UNITED STATES SECURITIES AND EXCHANGE COMMISSION  Washington, D.C.  20549  FORM
10-K   [x] ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the
fiscal year ended December 31, 2008  [  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934  For the
transition period from ______________________ to
________________________  Commission file number: 000-23338  THE
CASTLE GROUP, INC. (Exact
name of registrant as specified in its charter)  Utah
99-0307845(State or Other Jurisdiction of
(I.R.S. Employer Identification No.)incorporation or organization)  500 Ala
Moana Boulevard, 3 Waterfront Plaza, Suite 555, Honolulu HI 96813 (Address
of principal executive office)  Registrants telephone number: (808) 524-0900  Securities registered under Section 12(b) of the Exchange Act:
 None  Securities registered under Section 12(g) of the Exchange Act:  Common
Stock, $0.02 par value (Title of
class)  Indicate by check mark if the Issuer is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]  Check whether the
Issuer is not required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act. [  ]  Check whether the
Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]   No
[  ]  Check if there is no
disclosure of delinquent filers in response to Item 405 of regulation S-K
contained in this form, and no disclosure will be contained, to the best of
Issuers knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [
 ]  Indicate by check mark
whether the Issuer is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company.  See the definitions
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act.:  Large
accelerated filer [   ] Accelerated
filer [  ] Non-accelerated
filer   [   ]  (Do not check if a smaller reporting
company) Smaller
reporting company  [X]  Indicate by check mark
whether the Issuer is a shell company (as defined in Rule 12b-2 of the
Act).  [   ] Yes   [X] No    1    Aggregate
Market Value of Non-Voting Common Stock Held by Non-Affiliates  As of March 20, 2009,
there were approximately 4,889,989 shares of common voting stock of the Issuer
held by non-affiliates. As of March 20, 2009, the closing price of the common
stock on the OTC Bulletin board was $.70 per share or an aggregate value of
$3,422,992.  Issuers Involved in Bankruptcy Proceedings During the Past Five
Years  Not applicable.  Check whether the
Issuer has filed all documents and reports required to be filed by Section 12,
13 or 15(d) of the Exchange Act after the distribution of securities under a
plan confirmed by a court.  Not
applicable.  Applicable Only to Corporate Issuers  Number of shares
outstanding of the Issuers common stock as of March 30, 2009:
  9,946,392  Documents Incorporated by Reference  See Part IV, Item 15.
 The Exhibit Index appears on page 40.  2     TABLE OF CONTENTS PART I 4 Item 1.  Business. 4 Item 1A.  Risk
Factors 6 Item 2.  Property. 8 Item 3.  Legal
Proceedings. 8 Item 4.  Submission of Matters to
a Vote of Security Holders. 8 PART II 8 Item 5.  Market for Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities. 8 Item 6.  Selected Financial Data
and Supplementary Financial Information. 9 Item 7.   Managements
Discussion and Analysis of Financial Condition and Results of
Operation. 10 Item 8.  Financial
Statements 14 Item 9.   Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure. 32 Item 9A(T). Controls and
Procedures. 32 Item 9B. Other
Information. 33 PART III 33 Item 10.  Directors, Executive
Officers and Corporate Governance. 33 Item 11. Executive
Compensation. 35 Item 12 . Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters. 36 Item 13. Certain Relationships and
Related Transactions, and Director Independence 38 Item 14. Principal Accountant Fees and
Services. 39 PART IV. 40 Item 15. Exhibits and Financial
Statement Schedules. 40    3     PART I   Item 1.  Business. Forward-looking Statements.  The
Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
harbor for forward-looking statements made by or on behalf of Castle.
 Castle and its representatives may from time to time make written or oral
statements that are forward-looking, including statements contained in this
Annual Report and other filings with the Securities and Exchange Commission, and
in reports to Castles stockholders.  Management believes that all
statements that express expectations and projections with respect to future
matters, as well as from developments beyond Castles control, including changes
in global economic conditions, are forward-looking statements within the meaning
of the Act.  These statements are made on the basis of managements views
and assumptions, as of the time the statements are made, regarding future events
and business performance. There can be no assurance; however, that managements
expectations will necessarily come to pass.  Factors
that may affect forward-looking statements include a wide range of factors that
could materially affect future developments and performance, including the
following: Changes in company-wide strategies, which may result in changes in
the types or mix of businesses in which Castle is involved or chooses to invest;
changes in U.S., global or regional economic conditions; changes in U.S. and
global financial and equity markets; including significant interest rate
fluctuations; which may impede Castles access to, or increase the cost of,
external financing  for its operations and investments; increased
competitive pressures, both domestically and internationally; legal and
regulatory developments, such as regulatory actions affecting environmental
activities; the imposition by foreign countries of trade restrictions and
changes in international tax laws or currency controls; adverse weather
conditions or natural disasters, such as hurricanes and earthquakes; and labor
disputes, which may lead to increased costs or disruption of operations. 
This list of factors that may affect future performance and the accuracy of
forward-looking statements are illustrative, but by no means exhaustive.
 Accordingly, all forward-looking statements should be evaluated with the
understanding of their inherent uncertainty.  Description of the
Business  The
Castle Group, Inc. (the Company, Castle, we, or us) through its
subsidiaries manages luxury and mid-range resort condominiums and hotels on all
of the major islands within the state of Hawaii, and resorts located in Saipan,
New Zealand, Thailand and Guam.  The Company was incorporated in Utah on
August 21, 1981 and on June 4, 1993 the name of the Company was changed to The
Castle Group, Inc.  Principal Products or
Services and Their Markets  General  Castle
is a full service hospitality and hotel management company that prides itself on
its ability to be both Flexible and Focused, the Companys operations motto.
 Flexible, to meet the specific needs of property condo owners at the
properties that it manages; and Focused, in its efforts to achieve enhanced
rental income and profitability for those owners.  Castle earns its
revenues by providing several types of services to property owners including,
hotel and resort management and operations; reservations staffing and
operations; sales and marketing; and accounting.  Castles revenues are
derived primarily from two sources: (1) the rental of hotel rooms and
condominium accommodations along with food and beverage sales at the properties
it manages and; (2) fees paid for services it provides to property owners.
 Castle also derives revenues from commissions and incentive payments,
based on sales and performance criteria at each property.  In
September of 2008, Castle began managing the new Halii Kai at Waikoloa resort
property on the Big Island of Hawaii.  This is Castles first entry into
the Waikoloa Resort which is located north of the Kona area.  The Halii Kai
is made up of 192 luxury two and three bedroom Oceanfront luxury villas which
range in size from 1,204 to 1,930 square feet, and marks an important addition
to Castles portfolio of properties as a destination for luxury oriented
travelers.  Corporate
Culture  Castles
corporate culture has been internally branded as F & F,
which means Flexibility and Focus. The organization and
infrastructure is solid; and designed for maximum flexibility to react to any
and all marketplace dynamics; while at the same time, allowing us to remain
focused on our objectives and overall strategy without losing focus or
perspective.  Marketing
Strategy  Most
of our marketing efforts are focused towards acquiring and retaining guests for
the properties we manage.  Castle does not own any hotels or resorts;
however, it has made an investment in the property that it manages in New
Zealand.  Marketing is done through a variety of distribution channels
including direct Internet sales, wholesalers, online and traditional travel
agencies and group tour operators.   Castle also manages and operates
an interactive web site (www.Castleresorts.com) for
customers to view information about the properties we manage and make
reservations to stay at the properties.  The website offers user-  4    friendly
navigation, interactive features and rich content, while offering attractive
rates and a travel booking engine that can handle rate conversions for over 100
foreign currencies.  The proprietary online booking and reservations engine
supports a dynamic pricing model which maximizes revenues for all of our
properties under management.  Castle
supports its online presence with its own full service, reservation call center
that provides a wide range of services from tour reservation processing and
rooms control, to handling group bookings.  The reservation center
electronically connects resort property inventory and rates to the four major
Global Distribution Systems (GDS).  This connectivity displays rates and
inventory of Castles properties to over 500,000 travel agents worldwide as well
as Internet connectivity to over 1,200 travel websites around the globe.  Diversity  Castle
has a diverse portfolio of properties located in desired island resort
destinations throughout the Pacific Region and beyond. We represent hotels,
resort condominiums, luxury villas and lodging accommodations throughout Hawaii,
Micronesia, New Zealand and Thailand.  In
Hawaii, Castle is the only lodging chain that represents properties on the five
major Hawaiian Islands of Oahu/Waikiki, Maui, Kauai, Molokai and Hawaii, which
allows customers the option to island-hop, and provides Castle cross-selling
opportunities. Our Honolulu headquarters serves as the epicenter for
international operations in Saipan, Guam, New Zealand and in Thailand. Our
diverse destinations offer customers the opportunity to discover new experiences
and varying cultures.  Castle
offers a wide range of accommodations at various price points from exclusive
private villas, full-service all-suites hotels, oceanfront resort condominiums,
to modestly priced hotels with up to 600 guest rooms.  Our collection of
all-suites condominium resorts, hotels, villas, lodges and vacation rentals
allows customers to select the best accommodation to suit their individual style
and budget.  Our
ability to deliver consistent financial returns to our property owners
demonstrates Castles competency in managing and marketing a wide range of
accommodations to our customers via multiple channels of distribution.  Brand
Strategy  Each
property Castle manages is individually branded in order to extract maximum
value from its strengths.  The Castle brand stays in the background and our
focus is on marketing the uniqueness of each property, while satisfying the
needs and expectations of our owners.  Each property we manage maintains
its own brand identity and personality, while utilizing the Castle advantage of
our powerful marketing resources, channel distribution, resort management
expertise, industry partnerships and networks.  Castles
brand strategy is one of the areas that clearly differentiate us from the high
profile branded hospitality companies.  When a hotel owner or developer is
considering contracting a large worldwide hospitality company for possible hotel
management, there are several considerations that must be assessed.  With
major worldwide brands, usually come the high costs that the owner must bear to
sustain the expensive marketing and operational expense that the brand demands
to offset their marketing costs. There are also some tangible differences from
the guests or customers perspective as well.  At Castle, we believe that
one size does not fit all.  Castle
markets each property with its own independent brand identity and deploys
customized marketing programs to fit the specific demographics attracted to each
of our properties.  Through our brand building efforts, we begin the
process of positioning each of our resort brands to our key market segments,
niche targeted customers and distribution channels.  We
also do not flag our properties with the Castle name.  The advantages of
doing so are several.  There is a high demand for the independent smaller
boutique hotels and condominiums, as travelers favor a more individualized and
unique travel experience. We believe that this allows the consumer to better
choose the specific type of vacation experience desired based upon the specific
attributes of the property selected.  This ongoing trend towards smaller,
independent hotels, as opposed to the familiar mid-range chains has been seen in
recent years throughout the world tourism marketplace.  Marketing Programs
and Promotions  Castle
has implemented numerous marketing programs and promotions directed towards both
the consumer and trade markets to generate incremental revenue and market
loyalty for the individual properties.  We have developed a wide range of
programs designed specifically to reflect the unique attributes of each of our
resort properties, while providing various incentives.  We manage a number
of marketing programs and promotions, some of which are seasonal to drive
incremental room night revenues during valley or shoulder periods, and some of
which are ongoing throughout the year.  During the past year we have
emphasized programs relating to value travel and accommodations as well as the
new Luxury properties we have begun managing.  Growth
Strategy  The
majority of the properties presently managed by Castle are located within the
state of Hawaii.  In addition, Castle manages properties in New Zealand,
Guam, Micronesia and in Thailand.   5    During
the course of 2008, as a result of the declines in world economic conditions and
decreasing revenues from our existing operations, Castle has slowed its
expansion plans and efforts aimed at Thailand and Vietnam.  While we
believe that significant opportunities for Castle exist there, we have chosen to
focus on obtaining additional contracts within the State of Hawaii due to the
opportunities afforded by the economic downturn including sales of properties,
foreclosures, underperformance of certain properties, and dissatisfaction with
the current management of our competitors.  As
part of Castles strategies to secure long term, multi-year management
contracts, from time to time, we have found it advantageous to purchase or lease
selected real property within a resort or condominium project.  This
occurred in 2004, when Castles wholly owned subsidiary, NZ Castle Resorts and
Hotels Limited, entered into an agreement to purchase all of the shares of
Mocles Holdings Limited (Mocles), a New Zealand Corporation.  Mocles owns
the Podium levels (Podium) of the Spencer on Byron Hotel in Auckland, New
Zealand, which includes the front desk, restaurant, bar, ballroom, board room,
conference rooms, back of the house facilities and other areas necessary for the
hotels operation.  Through our ownership of the Podium and a multi-year
management contract for the Spencer on Byron hotel, Castle is assured of ongoing
revenues in future years from this property.    Item 1A.  Risk
Factors  The
demand for hotels rooms and resort condominiums may decrease further and impair
our ability to earns profits and obtain financing  As
a result of the economic downturn, the decreased number of airline seats to
Hawaii, and increased cost of airline travel, the demand for hotel rooms and
vacation property rentals decreased substantially in 2008 both worldwide and in
the areas we serve.  This resulted in lower occupancy factors for the
accommodations we manage and lower rental rates paid for those accommodations.
 As a result thereof, as more fully described on the attached financial
statements, our gross revenues decreased and we incurred a net loss in 2008.
 No assurance can be given that the demand for hotel rooms and vacation
property rentals in the areas we serve will not decline even further or remain
at the present level indefinitely.  Especially under these conditions, no
assurance can be provided that Castle will be able to reduce its costs or
increase its revenues to the extent necessary for the company to earn a net
profit in any quarter, year or other period future period.  Continuing
losses may make it difficult or impossible for Castle to continue to obtain the
financing or investment capital necessary to operate and/or grow our
business.  Our
Business and financial results depend upon factors that affect the vacation
rental and property management industries.  Factors
such as the following could have a negative impact on Castles business and
financial results:  · the
continuation or worsening of current economic conditions in the United States
and other parts of the world;  · impact
of war and terrorist activity (including threatened terrorist activity) and
heightened travel security measures instituted in response thereto;  · travelers
fears of exposures to contagious diseases;  · domestic
and international political and geopolitical conditions;  · reduction
in the demand and adverse changes in travel and vacation patterns  · an
interruption or decrease of airline service, and/or the financial condition of
the airline industry and the impact on air travel;  · adverse
weather conditions or natural disasters, such as hurricanes, tidal waves or
tornados; and  · events
such as terrorist attack or outbreaks of disease or the threats thereof, which
cause potential customers to cancel their vacation or travel plans.  Operations
are geographically concentrated in four areas.  Castle
manages properties that are significantly concentrated in Hawaii, New Zealand,
Thailand and Micronesia (Guam and Saipan).  Adverse events or conditions
which affect these areas in particular, such as economic recession, changes in
regional travel patterns, extreme weather conditions or natural disasters, would
have a more significant adverse effect on our operations than if its operations
were more geographically diverse.  Renewal
of the Companys management contracts is important to the success of our
business.  Castles
management contracts vary in term from a few months to several years and over
its history have been renewed consistently for many years.  Pursuant to
Hawaii's condominium law, all leases of property owned by the Association of
Apartment Owners (such as the front desk and other areas used in the operation
of a rental program) are cancelable by the Association of Apartment Owners on
sixty days notice. This requirement extends to Castle and to all of our
competitors operating in Hawaii.  As a result of this requirement and for
competitive reasons, most of our management contracts contain terms which
provide for cancellation or termination within one year or less.  The loss
of the property wide management contract  6    for
one or more of the hotels or resorts managed by Castle could have a significant
adverse impact on our gross revenues and earnings.  Although management
believes that the number of properties, rooms and condominium units Castle
manages will increase substantially over time, no assurances can be given that
the number of such properties, rooms and condominium units will increase and not
decrease in any quarter, year or other period.  There can be no assurances
that we will be able to keep our current portfolio of property contracts or that
we would be able to replace any contracts terminated by the property owners.  Our
Services may be rendered uncompetitive.  The
vacation rental and property management industry is highly competitive and has
low barriers to entry. The industry has two distinct customer groups -- vacation
property renters and vacation property owners.  Castle competes for
vacation property owners primarily (but not exclusively), with regional and
local vacation rental and property management companies located in our markets.
 Some of these competitors are affiliated with the owners or operators of
resorts where these competitors provide their services.  Certain of these
competitors may have lower cost structures and/or may provide their services at
lower rates.  Castle competes for vacation property renters and owners with
local competitors (including owners of similar properties who manage the units
themselves or through a realtor or other management company) who may have lower
cost structures and/or may be willing to rent their units at lower rates than we
can afford.  Castle also competes for vacation property renters and for
vacation property owners with regional, national and international management
companies who have more recognizable brand names, larger marketing budgets and
have advantages of marketing programs and relationships which are not available
to us.  We
may not be able to expand the number of properties we manage.  Management
intends to continue to increase the number of properties we manage both within
our current markets and within other targeted geographic areas.  Especially
in light of current economic conditions and the losses we have incurred, no
assurance can be given that the number of rooms and properties which we manage
will increase and not decrease in any quarter, year or other period.  It is
possible that competition may increase for properties we currently manage or
might seek to manage.  Acquisitions
of properties also involve a number of special risks, which could have a
material adverse effect on our business and financial results.  These risks
include but are not limited to the following:  · failure
of acquired properties to achieve expected financial results;  · diversion
of managements attention;  · failure
to retain key personnel;  · increased
potential for customer dissatisfaction or performance problems of newly acquired
properties which may adversely affect our reputation.  Our
business depends on attracting and retaining highly capable management and
employees.  Castles
business substantially depends on the efforts and relationships of our senior
management and will likely be dependent on senior management for obtaining
management contracts for additional properties or businesses acquired in the
future.  If any of our senior managers becomes unable or unwilling to
continue in his or her role, or if we are unable to attract and retain other
qualified employees, it could have a material adverse effect on our business and
financial results.  Although Castle has entered into long term employment
agreements with our two principal executive officers, no assurance can be given
that either these individuals or other members of senior management will
continue in his or her present capacity for any particular period of time.  Our
business and operating results are seasonal.  The
travel and hospitality business is seasonal.  Castles financial results
have been and will continue to be subject to quarterly fluctuations caused
primarily by the combination of seasonal variations and our revenue recognition
policies.  Our quarterly financial results may also be subject to
fluctuations as a result of the timing and cost of acquisitions, changes in
relationships with travel providers, extreme weather conditions or other factors
affecting leisure travel, and the vacation rental and property management
industry.  Unexpected variations in our quarterly financial results could
adversely affect the price of our common stock.  Our
stock price may be depressed and our common stock may be thinly traded.  On
December 31, 2007, the common stock of the Company began trading on the OTC
Bulletin Board under the symbol CAGU for the first time since 2000.  Since
the commencement of trading, the stock has been very thinly traded.  Prior
to this our existing stockholders have not had the opportunity to publicly sell
the common stock they own on a securities exchange or through a broker dealer
since 2000.  We cannot assure you that these stockholders will not attempt
to sell their existing holdings at times or in such quantities or prices, that
will not exceed the demand for our common stock and/or which will not depress
the market price for our common stock.  Our revenues, income, market
capitalization and the trading volume of our common stock may not be sufficient
to induce securities analysts to follow, analyze or recommend our stock or to
induce or allow institutional investors to purchase our common stock.  The
following factors, among others, may cause the market price to significantly
increase or decrease:   7    · any
projections of revenues or income which we announce may be
inaccurate;  · our
annual or quarterly financial results may vary significantly from quarter to
quarter or from year to year, which variations may be greater than those of our
competitors;  · conditions
in the general economy, or the vacation and property rental management or
leisure and travel industries in particular are subject to change for a variety
of reasons;  · unfavorable
publicity about us or our industry; and  · significant
price and volume volatility in the stock market in general for reasons unrelated
to us.      Item 2.  Property.  Castle leases office space for its principal executive offices.
 The current leases expire on March 1, 2011 and October 31, 2011 at a
rental cost that averages $9,793 per month, plus the cost of common area
maintenance.  Castle has an option to renew the leases for an additional
three years at the then prevailing rental rates.  Castle leases additional office space at a rental cost of $6,200
per month, this lease expires in February, 2011.  In July, 2001, Castle entered into lease agreements (in lieu of a
traditional management agreements) with each of the owners of approximately 250
investment units of the Spencer on Byron condominium project for the purpose of
having those units be part of the rental program at the Spencer on Byron Hotel.
 The leases are for a period of ten years expiring on July 18, 2011, and
Castle has the option to extend these leases for an additional 20 years.
 Monthly lease rent through 2011 is calculated as a percentage of the
purchase price paid by the original owner of each condominium.  On December 24, 2004, the Company, through its wholly owned
subsidiary NZ Castle Resorts and Hotels Limited, entered into an agreement to
purchase all of the shares of Mocles Holdings Limited (Mocles), a New Zealand
Corporation.  The purchase price for Mocles was $7,455,213 (NZ$10,367,048),
net of imputed interest $1,164,699 (NZ$1,632,952).  The face value of the
purchase price was $8,619,912 (NZ$12,000,000).   Details of this
purchase and residual amounts due are more fully described in Note 11 of the
Notes to Financial Statements.     Item 3.  Legal Proceedings.  The Company is subject to various other claims and lawsuits which
are normal and reasonably foreseeable in light of the nature of the Companys
business and the growth in the Companys business.  In the opinion of
management, although no assurances can be given, the resolution of these claims
will not have a material adverse effect on the Companys financial position,
results of operations and liquidity.  Further, to the knowledge of
management, no director, officer, affiliate, or record of beneficial owner of
more than 5% of the common voting stock of the Company is a party adverse to the
Company or has a material adverse interest to the Company in any material
proceeding.    Item 4.  Submission of Matters to a Vote of Security
Holders.  No matter was submitted to a vote of the security holders of
record during 2008.     PART II     Item 5.  Market for Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.  Castles
common stock began trading on December 31, 2007 under the trading symbol CAGU.
 Prior to that time, it traded sporadically on the pink sheets.  The
OTC Bulletin Board is an over the counter market quotation system and as such,
all stock prices reflect as noted by the system are inter-dealer prices, without
retail mark-up, mark-down or commissions and may not represent actual
transactions.  Price Range of Common
Stock  The
price range per share of common stock presented below represents the highest and
lowest sales prices for the Companys common stock on the OTC Bulletin Board
during each quarter of the two most recent fiscal years. Fourth Quarter

