CAGU The Castle Group Inc (CE)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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

For the quarterly period ended March 31, 2008

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15 ( d ) OF THE EXCHANGE ACT

For the transition period from ____________ to____________

Commission File No. 000-23338

THE CASTLE GROUP, INC .

(Exact name of small business issuer 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, Hawaii 96813

(Address of Principal Executive Offices)

(808) 524-0900

(Issuer’s Telephone Number)

N/A

(Former name, former address and former fiscal year,

if changed since last report)

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 Issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant is 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 [  ]      Smaller reporting company [X]

Indicate by check mark whether the Issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes [  ] No [X]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Not applicable.

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Check whether the Issuer 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

Indicate the number of shares outstanding of each of the Issuer’s classes of common equity, as of the latest practicable date: March 31, 2008 - 9,538,055 shares of common stock.

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.

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THE CASTLE GROUP INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2008 (Unaudited) and December 31, 2007 (Audited)
ASSETS
						3/31/08	12/31/07
Current Assets
Cash and cash equivalents						$556,133	$494,089
Accounts receivable, net of allowance for bad debts						3,137,020	3,262,058
Deferred tax asset						642,000	642,000
Prepaids and other current assets						272,271	339,620
Total Current Assets						4,607,424	4,737,767
Property plant & equipment, net						8,247,115	8,050,563
Goodwill						54,726	54,726
Deposits						32,679	28,070
Restricted cash						231,861	163,157
Deferred tax asset						1,252,166	1,319,475
TOTAL ASSETS						$14,425,971	$14,353,758
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities
Accounts payable						$3,162,605		$3,489,311
Deposits payable						386,853		386,359
Current portion of long term debt						1,201,303		1,308,262
Current portion of long term debt to related parties						180,850		110,850
Accrued salaries and wages						1,001,104		944,459
Accrued taxes						131,829		158,948
Accrued interest						45,017		66,250
Other current liabilities						86,369		8,267
Total Current Liabilities						$6,195,930	$6,472,706
Non Current Liabilities
Long term debt, net of current portion						5,006,637		4,916,997
Deposits payable						231,861		163,157
Notes payable to related parties						165,363		223,770
Other long term obligations, net						3,018,000		3,018,000
Total Non Current Liabilities						8,421,861	8,321,924
Total Liabilities						$14,617,791	$14,794,630
Stockholders' Equity (Deficit)
Preferred stock, $100 par value, 50,000 shares authorized, 11,050						1,105,000		1,105,000
shares issued and outstanding in 2008 and 2007, respectively
Common stock, $.02 par value, 20,000,000 shares authorized, 9,538,055						190,761		190,761
shares issued and outstanding in 2008 and 2007, respectively
Additional paid in capital						3,366,928		3,366,928
Retained deficit						(4,935,272)		(5,034,930)
Accumulated other comprehensive income (loss)						80,763		(68,631)
Total Stockholders’ Equity (Deficit)						(191,820)	(440,872)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)						$14,425,971		$14,353,758
The accompanying notes are an integral part of these consolidated financial statements

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THE CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDING MARCH 31, 2008 & 2007 (Unaudited)
					2008	2007
Revenues
Revenue attributed from properties					$5,170,184	$4,571,964
Management & Service					811,265	336,656
Other Income					24,733	75,340
Total Revenues					6,006,182	4,983,960
Operating Expenses
Property					4,635,935	4,166,332
Payroll and office expenses					663,151	399,927
Administrative and general					377,893	231,365
Depreciation					56,290	56,188
Total Operating Expense					5,733,269	4,853,812
Operating Income					272,913	130,148
Interest Income					2,567	36,916
Interest Expense					(108,513)	(133,093)
Income (loss) before taxes					166,967	33,971
Income Taxes					67,309	14,269
Net Income (Loss)					$99,658	$19,702
Other Comprehensive Income
Foreign currency translation adjustment					149,394	31,080
Total Comprehensive Income (Loss)					$249,052	$50,782
Earnings (Loss) Per Share
Basic					$0.01	$0.00
Diluted					$0.01	$0.00
Weighted Average Shares
Basic					9,538,055	9,538,055
Diluted					10,156,388	9,906,388

