2,000     1,000
Club boats / marina improvements                               1,500     1,000
Other amenities/improvements                                   2,000
Entrance/gatehouse                                               500
Design, permits, engineering
 contingency                                         3,075     7,200     2,012
                                                   -------   -------   -------

                                                   $23,575   $55,200   $14,512
                                                   =======   =======   =======

The Company  recognizes  that its current  operations  will not be sufficient to
fund the cost of Mahukona's  development  and it may not be successful in future
capital  raising  or debt  financing  activities.  Accordingly,  the  Company is
exploring other financing strategies including,  but not limited to, a 50% joint
venture  with  development  partners,  including,  but not limited  to,  another
property  development  company,  a  fractional  facility  management  company or
private investors.

MARINE FOREST

In 2001, the Company  continued (but to a lesser extent than in 2000) to advance
funds to Marine Forest, a related Japanese  corporation that owns  approximately
400 acres of land in Okinawa,  Japan,  in which it is  developing  pursuant to a
"golf resort" theme. Funding of $1.95 million and $7.8 million in 2001 and 2000,
respectively, were used by Marine Forest primarily in the construction of a golf
course and related  amenities.  As previously  disclosed in the Company's  prior
public filings, the Company did not anticipate repayment of these notes in 2001,
however it did anticipate interest payments to commence on or about December 31,
2001.  However,  such interest  payments were  contingent  upon Marine  Forest's
ability to start the sales of its golf  memberships.  These sales were postponed
and development (construction) activity was temporarily suspended as a result of
the events of September 11th.

                                       25
<PAGE>

The Company continues to discuss the possibility of a strategic arrangement with
Marine  Forest  including,  but not  limited to, the  Company  acquiring  Marine
Forest,  which  Marine  Forest has orally  agreed to.  However,  the parties are
waiting the completion of the revised Mahukona development plan (expected in the
second quarter of 2002) to further its  discussion in this regard.  Based on its
discussion  with Marine  Forest  management,  the Company  believes  that Marine
Forest will piggyback the Company's "all-inclusive fractional ownership" concept
contemplated for Mahukona

Through  December  31, 2001,  no interest has been paid to the Company,  however
management anticipates that all accrued interest receivable  (approximately $1.3
million at December 31, 2001) will be  reclassified  to principal and settled in
connection  with the  parties'  contemplated  strategic  arrangement  previously
discussed.

At December  31, 2001,  in light of the  speculative  nature of Marine  Forest's
contemplated development projects among other reasons and in accordance with its
compliance  with the  requirements  of SFAS No. 114, the Company has recorded an
impairment charge of approximately $7.2 million.

                                       26
<PAGE>

ITEM 7.  Consolidated Financial Statements.


INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholders of
Surety Holdings Corp. and Subsidiary

We have audited the accompanying  consolidated  balance sheet of Surety Holdings
Corp.  and  Subsidiary  as of December  31, 2001,  and the related  consolidated
statements of  operations,  stockholders'  equity,  and cash flows for the years
ended December 31, 2001 and 2000. These  consolidated  financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audits to obtain  reasonable  assurance  about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated financial position of Surety
Holdings  Corp.  and  Subsidiary as of December 31, 2001,  and the  consolidated
results of their  operations  and their cash flows for the years ended  December
31, 2001 and 2000, in conformity with accounting  principles  generally accepted
in the United States of America.




                                       /s/ Rothstein, Kass & Company, P.C.


Roseland, New Jersey
March 15, 2002, except for the last paragraph
  of Note 11, which is as of March 29, 2002


                                       27
<PAGE>

                      SURETY HOLDINGS CORP. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2001

                                     ASSETS

<TABLE>
<S>                                                          <C>
CURRENT ASSETS
Cash                                                            $    9,908,000
Real estate held for sale, current                                   2,446,000
Other current assets                                                   736,000
                                                                ---------------

Total current assets                                                13,090,000

NOTES RECEIVABLE, less current maturities                            1,787,000

REAL ESTATE HELD FOR SALE                                           36,810,000

NOTES RECEIVABLE AND ACCRUED INTEREST,
   MARINE FOREST RESORT, INC., net of a $7.2
   million allowance for loan losses.                                3,814,000

REAL ESTATE DEVELOPMENT COSTS                                       35,777,000

PROPERTY AND EQUIPMENT, net                                          3,206,000

DEFERRED TAX ASSET                                                   3,520,000
                                                                ---------------

                                                                 $   98,004,000
                                                                ===============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Notes payable, current maturity                                  $      30,000
Notes payable, president, including accrued
  interest of $21,300                                                  375,000
Accounts payable                                                       438,000
Accrued expenses and other current liabilities                         130,000
Income taxes payable                                                     1,000
                                                                ---------------

Total current liabilities                                              974,000
                                                                ---------------

LONG-TERM LIABILITIES,
Notes payable, less current maturity                                   435,000
                                                                ---------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Common stock, $.001 par value,
  200,000,000 shares authorized,
   6,738,000 shares issued and
  outstanding                                                            7,000
Capital in excess of par value                                     101,678,000
Accumulated deficit                                                 (5,090,000)

                                                                ---------------
Total stockholders' equity                                          96,595,000
                                                                ---------------