Third Quarter

Second Quarter

First QuarterFiscal
2008 price range per common share

$
1.31-$1.00

$
1.65-$1.00

$
1.75-$1.00

$
2.00-$1.00Fiscal
2007 price range per common share (1)

$
1.01
- $0.35

$
None

$
None

$
None   8    (1) Castles
common stock was approved for trading on the OTC Bulletin Board on December 27,
2007 under the trading symbol CAGU.  During 2007, the stock traded for only
one day, on December 31, 2007 and its closing price on that day was $1.01 per
share  Holders
of Record  There
were approximately 280 owners of record of Castles common stock as of February
28, 2009.  Dividends  Castle
has not paid any dividends with respect to its common stock, and does not intend
to pay dividends on its common stock in the foreseeable future.  As more
fully described in Note 7 to Castles consolidated financial statements included
herein, in 1999 and 2000, the Company issued a total of 11,050 shares of $100
par value redeemable preferred stock.  Dividends are cumulative from the
date of original issue and are payable semi-annually, when, and if declared by
the board of directors beginning July 15, 1999, at a rate of $7.50 per annum,
per share.  During the fiscal year ended July 31, 2000, the Company paid
dividends to holders of record as of July 15, 2000, in the amount of $16,715.
 At December 31, 2008, undeclared and unpaid dividends on these shares
totaled $767,168 or $69.43 per preferred share.  These dividends are not
accrued as a liability, since no dividends have been declared.  Castle
cannot pay dividends on its common stock until it declares and pays the
dividends on its preferred stock.  It is the present intention of
management to utilize all available funds for the development and expansion of
Castles business, rather than for common stock dividend payments.  Securities Authorized
for Issuance under Equity Compensation Plans  Castle
does not have any equity compensation plans and as such no securities have been
authorized for issuance subject to such a plan.  Recent
Sales of Unregistered Securities  During
the last three years, we issued the following unregistered securities:  During
2006, Castle voided 900,000 shares of common stock.  The shares were issued
as part of a compromise agreement reached in 2001, with the developer of a hotel
that Castle previously leased.  As a result of a final settlement agreement
occurring in 2007, between Castle and the hotel developer, the compromise
agreement signed in 2001, was rescinded, and therefore, Castle voided the
900,000 shares that were previously issued.  During
2007, there were no issuances of unregistered securities.  In
April, 2008, the Company raised additional capital from the completion of a Unit
offering which resulted in the issuance of 333,337 Units at a price of
$1.50 per Unit.  Each Unit consists of one a of the Companys common stock
and a warrant to purchase an additional share of the Companys common stock at a
price of $3.50 for a period of three years, subject to certain restrictions.
 Through this financing the Company raised a net amount of $224,744 for use
as working capital and converted $227,500 in outstanding debt and short term
obligations.  Members of management and certain directors purchased 260,003
Units at the offering price.  During
the quarter ended June 30, 2008, the Company issued 75,000 shares of its common
stock to one of its directors for services rendered to the Company .These shares
were valued at $1.75 per share which equals the closing price of  the
common stock on the date of issuance and the entire valuation was recorded as a
compensation expense on that date.  Castle
issued all of these securities to persons who were accredited investors or
sophisticated investors, as those terms are defined in Regulation D of the
Securities and Exchange Commission; and each such person had prior access to all
material information about us.  We believe that the offer and sale of these
securities were exempt from the registration requirements of the Securities Act
of 1933, as amended (the Securities Act), pursuant to Sections 4(2) and 4(6)
thereof, and Rule 506 of Regulation D of the Securities and Exchange Commission.
 Sales to accredited investors are preempted from state regulation.  Use
of Proceeds of Registered Securities.  There
were no proceeds received by Castle from the sale of registered securities
during the 12 months ending December 31, 2008.  Purchases
of Equity Securities by Us and Affiliated Purchasers.  There
were no Purchases of Equity Securities or Affiliated Purchasers during the 12
months ending December 31, 2008.     Item 6.Selected
Financial Data and Supplementary Financial Information.   Not Applicable     9     Item 7.   Managements Discussion and Analysis of
Financial Condition and Results of Operation.   CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS  Certain
statements contained in Managements Discussion and Analysis of Financial
Condition and Results of Operations and Plan of Operations including
statements regarding the anticipated development and expansion of Castles
business, the intent, belief or current expectations of the performance of
Castle, and the products and/or services it expects to offer and other
statements contained herein regarding matters that are not historical facts, are
forward-looking statements.  Because such statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements.  Factors that could cause
actual results to differ materially from those expressed or implied by such
forward-looking statements include, but are not limited to, the factors set
forth in Managements Discussion and Analysis of Financial Condition and
Results of Operations and Plan of Operations.  Factors
that may affect forward- looking statements include a wide range of factors that
could materially affect future developments and performance, including the
following:Changes in company-wide strategies, which may
result in changes in the types or mix of businesses in which Castle is involved
or chooses to invest; changes in U.S., global or regional economic conditions,
changes in U.S. and global financial and equity markets, including significant
interest rate fluctuations, which may impede Castles access to, or increase the
cost of, external financing  for its operations and investments; increased
competitive pressures, both domestically and internationally, legal and
regulatory developments, such as regulatory actions affecting environmental
activities, the imposition by foreign countries of trade restrictions and
changes in international tax laws or currency controls; adverse weather
conditions or natural disasters, such as hurricanes and earthquakes, labor
disputes, which may lead to increased costs or disruption of operations. 
This list of factors that may affect future performance and the accuracy of
forward-looking statements are illustrative, but by no means exhaustive.
 Accordingly, all forward-looking statements should be evaluated with the
understanding of their inherent uncertainty.  RESULTS
OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2008 and 2007  For
added clarity in the discussion below the Companys Quarterly Statement of
Operations for 2008 and 2007 are presented as reported in the Companys Form
10-Q Quarterly Reports with the Securities and Exchange Commission: THE CASTLE GROUP INC.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOMEBy Quarter 2008 and 2007($ in millions)Q1/08
Q2/08
Q3/08
Q4/08

2008

Q1/07
Q2/07
Q3/07
Q4-07

2007RevenuesRevenue
attributed from properties
$5.170
$4.006
$4.122
$4.314

$17.612

$4.572
$4.307
$4.860
$4.668

$18.408Management
& Service
$0.811
$0.593
$0.570
$0.467

$2.442

$0.337
$0.447
$0.610
$0.857

$2.250Other
Income
$0.025
$0.024
$0.004
$0.019

$0.071

$0.075
$0.087
$0.106
$0.101

$0.369Total
Revenues
$6.006
$4.622
$4.696
$4.800

$20.125

$4.984
$4.841
$5.576
$5.626

$21.026.





