Surety Capital Corp

• Our president or chief executive officer;
• The holders of at least 10 percent of the outstanding shares of our capital stock entitled to vote at the proposed special meeting; or
• Our Board of Directors by means of a duly adopted resolution.

Special stockholder meetings may not be called by any other person or in any other manner. Our proposed Bylaws further provide that only those matters set forth in the notice of the special meeting may be considered or acted upon at the special meeting.

Limitation of Liability

Our proposed Articles of Incorporation will provide that any director or officer shall not be personally liable to us or our stockholders for damages as a result of any act or failure to act in his capacity as a director or officer, unless:

• It is proven, in addition to any and all other requirements for such liability, (i) that his act or failure to act constituted a breach of his duty of loyalty to the Company or its stockholders, (ii) that he did not act in good faith or acted in a manner involving intentional misconduct or a knowing violation of law, or (iii) that he derived an improper personal benefit from the transaction in respect of which such breach of fiduciary duty occurred; or
Such person is a director liable under Section 78.300 of the Nevada Revised Statutes for the payment of an improper distribution by us to our stockholders.

Indemnification

Our proposed Articles of Incorporation provide that we shall indemnify any director, officer or employee, or former director, officer or employee of the Company, or any person who may have served at its request as a director, officer or employee of another corporation in which it owns shares of stock, or of which it is a creditor, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement to the full extent permitted by Section 78.502 of the NRS, including the power to purchase and maintain insurance, as provided in Section 78.752 of the NRS.

Our proposed Bylaws will contain similar indemnification and limitation of liability provisions. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or persons

controlling our Company under the indemnification provisions, or otherwise, we are aware that, in the opinion of the SEC, the indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

Amendment of Bylaws

Under our proposed Articles of Incorporation, our proposed Bylaws may be amended by our Board of Directors.

Appraisal Rights of Our Stockholders

Stockholders of the Company are not entitled to appraisal rights in connection with the Bank sale transaction contemplated by the Stock Purchase Agreement, but they are entitled to appraisal rights in connection with the merger.

Under Delaware law, our stockholders are entitled, after complying with certain requirements of Delaware law, to dissent to the approval of the "change in domicile" merger, pursuant to Section 262 of the DGCL and to be paid the “fair value” of their shares of Surety Delaware stock in cash by complying with the procedures set forth in Section 262 of the DGCL. Set forth below is a summary of the procedures relating to the exercise of dissenters’ rights by our stockholders. This summary does not purport to be a complete statement of the provisions of Section 262 of the DGCL and is qualified in its entirety by reference to such provisions, which are contained in Attachment “E” to this proxy statement.

Under Delaware law, if you do not wish to accept the Plan of Merger, you have the right to dissent from the merger and to receive payment in cash for the fair value of your shares of our common stock, exclusive of any element of value arising from the accomplishment or expectation of the merger. Stockholders electing to exercise appraisal rights must comply with the provisions of Section 262 of the DGCL in order to perfect their rights. We will require strict compliance with the statutory procedures.

The following is intended as a brief summary of the material provisions of the Delaware statutory procedures required to be followed by a stockholder in order to dissent from the merger and perfect appraisal rights.

Section 262 requires that stockholders be notified that appraisal rights will be available not less than 20 days before the stockholder meeting to vote on the merger. A copy of Section 262 must be included with such notice. This proxy statement constitutes our notice to our stockholders of the availability of appraisal rights in connection with the merger in compliance with the requirements of Section 262. If you wish to consider exercising your appraisal rights, you should carefully review the text of Section 262 contained in Attachment “E” to this proxy statement since failure to timely and properly comply with the requirements of Section 262 will result in the loss of your appraisal rights under Delaware law.

If you elect to demand appraisal of your shares of our common stock, you must satisfy each of the following conditions:

• You must deliver to us a written demand for appraisal of your shares of our common stock before the vote with respect to the merger is taken. This written demand for appraisal must be in addition to and separate from any proxy or vote abstaining from or voting against adoption of the merger agreement. Voting against or failing to vote for adoption of the merger agreement by itself does not constitute a demand for appraisal within the meaning of Section 262;
• You must not vote in favor of adoption of the Plan of Merger. A vote in favor of the adoption of the Plan of Merger, by proxy or in person, will constitute a waiver of your appraisal rights in respect of the shares of our common stock so voted and will nullify any previously filed written demands for appraisal.

If you fail to comply with either of these conditions and the merger is completed, you will have no appraisal rights with respect to your shares of our common stock.

All written demands for appraisal should be addressed to Mr. Richard Abrams at Surety Capital Corporation, P.O. Box 1778, Fort Worth, Texas 76101, before the vote on the merger is taken at the stockholder meeting, and should be executed by, or on behalf of, the record holder of the shares of the common stock. The demand must reasonably inform us of the identity of the stockholder and the intention of the stockholder to demand appraisal of his shares of our common stock.

To be effective, a demand for appraisal by a holder of our common stock must be made by, or in the name of, such registered stockholder, fully and correctly, as the stockholder’s name appears on his stock certificate(s) and cannot be made by the beneficial owner if he does not also hold the shares of record. The beneficial holder must, in such cases, have the registered owner submit the required demand in respect of those shares.