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

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THE CASTLE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDING MARCH 31, 2008 & 2007(UNAUDITED)
					2008	2007
Cash Flows from Operating Activities
Net income (loss)					$99,658	$19,702
Depreciation					56,290	56,185
Amortization of discount					64,942	56,482
(Increase) decrease in
Accounts receivable					(209,494)	(523,128)
Other current assets					174,095	29,817
Deposits and other assets					(4,676)	0
Restricted cash					(63,283)	73,408
Deferred taxes					67,309	14,269
Increase (decrease) in
Accounts payable and accrued expenses					3,287	499,635
Net Change From Operating Activities					188,128	226,370
Cash Flows from Investing Activities
Purchase of assets					(20,840)	(17,023)
Net Change from Investing Activities					(20,840)	(17,023)
Cash Flows from Financing Activities
Proceeds from notes					145,000	0
Payments on notes					(246,312)	(143,341)
Net Change from Financing Activities					(101,312)	(143,341)
Effect of exchange rate on changes in cash					(3,932)	342
Net Change in Cash					62,044	66,348
Beginning Balance					494,089	1,100,302
Ending Balance					$556,133	$1,166,650
Supplementary Information
Cash Paid for Interest					35,935	35,204
Cash Paid for Income Taxes					0	0

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

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Notes to Consolidated Financial Statements:

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

Note 1 Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  In the opinion of management, the accompanying interim financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation.  The results of operations for the three-month period ended March 31, 2008, are not necessarily indicative of the results for a full-year period. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual audited financial statements for the year ended December 31, 2007, that are contained in its 10-KSB Annual Report for December 31, 2007.

Income Recognition

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

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

The financial statements presented for the quarter ended March 31, 2008, have been adjusted to reflect a change in the accounting methodology which the Company has adopted.  The Company previously recorded “Management and Service Fees” from its properties that were operated under a Gross Contract as described above, and an offsetting amount was recorded as an expense under “Property” operating expenses.  The Company adopted a change in the accounting for these fees and expenses, and the financial statements for the quarter ended March 31, 2007, have been adjusted by reducing both “Management & Service” revenues and “Payroll & Office Expense” by $510,859, which reflects the amount of Management & Service fees that were recorded for properties operated under a Gross Contact as described above.  The Company believes that this method properly allocates the corporate office overhead costs to the Gross Contract properties.  The adjustment did not affect net income, operating income, EBITDA or any balance sheet accounts.

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Note 2 New Accounting Pronouncements

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

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

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 ended December 31, 2007, the Company is required to include a report of management on the Company’s internal control over financial reporting.  The internal control report must include a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting for the Company; of management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of year end; of the framework used by management to evaluate the effectiveness of the Company’s internal control over financial reporting; and for the year ending December 31, 2008, the Company’s independent accounting firm will be 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 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 “Noncontrolling Interest in Consolidated Financial Statements – an Amendment of ARB 51” (SFAS 160).  SFAS 160 clarifies that a noncontrolling 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 noncontrolling 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 noncontrolling 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.

Note 3 Subsequent event.

On April 30, 2008 the Company completed a private placement of $500,000 from the sale of 333,333 Units.  Each Unit consisted of one share of common stock with a par value of $0.02 per share and one purchase warrant exercisable for a period of three years to one share of the Company’s common stock at an exercise price of $3.50 per share.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Forward Looking Statements

Statements made in this Quarterly Report of the Castle Group, Inc. (“Castle” or the “Company”) which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and business of the Company, including, without limitation, (i) Castle’s ability to raise capital, and (ii) statements preceded by, followed by or that include the words “may,” “would,” “could,” “should,” “expects,” “projects,” “anticipates,” “believes,” “estimates,” “plans,” “intends,” “targets” or similar expressions.

Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond the Company’s control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, general economic or industry conditions, nationally and/or in the communities in which the Company conducts business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, the Company’s ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting Castle’s operations, products, services and prices.

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.

Plan of Operation     

Principal products or services and their markets

General

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

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.

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Castle’s marketing efforts are focused toward potential guests for those properties that Castle manages. Castle does not own any hotels or resorts of its own; however it has made an investment in the property that it manages in New Zealand.  Marketing is done through a variety of distribution channels including direct Internet sales, wholesalers, online and traditional travel agencies and group tour operators.  Recently, Castle has expanded its sales and marketing staff and implemented a redesign of its interactive web site (www.Castleresorts.com).  Unlike many other hotel and resort operators, Castle does not market the properties it manages under the Castle brand.  Instead of emphasizing the “Flag” or chain name, the Company’s strategy is to promote the name and reputation of the individual properties under management. Castle believes that this allows the consumer to better choose the specific type of vacation experience desired based upon the specific attributes of the property selected.