$0.000






$0.000Operating
Expenses





$0.000






$0.000Attributed
property expenses
$4.636
$4.280
$4.019
$3.896

$16.831

$4.166
$4.228
$4.422
$4.538

$17.354Payroll
and office expenses
$0.663
$0.707
$0.596
$0.654

$2.620

$0.400
$0.533
$0.548
$0.758

$2.239Administrative
and general
$0.378
$0.401
$0.172
$0.141

$1.092

$0.231
$0.226
$0.411
$1.303

$2.171Depreciation
$0.056
$0.056
$0.052
$0.042

$0.206

$0.056
$0.060
$0.060
$0.033

$0.209Total
Operating Expense
$5.733
$5.444
$4.839
$4.733

$20.749

$4.854
$5.047
$5.441
$6.631

$21.972Operating
Profit (Loss)
$0.273
($0.821)
($0.143)
$0.067

($0.624)

$0.130
($0.206)
$0.135
($1.005)

($0.946)Foreign
Exchange Gain



$0.585

$0.585






$0.000Interest
Income
$0.003
$0.000
$0.003
$0.000

$0.005

$0.037
$0.037
$0.038
($0.112)

$0.000Interest
Expense
($0.109)
($0.094)
($0.088)
($0.162)

($0.453)

($0.133)
($0.136)
($0.134)
($0.138)

($0.542)Loss
before taxes
$0.167
($0.916)
($0.228)
$0.490

($0.487)

$0.034
($0.305)
$0.039
($1.256)

($1.488)Income
tax benefit (Expense)
($0.067)
$0.370
$0.108
($0.213)

$0.197

($0.014)
$0.135
($0.023)
$0.274

$0.371Net
Profit (Loss)
$0.100
($0.546)
($0.121)
$0.277

($0.290)

$0.020
($0.170)
$0.015
($0.982)

($1.117)  10       Revenue: For
2008, our revenue trend is reflective of a substantial decrease in the number of
visitors to Hawaii as a result of the decrease in seating capacity provided by
the airlines serving Hawaii in 2008 as compared to 2007 as well as a reluctance
on the part of travelers to embark on leisure travel to Hawaii and New Zealand
during the difficult economic times.  The Hawaii State Department of
Business, Economic Development, and Tourism announced that overall there was a
10.2% reduction in airline seats available to bring passengers to Hawaii in 2008
as compared to 2007.  This was in part due to the bankruptcy of two
important airlines Aloha and ATA in April 2008.  This trend was mirrored by
a decrease of 9.0% in visitor days and a 10.6% decrease in the number of
visitors to the Islands during 2008, as compared to 2007.1The majority of the decrease in visitors
and the resulting impact on Castles revenues occurred during the 2nd,
3rdand 4thquarters of 2008.  Statewide, as reported by Hospitality Advisors and Smith
Travel Research, room revenues of hotels in Hawaii fell 6.6% and hotel occupancy
fell 4.6 percentage points.2  Castles
Revenues totaled $20,125,185 for the year ended December 31, 2008, representing
a modest 4% decrease from $21,026,079, in 2007.  The decrease in visitors
and the resulting impact on Castles revenues occurred during the
2nd, 3rd, and 4th quarters of 2008.
 Castles quarterly revenues increased 21% in the first quarter of 2008 as
compared to the first quarter of 2007, and then decreased 5%, 16%, and 15% as
compared to the previous year in each of the subsequent quarters. Total revenue
for the fourth quarter of 2008 totaled $4,800,290 as compared to $5,625,676 in
the fourth quarter of 2007.  The
Company has two basic types of agreements.  Under a Gross Contract the
Company records revenue which is based on a percentage of the gross rental
proceeds received from the rental of hotel or condominium units.
  Under a Gross Contract the Company pays a portion of the gross
rental proceeds to the owner of the rental unit.  The Company only records
the difference between the gross rental proceeds and the amount paid to the
owner of the rental unit as Revenue Attributed from
Properties.  Under the Gross Contract, the Company is responsible for
all of the operating expenses for the hotel or condominium unit.  Under a
Net Contract, the Company receives a management fee that is based on a
percentage of the gross rental proceeds received from the rental of hotel or
condominium units.  Under the Net Contract, the owner of the hotel or
condominium unit is responsible for all of the operating expenses of the rental
program covering the owners unit.  Under the Net Contract, the Company
also typically receives an incentive management fee, which is based on the net
operating profit of the covered property. Revenues received under the net
contract are recorded as Management and Service Income.  Under both types
of agreements, revenues are recognized after services have been rendered.
 A liability is recognized for any deposits received for which services
have not yet been rendered.  Revenues
attributed from Properties decreased 4% to $17,612,130 for the year ended
December 31, 2008, as compared to $18,407,645, in 2007.  Revenues
attributed to Castles New Zealand operation decreased a total of 4% in 2008, as
compared to 2007, with three quarters of this decrease coming as a result of the
strengthened US Dollar exchange rate as compared to the New Zealand Dollar.
 The remainder of the decrease is indicative of a 18% decrease in occupancy
partially offset by a 4% increase in Average Daily Rate in 2008, as compared to
2007, for rooms at properties managed under Gross Contracts outside of New
Zealand. Management and Service Revenues increased 9% to $2,442,137 in 2008,
from $2,249,777 in 2007.  This net increase is due to a significant
increase in the number of properties and rooms managed during 2008, as compared
to 2007, under Net Contracts.  This increase is indicative of a 56%
increase in gross property revenues at properties managed under Net Contracts
for which Castle receives and records as net revenue a percentage as
compensation for services rendered.  Due to the long term nature of the
expected downturn in the economy and related impacts on the Companys revenues,
in late 2008, and early 2009, Castle has renegotiated some of its longer term
contracts with certain property owners which are expected provide substantially
higher revenues per room managed and help to restore the Companys overall
profitability beginning with the fourth quarter of 2008, and continuing through
2009.  Revenues Attributed from Properties totaled $4,314,003 in the fourth
quarter of 2008, compared to $4,668,162 in the same period of 2007.  Costs
and Expenses  Total
Operating Expenses were $20,749,229 for the 12 months ending December 31, 2008.
 This represents a 6% decrease from the Total Operating Expenses of
$21,972,232, in 2007.  During the second half of 2008, and early 2009, in
response to the decreasing revenues, we instituted a number of difficult but
necessary efficiency and cost saving measures, many of which will not be fully
realized until 2009.  Excluding the effect of an accounts receivable
valuation allowance in the amount of $954,459 booked in the fourth quarter of
2007, Total Operating Expenses decreased from $5,676,669 in the fourth quarter
of 2007 to $4,733,182 in the fourth quarter of 2008, a decrease of 19.93%.  Attributed
Property Expenses decreased 3% to $16,831,482 for the 12 months ending December
31, 2008, as compared to $17,353,863 in 2007.  Attributed Property Expenses
include the operating expenses of the properties or condominiums which are
managed under Gross Contracts.  The decrease in expenses results from
decreased variable costs and decreased staffing required due to lower occupancy.
 The Company also instituted other measures to better match costs and
expenses with the lower occupancy and average daily rates we are encountering at
our properties.    1 Hawaii State Department of Business,
Economic Development and Tourism (http://hawaii.gov/dbedt/info/visitor-stats/tourism/2008/dec08.swf)   2 Pacific Business News (http://pacific.bizjournals.com/pacific/stories/2009/02/09/story5.html)   11    Payroll
and office expense totaled $2,620,058 for the full year of 2008, as compared to
$2,238,559 in the year earlier period. This increase is primarily related to an
additional $190,000 in accounting and reservations payroll to service the
additional properties which the Company had under contract in 2008, compared to
2007.  The Company hired additional corporate staff in early 2008, in
anticipation of continued rapid growth and expansion which resulted in an
increase in Payroll and Office expense in the early part of the year and then
reduced corporate staff and office space, and renegotiated office leases
beginning in the second half which resulted in a subsequent decrease in payroll
and office expense on a quarterly basis in the third and fourth quarter.
 Total Payroll and office expenses were $653,607 in the final quarter of
2008, compared to $757,529 in the same period of 2007.  Administrative
and general expense totaled $1,091,729 in 2008, a reduction of 10% as compared
to $1,216,715 (net of $954,459 of expense related to an adjustment in the
carrying value of a receivable, total gross expense amounting to $2,171,173) for
2007. The reduction in administrative and general expenses is a result of a
decrease in expenses relating to sales and marketing, business development and
investor relations in 2008, as compared to 2007.  Fourth quarter 2008
administrative and general expenses totaled $141,128 as compared to $1,303,173
in the fourth quarter of 2007, which included a $954,459 allowance for doubtful
accounts.  EBITDA
reflects the Companys earnings without the effect of depreciation, interest
income or expense or taxes.  Castles management believes that EBITDA is a
good alternative indicator of the Companys financial performance, because it
removes the effects of non-cash depreciation and amortization of assets as well
as the fluctuations of interest costs based on Castles borrowing history along
with increases and decreases in tax expense brought about by changes in the
provision for future tax effects rather than current income.  A comparison
of EBITDA and Net Income for 2008 and 2007 is shown below.  For the year
ended 2008, EBITDA was ($418,085) as compared to ($737,515) for 2007, an
increase of $319,431.  EBITDA for the Fourth
quarter of 2008 was $109,562 as compared to an EBITDA of ($972,647) in the
fourth quarter of 2007.   EBITDA is not a measure that is
recognized within generally accepted accounting principles (GAAP).  Comparison
of Net Income to EBITDA: THE CASTLE GROUP, INC. Comparison of Net Income to EBITDA By Quarter 2008 and 2007 Q1/08
Q2/08
Q3/08
Q4/08

2008

Q1/07
Q2/07
Q3/07
Q4-07

2007Net
Income:
$99,658
($545,882)
($120,519)
$276,714

($290,029)

$19,702
($170,208)
$15,323
($981,935)

($1,117,118)Add
Back:Income
Taxes
67,309
-369,783
-107,543
213,419

-196,598

14,269
-134,740
23,273
-274,150

-371,348Interest
Expense
105,946
94,229
85,432
161,925

447,532

96,177
98,905
96,598
250,633

542,313Depreciation
56,290
55,637
51,579
42,454

205,960

56,188
59,676
59,968
32,805

208,637LessForeign
Exchange Gain:
0
0
0
-584,950

-584,950

0
0
0
0

0EBITDA
$329,203
($765,799)
($91,051)
$109,562

($418,085)

$186,336
($146,367)
$195,162
($972,647)

($737,516)  Depreciation
expense in 2008 decreased by $2,677, to $205,960 when compared to 2007.
 This was due to a slight decrease in the number of depreciable assets as
compared to the prior year, and a strengthening of the US Dollar as compared to
the New Zealand Dollar.  A
foreign exchange gain of  $584,950 was recognized in the 4th
quarter of 2008 which resulted from the impact of a reduction  of the
Guarantor Obligation of the Company that is payable in New Zealand Dollars (see
note 4 of the Notes to Consolidated Financial Statements).  This reduction
was due to the strengthening of the US Dollar exchange rate against the New
Zealand Dollar.  Interest
expense for 2008 totaled $447,532 for 2008, a decrease of $94,781 as compared to
2007s total of $542,313.  This decrease is primarily due to the impact on
the interest payable on the Companys debt in New Zealand as a result of a more
favorable US Dollar to New Zealand Dollar exchange rate in 2008.  Income
tax benefit for 2008 totaled $196,598, a decrease of $174,750 when compared to
2007s Income Tax Benefit of $371,348 due to the impact on the income tax
provision from a decrease in taxable loss in 2008 as compared to 2007.  The
Companys deferred tax asset balance of $2,158,073 on December 31, 2008 is
derived primarily from its taxable losses in recent years.  This reflects
the Companys estimate of the amount which will offset tax liabilities from
expected taxable income in future years.  The Company expects to be
profitable in 2009, and in future years as the benefits of the cost savings
measures noted above are  12    realized
and additional properties and management contracts are added.  We believe
that it is likely that the current portion of the deferred tax asset will be
utilized in 2009 and the remainder will be utilized in subsequent years.
 Since the majority of these losses occurred in recent years, the useful
life of the tax asset extends well into the projected taxable periods.
 Further, the nature of the derivation of the tax asset is directly
applicable to the nature of the expected tax liability in future periods; as
such the quality of the tax asset in relation to the expected utilization is
high.  (see note 9 of the Notes to Consolidated Financial Statements.)  Net
Loss for the year ended December 31, 2008, was ($290,029), a change of $827,089
compared to the Net Loss of ($1,117,118) for the year ended December 31, 2007.  Liquidity:  Our
primary sources of liquidity include available cash and cash equivalents, and
borrowing under the credit facility which was secured in October 2008,
consisting of a $500,000 term loan and a $250,000 line of credit..  These
facilities contain representations and warranties, conditions, covenants and
events of default that are customary for this type of credit facility but do not
contain financial covenants.  We do not believe the limitations contained
in the credit facility will, in the foreseeable future, adversely affect our
ability to use the credit facility and execute our business plan.  Expected
uses of cash in fiscal 2009 include funds required to support our operating
activities, including continuing to opportunistically and selectively expand the
number of properties under our management.  We
experienced a loss in fiscal 2008 of $290,029, and our Total Current Assets
declined from $4.7 million at the end of 2007, to $3.3 million at the end of
2008.  The trend of continued losses has reversed in recent months as the
Company reported an Operating Profit in the fourth quarter of 2008.  We
anticipate a continuation of current occupancy and rate trends and levels for
the properties currently under contract for the remainder of 2009.  We plan
to expand the number of properties under management, which will increase the
overall revenue stream in 2009.  The specific impact of these additions on
revenue depends on the timing of when new properties are added during the year.
 More importantly, we  implemented a number of cost saving and
efficiency programs that began to improve the Companys profitability and cash
flows in the fourth quarter of 2008, leading to an operating profit of $67,000
for the quarter.  While its a small profit in absolute terms, we believe
that it represents a turning point during these difficult times and we project
that the Company will significantly improve the overall profitability, cash
flows, and working capital liquidity through 2009 as compared to 2008.
 This view is based on the following assumptions:  · A
continuation of weak global macroeconomic trends in consumer spending and
especially travel spending by consumers, and the resulting visitation trends to
Hawaii and New Zealand particularly in the first half of the fiscal year. · Continued
impact on occupancy levels and average daily rates at the properties we manage
as compared to recent years. · A
continuation of the cost savings and efficiency measures and reduction in
business development and investor relations costs.  This is anticipated to
reduce operating expenses by approximately $1.3 million as compared to 2008.
 This will provide the basis for improved operating trends throughout 2009. · Expansion
of the number of properties under management, with emphasis on Hawaii and New
Zealand.  Based
on operating results for January and February 2009, and projections for March
2009, we anticipate recording an Operating Profit for the first quarter of 2009.
 We have also taken steps to enhance our liquidity by refinancing and
increasing credit facilities in October 2008. . Our plans to manage our
liquidity position in fiscal 2009 include:  · Maintaining
an intense focus on controlling expenses; while maintaining strong relationships
with our owners and travel wholesalers and partners to ensure continuity and
good communication.  · Improving
our accounts receivable collection rates which will have a positive impact on
working capital and liquidity.  · Continuing
with only limited capital expenditures and projects,  We
have considered the impact of the financial outlook on our liquidity and have
performed an analysis of the key assumptions in our forecast such as sales,
gross margin and expenses; an evaluation of our relationships with our travel
partners and property owners and an analysis of cash requirements, other working
capital changes, capital expenditures and borrowing availability under our
credit facility.  Based upon these analyses and evaluations, we expect that
our anticipated sources of liquidity will be sufficient to meet our obligations
without disposition of assets outside of the ordinary course of business or
significant revisions of our planned operations through 2009.  Other
Borrowings  During
2008, the Company refinanced and expanded its available credit facilities by
refinancing its term loans and lines of credit with a local bank in Hawaii.
 The Company obtained a term loan for $500,000, the majority of which was
used to refinance an existing term loan and a line of credit for $250,000 for
general working capital purposes.  As of March 16, 2009, the Company  13    has
drawn $25,000 against the line of credit.  The Company has also utilized an
equipment lease line of credit totaling $150,000 to finance its capital
equipment and computer hardware.  In December of 2007, as part of the
Company acquiring a new hotel management agreement, the Company allowed the
hotel owner to purchase computer hardware using the Companys equipment lease
line of credit in the amount of $76,501.  The hotel owner shall be
responsible for making the operating lease payments to the bank, and also agreed
to assume, refinance, or retire the lease should the management agreement
between the Company and the hotel be terminated.  In addition, the
Companys has a $100,000 NZD line of credit with a New Zealand bank to finance
its general working capital flows in New Zealand.  As of March 16, 2009
there are no borrowings against this line of credit.  Off-Balance
Sheet Arrangements  As
of December 31, 2007, the Company had an available lease line of credit with a
bank for up to $250,000.  In December of 2007, as part of the Company
acquiring a new hotel management agreement, the Company allowed the hotel owner
to purchase computer hardware using the Companys equipment lease line of credit
in the amount of $76,501.  The hotel owner shall be responsible for making
the operating lease payments to the bank, and also agreed to assume, refinance
or retire the lease should the management agreement between the Company and the
hotel be terminated.  On October 24, 2008, the lease line of credit was
terminated by the bank upon the Company refinancing its term loan and revolving
line of credit with another bank.  Refer to Note 4 of the Financial
Statements.  Foreign
Currency  The
U.S. dollar is the functional currency of our consolidated entities operating in
the United States.  The functional currency for our consolidated entities
operating outside of the United States is generally the currency of the country
in which the entity primarily generates and expends cash.  For consolidated
entities whose functional currency is not the U.S. dollar, Castle translates its
financial statements into U.S. dollars.  Assets and liabilities are
translated at the exchange rate in effect as of the financial statement date,
and results of operations are translated using the weighted average exchange
rate for the period.  Translation adjustments from foreign exchange are
included as a separate component of stockholders equity.  Item 7A.
 Quantative and Qualitative Disclosure About Market Risk  Not
applicable.     Item 8.  Financial Statements  The Castle Group, Inc. and Subsidiaries Table of Contents    Report
of Independent Registered Public Accounting Firm
Page
15Consolidated
Balance Sheets  December 31, 2008 and 2007
Page
16Consolidated
Statements of Operations and Comprehensive Income (Loss) -  Years
Ending December 31, 2008 and 2007
Page
17Consolidated
Statements of Cash Flows  Years Ending December 31, 2008 and 2007
Page
18Consolidated
Statements of Stockholders Deficit - Years Ending December 31, 2008 and
2007
Page
19Notes
to Consolidated Financial Statements
Pages
20-31    14      REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM  The
Board of Directors and Shareholders The
Castle Group, Inc. and Subsidiaries  We have audited the accompanying consolidated balance sheets of
The Castle Group, Inc. and Subsidiaries as of December 31, 2008 and 2007, and
the related consolidated statements of operations and comprehensive income, cash
flows, and stockholders deficit, for the years ended December 31, 2008 and
2007.  These financial statements are the responsibility of the Companys
management.  Our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.  The
Company has determined that it is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.  Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting.  Accordingly, we
express no such opinion.  An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audit provides a reasonable basis for
our opinion. In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Castle Group,
Inc. and Subsidiaries as of December 31, 2008 and 2007, and the results of
operations and cash flows for the years ended December 31, 2008 and 2007, in
conformity with accounting principles generally accepted in the United States of
America. /s/Mantyla McReynolds LLC Mantyla
McReynolds LLC Salt
Lake City, Utah March
30, 2009     15     THE CASTLE GROUP INC.CONSOLIDATED BALANCE SHEETSDECEMBER 31, 2008 & 2007ASSETSDecember 31,
December 31,2008
2007Current
AssetsCash
and cash equivalents
$ 344,677
$ 494,089Accounts
receivable, net of allowance for bad debts
2,169,325
3,262,058Deferred
tax asset
379,625
642,000Prepaids
and other current assets
426,843
339,620Total
Current Assets
3,320,470
4,737,767Property,
furniture & equipment, net
5,894,698
8,050,563Goodwill
54,726
54,726Deposits
26,837
28,070Note
Receivable, net of allowance
0
0Restricted
cash
215,428
163,157Deferred
tax asset
1,778,448
1,319,475TOTAL
ASSETS
$11,290,607
$14,353,758LIABILITIES AND STOCKHOLDERS' DEFICITCurrent
LiabilitiesAccounts
payable
$3,101,731
$3,414,311Accounts
payable- related party
190,240
75,000Deposits
payable
345,170
386,359Current
portion of long term debt
464,082
1,308,262Current
portion of long term debt to related parties
16,440
110,850Accrued
salaries and wages
913,799
944,459Accrued
taxes
132,714
158,948Accrued
interest
47,947
66,250Other
current liabilities
17,222
8,267Total
Current Liabilities
$5,229,345
$6,472,706Non
Current LiabilitiesLong
term debt, net of current portion
3,924,532
4,916,997Deposits
payable
215,428
163,157Notes
payable to related parties
157,420
223,770Other
long term obligations, net
2,433,050
3,018,000Total
Non Current Liabilities
6,730,430
8,321,924Total
Liabilities
$11,959,775
$14,794,630Stockholders'
DeficitPreferred
stock, $100 par value, 50,000 shares authorized, 11,050
1,105,000
1,105,000shares
issued and outstanding in 2008 and 2007, respectivelyCommon
stock, $.02 par value, 20,000,000 shares authorized, 9,946,392
198,929
190,761&
9,538,055 shares issued and outstanding in 2008 and 2007,
respectivelyAdditional
paid in capital
4,100,700
3,366,928Retained
deficit
(5,324,959)
(5,034,930)Accumulated
other comprehensive income (loss)
(748,838)
(68,631)Total
Stockholders' Deficit
(669,168)
(440,872)TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
$11,290,607
$14,353,758The accompanying notes are an integral part of these
consolidated financial statements  16        THE CASTLE GROUP INC.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOMEYEARS ENDING DECEMBER 31, 2008 & 200712/31/2008
12/31/2007RevenuesRevenue
attributed from properties