                                                                $   98,004,000
                                                                ===============
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       28
<PAGE>

                      SURETY HOLDINGS CORP. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                   2001               2000
                                              -------------        ------------
<S>                                           <C>                  <C>
REVENUES                                       $ 6,831,000         $15,220,000

COST OF REVENUES                                 2,944,000           5,450,000
                                              -------------        ------------

GROSS PROFIT                                     3,887,000           9,770,000

GENERAL AND ADMINISTRATIVE
 EXPENSES                                        1,268,000           1,257,000
                                              -------------        ------------

INCOME FROM OPERATIONS                           2,619,000           8,513,000
                                              -------------        ------------

OTHER INCOME (EXPENSE)
  Interest income                                1,377,000             547,000
  Interest expense                                 (82,000)            (44,000)
  Impairment charge                             (7,200,000)
                                              -------------        ------------

                                                (5,905,000)            503,000
                                              -------------        ------------

INCOME (LOSS) BEFORE INCOME TAXES               (3,286,000)           9,016,000

INCOME TAXES (BENEFIT)                          (1,352,000)             822,000
                                              -------------        ------------

NET INCOME (LOSS)                              $(1,934,000)         $ 8,194,000
                                              =============        ============
NET INCOME (LOSS) PER COMMON
 SHARE, basic and diluted                      $     (0.29)         $      1.23
                                              =============        ============
WEIGHTED AVERAGE COMMON SHARES
 OUTSTANDING, basic and diluted                  6,738,000           6,684,000
                                              =============        ============
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       29
<PAGE>

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                            COMMON STOCK         CAPITAL IN                        TOTAL
                                        --------------------     EXCESS OF      ACCUMULATED     STOCKHOLDERS'
                                          SHARES     AMOUNT      PAR VALUE        DEFICIT          EQUITY
                                        ---------    -------   -------------   -------------   -------------
<S>                                     <C>          <C>       <C>             <C>             <C>
BALANCES, January 1, 2000               6,300,000    $6,000    $ 94,366,000    $(11,350,000)   $ 83,022,000

CAPITAL CONTRIBUTIONS                                                72,000                          72,000

SALES OF COMMON STOCK, net
 of offering costs                        438,000     1,000       7,240,000       7,241,000

NET INCOME                                                                        8,194,000       8,194,000
                                        ---------    ------    -------------   -------------   -------------

BALANCES, December 31, 2000             6,738,000     7,000     101,678,000      (3,156,000)     98,529,000

NET LOSS                                                                         (1,934,000)     (1,934,000)
                                        ---------    ------    -------------   -------------   -------------

BALANCES, December 31, 2001             6,738,000    $7,000    $101,678,000    $ (5,090,000)   $ 96,595,000
                                        =========    ======    ============    =============   =============
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       30
<PAGE>

                      SURETY HOLDINGS CORP. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                       2001            2000
                                                  -------------   -------------
<S>                                               <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                               $ (1,934,000)   $  8,194,000
  Adjustments to reconcile net income (loss)
   to net cash used in operating activities:
  Depreciation and amortization                        147,000         121,000
  Deferred income taxes                             (1,391,000)        675,000
  Impairment charge, Marine Forest Resorts, Inc.     7,200,000
  Accrued interest receivable,
    Marine Forest Resorts, Inc.                     (1,054,000)       (210,000)
  Gain on sales of property                         (3,968,000)    (10,418,000)
  Loss on disposition of property                       10,000
  Loss on sale of notes receivable                      14,000
  Increase (decrease) in cash
   attributable to changes in operating
   assets and liabilities:
  Other current assets                                  (2,000)        103,000
  Accounts payable                                      65,000         210,000
  Accrued expenses and other
   current liabilities                                (221,000)        (67,000)
  Income taxes payable                                (126,000)        127,000
                                                  -------------   -------------

NET CASH USED IN OPERATING ACTIVITIES               (1,260,000)     (1,265,000)
                                                  -------------   -------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property and equipment                 (225,000)       (676,000)
  Proceeds from sales of property                    4,941,000      11,853,000
  Real estate development expenditures              (2,940,000)     (1,826,000)
  Proceeds from repayments of notes receivable       1,087,000         393,000
  Advances to Marine Forest Resort, Inc.            (1,950,000)     (7,800,000)
                                                  -------------   -------------

NET CASH PROVIDED BY INVESTING ACTIVITIES              913,000       1,944,000
                                                  -------------   -------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Principal payments on mortgage
   notes payable and bank line of credit            (1,016,000)       (409,000)
  Proceeds from bank line of credit                  1,000,000         400,000
  Capital contributions                                                 72,000
  Proceeds from notes payable, president               217,000         230,000
  Payments of notes payable, president                 (93,000)
  Proceeds from sales of common
    stock, net of offering costs                                     7,240,000
                                                  -------------   -------------

NET CASH PROVIDED BY FINANCING ACTIVITIES              108,000       7,533,000
                                                  -------------   -------------

NET INCREASE (DECREASE) IN CASH                       (239,000)      8,212,000

CASH
  Beginning of year                                 10,147,000       1,935,000
                                                  -------------   -------------

  End of year                                     $  9,908,000     $10,147,000
                                                  =============   =============
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       31
<PAGE>