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.  Recently, Castle has expanded its sales and marketing staff and implemented a redesign of its interactive web site (www.Castleresorts.com).  Unlike many other hotel and resort operators, we do not market the properties we manage under the Castle brand. Instead of emphasizing the “Flag” or chain name, Castle’s strategy is to promote the name and reputation of the individual properties under management.  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.

 

We recently launched our redesigned website which has a customized proprietary booking engine and intuitive functionality, that we believe sets us apart from our competitors.   Our website (CastleResorts.com) offers state-of-the-art functionalities, user-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. Castle’s proprietary online booking engine supports a dynamic pricing model which maximizes revenues for all of our properties under management.  We intend to continue to invest in optimizing our on-line presence directed specifically towards our own website, since revenue derived through our own branded website yields a higher margin utilizing retail rates.

Castle supports its online presence with its own full service, 7 day a week 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 worldwide.

For customer convenience, we offer direct to consumer online booking reservations of guest rooms at resort and condominium properties under contract and also vacation packages with attractions and activities related to our hotels and condominiums through Castle’s interactive web site at www.CastleResorts.com.  

Diversity

Castle has a diverse portfolio of properties located in desired island resort destinations throughout the Pacific Region and beyond.  We represent 26 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, and positions us for expansion in Southeast Asia as well as throughout the Pacific.  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.

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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.  This ongoing trend towards smaller, independent hotels, as opposed to the familiar mid-range chains, is not only occurring in Hawaii, but seen throughout the world tourism marketplace.  This increased demand is fueled by the following traveler’s expectations:  

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Seeking personalized recognition, attention, and service.

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Desiring hotel and condominium accommodations that impart a sense of place and provides a unique guest experience.  

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Demanding quality and personalized service, which creates high retention and repeat customers.  

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.  At any given time, we may have up to 50 ongoing marketing programs and promotions in place, 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.  Below is a sampling of several ongoing marketing programs and promotions currently in place:

Castle’s Best Rate Guarantee: The Castle Best Rate Guarantee program is a signature Castle program which assures customers they will always be guaranteed the best pricing via the Internet.  This ensures that our distribution partners, particularly the online travel agencies, do not undercut our retail pricing in the marketplace.   If qualified, the customer receives the best rate along with a category upgrade, late checkout privileges, and other benefits such as waiving the full advance payment and the ability to modify or cancel without penalty.  

Castle Advantage: The Castle Advantage program provides those aged 50 years and up, special discounted programs and rates.  Baby boomers enjoy traveling and are an excellent target audience, as they have both the time and money to explore the type of destination experiences Castle offers.

T’anks Hawaii:  Local resident business is pursued year-round, particularly during the slower seasons when inbound travel slows and rooms are more readily available at discounted rates.  Each destination actively targets this market whether in Guam, New Zealand for holiday periods or year-round in Hawaii.  The benefit to Castle is that the local residents will recommend Castle to incoming friends, family and business associates in the destinations that Castle serves.  In Hawaii, the seasonal T’anks Hawaii program is offered, which includes accommodations at a preferred Castle property, rental car and a free tank of gas.

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We also have specialized marketing packages aimed at specific audiences such as our frequent flyer programs with Hawaiian Airlines and Japan Airlines.  Mileage points are awarded for stays at Castle properties and additional promotional opportunities are provided by these select airlines.  Additionally, we offer  benefits programs and discounts targeted towards the baby boomers known as the “new seniors” for those aged 50 years and up; the military, government employees, business travelers, industry personnel and membership organizations, Castle provides bonus incentives to travel agents for referrals, industry discounts to airline employees and travel agents, and specially discounted rates are offered to members of clubs and associations with thousands of members such as AAA, Entertainment and Quest, to name a few.

Guest Relations and Quality Assurance

Rather than a generic approach to the guest experience, Castle provides customized guest relations programs that focus on the uniqueness of each resort property and the host culture.  Each aspect of the guest touch points is given careful consideration from the welcome through to the farewell, as well as the in-room experience.  Castle’s Guest Relations Committee along with the feedback from each properties staff and owners, customizes the program; establishes standards; provides staff training; conducts periodic inspections and on-going basis reviews; all of which evolves the program for continual improvement.  This effort is driven from within our operations team and the primary objective is to positively differentiate the Castle guest’s experience, from its competitors. Castle’s quality assurance program helps monitor and ensure that we deliver the highest level of service.  Our guest satisfaction program gives us the feedback from the guest’s perspective, which is reflected in our hospitality report card.  Utilizing a third-party research and polling firm, we are able to benchmark our service levels and compare them to Castle’s aggregate.  We share the quarterly reports with our owners and use this quantifiable data to help us determine what areas we are doing well in and what areas need attention.  This guest satisfaction program is tied into the general manager’s responsibilities and bonus plan.  As a hotel management company, our guest satisfaction is our highest priority and focus, alongside with our owners’ satisfaction and favorable financial returns.