$
17,612,130
$18,407,645Management
& Service




2,442,137
2,249,777Other
Income




70,918
368,657Total
Revenues




20,125,185
21,026,079Operating
ExpensesAttributed
property expenses




16,831,482
17,353,863Payroll
and office expenses




2,620,058
2,238,559Administrative
and general




1,091,729
2,171,173Depreciation




205,960
208,637Total
Operating Expense




20,749,229
21,972,232Operating
Loss




(624,044)
(946,153)Foreign
Exchange Gain




584,950
-Interest
Expense




(447,533)
(542,313)Loss
before taxes




(486,627)
(1,488,466)Income
tax benefit




196,598
371,348Net
Loss




$
 (290,029)
$
(1,117,118)Other
Comprehensive IncomeForeign
currency translation adjustment




(680,207)
221,320Total
Comprehensive Income (Loss)




$
(970,236)
$(895,798)Earnings
(Loss) Per ShareBasic




$
                                      (0.03)
$
                                           (0.12)Diluted




$
                                      (0.03)
$
                                           (0.12)Weighted
Average SharesBasic




9,812,134
9,538,055Diluted




9,812,134
9,538,055The accompanying notes are an integral part of these
consolidated financial statements   17     THE CASTLE GROUP INC.CONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDING DECEMBER 31, 2008 & 20072008
2007Cash
Flows from Operating ActivitiesNet
income (loss)




$(290,029)
$(1,117,118)Depreciation




205,960
208,637Amortization
of discount




174,312
387,738Provision
for uncollectible note receivable




-
954,459Stock
issued for compensation




131,250
-Interest
on guarantor obligation




158,445
-Foreign
exchange gain on guarantor obligation




(584,950)
-(Increase)
decrease inAccounts
receivable




860,679
(620,162)Other
current assets




(137,745)
-Deposits
and other assets




1,111
(57,795)Restricted
cash




(115,434)
224,431Deferred
taxes




(196,598)
(371,348)Increase
(decrease) inSettlement
agreement




-
(260,000)Accounts
payable and accrued expenses




230,814
695,922Net
Cash Flows From Operating Activities




437,815
44,764Cash
Flows from Investing ActivitiesPurchase
of property, furniture and equipment




(46,638)
(108,979)Net
Cash Flows from Investing Activities




(46,638)
(108,979)Cash
Flows from Financing ActivitiesProceeds
from notes




500,000
175,000Private
placement of stock




224,744
-Payments
on notes




(1,188,174)
(733,884)Net
Cash Flows from Financing Activities




(463,430)
(558,884)Effect
of exchange rate on changes in cash




(77,159)
16,886Net
Change in Cash




(149,412)
(606,213)Beginning
Balance




494,089
1,100,302Ending
Balance




$ 344,677
$494,089Non
cash transactionsConversion
of debt to equity




227,500
0Supplementary
InformationCash
Paid for Interest




$(120,097)
$(150,972)Cash
Paid for Income Taxes




-
-The accompanying notes are an integral part of these
consolidated financial statements    18     THE CASTLE GROUP INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICITYEARS ENDING DECEMBER 31, 2008 & 2007AccumulatedAdditional

OtherPreferred Stock
Common Stock
Paid-in
Retained
ComprehensiveShares
Amount
Shares
Amount
Capital
Deficit
Income (Loss)
TotalBalanceDecember
31, 2006

11,050
$1,105,000
9,538,055
$190,761
$ 6,681,930
$(3,917,812)
$(289,951)
$3,769,928Net
LossDecember
31, 2007






(1,117,118)

(1,117,118)Reduction
of Paid in Capital





(3,315,002)


(3,315,002)Foreign
CurrencyTranslation
Adjustment







221,320
221,320BalanceDecember
31, 2007

11,050
1,105,000
9,538,055
190,761
3,366,928
(5,034,930)
(68,631)
(440,872)Net
LossDecember
31, 2008






(290,029)