                      SURETY HOLDINGS CORP. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                     YEARS ENDED DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                       2001              2000
                                                     --------        -----------
<S>                                                  <C>             <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION, cash paid during the year for:
  Interest                                           $ 51,000        $   41,000
                                                     ========        ==========
  Income taxes                                       $165,000        $       --
                                                     ========        ==========

SUPPLEMENTAL DISCLOSURES OF NONCASH
 INVESTING AND FINANCING ACTIVITIES:

Equipment financed                                   $ 55,000        $       --
                                                     ========        ==========

 Issuance of notes receivable upon
   sales of property                                 $894,000        $2,291,000
                                                     ========        ==========
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       32
<PAGE>

                      SURETY HOLDINGS CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    NATURE OF OPERATIONS

Surety Holdings Corp. and Subsidiary (the "Company") is primarily engaged in the
development  of a property on 642 acres of land in the North Kohala  district of
Hawaii  Island in the state of  Hawaii.  This  development,  referred  to as the
Mahukona  development  project (see Note 4), was initially slated to be a hotel,
18-hole golf course and resort homes.  However,  the Company is exploring  other
avenues  of  development  for the  642  acres  most  notably,  an  all-inclusive
fractional interest club community.

The  current  operations  of the Company  include  the sale of its  non-Mahukona
development project real estate and other ancillary activities, all of which are
not deemed to be the future of the Company's business.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The  consolidated  financial  statements of the Company  include the accounts of
Surety Holdings Corp. and its wholly-owned subsidiary, Surety Kohala Corporation
("Kohala")  (formerly  Chalon  International  of Hawaii,  Inc.). All significant
intercompany balances and transactions have been eliminated in consolidation.

CASH

The Company  maintains its cash with financial  institutions in accounts that at
times may exceed insured  limits.  The Company has not experienced any losses in
such accounts and believes it is not subject to any  significant  credit risk on
cash.

PROPERTY AND EQUIPMENT

Property and  equipment  are stated at cost less  accumulated  depreciation  and
amortization. Depreciation and amortization are provided using the straight-line
method over the following estimated useful lives.

    Buildings and improvements                                 15-30 Years
    Livestock                                                      7 Years
    Orchard                                                       15 Years
    Machinery, equipment and other                              5-10 Years

REVENUE RECOGNITION

Revenue from the sale of real estate is recognized at the time title is conveyed
to the buyer,  minimum down payment requirements are met, the terms of any notes
received satisfy continuing payment requirements,  and there are no requirements
for continuing involvement by the Company with the property.

REAL ESTATE HELD FOR SALE AND DEVELOPMENT COSTS

Real estate held for sale is stated at the lower of cost or market.

All direct and indirect  costs (see Note 4) relating to the  Company's  Mahukona
development  project are  capitalized in accordance  with Statement of Financial
Accounting  Standards  ("SFAS") No. 67 "Accounting  for Costs and Initial Rental
Operations of Real Estate  Projects."  Such standard  requires costs  associated
with the  acquisition,  development,  and  construction  of real estate and real
estate-related  projects  to  be  capitalized  as  part  of  that  project.  The
realization  of these  costs is  predicated  on the  ability  of the  Company to
successfully open and operate Mahukona.  The Company allocates  capitalized real
estate development costs on a specific  identification  basis.  Common costs and
amenities are allocated on a relative fair market value basis.

Management believes that the recorded costs associated with real estate held for
sale and development costs on the consolidated balance sheet will be recoverable
through the sale and development of the properties.


                                       33
<PAGE>

                      SURETY HOLDINGS CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

IMPAIRMENT

The Company reviews its real estate held for sale, real estate development costs
and long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable. To
determine  the  recoverability  of these  assets,  the Company  employs  various
methods  to assess  fair  value  including,  but not  limited  to,  analysis  of
undiscounted   net  cash  flows,   third  party  appraisals  or  valuations  and
contractual sales value of similar properties. Impairment is the amount by which
the carrying value of the asset exceeds its fair value.

INCOME (LOSS) PER COMMON SHARE

The Company complies with SFAS No. 128, "Earnings Per Share" which requires dual
presentation of basic and diluted  earnings per share.  Basic earnings per share
excludes  dilution  and is  computed  by  dividing  income  available  to common
stockholders  by the  weighted-average  common shares  outstanding for the year.
Diluted  earnings per share reflects the potential  dilution that could occur if
securities or other  contracts to issue common stock were exercised or converted
into common  stock or resulted in the  issuance of common stock that then shared
in the  earnings of the entity.  Since the  Company has no  securities  or other
contracts to issue common stock,  basic and diluted net income (loss) per common
share for the years ended December 31, 2001 and 2000 were the same.

INCOME TAXES

The Company  complies with SFAS No. 109,  "Accounting  for Income  Taxes," which
requires an asset and liability  approach to financial  accounting and reporting
for income taxes.  Deferred  income tax assets and  liabilities are computed for
differences  between  the  financial  statement  and tax  bases  of  assets  and
liabilities that will result in future taxable or deductible  amounts,  based on
enacted tax laws and rates  applicable  to the periods in which the  differences
are expected to affect taxable  income.  Valuation  allowances are  established,
when necessary,  to reduce deferred income tax assets to the amounts expected to
be realized.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments held by the Company include cash, notes receivable,  notes
payable and accounts  payable.  The book value of cash and accounts  payable are
considered to be  representative  of fair value because of the short maturity of
these instruments.  The fair values of the notes receivable (excluding the notes
receivable from Marine Forest Resort,  Inc.- "Marine  Forest") and notes payable
approximate  book  values  primarily  because  the  contractual  interest  rates
approximate prevailing market rates.