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 most recently in Thailand.  We believe that there are significant opportunities to expand Castle’s operations both in the markets it currently serves, as well as other Pacific Basin and Asian vacation destinations including Vietnam.  Consequently over the last several quarters we have announced new key management appointments and promotions as part of our strategic plan to position Castle for significant growth within our current markets and to capitalize on the emerging growth opportunities particularly within the Asian markets.  In 2007, Castle formed its Thailand division to support its new business initiatives in Thailand.

Also as a part of our growth initiatives, we have formed an experienced acquisition team and have engaged in strategic alliances with various hospitality development companies and prominent investment banks, who wish to team up with us in pursuing growth opportunities within our key targeted markets .   Significant opportunities for Castle to obtain additional contracts within the State of Hawaii are also available to us due to a myriad of factors that include sales of properties, foreclosures, underperformance, 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

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

Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Plan of Operation” 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.”

Revenues

Total Revenues increased by 21% to $6,006,182 for the three months ended March 31, 2008, from $4,983,960 in the comparable period in 2007.  The increase reflects increases in revenue from both domestic and international operations in the first quarter of 2008, primarily as a result of six new property contracts initiated in 2007 and to a lesser degree by changes in rates and occupancy at the properties under Castle’s management.  Revenues Attributed from Properties increased by approximately 13% or $598,220 for the first quarter of 2008 as compared to the comparable periods of 2007, due to primarily to increases in revenue from the New Zealand operation from increased occupancy and daily rates and a strengthening of the New Zealand dollar.  Management and Service Revenues during the first quarter increased by 141% to $811,265 in 2008 from $336,656 in 2007. This increase is primarily due to incremental of revenues from the additional contracts initiated in 2007.

Expenses

Property Expenses are those expenses related to the management of the resort and condominium properties which are operated on a Gross Revenue contract basis.  Property expenses increased by 11% to $4.6 million for the three months ended March 31, 2008, from $4.2 million in the three months ending March 31, 2007.  These expense increases are in line with revenue increases and are subject to the effects of the exchange rate of the U.S. dollar as compared to the New Zealand dollar, which strengthened against the U.S. dollar when comparing 2008 to 2007.

Comparing the first quarter of 2008 and 2007, payroll and office expenses increased by $263,224 or 66% to $663,151 from $399,927 as Castle added operational positions to improve the services provided by the additional properties contracts and the previously existing portfolio of properties under contract.  Staffing levels in the areas of reservations, sales and marketing, accounting and finance, and infrastructure and technology were increased in 2007 and 2008 in response to the growth in the number of units under contract, the geographical expansion of the Company in 2007 and 2008 and continued expected growth in the future.

Administrative and general expenses increased by 63% or $146,528 during the first quarter of 2008 as compared to the first quarter of 2007.  This increase is primarily a result of expenses incurred related to establishing operations in Thailand, business development efforts in Vietnam and the increase in the number of properties under management.

EBITDA (Earnings before Interest, Depreciation, Taxes and Amortization) reflects the Company’s earnings without the effect of depreciation, interest income or expense or taxes.  Castle’s management believes that in many ways it is a good alternative indicator of the Company’s financial performance.  It removes the effects of non-cash depreciation and amortization of assets, as well as the fluctuations of interest costs based on the Company’s borrowing history and increases and decreases in tax expense brought about by changes in the provision for future tax effects rather than current income.  A comparison of EBITDA and Net Income is shown below.  EBIDTA increased by 77% and totaled $329,203 for the three months ended March 31, 2008, as compared to $186,336 in the year earlier period.  These changes are primarily a result of increases in Total Revenue Attributed to Properties which were offset by increases in Property Expense.  When combined with the increases in Management and Service revenues and increases in Payroll and office expense and administrative and general expenses the result is an increase in EBITDA of $142,867.