(290,029)Interest
on Guarantor Obligation





158,445


158,445Issuance
of Stock for Services



75,000
1,500
129,750


131,250Private
Placement of Stock, net of Issuance costs



333,337
6,668
445,577


452,245Foreign
CurrencyTranslation
Adjustment







(680,207)
(680,207)BalanceDecember
31, 2008

11,050
$1,105,000
9,946,392
$198,929
$ 4,100,700
$(5,324,959)
$(748,838)
$(669,168)The
accompanying notes are an integral part of these consolidated financial
statements  19    The Castle Group, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1. Summary
of Significant Accounting Policies Organization  The
Castle Group, Inc. was incorporated under the laws of the State of Utah on
August 21, 1981.  The Castle Group, Inc. operates in the hotel and resort
management industry in the State of Hawaii, New Zealand, Thailand, The Federated
States of Micronesia, the Territory of Guam and the Commonwealth of Saipan under
the trade name Castle Resorts and Hotels. The
accounting and reporting policies of The Castle Group, Inc. (the Company)
conform with generally accepted accounting principles and practices within the
hotel and resort management industry.  Principles
of Consolidation  The
consolidated financial statements of the Company include the accounts of The
Castle Group, Inc. and its wholly-owned subsidiaries, Hawaii Reservations Center
Corp., HPR Advertising, Inc., Castle Resorts & Hotels, Inc., Castle Resorts
& Hotels Thailand Ltd., NZ Castle Resorts and Hotels Limited (a New Zealand
Corporation),  NZ Castle Resorts and Hotels wholly-owned subsidiary,
Mocles Holdings Limited (a New Zealand Corporation), Castle Resorts & Hotels
NZ) Ltd., Castle Group LLC (Guam), Castle Resorts & Hotels Guam Inc. and KRI
Inc. dba Hawaiian Pacific Resorts (Interactive).  All significant
inter-company transactions have been eliminated in the consolidated financial
statements.  Use
of Management Estimates in Financial Statements  The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.  Cash
and Cash Equivalents  The
Company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.  Restricted
Cash  The
Company holds funds on behalf of the unit owners for one of the properties it
manages.  These funds are to be used only for the replacement and
refurbishment of the furniture and equipment within the rooms owned by the unit
owner.  As of December 31, 2008 and 2007, the Company had $215,428 and
$163,157, respectively, of funds held for this purpose.  The Company
records an offsetting liability as a long term deposit payable on its balance
sheet.  Accounts
Receivable  The
Company records an account receivable for revenue earned but net yet collected.
 If the Company determines any account to be uncollectible based on
significant delinquency or other factors, it is immediately written off.
 An allowance for bad debts has been provided based on estimated losses
amounting to $244,631 and $214,559 as of December 31, 2008 and 2007,
respectively.  Relating to the HBII Note Receivable, pursuant to GAAP,
the Company has established a reserve for uncollectible note receivable during
2007 for $4,269,151.  The Company recorded an expense during 2007 for
$954,459, and reduced additional paid in capital for $3,315,002 in providing for
the uncollectible debt reserve (See Note 2).  This is a reflection of the
nature of the original accounting treatment.  Property,
Furniture, and Equipment  Property,
furniture, and equipment are recorded at cost.  When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the accounting records, and any resulting gain or loss is reflected in the
Consolidated Statement of Operations for the period.  The cost of
maintenance and repairs are expensed as incurred.  Renewals and betterments
are capitalized and depreciated over their estimated useful lives.  At
December 31, 2008 and 2007, property, furniture, and equipment consisted of the
following: 2008
               2007 Real
estate - Podium (see Note 11)  $
6,003,533        $ 8,036,503 Equipment
and furnishings 1,104,065
          1,396,993 Less
accumulated depreciation (1,212,900)
       (1,382,933)  $
5,894,698        $ 8,050,563   Depreciation
is computed using the declining balance and straight-line methods over the
estimated useful life of the assets (Equipment and furnishings 5 to 7 years,
Podium 50 years).  For the years ended December 31, 2008 and 2007,
depreciation expense was $205,960 and $208,637, respectively.   20    Goodwill
and Intangibles  Under
SFAS No. 142, Goodwill and Other Intangible Assets, goodwill related to our
historical acquisitions is not amortized, but is subject to annual review for
impairment or upon the occurrence of certain events, and, if impaired, are
written down to its fair value.  The Company has not recognized any
impairment losses during the periods presented.  Revenue
Recognition  The
Company recognizes revenue from the management of resort properties according to
terms of its various management contracts.  The
Company has two basic types of agreements.  Under a Gross Contract the
Company records revenue which is based on a percentage of the gross rental
proceeds received from the rental of hotel or condominium units.
  Under a Gross Contract the Company pays a portion of the gross
rental proceeds to the owner of the rental unit.  The Company only records
the difference between the gross rental proceeds and the amount paid to the
owner of the rental unit as Revenue Attributed from
Properties.  Under the Gross Contract, the Company is responsible for
all of the operating expenses for the hotel or condominium unit.  Under a
Net Contract, the Company receives a management fee that is based on a
percentage of the gross rental proceeds received from the rental of hotel or
condominium units.  Under the Net Contract, the owner of the hotel or
condominium unit is responsible for all of the operating expenses of the rental
program covering the owners unit.  Under the Net Contract, the Company
also typically receives an incentive management fee, which is based on the net
operating profit of the covered property. Revenues received under the net
contract are recorded as Management and Service Income.  Under both types
of agreements, revenues are recognized after services have been rendered.
 A liability is recognized for any deposits received for which services
have not yet been rendered.  Under
a Gross Contract, the Company records the expenses of operating the rental
program at the property covered by the agreement.  These expenses include
housekeeping, food & beverage, maintenance, front desk, sales &
marketing, advertising and all other operating costs at the property covered by
the agreement.  Under a Net Contract, the Company does not record the
operating expenses of the property covered by the agreement.  The
difference between the Gross and Net contracts is that under a Gross Contract,
all expenses, and therefore the ownership of any profits or the covering of any
operating loss, belong to and is the responsibility of the Company; under a Net
Contract, all expenses, and therefore the ownership or any profits or the
covering of any operating loss belong to and is the responsibility of the owner
of the property.  The operating expenses of properties managed under a
Gross Contract are recorded as Attributed Property Expenses.  Advertising,
Sales and Marketing Expenses  The
Company incurs sales and marketing expenses in conjunction with the production
of promotional materials, trade shows, and retainers for out-of-state sales
agents, and related travel costs.  In accordance with the AICPAs Statement
of Position No. 93-7 Reporting on Advertising Costs, the Company expenses
advertising and marketing costs as incurred or as the advertising takes place.
 For the years ended December 31, 2008 and 2007, total advertising expense
was $1,310,388 and $1,590,475 respectively.  Stock-Based
Compensation  The
Company has accounted for stock-based compensation under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 123(R), Share Based
Payment.  This statement requires us to record an expense associated
with the fair value of stock-based compensation.  The Company
currently uses the Black-Scholes option valuation model to calculate the
valuation of stock options and warrants at the date of grant.  Option
pricing models require the input of highly subjective assumptions, including the
expected price volatility.  Changes in these assumptions can
materially affect the fair value estimate.  The
average risk-free interest rate is determined using the U. S. Treasury rate in
effect as of the date of grant, based on the expected term of the warrant.  Income
Taxes  In
June 2006, the FASB issued Interpretation No. 48 Accounting for Uncertainty in
Income Taxes, and Interpretation of FASB Statement No. 109 (FIN
48).  We adopted FIN 48 on January 1, 2007.  Under FIN 48,
tax benefits are recognized only for tax positions that are more likely than not
to be sustained upon examination by tax authorities.  The amount
recognized is measured as the largest amount of benefit that is greater than 50
percent likely to be realized upon ultimate settlement.  Unrecognized
tax benefits are tax benefits claimed in our tax returns that do not meet these
recognition and measurement standards.  Upon the adoption of FIN 48, we had
no liabilities for unrecognized tax benefits and, as such, the adoption had no
impact on our financial statements, and we have recorded no additional interest
or penalties.  The adoption of FIN 48 did not impact our effective tax
rates.  Our policy is to recognize potential interest and penalties accrued
related to unrecognized tax benefits within income tax expense.  For
the years ended December 31, 2008 and 2007, the Company did not recognize any
interest or penalties in its Statement of Operations, nor did it have any
interest or penalties accrued in its Balance Sheet at December 31, 2008 and
2007, relating to unrecognized benefits.  Basic
and Diluted Earnings per Share  Basic
earnings per share of common stock were computed by dividing income available to
common stockholders, by the weighted average number of common shares
outstanding.  Diluted earnings per share were computed using the treasury
stock  21    method
under SFAS No. 128 Earnings per Share.  The calculation of Basic and
Diluted earnings per share for 2008 and 2007 did not include 368,335 shares
which would be issued upon conversion of the outstanding $100 par value
redeemable preferred stock of the Company, nor does it include 150,000 shares
issuable pursuant to the exercise of vested warrants as of December 31, 2007 and
483,337 vested warrants as of December 31, 2008 as the effect would be
anti-dilutive.  Concentration
of Credit Risks  The
Company maintains its cash with several financial institutions in Hawaii, New
Zealand, and Thailand.  Balances maintained with these institutions are
occasionally in excess of federally, insured limits.  As of December 31,
2008 and 2007, the Company had balances of $85,181 and $496,423, respectively,
in excess of US federally insured, limits of $250,000 and $100,000,
respectively, per financial institution.  Concentration
in Market Area  The
Company manages hotel properties in Hawaii, Thailand, New Zealand and
Micronesia, and is dependent on the visitor industries in these geographic
areas.  Fair
Value of Financial Instruments  SFAS
157 defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles and enhances disclosures about fair
value measurements.  Fair value is defined under SFAS 157 as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date.  Valuation techniques used to measure fair value
under SFAS 157 must maximize the use of observable inputs and minimize the use
of unobservable inputs.  The standard describes a fair value hierarchy
based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value.
 The carrying value of notes receivable and notes payable approximates fair
values as these notes have interest rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining
maturities.  Guarantees  We
record a liability for the fair value of a guarantee on the date a guarantee is
issued or modified.  The offsetting entry depends on the circumstances in
which the guarantee was issued.  Funding under the guarantee reduces the
recorded liability.  When no funding is forecasted, the liability is
amortized into income on a straight-line basis over the remaining term of the
guarantee.  Foreign
Currency Translation and Transaction Gains/Losses  The
U.S. dollar is the functional currency of our consolidated entities operating in
the United States.  The functional currency for our consolidated entities
operating outside of the United States is generally the currency of the country
in which the entity primarily generates and expends cash.  For consolidated
entities whose functional currency is not the U.S. dollar, we translate their
financial statements into U.S. dollars.  Assets and liabilities are
translated at the exchange rate in effect as of the financial statement date,
and the line items of the results of operations are translated using the
weighted average exchange rate for the year. Translation adjustments from
foreign exchange are included as a separate component of shareholders equity.
 Gains and losses resulting from foreign currency transactions are included
in the consolidated statements of operations.  New
Accounting Pronouncements  In
September 2006, the FASB issued SFAS No. 157 Fair Value
Measurements.  SFAS 157 defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value
measurements.  SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements.  The provisions of SFAS 157 were originally to be
effective beginning January 1, 2008.  Subsequently, the FASB provided
for a one-year deferral of the provisions of SFAS 157 for non-financial assets
and liabilities that are recognized or disclosed at fair value in consolidated
financial statements on a non-recurring basis.  We are currently
evaluating the input of adopting the provisions of SFAS 157 for non-financial
assets and liabilities that are recognized or disclosed on a non-recurring
basis.  In
June 2003, the Securities and Exchange Commission (SEC) adopted final rules
under Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404).
 Commencing with the Companys Annual Report for the year ending December
31, 2007, the Company was required to include a report of management on the
Companys internal control over financial reporting.  The internal control
report must include a statement of managements responsibility for establishing
and maintaining adequate internal control over financial reporting for the
Company; of managements assessment of the effectiveness of the Companys
internal control over financial reporting as of yearend; of the framework used
by management to evaluate the effectiveness of the Companys internal control
over financial reporting; and for the year ending December 31, 2009, the
Companys independent accounting firm is required to issue an attestation report
on managements assessment of the Companys internal control over financial
reporting, which report is also required to be filed as part of the Annual
Report on form 10-K.  In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. 
SFAS No. 141(R) changes the accounting for and reporting of business combination
transactions in the following way:  Recognition with certain exceptions, of
100% of the fair values of assets acquired, liabilities assumed, and non
controlling interests of acquired businesses; measurement of all  22    acquirer
shares issued in consideration for a business combination at fair value on the
acquisition date; recognition of contingent consideration arrangements at their
acquisition date fair values, with subsequent changes in fair value generally
reflected in earnings; recognition of pre-acquisition gain and loss
contingencies at their acquisition date fair value; capitalization of in-process
research and development (IPR&D) assets acquired at acquisition date fair
value; recognition of acquisition-related transaction costs as expense when
incurred; recognition of acquisition-related restructuring cost accruals in
acquisition accounting only if the criteria in Statement No. 146 are met as of
the acquisition date; and recognition of changes in the acquirers income tax
valuation allowance resulting from the business combination separately from the
business combination as adjustments to income tax expense.  SFAS No.
141(R) is effective for the first annual reporting period beginning on or after
December 15, 2008 with earlier adoption prohibited.  The adoption of
SFAS No. 141(R) will affect valuation of business acquisitions made in 2009 and
forward.  In
December 2007, the FASB issued SFAS No. 160 Non-controlling Interest in
Consolidated Financial Statements  an Amendment of ARB 51 (SFAS
160).  SFAS 160 clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements.  It also
requires consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the non-controlling interest, and
requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the
non-controlling interest.  SAFS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008.  Earlier adoption is prohibited.  We do not anticipate
a material impact upon adoption.  In
March 2008, the FSAB issued FASS No. 161, Disclosures about Derivative
Instruments and Hedging Activities.  SFAS 161 is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entitys financial position, financial performance, and cash
flows.  SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged.  We do not anticipate a material impact upon
adoption.  2. Related
Party Transactions  Hanalei
Bay International Investors (HBII)  The
Chairman and CEO of the Company is the sole shareholder of HBII Management,
Inc., the managing General Partner of Hanalei Bay International Investors
(HBII).  In March 1999, HBII consummated the sale of its interest in
Hanalei Bay Resort to an unrelated third party.  The cash proceeds received
by HBII on the closing of the sale were not sufficient to satisfy all claims of
HBIIs creditors, including the Company, and the Company accepted a note
receivable in the amount of $4,420,003 as settlement for its account receivable
balance of $1,105,001 at the time of the sale.  The excess amount
$3,315,002 over the receivable balance was accounted for as a shareholder
contribution.  Under the terms and conditions of the agreement to sell
Hanalei Bay Resort, HBII was entitled to receive a percentage of the future cash
flows from the resorts hotel operations and the sale of certain time-share
units.  As
part of the Companys purchase of real estate in New Zealand (see Note 11), an
assignment of $3,018,000 of the total note receivable from HBII was made to the
seller of the real estate, with the Company remaining as guarantor should the
note receivable not be collected before December 31, 2009, which was further
extended to December 24, 2010. (See Note 3).  During
2006, the purchaser of Hanalei Bay Resort (HBR), disputed the amount that it
was indebted to HBII, and HBII filed a lawsuit to collect the amounts owed by