The Company  accounts for the notes  receivable from Marine Forest (see Note 11)
under the provisions of SFAS No. 114, "Accounting by Creditors for Impairment of
a  Loan".  Under  SFAS No.  114,  a loan is  impaired  when,  based  on  current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual  terms of the loan agreement.  SFAS
No. 114  requires  lenders to measure  impaired  loans based on: (i) the present
value of expected future cash flows discounted at the loans' effective  interest
rate;  (ii) the loan's  observable  market price; or (iii) the fair value of the
collateral if the loan is collateral-dependent.  An allowance for loan losses is
maintained  if the  measure  of an  impaired  loan is  less  than  its  recorded
investment.  Adjustments to the allowance are made through corresponding charges
or credits to the provision for loan losses.


                                       34
<PAGE>

                      SURETY HOLDINGS CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS Nos.
141, "Business Combinations,  " and 142, "Goodwill and Other Intangible Assets".
SFAS No. 141 requires  that the purchase  method of  accounting  be used for all
business  combinations  initiated after June 30, 2001, and establishes  specific
criteria for the recognition of goodwill separate from other intangible  assets.
Under the  provisions  of SFAS No.  142,  which is  effective  for fiscal  years
beginning  after December 15, 2001,  goodwill (and  intangible  assets deemed to
have indefinite lives) will no longer be amortized but will be subject to annual
impairment tests in accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives.

In August 2001, the FASB issued SFAS No. 144,  "Accounting for the Impairment or
Disposal of  Long-Lived  Assets".  This  statement  will be effective for fiscal
years  beginning  after December 15, 2001.  This statement  establishes a single
accounting  model,  based  upon  the  framework  established  in SFAS  No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", for long-lived  assets to be disposed of by sale and to address
significant implementation issues.

The Company is in the process of  assessing  the impact of the adoption of these
statements on its  consolidated  financial  position,  results of operations and
cash flows.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America 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.

RECLASSIFICATIONS AND RESTATEMENTS

Certain 2000 amounts have been reclassified to conform to the 2001 presentation.
Stockholders'  equity has been  restated to give  retroactive  recognition  to a
February 2002 stock split (see Note 7).

3.    NOTES RECEIVABLE

At December 31, 2001, the Company had notes receivable aggregating approximately
$2,395,000.  The notes bear  interest at rates  ranging from 7% to 8% per annum,
mature on various dates through 2011 and are collateralized by real property.

Approximate  maturities of notes receivable  subsequent to December 31, 2001 are
as follows:

    YEAR ENDING DECEMBER 31,
         2002                                                    $ 608,000
         2003                                                       28,000
         2004                                                       30,000
         2005                                                      760,000
         2006                                                      914,000
       Thereafter                                                   55,000
                                                                ----------

                                                                $2,395,000
                                                                ==========


                                       35
<PAGE>

                      SURETY HOLDINGS CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.    REAL ESTATE DEVELOPMENT COSTS

At December 31, 2001, real estate development costs, attributed primarily to the
Company's Mahukona development project, consist of the following:

    Land and land acquisition costs                            $23,896,000
    Planning and studies                                         1,873,000
    Engineering and architectural                                  551,000
    Infrastructure                                               5,956,000
    Professional and consulting fees                             2,105,000
    Other                                                        1,396,000
                                                               -----------

                                                               $35,777,000
                                                               ===========

5.    PROPERTY AND EQUIPMENT

At December 31, 2001, property and equipment consist of the following:

    Land                                                        $1,550,000
    Buildings and improvements                                   1,892,000
    Livestock                                                      764,000
    Orchard                                                        300,000
    Machinery, equipment and other                                 571,000
                                                                ----------
                                                                 5,077,000
    Less accumulated depreciation
       and amortization                                          1,871,000
                                                                ----------

                                                                $3,206,000
                                                                ==========

6.    NOTES PAYABLE AND CREDIT FACILITY

The Company has a mortgage note, which is collateralized by certain property and
is payable in monthly  installments of principal and interest  through 2019. The
mortgage note bears interest based on an adjustable  rate (7.75% at December 31,
2001), not to exceed 15%, adjusted annually.

In 2001, the Company entered into two note agreements to finance the purchase of
two vehicles used in connection with the Company's Mahukona project. These notes
bear  interest  at 8.5% and are  payable  in  monthly  installments  aggregating
approximately $2,000 through August 2004.


                                       36
<PAGE>

                      SURETY HOLDINGS CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.   NOTES PAYABLE AND CREDIT FACILITY (CONTINUED)

Approximate  aggregate  future  required  principal  payments  on these notes at
December 31, 2001 are as follows:

    YEAR ENDING DECEMBER 31,
         2002                                                     $ 30,000
         2003                                                       34,000
         2004                                                       29,000
         2005                                                       17,000
         2006                                                       18,000
       Thereafter                                                  337,000
                                                                  --------

                                                                  $465,000
                                                                  --------

In addition, the Company had a $500,000 bank line of credit, which bore interest
at the U.S.  prime rate (4.75% at December 31, 2001) plus 2%. At December 31,
2001, there were no borrowings against the bank line of credit. In 2002, the
bank line of credit was terminated.