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Comparison of Net Income to EBITDA:
		For the Three Months Ended March 31,
		2008		2007
Net Income		$    99,658		$  19,702
Add Back:
Income Taxes		67,309		14,269
Net interest expense		105,946		96,177
Depreciation		56,290	56,188
EBITDA -		$     329,203		$   186,336

Depreciation

Castle’s business does not require a great deal of capital expenditure for equipment or fixed assets.  As a result, depreciation expense was $56,290 for the three months ended March 31, 2008, as compared to $56,188 for the same period last year.

Interest Income and Expense

Interest income of $2,567 for the three months ended March 31, 2008, as compared to $36,916 in the same period last year reflects lower invested cash balances in the first quarter of 2008 as compared to the comparable period in 2007 and $36,916 interest on Note Receivable recorded in the first quarter of 2007, which was not continued in 2008.

 

Interest Expense of $108,513 for the three months ended March 31, 2008, as compared to $133,093 for the same period last year, reflects a decrease in the discount of $36,916 recognized for the assignment of a Note Receivable used as part of the Purchase of real estate.  This discount was not recognized in the first quarter of 2008.

Income Tax

An increase in taxable income for the three month period ended March 31, 2008, led to an increase in Income Tax Expense for the three month period ended March 31, 2008, to $67,309 from $14,269 in the respective period of 2007.

Net Income (Loss)

Net income for the three months ending March 31, 2008, totaled $99,568 as compared to net income of $19,702 in the year earlier period.  This is primarily a result of the Company the impact of the six new contracts which were signed in 2007.

Foreign Currency Translation Adjustment

For consolidated entities whose functional currency is not the U.S. dollar, Castle translates their financial statements into U.S. dollars.  Assets and liabilities are translated at the exchange rate currently 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. Changes in the carrying value of the assets and liabilities of the consolidated entities outside of the United States due to foreign exchange changes are reflected as Foreign Currency Adjustments.  Foreign Currency Translation adjustments totaled $149,394 for the three months ended March 31, 2008, and $31,080 for the prior year, which reflects a decrease in the U.S. dollar to New Zealand dollar exchange rate during 2008 and 2007.

Total Comprehensive Income

Total Comprehensive Income (Loss) for the three months ended March 31, 2008, totaled $249,052 as compared to $50,782 in the year earlier period.  This is primarily a result of the changes in Revenue and Property and Operating Expenses noted above and the changes in Income Tax expense and Foreign Currency Translation adjustments also noted above.

Off-balance sheet arrangements

None; not applicable.

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

The primary market risk that the Company may be impacted by is the fluctuation of the exchange rate of the U.S. dollar relative to foreign currencies. 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. Changes in exchange rates of the US Dollar to other foreign currencies may have a significant impact on the financial and operating results of the Company in future periods.

Item 4T.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company, under the supervision and with the participation of its management, including the Company’s Chief Executive Officer (who is also the acting CFO) has evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) under the Exchange Act, as of the date of this Quarterly Report.  Based upon that evaluation, the Chief Executive Officer has concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

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 first fiscal quarter that have materially affected, or are reasonably likely to materially affect its internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

There have been no material changes from our risk factors as previously disclosed in our 10KSB.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Recent Sales of Unregistered Securities

There were no sales of unregistered securities during the quarterly period ended March 31, 2008

Use of Proceeds of Registered Securities

No proceeds were received from the sale of registered securities during the quarterly period ended March 31, 2008.

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Purchases of Equity Securities by Us and Affiliated Purchasers

None; not applicable.  

Item 3. Defaults Upon Senior Securities.

None; not applicable.

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

None; not applicable.

Item 5. Other Information.

(a)     Subsequent events.

On April 30, 2008 the Company completed a private placement of $500,000 from the sale of 333,333 Units.  Each Unit consisted of one share of common stock with a par value of $0.02 per share and one purchase warrant exercisable for a period of three years to one share of the Company’s common stock at an exercise price of $3.50 per share.

(b)     Nominating Committee

During the quarterly period ended March 31, 2008, there were no changes in the procedures by which security holders may recommend nominees to Castle’s Board of Directors.

Item 6. Exhibits

(a) Exhibits and index of exhibits.

31.1 302 Certification of Rick Wall, Chief Executive Officer

32    Section 906 Certification

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant has caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.

THE CASTLE GROUP, INC.

Date:	5/5/08		By:	/s/Rick Wall
				Rick Wall
				Chief Executive Officer and Chairman of the Board of Directors and Acting CFO

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