HBR.  In March 2008, HBII and Quintus Resorts, LLC (Quintus), the parent
company of HBR, entered into a settlement to resolve the litigation by Quintus
issuing a 19.9% membership interest in Quintus to HBII or its designee, which
included a preferred return as to the first $6.2 million of future distributions
of available cash flow.  Quintus
is the owner of a timeshare resort project in Genoa, Nevada, near Lake Tahoe.
 Quintus has not yet completed its financial statements for 2008 but
estimates that its net loss incurred in 2008 will eliminate all or virtually all
of its net equity as calculated according to generally accepted accounting
principles.  Neither Quintus estimates as to the fair market value of its
assets nor its projections have been verified or reviewed by Management or any
independent third party.  For
at least the next two years, Quintus will be required to use all of its
available cash flow to pay down the substantial indebtedness it incurred in
purchasing the resort.  Based on Quintuss financial projection, HBIIs
management believes that it is likely to receive in excess of $6,000,000 from
its ownership interest in Quintus and that it will utilize these funds to pay
its indebtedness to the Company.  In that the distributions from HBII will
likely not be realized for a number of years and are subject to uncertainty and
risks over which the Company has no control, there can be no assurance that the
Company will receive any distributions from HBIIs ownership interest in Quintus
within the next ten years, if at all.  In light of such uncertainties, as
required by Generally Accepted Accounting Principles (GAAP) the Company has
established a reserve for uncollectible amounts.  The Company recorded an
expense during 2007 for $954,459, and reduced additional paid in capital for
$3,315,002 in providing for the reserve.  Loan
Fees  In
2006, the Company secured $600,000 in financing from a bank, which was
subsequently replaced by a loan and line of credit from another bank (see note 6
to the financial statements).  The CEO of the Company acted as guarantor
for these loans.  As consideration for the guaranty, the Company pays a
quarterly guaranty fee of 2% of the amount of the credit facility utilized per  23    annum
to the CEO of the Company.  During 2008 and 2007, the Company paid $4,499
and $8,156 in guaranty fees to the Companys CEO.  Related
Party Loans  In
June, 2004, a director loaned the Company $100,000 with interest at the rate of
8% per annum and monthly payments of interest plus $521, and a maturity date of
January 1, 2010.  In
December of 2007, and early 2008 the Chairman and CEO of the Company advanced a
total of  $100,000 to the Company to capitalize the Companys Thailand
subsidiary, and in April 2008, the advance was converted to common stock and
warrants as part of the Companys Unit offering.  In
April 2008 two directors converted loans and amount outstanding totaling
$100,000 into common stock and warrants as part of the Companys Unit offering.  Through
December 2008, the Company has accrued but not paid the Chairman and CEO a total
of $103,840 for expenses incurred on behalf of the Company.  Through
December 2008, the Company has accrued but not paid Mr. Jerry Ruthruff a total
of $86,400 for professional fees earned during 2008.  3. Notes
Receivable  Notes
receivable consisted of the following: 2008 2007 Note
receivable from Hanalei Bay International Investors, secured
by a direct assignment of Hanalei Bay International Investors
right to receive future proceeds from HBIIs ownership
interest in Quintus. (Assigned
to third parties- see Note 2) $
 4,269,151       $ 4,269,151  Less
Reserve for Uncollectible Notes 4,269,151
         4,269,151   Notes
Receivable, Non-current $
               0
        $
              0  See
Note 2 above. Pursuant to GAAP, the Company has established a reserve for
uncollectible amounts.  The Company recorded an expense during 2007 for
$954,459, and reduced additional paid in capital for $3,315,002 in providing for
the reserve.  4. Commitments
and Contingencies  Leases  The
Company leases two office spaces expiring March 1, 2011 and October 31, 2011 and
for the years ended December 31, 2008 and 2007, the Company paid $340,554 and
$351,149, respectively, in lease expense for these leases.  As
of December 31, 2008, the future minimum rental commitment under these leases
was $796,468.  In
July, 2001, Castle entered into lease agreements (in lieu of a traditional
management agreements) with each of the owners of approximately 250 investment
units of the Spencer on Byron condominium project for the purpose of having
those units be part of the rental program at the Spencer on Byron Hotel.
 The leases are for a period of ten years expiring on July 18, 2011, and
Castle has the option to extend these leases for an additional 20 years.
 Monthly lease rent through 2011 is calculated as a percentage of the
purchase price paid by the original owner of each condominium. Total lease
expense for the year ending December 31, 2008 and 2007 was $2,231,637 and
$2,294,177, respectively.  As
of December 31, 2008, the future lease commitments are as follows: Year Amount 2009 $
   2,107,063 2010 2,112,371 2011 1,248,881 2012 0 Total $
   5,468,315  The
purchase of Mocles Holdings Limited (see Note 11) includes a requirement for
monthly payments of the greater of $11,582 (NZ$20,000) or Surplus Profits, as
defined at Note 11.  Using the monthly rate of $11,582, total annual
payments will be approximately $138,984 per year, beginning in 2009.  The
Company has not yet determined whether the Surplus Profits will be greater than
$138,984 for 2009.  The approximate term is 3 years.  As
of December 31, 2007, the Company had an available lease line of credit with a
bank for up to $250,000.  In December of 2007, as part of the Company
acquiring a new hotel management agreement, the Company allowed the hotel owner
to purchase  24    computer
hardware using the Companys equipment lease line of credit in the amount of
$76,501.  The hotel owner shall be responsible for making the operating
lease payments to the bank, and also agreed to assume, refinance or retire the
lease should the management agreement between the Company and the hotel be
terminated.  On October 24, 2008, the lease line of credit was terminated
by the bank upon the Company refinancing its term loan and revolving line of
credit with another bank.  Guaranty  As
part of the Companys purchase of real estate in New Zealand (see Note 11), an
assignment of $3,018,000 of the total note receivable from HBII was made to the
seller of the real estate, with the Company remaining as guarantor should the
note receivable not be collected before December 24, 2010.  Due to the
devaluation of the New Zealand dollar against the US dollar, the amount recorded
as Other long term obligations on the Companys balance sheet was reduced to
$2,433,050, with the difference of $584,950 recorded as a foreign exchange gain
as of December 31, 2008.  The
assignment does not have a provision for interest and in 2007, the Company had
fully amortized the imputed interest on the assignment.  For 2008, the
Company recorded interest expense of $158,445, based on 5.25% on the $3,018,000
assignment and an increase in Additional Paid in Capital for the same
amount.  The
Company has recognized a guarantor liability for these assignments, amounting to
$2,433,050 as of December 31, 2008, and $3,018,000 as of December 31, 2007,
which represents the present fair value of the obligation undertaken in becoming
a guarantor of the payment of the assigned receivables.  Pursuant to an
extension agreement signed in March 2008, since the Company was current with its
other obligations in connection with the purchase of the New Zealand Real
Estate, the remaining balance will be due on December 24, 2010.  Further,
if the Company is current with those obligations as of December 24, 2010, and
has paid not less than NZ$ 7,183,260 toward the purchase price, an additional
six month extension is available.  Management
Contracts  The
Company manages several hotels and resorts under management agreements expiring
at various dates.  Several of these management agreements contain automatic
extensions for periods of 1 to 10 years.  In
addition, the Company has sales, marketing and reservations agreements with
other hotels and resorts expiring at various dates through December 2009.
 Several of these agreements contain automatic extensions for periods of
one month to three years.  Fees received are based on revenues, net
available cash flows or commissions as defined in the respective agreements.  Litigation  There
are various claims and lawsuits pending against the Company involving
complaints, which are normal and reasonably foreseeable in light of the nature
of the Companys business.  The ultimate liability of the Company, if any,
cannot be determined at this time.  Based upon consultation with counsel,
management does not expect that the aggregate liability, if any, resulting from
these proceedings would have a material effect on the Companys consolidated
financial position, results of operations or liquidity.  5. Employee
Benefits  The
Company has a 401(k) Profit Sharing Plan (the Plan) available for its
employees.  Under the terms of the Plan, the Company may match 50% of the
compensation reduction of the participants in the Plan up to 1% of compensation.
 Matching contributions for the years ended December 31, 2008, and 2007
were $13,030 and $13,193, respectively.  Any employee with one-year of
continuous service and 1,000 credit hours of service, who is at least twenty-one
years old, is eligible to participate.  For the years ended December 31,
2008 and 2007, the Company made no profit contributions.  Subsequent to the
end of 2008, the Company terminated its matching contribution effective March 1,
2009.  Employees may continue to contribute a portion of their compensation
into the plan however the Company will not make a matching contribution.  The
Company also has a Flexible Benefits Plan (the Benefits Plan).  The
participants in the Benefits Plan are allowed to make pre-tax premium elections
which are intended to be excluded from income as provided by Section 125 of the
Internal Revenue Code of 1986.  To be eligible, an employee must have been
employed for 90 days.  The benefits include group medical insurance, vision
care insurance, disability insurance, cancer insurance, group dental coverage,
group term life insurance, and accident insurance.  6. Notes
Payable  Notes
payable consisted of the following: 2008 2007 Note
dated 4/26/04 to the Companys CEO with interest at
prime plus 2.5%, with monthly payments of $2,544 balance
due on 4/26/09, unsecured $
     10,190 $
     39,699  Note
dated 6/6/04 to a director, with interest at the rate of
8%, monthly payments of  interest plus $521, balance
due 1/1/10, unsecured 46,354 102,604   25    Note
dated 6/16/04 to unrelated party with interest at the rate
of 15% due on 1/1/10 with monthly payments of NZ$3,225
(US$1,868), unsecured  149,408 200,002  Note
dated 7/31/95 to former stockholders, due 8/31/98 with
interest at 6%, unsecured.  No formal demand has been
made on the Company. 12,000 12,000   Note
dated 12/31/02 from the Companys CEO, with interest
at 10%, due on or before 1/1/10, unsecured 117,316 117,316  Note
dated 12/31/04, payable in New Zealand, net of discount
of US$0.75 million and US$0.69 million, as of 2008 and
2007, respectively, with a face value of NZ$8.6 million
and which is secured by real estate in New Zealand and
a general security agreement including an assignment of US$3.018
million of the note receivable due from HBII.  The Company
acts as a guarantor for the payment of the assigned receivable,
and therefore, the obligation undertaken as a guarantor is
included in this amount.  The guarantor obligation is referred to
as Other long term obligations on the Balance Sheet (See
Note 4).  The effective interest rate at December 31, 2008
is 4.35% per annum.  The maturity date is December 24,
2010. 6,048,787 8,028,868  Note
dated 12/31/04 payable to unrelated party,
with interest at 10% due 3/01/12 with
monthly payments of $2,975, unsecured 92,176 117,277  Note
dated 12/14/06 payable to a bank, with interest at
the banks base lending rate plus 1.25%, secured by up
to $600,000 of the note receivable from Hanalei Bay Resort.
 Balance is due 12/8/08. 0 449,880  Note
dated 10/20/08 payable to a bank, with interest at
the banks prime rate plus 1%, secured by a security interest
in all personal property of the Company and by the
personal guaranty of the Companys Chairman & CEO,
with monthly payments of $8,333 plus interest. The
note is due on or before 10/20/2013 483,334 0  Note
payable to former developer of a hotel located in Guam,
which resulted from a settlement agreement reached
between the Company and the developer.  The note
is non-interest bearing and is due on or before January
18, 2008 (See Note 13) 0 100,000  Advance
from CEO dated 12/31/07, with no specified
interest or repayment terms. 0 75,000  Loan
of $100,000 dated 11/16/07 from the Companys $250,000
revolving line of credit with a bank.  The line
is secured by the personal guaranty of the Companys Chairman
& CEO, and a general security interest in The
Companys assets. Note bears interest at the banks base
lending rate plus 1% (8.25% at 12/31/07) and is due
4/1/09.  This revolving line of credit was terminated on
October 24, 2008. 0 100,000  Revolving
line of credit with a bank for up to $250,000. The
line is secured by the personal guaranty of the Companys
Chairman & CEO, and a general security Interest
in the Companys assets.  Draws against the line will
bear interest at the banks base lending rate plus 1%.
 The line has a termination date of October 24, 2009. 0 0  Revolving
line of credit with a bank for up to NZ $100,000. The
line is secured by a general security interest
in the Companys assets in New Zealand.  26    Draws
against the line will bear interest at the banks base lending rate
plus 1%.  The line has a termination date of October 24, 2009. As
of March 20, 2009 there have been no draws against this line of credit. 0 0  Note
dated 12/31/04 payable to unrelated party, secured
by up to $800,000 of the note receivable from Hanalei
Bay Resort (see note 3) with interest at 8%, balance
is due on 5/1/2009 35,959 235,233  Subtotal $
6,995,524 $
9,577,879 Less
Current Portion 480,522 1,419,112 Notes
payable, non-current $
6,515,002 $
8,158,767  The
five year payout schedule for notes payable is as follows:  Year Amount  2009 $
    480,522 2010 6,197,857 2011 133,811 2012 100,000 2013 83,334 Total $
 6,995,524  7. Redeemable
Preferred Stock  In
1999 and 2000, the Company issued a total of 11,050 shares of $100 par value
redeemable preferred stock to certain officers and directors.  Dividends
are cumulative from the date of original issue and are payable semi-annually,
when, and if declared by the board of directors beginning July 15, 1999, at a
rate of $7.50 per annum per share.  During the fiscal year ended July 31,
2000, the Company paid dividends to holders of record as of July 15, 2000, in
the amount of $16,715.  At December 31, 2008, undeclared and unpaid
dividends on these shares were $767,168 or $69.43 per preferred share.
 These dividends are not accrued as a liability, as no declaration has
occurred.  The shares are nonvoting, and are convertible into the Companys
common stock at an exercise price of $3.00 per share.  As of January 15,
2001, the redeemable preferred stock is redeemable at the option of the Company
at a redemption price of $100 per share plus accrued and unpaid dividends.  8. Common
Stock  During
2008, the Company issued 408,337 shares of its $.02 par value common stock
comprised of the following:  The
Company issued 333,337 shares under a private placement for $1.50 per share.
 Of the $500,000 received, $227,500 was received through the conversion of
outstanding debt and the balance of $272,500 was received in cash.  The
Company offset $47,756 of costs relating to the private placement against the
proceeds received.  Participants in the private placement also received for
each share of common stock purchased, a warrant to purchase one share of the
Companys common stock for $3.50 per share, exercisable on or before April 30,
2011.  The
Company issued 75,000 shares to a director for services.  The shares were
valued at $1.75, which was the last publicly traded value quoted on the OTCBB at
the time the shares were issued.  As a result, compensation expense was
immediately recognized amounting to $131,250.  The
Company has a guarantor obligation of $3,018,000 related to the purchase of real
estate (see Note 11).  The terms of the agreement do not provide for
interest to be paid to the holder of this debt and therefore in 2008, the
Company recorded interest expense of 5.25% of the obligation and increased
Additional Paid in Capital for the amount of interest expense recorded on the
obligation.  Common
Stock Options and Warrants  The
Company does not have Stock Based Incentive, Stock Purchase or Stock Option or
Warrant Plans.  During 2008, the Company granted Warrants for the purchase
of up to 333,337 shares of the Companys common stock.  No compensation
expense for these Warrants is necessary since they were purchased as part of the
2008 private placement.  During 2007, the Company granted the Warrants for
the purchase of up to 250,000 shares of the Companys common stock.  None
of these Warrants have been exercised as of 12/31/08.  In applying the
Black-Sholes methodology to the warrant grants the fair value of the Companys
stock-based awards granted was estimated using an expected annual dividend yield
of 0%, a risk free interest rate of 4.87%, an expected warrant life of
 between 0 and 2.0 years and expected price volatility of  39.02%.
 The overall impact on the consolidated statement of operations for
stock-based compensation expense for the years ended December 31, 2008 and 2007
was negligible. No options or warrants were outstanding prior to January 1,
2007.  The
average risk-free interest rate is determined using the U.S. Treasury rate in
effect as of the date of grant, based on the expected term of the stock
warrant.  The Company determined the expected term of the stock warrants as
being equal to one half of the contractual term of the warrants due to a lack of
forfeiture history and the thinly traded volume of the Companys common stock.
  The expected price volatility was determined using the average
historical volatility of the stock prices of a group of 15  27    publically
traded peer companies in the Companys industry.  The stock price used was
equal to the historical average stock price over the 6 month period prior to
grant, which approximately represented the book value of the stock at the time
of grant. For warrants with a vesting period, compensation expense is recognized
on a straight line basis over the service period which corresponds to the
vesting period.  Changes
in warrants for the years ended December 31, 2008 and 2007 were as
follows:  NumberofShares