7.    STOCKHOLDERS' EQUITY (INCLUDING SUBSEQUENT EVENT)

In March 2000, the Company raised  approximately  $7.2 million,  net of offering
costs, pursuant to a private placement of 146,000 shares (retroactively restated
to 438,000 shares -- see next paragraph) of its common stock at $50 per share.

In February 2002, the Company's  board of directors  authorized a  three-for-one
stock  split  effected  in the form of a 200 percent  stock  dividend  which was
distributed on February 15, 2002 to  stockholders of record on February 4, 2002.
Stockholders'  equity has been restated to give  retroactive  recognition to the
stock split for all periods presented by reclassifying from capital in excess of
par value to common stock the par value of the  additional  shares  arising from
the split. In addition,  all references in the consolidated financial statements
to number of shares and per share amounts have been restated.

8.    NON-CANCELABLE OPERATING LEASES

The Company leases certain parcels of land to tenants,  which are used primarily
for agricultural purposes, under noncancelable operating leases expiring through
2028. Rental income under these operating leases and month-to-month arrangements
was  approximately  $346,000 and $336,000 for the years ended  December 31, 2001
and 2000, respectively.  Approximate minimum rentals under the operating leases,
excluding renewal options, are as follows:

    YEAR ENDING DECEMBER 31,
         2002                                                      $63,000
         2003                                                       60,000
         2004                                                       44,000
         2005                                                       44,000
         2006                                                       42,000
       Thereafter                                                  377,000
                                                                  --------

                                                                  $630,000
                                                                  ========


                                       37
<PAGE>

                      SURETY HOLDINGS CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9.    INCOME TAXES

At December 31, 2001,  the Company's  deferred  income tax asset is comprised of
the tax benefit  associated  with the following items based on the statutory tax
rates currently in effect:

    Net operating loss carryforwards                             $472,000

    Tax credits                                                   172,000

    Difference between financial
      and tax bases of assets                                    2,876,000
                                                                ----------

                                                                $3,520,000
                                                                ==========

The  provision  for income  taxes  (benefit)  in the  accompanying  consolidated
statements of operations consisted of the following for the years ended December
31, 2001 and 2000:

                                                2001               2000

    CURRENT, federal                       $     45,000      $     147,000
                                           ------------      -------------

    DEFERRED
         Federal                            (1,195,000)            555,000
         State                                (202,000)            120,000
                                           ------------      -------------

                                            (1,397,000)            675,000
                                           ------------      -------------

                                           $(1,352,000)      $     822,000
                                           ============      =============

The following  table  reconciles  the federal  statutory  income tax rate to the
Company's effective tax rate for the years ended December 31, 2001 and 2000:

                                                            2001      2000

    Provision for income taxes
     at the federal statutory rate                         (34%)       34%

    State income tax,
     net of federal tax benefit                             (6)         6

    Effect of change in
     valuation allowance                                              (31)

    Other                                                   (1)
                                                          ------     -----

                                                           (41%)       9%
                                                          ======     =====

At December  31,  2001,  the Company had net  operating  loss  carryforwards  of
approximately $1.2 million available to offset future income subject to tax. The
net operating loss carryforwards expire through 2021.


                                       38
<PAGE>

                      SURETY HOLDINGS CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10.   COMMITMENTS AND CONTINGENCIES

The  prior  approvals  obtained  for  the  Mahukona   development   project  are
conditional;  that is,  each  approval  is  subject  to  various  conditions  of
approval.  Certain  of these  conditions  of  approval  contain  time  limits or
financial  compliance  requirements,  which if not met, may ultimately result in
legislative and/or administrative actions to void or revoke the prior approvals.
The effect of such adverse  actions would be to return the land  entitlements to
the former  zoning,  or more  appropriate  zoning as determined by the County of
Hawaii.  The  Company  believes  that it has  continued  to  maintain  the prior
approvals  through  compliance  with all applicable  conditions.  In the future,
however,  the Company may not be able to maintain compliance with all applicable
conditions.

The  Company has entered  into  various  consulting  agreements  for  investment
banking, project development and other services .

The Company is involved in certain legal actions that arose in the normal course
of business. In the opinion of the Company's management, the resolution of these
matters will not have a material  adverse effect on the  consolidated  financial
position, results of operations or cash flows of the Company.

11.   RELATED PARTY TRANSACTIONS

PRESIDENT

During 2001 and 2000, the Company's  President advanced the Company $217,000 and
$230,000, respectively,  pursuant to one-year, 5% promissory notes. During 2001,
the Company repaid the President $93,000.  Related interest expense for 2001 and
2000 is approximately $18,000 and $3,000, respectively.