WeightedAverageExercisePrice

Remaining
Contractual Term (in Years)

Intrinsic
Value2007:Beginning
balance

0Granted

250,000

$2.20

3.5

$
        0Exercised

0Forfeited/expired

0Balance
at December 31, 2007

250,000

$2.20

3.5

$
        0Exercisable

150,000

$2.33

3.5

$
        02008:Granted

333,337

$3.50

2.3

$
        0Exercised

0Forfeited/expired

0Outstanding
at December 31, 2008

583,337

$2.95

Various

$
        0Exercisable

483,337

$2.95

Various

$
        0Weighted
average fair value of warrants granted during year







$
        0  The
following table summarizes information about compensatory warrants outstanding
at December 31, 2008:  Warrants
Outstanding

Warrants
ExercisableRange
of Exercise Prices

Number
Outstanding

Weighted
Average Remaining Contractual Life (in years)

Weighted
Average Exercise Price

Number
Exercisable

Weighted
Average Exercise Price$2.00

200,000

3.5

$
           2.00

100,000

$
       2.00$3.00

50,000

3.6

3.00

50,000

3.00$3.50

333,337

2.3

3.50

333,337

3.50Total:$2.00-$3.50

583,337

2.8

$
          2.95

483,337

$
             2.95  9. Income
Taxes  The provision for income taxes consists of the following:  2008
2007Current
$
                0
$
                0DeferredFederal
(  165,454)
(    312,521)State
(    31,144)
(
     58,827)Foreign
-
-Total Provision (Benefit)
$ (  196,598)
$ (    371,348)   28    The components of the Companys deferred tax assets and
liabilities are as follows: 2008
2007Deferred Tax AssetsCurrent:Accounts Receivable
$
             71,134
$
                      0Accrued Vacation
130,491
0Net Operating Loss
178,000
642,000Total Current
379,625
642,000Non-CurrentNote Receivable
385,601
385,601Goodwill
39,637
49,516Net Operating Loss Carryforwards
1,863,035
1,424,390Total Non-Current
2,288,273
1,859,507Total Deferred Tax Assets
2,667,898
2,501,507Less: Valuation Allowance
(509,825)
(540,032)Net Deferred Tax Asset
$
        2,158,073
$
        1,961,475Deferred Tax LiabilityCurrent:
$
                     0
$
                     0Non-Current
0
0Net Deferred Tax Liability
$
                     0
$
                     0Deferred Tax Assets (Liabilities)Current Portion
$
            379,625
$
            642,000Non-Current Portion
$
         1,778,448
$
         1,319,475  As of December 31, 2008, the Company had net operating loss
carryforwards amounting to $3,723,541 and $1,544,924 for domestic and foreign
jurisdictions, respectively, which expire on various dates through 2028.
 The Company expects to utilize $178,000 of the loss carryforward for the
year ended December 31, 2009, and has therefore classified the deferred tax
asset associated with the loss carryforward as a current asset on the Companys
consolidated balance sheet.  The valuation allowance decreased by $30,207
to $509,825 during the period from 2007 to 2008.  Income tax expense differs from amounts computed by applying the
statutory Federal rate to pretax income as follows:  2008
2007Expected US Income Tax (Benefit) on Consolidated Income
before Tax
$ (165,454)
$ (506,078)Effects of:Expected State Income Tax (Benefit) on Consolidated Income
before Tax
(30,116)
(95,262)Change in valuation allowance
(30,207)
223,747Other
29,179
6,245Effective Tax Provision (Benefit)
$ (196,598)
$ (371,348)  The Company adopted the provisions of FIN 48 on January 1, 2007.
As a result of this adoption, the Company has evaluated its uncertain tax
positions as required by FIN 48 and determined that any required adjustments
would not have a material impact on the Company's balance sheet, income
statement, or statement of cash flows.   29    A reconciliation of the unrecognized tax benefits for the years
ending December 31, 2008 and 2007 is presented in the table below:  2008
2007Beginning
Balance
$
                      0
$
                      0Additions
based on tax positions related to the current year
0
0Reductions
for tax positions of prior years
0
0Reductions
due to expiration of statute of limitations
0
0Settlements
with taxing authorities
0
0Ending
Balance
$
                      0
$
                      0  Our
policy is to recognize potential interest and penalties accrued related to
unrecognized tax benefits within income tax expense.  For the year
ended December 31, 2008 and 2007, we did not recognize any interest or
penalties, nor did we have any interest or penalties accrued as of December 31,
2008 and 2007 relating to unrecognized benefits.  The tax years 2001 through 2008 remain open to examination for
federal income tax purposes and by other major taxing jurisdictions to which we
are subject.  10. Business
Segments  As
stated in Note 1, the Company has two basic types of hotel management
agreements:  Gross Contracts and Net Contracts. As described in Note 1, the
revenues and expenses are disclosed separately on the statements of operations
for each type of agreement.  The assets included in the consolidated
financial statements only consist of assets owned in relation to the Gross
Contract agreements and other assets used for general corporate purposes.
 The financial statements do not include any assets the Company manages
under the Net Contract agreements, since the Company does not have the same
level of responsibility that it has under Gross Contracts.  The
consolidated financial statements include the following related to international
operations (which are predominately in New Zealand and related to Gross Contract
agreements):  Revenues of $8,954,324 in 2008 and $9,332,026 in 2007;
results from operations of $181,268 in 2008 and ($482,931) in 2007; and fixed
assets of $5,855,385 in 2008 and $8,008,070 in 2007.   The
consolidated financial statements also include the following related to our
operations in Thailand:  Revenues of $725,082 in 2008 and $29,942 in 2007;
results from operations of $89,731) in 2008 and $29,942 in 2007; and fixed
assets of $9,028 in 2008 and none in 2007.  11. Purchase
of Mocles Holdings Limited  On
December 24, 2004, the Company, through its wholly owned subsidiary NZ Castle
Resorts and Hotels Limited, entered into an agreement to purchase all of the
shares of Mocles Holdings Limited (Mocles), a New Zealand Corporation.
 Following are the significant provisions of this agreement (with
modifications according to a Deed of Variation dated April 15, 2005):  Mocles
owns the Podium levels (Podium) of the Spencer on Byron Hotel in Auckland, New
Zealand.  The
purchase price for Mocles was $6,003,558 (NZ$10,367,048), net of imputed
interest $945,643 (NZ$1,632,952).  The face value of the purchase price was
$6,949,200 (NZ$12,000,000).  The
purchase price is to be paid as follows:  Partial
assignment of the Companys receivables from Hanalei Bay International Investors
(HBII) in the amount of US$3,018,000.  In the event that this amount is
not realized from HBII, the Company is obligated to make up the difference by
December 24, 2010.  Monthly
payments of the greater of NZ$20,000 (US$11,582), or Surplus Profits defined as
50% of net profits calculated in accordance with New Zealands Generally
Accepted Accounting Principles or International Reporting Standards. The
remaining balance is due December 24, 2010. Further, if the Company is current
with its other obligations as set forth herein and has paid not less than
$7,183,260 toward the purchase price an additional six month extension is
available.  At
the time of purchase, Mocles had additional debts, namely: Bank
Mortgage  There is $2,273,502 payable to a bank which is secured by the Podium.
 The liability to the bank must be refinanced, paid in full, or
renegotiated to the extent that the current guarantors are released from all
obligations associated therewith, by December 31, 2009, which was subsequently
extended to December 24, 2010. Advances
from parties heretofore related to Mocles in the amount of $1,509,768.  The
entire amount is due and payable by December 24, 2010.  There is no
interest associated with this liability.  The
purchase price is deemed to be satisfied in part by NZ Castle procuring
repayment of Mocles additional debts.  After NZ Castle has procured
repayment of the additional debts by or on behalf of Mocles, the total payable
to the seller of the Mocles shares under 1 and 2 above is $4,836,642.   30    Mocles
shares are being held legally by the seller of such shares until such time as
all obligations associated with this transaction are satisfied.  An
amount equal to the interest payable by Mocles to the bank is to be paid
annually to Mocles by the Company as rental for the Podium.  A
replacement fund is to be established from 50% of the net profits from the
operation of the Podium, until such time as there is NZ$175,000 (US$101,343)
regularly available for the replacement of furniture, fixtures and equipment
installed in the Podium.  If and to the extent that the balance in the
replacement fund would exceed NZ$175,000 (US$101,343), the 50% share of the net
profits must be paid towards the purchase price rather than being
accumulated.  12. Settlement
Agreement  On
June 7, 2007, the Company entered into a Settlement Agreement with the developer
of a hotel that was previously leased by the Company between 1999 and 2001.
 The Company and the developer had previously entered into a Compromise
Agreement in 2001, which called for the Company to make certain payments to the
developer, and also to issue 900,000 shares of its restricted common stock to
the developer.  In 2001, the Company recorded the issuance of 900,000
shares of common stock to the developer and recorded a note payable for
$240,000, representing the balance of the payments due to the developer.
 The Settlement Agreement reached in June 2007 voided the Compromise
Agreement and therefore as of December 31, 2006, the Company voided the 900,000
shares that were previously issued.  Under the terms of the Settlement
Agreement, the Company was also required to pay an additional $260,000, for a
total of $500,000 to the developer, in monthly installments commencing in June
2007, with the total amount to be paid on or before January 18, 2008.  In
accordance with the terms of the Settlement Agreement, the Company increased the
note payable to the developer by $260,000 as of December 31, 2006.  The
Company paid the note payable to the developer in full on January 18, 2008.  13. Subsequent
Events    In 2009, the Company discontinued its matching contribution
on the Companys 401k pension plan (see note 5).      31     Item 9.   Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.   None.      Item 9A(T). Controls and Procedures.  Evaluation
of Disclosure Controls and Procedures  The
Companys management conducted an evaluation, under the supervision and with the
participation of the Companys Chief Executive Officer (who is also the Acting
Chief Financial Officer), of the effectiveness of the design and operation of
the Companys disclosure controls and procedures as of December 31, 2008.
 Our Chief Executive Officer has concluded that all disclosure controls and
procedures were effective as of December 31, 2008, in providing reasonable
assurance that information required to be disclosed by us in the reports we file
under the Exchange Act are recorded, processed, summarized, and reported as
specified in the Securities and Exchange Commissions rules, regulations, and
forms.  The
design and evaluation of disclosure controls and procedures must reflect the
fact that there are resource constraints and that management is required to
apply its judgment in evaluating the benefits of possible controls and
procedures relative to their costs.  Management has determined that any
identified deficiencies, in the aggregate, do not constitute material weaknesses
in the design and operation of our internal controls in effect prior to December
31, 2008.  Changes
in Internal Control over Financial Reporting  There
have not been any changes in the Companys internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act, during its fourth fiscal quarter of 2008 that have materially
affected, or are reasonably likely to materially affect its internal control
over financial reporting.  Managements
Report on Internal Control over Financial Reporting  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting.  Our internal control system is intended
to provide reasonable assurance to our management and board of directors
regarding the preparation and fair presentation of published financial
statements and that we have controls and procedures designed to ensure that the
information required to be disclosed by us in our reports that we are required
to file under the Exchange Act is accumulated and communicated to our
management, including our principal executive and our principal financial
officers or persons performing similar functions, as appropriate to allow timely
decisions regarding financial disclosure.  Managements
assessment of the effectiveness of our internal controls is based principally on
our financial reporting as of December 31, 2008.  In making our assessment
of internal control over financial reporting, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control  Integrated Framework.  Our management, with
the participation of our Chief Executive Officer (who is also the Acting Chief
Financial Officer), has evaluated the effectiveness of our internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act, as of December 31, 2008.  Those rules define internal control
over financial reporting as a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles (GAAP) and includes those policies and procedures that:  
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
Provide
reasonable assurance that the transactions are recorded as necessary to
permit the preparation of financial statements in accordance with GAAP,
and the receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the
Company; and
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Companys assets that
could have a material effect on the financial statements.  Based
on our assessment and those criteria, management believes that, as of
December 31, 2008, the Companys internal control over financial reporting
is effective.  Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.  Projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with policies or procedures may deteriorate.  This
Annual Report does not include an attestation report of the Companys registered
public accounting firm due to a transition period established by rules of the
Securities and Exchange Commission for Smaller Reporting Companies. 
Managements report was not subject to attestation by the Companys registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only managements report
in this Annual Report.  Our auditors have not advised us of any material
weaknesses in our internal controls in connection with auditing our consolidated
financial statements for the years ended December 31, 2008, and 2007.    32     Item 9B. Other Information.  In 2009, the Company discontinued its matching contribution on the
Companys 401k pension plan (see note 5).    PART III    Item 10.  Directors, Executive Officers and Corporate
Governance.  The
following table sets forth certain information concerning the directors and
executive officers of Castle as of December 31, 2008.   Except as
otherwise stated below, the directors will serve until the next annual meeting
of stockholders or until their successors are elected or appointed, and the
executive officers will serve until their successors are appointed by the Board
of Directors.  Name
Age
Position
Position
Held SinceRick
Wall
65
Chief
Executive Officer, Director and Chairman of the Board
1993Alan
R. Mattson
52
Chief
Operating Officer and Director
2004Jerry
Ruthruff
61
Secretary
and Director
2004John
Brogan
76
Director
2007Michael
Irish
55
Director
2004Rick
Humphreys
65
Director
2005Stanley
Mukai
76
Director
2004Motoko
Takahashi
64
Director
1993Roy
Tokujo
67
Director
1998Tony
Vericella
56
Director
2004Robert
Wu
43
Director
2007  Director
and Officer Backgrounds  Rick
Wall. - Mr. Wall was appointed Castles Chief Executive Officer and
Chairman of the Board in 1993.  Mr. Wall is the founder of Castle, and has
served on the board of directors, and the executive committee of the Hawaii
Visitors and Convention Bureau.  Alan
Mattson  Mr. Mattson possesses over 25 years of executive level hospitality and
travel industry experience.  Mr. Mattson was formerly vice president of
sales and marketing for Dollar Rent a Car, responsible for all sales and
marketing efforts for Hawaii, Asia, and the Pacific.  Prior to that, he was
director ofmarketing for Avis Car Rental,
operating out of the Avis worldwide headquarters in New York and responsible for
the marketing within the US rental car division.  In addition, Mr. Mattson
has seven years of sales and marketing experience with Hilton Hotels
Corporation, performing in a variety of senior level sales and marketing
positions in Hawaii and the domestic United States.  He joined Castle in
September 1999, as senior vice president of sales and marketing and was later
promoted to President in July, 2005.  Mr. Mattson was appointed to the
position of Chief Operating Officer of the Castle Group, Inc., in June, 2007.  Jerry
Ruthruff - Mr. Ruthruff joined Castle in 2003 as general counsel.  He is a
graduate of the University of Washington and earned his law degree from Harvard
Law School in 1972.  Mr. Ruthruff has been in private practice since 1972,
focusing on commercial matters and is a former trustee of the State of Hawaii
Employees Retirement System.  John
Brogan - Mr. Brogan is a well-respected and recognized leader in the hotel
industry, Mr. Brogans last position before retirement was President of Starwood
Hotels and Resorts - Hawaii.  Previously, he chaired various boards,
including Hawaii Visitors & Convention Bureau, Hawaii Hotel Association,
American Heart Association-Hawaii, Blood Bank of Hawaii, Waikiki Improvement
Association, and Chaminade University.  Rick
Humphreys - Mr. Humphreys has almost 40 years of financial expertise.
 He started his career with Bank of California, and was formerly president
of both First Federal S & L and Hawaiian Trust Company.  He also served
as chairman of Bank of America in Hawaii.  Mr. Humphreys is currently the
President of Hawaii Receivables Management, LLC.  Additionally, he is a
trustee of Pacific Capital Funds, and also a board member of the Bishop Museum,
and Cancer Research Center of Hawaii.  Mike
Irish - Mr. Irish has been a successful businessman in Hawaii for over 30
years.  Mr. Irish began his career in hotel management, but moved to real
estate and business acquisitions during the 1980s.  He became part of the
Hawaii food service industry with the purchase of Parks Brand Products in 1985,
Halms Kim Chee in 1986, and Diamond Head Seafood in 1995, where he continues to
serve as CEO.  Stanley
Mukai - Mr. Mukai is a partner practicing commercial and tax law in the Hawaii
law firm of McCorriston, Miller, Mukai, MacKinnon.  He holds a law degree
from the Harvard Law School.  He is a member of the Board of Directors of
Waterhouse, Inc., AIG Hawaii, and on the Board of Governors of Iolani School.
 Mr. Mukai has also served as Chairman of the Board of Regents of the
University of Hawaii and on the Board of Governors of the East-West Center.   33    Motoko
Takahashi - Ms. Takahashi was appointed Secretary of Castle in August of 1994,
and as director in March of 1995.  Ms. Takahashi had previously served as
director for various Japanese investment companies in the United States.
 She also holds the position as Vice President of N.K.C. Hawaii, Inc.
 Ms. Takahashi was born in Tokyo, Japan where she completed her education
and has resided in the United States for more than thirty years, with the past
ten in Hawaii.  Roy
Tokujo - Mr. Tokujo was elected to the board of directors in March 2000.
 Mr. Tokujo has over 45 years of experience in the hotel, restaurant and
entertainment business in Hawaii, and he is the President and CEO of Cove
Enterprises and Cove Marketing.  Mr. Tokujo was a founding member of the
Hawaii Tourism Authority and is managing partner of Ko Olina Activities, LLC and
Ko Olina Marketing & Licensing, LLC.  Tony
Vericella - Mr. Vericella is the Managing Director of Island Partners Hawaii, a
premier destination management company servicing the meeting and incentive
travel needs of corporations and organizations, primarily from North America,
Asia/Pacific and Europe.  He has 30 years of extensive leadership
experience in all aspects of the travel and tourism industry.  His career
in Hawaii began with Hawaiian Airlines and evolved to American Express Travel
Related Services, Budget Rent a Car-Asia/Pacific and the Hawaii Visitors and
Convention Bureau.  Robert
Wu- Mr. Wu currently serves as Executive Vice President for Asian development
for Castle Resorts & Hotels a subsidiary of the Castle Group, Inc.  He
joined the Company in January 2008 and became an integral part of Castles
business development in the Asia region.  Mr. Wu serves as the Chief
Executive Officer for the Wu Group, a Hawaii based firm that specializes in Asia
imports, management of several Hawaii businesses and business consultation
services for the Asia-Pacific region.  Significant
Employees  None,
not applicable.  Family
Relationships  There
are no family relationships between any Castle officers and directors.  Involvement
in Certain Legal Proceedings  During
the past five years, no current director, person nominated to become a director,
executive officer, promoter or control person of Castle:  (1)
was a general partner or executive officer of any business against which any
bankruptcy petition was filed, either at the time of the bankruptcy or two years
prior to that time;  (2)
was convicted in a criminal proceeding or named subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses);  (3)
was subject to any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; or  (4)
was found by a court of competent jurisdiction (in a civil action), the
Securities and Exchange Commission or the Commodity Futures Trading Commission
to have violated a federal or state securities or commodities law, and the
judgment has not been reversed, suspended or vacated.  Compliance
with Section 16(a) of the Securities Exchange Act.  Section
16 of the Securities Exchange Act of 1934 requires Castles directors and
executive officers and persons who own more than 10% of a registered class of
Castles equity securities to file with the Securities and Exchange Commission
initial reports of beneficial ownership (Form 3) and reports of changes in
beneficial ownership (Forms 4 and 5) of Castles common stock and other equity
securities of Castle.  Officers, directors and greater than 10%
shareholders are required by SEC regulation to furnish Castle with copies of all
Section 16(a) reports they file. Appropriate beneficial ownership forms have
been filed with the Securities and Exchange Commission and may be found at
(www.sec.gov).  To
Castles knowledge, as of the date hereof, all directors, officers and holders
of more than 10% of Castles common stock, have filed all reports required of
Section 16(a) of the Securities Exchange Act of 1934.  Code
of Ethics  Castle
has adopted a Code of Ethics that applies to all of its directors and executive
officers serving in any capacity, including our principal executive officer,
principal financial officer, and principal accounting officer or controller or
persons performing similar functions.  See Part IV, Item 15.   34    Nominating
Committee  The
Board of Directors has not established a Nominating and Corporate Governance
Committee because Castle management believes that the Board of Directors is able
to effectively manage the issues normally considered by a Nominating and
Corporate Governance Committee.  Audit
Committee   The
Board of Directors has appointed Richard Humphreys, Stanley Mukai and Motoko
Takahashi as the Audit Committee.  Mr. Humphreys, Mr. Mukai and Ms.
Takahashi are independent as that term is used in Item 7(d)(3)(iv) of
Schedule 14A under the Exchange Act.       Item 11. Executive Compensation.  Executive
Compensation  The
following table shows for the fiscal years ended December 31, 2007 and 2008 the
aggregate annual remuneration of both highly paid persons who are executive
officers of Castle:  SUMMARY COMPENSATION
TABLE  Name and
Principal Position
(a)
Year



(b)
Salary
($)


(c)
Bonus
($)


(d)
Stock
Awards
($)

(e)
Option
Awards
($)

(f)
Non-Equity Incentive Plan Compensation
($)
(g)
Nonqualified  Deferred Compensation
($)
(h)
All
Other Compensation
($)
(1)

(i)
Total
Earnings
($)

(j)Rick Wall
CEO &
Director
12/31/08
12/31/07
$225,249
220,490
0
0
0
0
0
0
0
0
0
0
2,252
1,117
$
227,501
221,607Alan Mattson COO
& Director
12/31/08
12/31/07
$181,988
198,083
0
0
0
0
0
0
0
0
0
0
1,853
1,740
$183,841
199,823  Both
Mr. Wall and Mr. Mattson earn salaries commensurate with their Employment
Agreements dated July 1, 2004 and January 1, 2006, respectively.  In
addition, both Mr. Wall and Mr. Mattson participate in Castles 401(k) benefit
plan.  (1)
All
Other Compensation consists of Company contributions to the Companys
qualified 401(k) plan   OUTSTANDING EQUITY
AWARDS AT FISCAL YEAR-END _______________________________________________________________________ Name
Number of Securities Underlying Unexercised Options (#)
Exercisable
Number of Securities underlying Unexercised Options (#)
Unexercisable
Equity Incentive Plan Awards Number of Securities Underlying
Unexercised Unearned Options (#)
Option Exercise Price
($)
Option Expiration Date
Number of Shares or Units of Stock That Have Not Vested
(#)
Market Value of Shares or Units of Stock That Have Not
Vested
($)
Equity Incentive Plan Awards: Number of Unearned Shares,
Vested Units or Other Rights That Have Not Vested (#)
Equity Incentive Plan Awards: Market or Payout Value of
Unearned Shares, Units or Other Rights That Have Not Vested ($)(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)None
None
None
None
None
None
None
None
None
None  The
Company does not have an equity compensation program.  As such no Executive
has received any equity or option grants.   35    Compensation
of Directors  DIRECTOR
COMPENSATION  Director
Fees Earned or Paid in Cash ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation ($)
Nonqualified Deferred Compensation Earnings ($)
All Other Compensation ($)
Total ($)(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)Rick
Wall* ^
2,750
0
0
0
0
0
$2,750Alan
Mattson* ^
2,750
0
0
0
0
0
$2,750John
Brogan
2,500
0
0
0
0
0
$2,500Rick
Humphreys
2,250
0
0
0
0
0
$2,250Michael
Irish
1,500
0
0
0
0
0
$1,500Stanley
Mukai
1,500
0
0
0
0
0
$1,500Jerry
Ruthruff
2,500
0
0
0
0
$96,000
$98,500Motoko
Takahashi*
2,000
0
0
0
0
0
$2,000Roy
Tokujo
2,500
0
0
0
0
0
$2,500Tony
Vericella
2,000
0
0
0
0
0
$2,000Robert
Wu*
2,000
131,250
0
0
0
0
$133,250  *Directors
who are employees of the Company^Fees
are included as compensation under Item 10 "Summary Compensation
Table"  Non-employee
Directors are paid $500 for each meeting of the Board which they attend.
 Members of the Executive Committee, Compensation Committee and Audit
Committee are paid $250 for each meeting of the respective committees which they
attend. Castle does not presently have a stock option or similar compensation or
incentive plan for members of the Board of Directors  On
April 30, 2008, the Company issued 75,000 shares of its common stock valued at
$131,250 to Mr. Robert Wu for services rendered to the Company based on the
closing price of the common stock on that date.    Item 12 . Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.  Security
Ownership of Certain Beneficial Owners  The
following table sets forth the number of shares of Castles common stock
beneficially owned as of March 31, 2009 by:  (i) each of the two highest
paid persons who were officers and directors of Castle, (ii) all officers and
directors of Castle as a Group, and (iii) each shareholder who owned more than
5% of Castles common stock, including those shares subject to outstanding
options, warrants and other convertible items.  Amounts also reflect shares
held both directly and indirectly by the persons named.  Name
and Address
Beneficially Owned (1)
Shares % of Class (2)Rick
Wall
3
Waterfront Plaza, Suite 555
500
Ala Moana Boulevard
Honolulu,
HI 96813
2,719,833 (2)
27.3%Motoko
Takahashi
3
Waterfront Plaza, Suite 555
500
Ala Moana Boulevard
Honolulu,
HI 96813
1,138,900 (3)
11.5%  Roy
Tokujo
1580
Makaloa St.
Honolulu,
HI  96814
413,334
4.2%Jerry
Ruthruff
700
Richards Street, Apt. 2709,
Honolulu,
HI 96813
333,334
3.4%Stanley
Mukai
500
Ala Moana Blvd 4th Floor
Honolulu,
HI  96813
180,334(4)
1.8%Alan
R. Mattson
3
Waterfront Plaza, Suite 555
500
Ala Moana Boulevard
Honolulu,
HI 96813
102,000
1.0%Robert
Wu
P.O
Box 11119
Honolulu,
HI 96828
93,667
0.9%Michael
Irish
3
Waterfront Plaza, Suite #555
Honolulu,
HI 96813
25,000
0.3%John
Brogan
797
Moanila St.
Honolulu,
HI 96821
33,334
0.3%Tony
Vericella
1909
Ala Wai Blvd #1603
Honolulu,
HI 96815
16,667
0.2%Directors
and officers
as
a group (10  persons)
5,056,403
50.8%  36      (1) Except
as otherwise noted, Castle believes the persons named in the table have sole
voting and investment power with respect to the shares of Castles common stock
set forth opposite such persons names.  Amounts shown include the shares
owned directly by the holder and shares held indirectly by family members of the
holder or entities controlled by the holder. (2) Includes
310,000 shares owned by HBII Management. (3) Includes
900,000 shares owned by NKC Hawaii. (4) Includes
180,344 shares held by a family foundation and pension plan. (5) Determined
on the basis of 9,946,392 shares outstanding.  Changes
in Control   There
are no current or planned transactions that would or are expected to result in a
change of control of Castle.  Securities
Authorized for Issuance under Equity Compensation Plans  Plan
Category
Number
of Securities to be issued upon exercise of outstanding options, warrants
and rights
Weighted-average exercise price of outstanding options,
warrants and rights
Number
of securities remaining available for future issuance under equity
compensation plans excluding securities reflected in column (a)(a)
(b)
(c)Equity compensation
plans approved by security holders
None
None
NoneEquity compensation
plans not approved by security holders
None
None
NoneTotal
None
None
None   37     Options,
Warrants and Rights  In
1999 and 2000, Castle issued 11,105 shares of Castles $100 par value redeemable
Preferred Stock through a private placement for a gross consideration of
$1,105,000.  The stock bears cumulative dividends at the rate of $7.50 per
annum for each share of stock.  Upon certain tender offers to acquire
substantially all of Castles common stock, the holders of the Redeemable
Preferred Stock may require that the shares be redeemed at a redemption price of
$100 per share plus accrued and unpaid dividends.  The shares are nonvoting
and entitle the holder to convert each share of Preferred Stock into 33.33
shares of Castles common stock.  Dividends are cumulative from the date of
original issue and are payable, semi-annually, when, and if, declared by the
board of directors.  At December 31, 2008, undeclared and unpaid dividends
on these shares were $767,168 or $63.73 per preferred share.  In
April, 2008, the Company raised additional capital from the completion of a Unit
offering which resulted in the issuance of  333,334 Units at a price of
$1.50 per Unit.  Each unit consists of one a of the Companys common stock
and a warrant to purchase an additional share of the Companys common stock at a
price of $3.50 for a period of three years, subject to certain restrictions.
 Through this financing the Company raised a net amount of $224,744 for use
as working capital and converted $227,500 in outstanding debt and short term
obligations.    Item 13. Certain Relationships and Related Transactions, and
Director Independence  Transactions
with Related Persons  Hanalei
Bay International Investors (HBII)  The
Chairman and CEO of the Company is the sole shareholder of HBII Management, Inc,
the managing General Partner of HBII. In March 1999, HBII consummated the sale
of its interest in Hanalei Bay Resort to an unrelated third party.  The
cash proceeds received by HBII on the closing of the sale were not sufficient to
satisfy all claims of HBIIs creditors, including the Company, and the Company
accepted a note receivable in the amount of $4,420,003 as settlement for its
account receivable balance of $1,105,001 at the time of the sale.  The
excess amount ($3.315M) over the receivable balance was accounted for as a
shareholder contribution.  Under the terms and conditions of the agreement
to sell Hanalei Bay Resort, HBII is entitled to receive a percentage of the
future cash flows from the resorts hotel operations and the sale of certain
time-share units.  As
part of the Companys purchase of real estate in New Zealand (see Note 11), an
assignment of $3,018,000 of the total note receivable from HBII was made to the
seller of the real estate, with the Company remaining as guarantor should the
note receivable not be collected before December 24, 2010.  During
2006, the Company also assigned $600,000 of the HBII note receivable to a bank
as security for a term loan.  Castle
has recorded a note receivable from Hanalei Bay International Investors (HBII)
which amounted to $4,269,151 including interest as of December 31, 2008.
 In March 2008, HBII and Quintus Resorts, LLC (Quintus), the parent
company of HBR, entered into a settlement to resolve the litigation by Quintus
issuing a twenty percent (19.9%) membership interest in Quintus to HBII or its
designee, which included a preferred return as to the first $6.2 million of
future distributions of available cash flow.  For
at least the next two or three years, Quintus will be required to use all of its
available cash flow to pay down the substantial indebtedness it incurred in
purchasing the resort.  Based on Quintuss financial projection, HBIIs
management believes that it is likely to receive in excess of $6,000,000 from
its ownership interest in Quintus and that it will utilize these funds to pay
its indebtedness to Castle.  In that the distributions from HBII will
likely not be realized for a number of years and are subject to uncertainty and
risks over which Castle has no control, there can be no assurance that Castle
will receive any distributions from HBIIs ownership interest in Quintus within
the next ten years, if at all.  As required by Generally Accepted
Accounting Principles (GAAP) the
Company has established a reserve of $4,269,141 for uncollectible notes relating
to this transaction.  In
October 2008, the Company secured a line of credit with a local bank for up to
$250,000.  The line is secured by the personal guaranty of the Companys
Chairman and CEO, and a general security interest in the Companys assets.In April, 2008, the Company raised
additional capital from the completion of a Unit offering which resulted in the
issuance of  333,334 Units at a price of $1.50 per Unit.  Each unit
consists of one a of the Companys common stock and a warrant to purchase an
additional share of the Companys common stock at a price of $3.50 for a period
of three years, subject to certain restrictions.  Through this financing
the Company raised a net amount of $224,744 for use as working capital and
converted $227,500 in outstanding debt and short term obligations.
 Directors and Officers of the Company purchased a total of 260,003 Units
in this offering.  Loan
Fees  In
2006, the Company secured $600,000 in financing from a bank, which was
subsequently replaced by a loan and line of credit from another bank (see note 6
to the financial statements).  The CEO of the Company acted as guarantor
for these loans.  As consideration for the guaranty, the Company pays a
quarterly guaranty fee of 2% of the amount of the credit facility utilized per
annum to the CEO of the Company.  During 2008 and 2007, the Company paid
$4,499 and $8,156 in guaranty fees to the Companys CEO.   38    Related
Party Loans  During
2002, the Companys CEO advanced $117,316 to the Company for general working
capital.  The note bears interest at 10% and is due on or before January 1,
2010.  During
2004, the Companys CEO advanced $125,000 to the Company for general working
capital.  The note calls for monthly payments of $2,544, including interest
at prime plus 2.5%, with the remaining principle balance due on 4/26/09.  During
2004, a director of the Company advanced $125,000 to the Company for general
working capital.  The note calls for monthly payments of $520.83, plus
interest on the unpaid balance at 10%.  The unpaid principle balance is due
on 1/1/09.  In
December of 2007, the Chairman and CEO of the Company advanced $75,000 to the
Company to capitalize the Companys Thailand subsidiary, and in April 2008, the
advance was converted to common stock and warrants as part of the Companys
Private Placement of Units.  Through
December 2008, the Company has accrued but not paid the Chairman and CEO a total
of $103,840 for expenses incurred on behalf of the Company.  Through
December 2008, the Company has accrued but not paid Mr. Jerry Ruthruff a total
of $86,400 for professional fees earned during 2008.  Except
for the transactions with HBII, the issuance of stock and warrants described
above, the financing guarantee arrangement, the related party loans and unpaid
fees, and the employment agreements with Rick Wall and Alan Mattson, there were
no transactions, proposed transactions or outstanding transactions to which
Castle or any of its subsidiaries was or is to be a party, in which the amount
involved exceeds $50,000 and in which any director or executive officer, or any
shareholder who is known to Castle to own of record or beneficially more than
10% of Castles common stock, or any member of the immediate family of any of
the foregoing persons, had a direct or indirect material interest.  Parents
of the Issuer:  Not
applicable.  Transactions
with Promoters and Control Persons  Except
as indicated under the heading Transactions with Related Persons of this Item
12, above, there were no material transactions, or series of similar
transactions, during Castles last five fiscal years, or any currently proposed
transactions, or series of similar transactions, to which we or any of our
subsidiaries was or is to be a party, in which the amount involved exceeded
$120,000 and in which any promoter or founder of ours or any member of the
immediate family of any of the foregoing persons, had an interest.     Item 14. Principal Accountant Fees and Services.  The
following is a summary of the fees billed to us by our principal accountants
during the fiscal years ended December 31, 2008 and 2007:  Fee
Category
2008
2007Audit
Fees
$       156,828
$       148,915Audit-related
Fees
0
0Tax
Fees
3,792
4,715All
Other Fees
4,741
0Total
Fees
$       165,361
$      
153,630  AUDIT
FEES  The
aggregate fees billed by Castles auditors for professional services rendered in
connection with the audit of Castles annual consolidated financial statements
and reviews of the interim consolidated financial statements for 2008 and 2007
were $156,828 and $148,915, respectively.  AUDIT-RELATED
FEES  The
aggregate fees billed by Castles auditors for any additional fees for assurance
and related services that are reasonably related to the performance of the audit
or review of Castles financial statements and are not reported under Audit
Fees above for 2008 and 2007 were $0 for all years.   39    TAX
FEES  The
aggregate fees billed by Castles auditors for professional services for tax
compliance, tax advice, and tax planning for 2008 and 2007 were $3,792 and
$4,715, respectively.  ALL
OTHER FEES  The
aggregate fees billed by Castles auditors for all other non-audit services
rendered to Castle, such as attending meetings and other miscellaneous financial
consulting, for 2008 and 2007 were $4,741 and $0, respectively.    PART IV.     Item 15. Exhibits and Financial Statement
Schedules.  Exhibit Index  Exhibit
No.
Title of
Document
Location
if other than attached hereto
Previously Filed3.1 *
Restated Articles of
Incorporation
Part I, Item 1
*
*3.2 *
Certificate of
Designation
Part I, Item 1 *
*3.3 *
By-Laws
Part I, Item 1
*
*3.4 *
By-Law
Amendment
Part I, Item 1
*
*10.1
Settlement Agreement
Manhattan Guam
Part I, Item 1
*
*10.2
Employment Agreement
with Rick Wall as amended
Part III, Item 10
*
*10.3
Employment Agreement
with Alan Mattson
Part III, Item 10
*
*14
Code of Ethics
Part III, Item
10
*21
Subsidiaries of the
Company31.1
302 Certification of
Rick Wall32
906
Certification * Referenced as filed as
exhibits to Form 10-KSB Annuak Report for the year ended December 31, 2006, on
September 19, 2007.    40    SIGNATURES  In accordance with Section
13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.  THE
CASTLE GROUP, INC. March
31, 2009 By
 /s/ Rick Wall Rick
Wall, Chief Executive Officer and
Chairman of the Board  In accordance with the
Exchange Act, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.  /s/ Rick Wall
Date:
3/31/09Rick WallChief Executive
Officer andChairman of the Board  /s/ Alan R.
Mattson
Date:
3/31/09

/s/ Jerry
Ruthruff
Date
3/31/09Alan R.
Mattson



Jerry RuthruffDirector and
President
Castle Resorts and
Hotels, Inc.



Secretary and
Director  /s/ John
Brogan
Date:
3/31/09

/s/ Mike
Irish
Date
3/31/09John Brogan



Mike IrishDirector



Director  /s/ Rick
Humphreys
Date:
3/31/09

/s/ Stanley
Mukai
Date
3/31/09Rick Humphreys



Stanley MukaiDirector



Director  /s/ Motoko
Takahashi
Date:
3/31/09

/s/ Roy
Tokujo
Date
3/31/09Motoko
Takahashi



Roy TokujoDirector



Director  /s/ Tony
Vericella
Date:
3/31/09

/s/ Robert
Wu
Date
3/31/09Tony Vericella



Robert WuDirector



Director                    41