MARINE FOREST RESORT, INC. ("MARINE FOREST")

Pursuant to  uncollateralized  promissory  notes,  the Company  advanced  Marine
Forest, a related Japanese corporation that owns approximately 400 acres of land
in Okinawa,  Japan,  $9.75  million.  The notes bear interest at the U.S.  prime
rate, at date of issuance,  plus one percent.  Under their original  terms,  the
notes were due six months after date of  issuance,  extended an  additional  six
months and subsequently extended to December 31, 2002, as a concession to Marine
Forest to advance Marine Forest's development projects. In connection therewith,
the Company continues to discuss the possibility of a strategic arrangement with
Marine  Forest,  including the Company  acquiring  Marine Forest.  However,  the
parties are waiting the  completion  of the revised  Mahukona  development  plan
(expected  in the  second  quarter of 2002) to further  its  discussion  in this
regard.  Related interest income for 2001 and 2000 is  approximately  $1,054,000
and  $210,000,  respectively.  Through  December 31, 2001,  no interest has been
paid, however management  anticipates that all accrued interest  receivable will
be  reclassified  to  principal  and  settled in  connection  with the  parties'
contemplated strategic arrangement.

At December  31, 2001,  in light of the  speculative  nature of Marine  Forest's
contemplated development projects among other reasons and in accordance with its
compliance  with the  requirements  of SFAS No.  114,  the  Company  recorded an
impairment charge of approximately $7.2 million.

OTHER

During 2001 and 2000, the Company rented  properties to related  individuals for
aggregate annual rentals of $49,000 and $30,000, respectively.

Subsequent  to December 31, 2001,  the Company  sold  property and  improvements
thereon to Kohala's President for approximately $575,000.


                                       39
<PAGE>

                      SURETY HOLDINGS CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12.   SEGMENT REPORTING

As discussed in Note 1, the  Company's  primary  business  focus is the Mahukona
development  project.  Nonetheless,  the  Company  complies  with  SFAS No.  131
"Disclosures  about  Segments of an Enterprise and Related  Information",  which
provides information about the Company's current business activities. Management
has divided the Company into the following segments:  real estate sales, rental,
cattle sales and other. Transactions between segments are not common and are not
material to the segment  information.  Some business  activities  that cannot be
classified in the aforementioned segments are shown under "corporate".

Operating  results,  by segment,  for the years ended December 31, 2001 and 2000
are as follows (in thousands):

<TABLE>
<CAPTION>
                                                        2001

                                        Real Estate                Cattle
                                          Sales        Rental      Sales      Other      Corporate        Total
                                         -------       ------      ------     -------     ---------      ---------
<S>                                      <C>           <C>         <C>       <C>         <C>            <C>
 Total revenues                          $ 5,835       $ 346       $ 393       $ 257      $     --        $ 6,831
 Total cost of revenues                    2,362         130         219         233                        2,944
                                         -------       ------      ------     -------     ---------      ---------

 Segment profit                            3,473         216         174          24                        3,887
 General and administrative expenses                                                        (1,268)        (1,268)
 Interest income, net                                                                        1,295          1,295
 Impairment charge                                                                          (7,200)        (7,200)
 Deferred tax benefit                                                                        1,352          1,352
                                         -------       ------      ------     -------     ---------      ---------

 Net income (loss)                       $ 3,473       $ 216       $ 174       $  24      $ (5,821)       $(1,934)
                                         =======       ======      ======     =======     =========      =========

 Total assets                            $41,651       $  58       $ 110      $1,033      $ 55,152        $98,004
                                         =======       ======      ======     =======     =========      =========

 Capital expenditures                    $    --       $   7       $  87       $  71      $  3,000        $ 3,165
                                         =======       ======      ======     =======     =========      =========

 Depreciation and amortization           $    --       $   6       $  14       $  68      $     59        $   147
                                         =======       ======      ======     =======     =========      =========
</TABLE>


                                       40
<PAGE>

                      SURETY HOLDINGS CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12.   SEGMENT REPORTING (CONTINUED)

<TABLE>
<CAPTION>
                                      2000

                                       Real Estate                Cattle
                                          Sales        Rental      Sales       Other     Corporate         Total
                                         -------       ------      ------     -------     ---------      ---------
<S>                                      <C>           <C>         <C>       <C>         <C>            <C>
 Total revenues                          $14,145       $  336       $488        $251       $    --       $ 15,220
 Total cost of revenues                    4,954          133        163         200                        5,450
                                         -------       ------      ------     -------     ---------      ---------

 Segment profit                            9,191          203        325          51                        9,770
 General and administrative expenses                                                        (1,257)        (1,257)
 Interest income, net                                                                          503            503
 Income taxes                                                                                 (822)          (822)
                                         -------       ------      ------     -------     ---------      ---------

 Net income (loss)                       $ 9,191       $  203       $325        $ 51       $(1,576)      $  8,194
                                         =======       ======      ======     =======     =========      =========

 Total assets                            $42,929       $1,979       $ 37        $119       $54,994       $100,058
                                         =======       ======      ======     =======     =========      =========

 Captial expenditures                    $    --       $    7       $  4        $420       $ 2,071       $  2,502
                                         =======       ======      ======     =======     =========      =========

 Depreciaton and amortization            $    --       $   10       $  5        $ 46       $    60       $    121
                                         =======       ======      ======     =======     =========      =========
</TABLE>

Included in corporate  total assets at December 31, 2001 and 2000 is real estate
development costs attributed  primarily to the Mahukona  development  project of
approximately $35.8 million and $32.8 million, respectively (see Note 4).


                                       41
<PAGE>


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND
FINANCIAL DISCLOSURE.  None

                                    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 with respect to
executive officers and directors of the Company and its subsidiary as of
December 31,2001.

Name                    Age       Position Held
----                    ---       -------------
Yoshihiro Kamon          39       President and sole Director of Surety

Howard R. Knapp          55       Chief Financial Officer of Surety
850 Fort Plains Road
Howell, NJ 07731

Masahiro Kume            41       Chairman, Pres. And Director of
66-1309 W. Ko Uka Court           Surety Kohala
Waimee, HI 96743, USA

Michael Gomes            53       1st Vice President of Surety Kohala
PO Box 562
Kapaau, HI 96775 USA

Duana Kanuha             53       2nd Vice President of Surety Kohala
PO Box 6532
Hilo, HI 96721

Herman Fernandez         38       Secretary and Treasurer of Surety
                                  Kohala

YOSHIHIRO KAMON. Mr. Kamon holds a B.A. degree in economics from Konan
University. In addition to being the President and sole Director of the Company,
Mr. Kamon has served, from 1996 to 1999, as the Executive Senior Vice President
of Surety Kohala and Executive Director of Chalon Corporation, in which
positions he was responsible for general business administration, finance
planning, budgeting, negotiations with commercial banks and property management.
From 1988 to 1996, he was a director of Chalon Corporation and Special Assistant
to Shoichi Kamon, Chairman and President of Chalon Corporation. From 1988 to
1999, Mr. Kamon was the President of Surety Kohala, responsible for management
of Surety Kohala's property on the Island of Hawaii. He was also the Director of
the Shanghai International Airport Hotel and restaurant and a Director of Chalon
Hong Kong from 1986 to 1996. Mr. Kamon is the brother-in-law of Mr. Kume.

HOWARD R. KNAPP. Having joined the Company in January 1999, Mr. Knapp has served
as the Company's Chief Financial Officer since January, 2000. From June 1998 to
January 1999, Mr. Knapp served in the Operations Department of Barron Chase. Mr.
Knapp served as Senior Vice President of Meridian Equities Company from 1996 to
July 1998. Previously, Mr. Knapp worked in the securities industry for over 30
years in various corporations, including trader, bank manager and principal in
various offices. Mr. Knapp received a B.S. degree in economics from St. Peter's
College in 1974.

MASAHIRO KUME. Mr. Kume joined Chalon Restaurants Corp. in 1979 and in 1989 he
became special assistant of Shoichi Kamon, Chairman and CEO of Chalon Group. Mr.
Kume has been involved in the development and management of Chalon Group's
resort projects, and is presently involved in the development of a networking
system for integrated resort management. In 1995 Mr. Kume was appointed a
director of Chalon Corp., Inc., a Japanese corporation, which operates
approximately 40 restaurants, 5 hotels and a resort facility, and was appointed
Chairman of Board of Surety Kohala in December 1999 and President in April,
2001. From 1990 to 1995 Mr. Kume was the Manager of the Division

                                       42
<PAGE>

Development Division of Chalon International (Japan). Mr. Kume is the
brother-in-law of Mr. Yoshihio Kamon.

MICHAEL GOMES. Mr. Gomes was born in and is a lifetime resident of Kohala,
Hawaii. He was employed by the Mauna Lani Resort as a project manager before
joining Surety Kohala in 1990. He was appointed First Vice President of Surety
Kohala in December, 1999.

DUANE KANUHA. Mr. Kanuha was the former Planning Director of county of Hawaii
and has extensive working experience in governmental entities in the State of
Hawaii. From 1992 to the present Mr. Kanuha has been employed by Surety Kohala.
He was appointed Second Vice President of Surety Kohala in December, 1999.

HERMANN FERNANDEZ. Mr. Fernandez joined Surety Kohala in 1989, and has served as
its Chief Financial Officer. Mr. Fernandez has a BS Degree in accounting from
the University of Washington and was employed by the United States Internal
Revenue before joining Surety Kohala. He was appointed as Secretary and
Treasurer in December, 1999.

Yoshihiro Kamon has not filed a report pursuant to Section 16(a) of the Exchange
Act.

The Company does not have any employment agreements with its executive officers.

ITEM 10. EXECUTIVE COMPENSATION.

The table below summarizes the compensation awarded to, earned by or paid to the
named executive officer for services rendered to the Company in all capacities
for the years ended December 31, 2001, 2000,1999 by each person serving as the
Company's Executive Officers in the years ended December 31, 2001, 2000, 1999.


                                                      Long Term
                                                    Compensatsion
                                                       Awards
                                                     Securities
                             Annual Compensation     Underlying
                             --------------------   Options/SARs
Name               Year      Salary($)   Bonus($)        #
----               ----      ---------   --------   ------------
Yoshihiro Kamon    2001          0
                   2000          0
                   1999          0

Masahiro Kume      2001      $118,200
                   2000      $118,200
                   1999          0

Hermann Fernandez  2001      $ 62,904
                   2000      $ 62,904
                   1999      $ 62,904

                                       43
<PAGE>

Mike Gomes         2001      $ 72,960
                   2000      $ 72,960
                   1999      $ 72,960

Duane Kanuha       2001      $ 88,224
                   2000      $ 88,224
                   1999      $ 88,224

Kengo Aso          2001          0
                   2000          0
                   1999          0

Howard R. Knapp    2001          0
                   2000          0
                   1999          0

Currently compensation remains at the same rate, but may change in the future.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANGEMENT AND
RELATED STOCKHOLDER MATTERS.

         The following table sets forth information regarding the beneficial
ownership, as defined in applicable regulations, of our common stock as of
December 31, 2001, by the following individuals or groups: each person or entity
who is known by us to own beneficially more than 5% of our outstanding stock;
each of the Named Executive Officers; each director of the Company; and, all
directors and executive officers as a group. Except as otherwise indicated, and
subject to applicable community property laws, the persons named in the table
below have sole voting and investment power with respect to all shares of common
stock held by them.

Name of                     No. of Shares          Percentage
Owner                   Beneficially owned(2)       of Class
-------                 ---------------------      ----------
Yoshihiro Kamon(1)           6,270,000                  93
1-608 2572 Shinohara
Kohoku
Yokohama, 2220026 Japan

Mahukona Holdings Corp(1)    6,270,000                  93
1-608 2572 Shinohara
Kohoku
Yokohama, 2220026 Japan

Directors/Officers           6,270,000                  93
7 as a group


(1)  Yoshihiro Kamon individually owns 270,000 shares (2) directly and by virtue
     of his ownership interest in Mahukona Holdings Corp. may be deemed to be
     the beneficial owner of

                                       44
<PAGE>

6,000,000 shares (2) owned by Mahukona Holdings Corp.

(2)  Retroactively restated to give effect to a February 2002 two hundred
percent (200%) stock dividend.

Yoshihiro Kamon and his immediate family directly and indirectly maintain voting
control of Mahukona Holdings Corp.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         In October 1998, Yoshihiro Kamon acquired 90% of the issued and
outstanding shares of the Company from a shareholder in exchange for $150,000.
Thereafter in September, 1999, the Company entered into an Agreement and Plan of
Merger and Reorganization, with Surety Kohala ., a Hawaii corporation ("Surety
Kohala"), whereby Surety Kohala would be merged into a subsidiary of SURETY
HOLDINGS CORP., and become a subsidiary of Surety. The Company issued two
million shares of its common stock, $.001 par value, to Mahukona Holdings
Corp.., the shareholder of Surety Kohala, as and for the consideration for this
acquisition. The Articles of Merger were filed with the Secretary of State of
Hawaii on December 29, 1999. Yoshihiro Kamon, President and Chairman of the
Company, is a 12% shareholder of Chalon Corp. and owns 50% of Kamon Corp. which
owns 66% of Chalon Corp. Mr. Kamon was President of Surety Kohala from 1988 to
1999, and was Executive Director and Vice President of Chalon Corp. from 1988 to
1999. Masahiro Kume, Chairman of Surety Kohala, is Mr. Kamon's brother-in law.

         During 2001 and 2000, the Company's President advanced the Company
$217,000 and $230,000, respectively, pursuant to one-year, 5% promissory notes.
During 2001, the Company repaid the President $93,000. Related interest expense
for 2001 and 2000 is approximately $18,000 and $3,000 respectively.

Conflicts

         Certain Officers, directors and shareholders of Surety Holdings Corp.
and Surety Kohala Corporation may also be officers directors and shareholders of
other companies with which Surety does business or that engage in the same
business as Surety. Moreover, other companies may have entered into contracts,
agreements, arrangements or otherwise do business with Surety which would
benefit certain of Surety's officers, directors and/or shareholders.

         Yoshihiro Kamon and his immediate family directly and indirectly own
40% of Marine Forest Resort, Inc. Although individuals and/or entities which are
related to Surety own directly or indirectly 40% of Marine Forest Resort, Inc.,
the balance of Marine Forest i.e., 60% is owned by non-related parties.

         Pursuant to uncollateralized promissory notes, the Company advanced
Marine Forest Resort, Inc. ("Marine Forest"), a related Japanese corporation
that owns approximately 400 acres of land in Okinawa, Japan, $9.75 million. The
notes bear interest at the U.S. prime rate,

                                       45
<PAGE>

at date of issuance, plus one percent. Under their original terms, the notes
were due six months after date of issuance. However, all notes were extended an
additional six months and subsequently extended to December 31, 2002, as a
concession to Marine Forest to advance Marine Forest's development projects. In
connection therewith, the Company continues to discuss the possibility of a
strategic arrangement with Marine Forest, including the Company acquiring Marine
Forest. However, the parties are waiting the completion of the revised Mahukona
development plan (expected in the second quarter of 2002) to further its
discussion in this regard. Related interest income for 2001 and 2000 is
approximately $1,054,000 and $210,000, respectively. Through December 31, 2001,
no interest has been paid, however, management anticipates that all accrued
interest receivable will be reclassified to principal and settled in connection
with the parties' contemplated strategic arrangements.

         At December 31, 2001, in light of the speculative nature of Marine
Forest's contemplated development projects among other reasons and in accordance
with its compliance with the requirements of SFAS No. 114, the Company recorded
an impairment charge of approximately $7.2 million.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         None

                                       46