If shares of our common stock are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of a demand for appraisal should be made in that capacity; and if the shares of our common stock are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or for all joint owners. An authorized agent, including an authorized agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, he is acting as agent for the record owner. A record owner, such as a broker, who holds shares of our common stock as a nominee for others, may exercise his right of appraisal with respect to the shares of our common stock held for one or more beneficial owners, while not exercising this right for other beneficial owners. In that case, the written demand should state the number of shares of our common stock as to which appraisal is sought. Where no number of shares is expressly mentioned, the demand will be presumed to cover all shares held in the name of the record owner.

If you hold your shares of our common stock in a brokerage account or in other nominee form and you wish to exercise appraisal rights, you should consult with your broker or the other nominee to determine the appropriate procedures for the making of a demand for appraisal by the nominee.

Within 10 days after the effective date of the merger, we must give written notice that the merger has become effective to each stockholder who has properly filed a written demand for appraisal and who did not vote in favor of the merger or consent to the merger. At any time within 60 days after the effective date, any stockholder who has demanded an appraisal has the right to withdraw the demand and to accept the share exchange specified by the merger agreement for his shares of our common stock. Within 120 days after the effective date, either we or any stockholder who has complied with the requirements of Section 262 may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares of our common stock held by all stockholders entitled to appraisal. We have no obligation to file such a petition in the event there are dissenting stockholders. Accordingly, the failure of any stockholder to file such a petition within the period specified could nullify previously written demands for appraisal.

If a petition for appraisal is duly filed by a stockholder and a copy of the petition is delivered to us, we will then be obligated, within 20 days after receiving service of a copy of the petition, to provide the Delaware Court of Chancery with a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares of our common stock. After notice to dissenting stockholders, the Delaware Court of Chancery is empowered to conduct a hearing upon the petition, and to determine those stockholders who have complied with Section 262 and who have become entitled to the appraisal rights provided thereby. The Delaware Court of Chancery may require the stockholders who have demanded payment for their shares to submit their certificates representing shares of our common stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with that direction, the Delaware Court of Chancery may dismiss the proceedings as to that stockholder.

After determination of the stockholders entitled to appraisal of their shares of our common stock, the Delaware Court of Chancery will appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest. When the value is determined, the Delaware Court of Chancery will direct the payment of such value, with interest thereon accrued during the pendency of the proceeding, if the Delaware Court of Chancery so determines, to the stockholders

entitled to receive the same, upon surrender by such holders of the certificates representing those shares of our common stock.

In determining fair value, the Delaware Court of Chancery is required to take into account all relevant factors. You should be aware that the fair value of your shares as determined under Section 262 could be more, the same or less than the value that you are entitled to receive under the terms of the merger agreement.

Costs of the appraisal proceeding may be imposed upon us and the stockholders participating in the appraisal proceeding by the Delaware Court of Chancery as the Delaware Court of Chancery deems equitable in the circumstances. Upon the application of a stockholder, the Delaware Court of Chancery may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts, to be charged pro rata against the value of all shares entitled to appraisal. Any stockholder who had demanded appraisal rights will not, after the effective date, be entitled to vote shares subject to that demand for any purpose or to receive payments of dividends or any other distribution with respect to those shares, other than with respect to payment as of a record date prior to the effective date; however, if no petition for appraisal is filed within 120 days after the effective date of the merger, or if the stockholder delivers a written withdrawal of his demand for appraisal and an acceptance of the merger within 60 days after the effective date of the merger, then the right of that stockholder to appraisal will cease and that stockholder will be entitled to receive the cash payment for his shares of our common stock pursuant to the merger agreement. Any withdrawal of a demand for appraisal made more than 60 days after the effective date of the merger may only be made with the written approval of the successor corporation and must, to be effective, be made within 120 days after the effective date.

In view of the complexity of Section 262, stockholders who may wish to dissent from the merger and pursue appraisal rights should consult their legal advisers.

Principal Reasons for the Change of Domicile Through This Merger

We have chosen to change our state of incorporation in order to take advantage of several features of Nevada corporate law which are expected to help us reduce our taxes and to facilitate our corporate actions. A comparison of Nevada and Delaware law follows:

• Companies domiciled in Nevada do not pay a franchise tax or a corporate income tax. Delaware imposes a corporate income tax.
• Under Nevada law, unless otherwise provided in the articles of incorporation, a corporation that desires to change the number of shares of a class or series, if any, of its authorized stock by increasing or decreasing the number of authorized shares of the class or series and correspondingly increasing or decreasing the

number of issued and outstanding shares of the same class or series held by each stockholder of record at the effective date and time of the change, except as otherwise provided in subsections 2 and 3 of Chapter 78.207 of the Nevada Revised Statutes, may do so by a resolution adopted by the board of directors, without obtaining the approval of the stockholders. The resolution may also provide for a change of the par value, if any, of the same class or series of the shares increased or decreased. After the effective date and time of the change, the corporation may issue its stock in accordance therewith.

The second bullet point above is especially important to us, inasmuch as we will be able to change our authorized shares to more efficiently meet our current needs. Presently, we need to go to the time and expense of having a stockholders’ meeting in order to change our authorized shares. We must be able to quickly deal with situations calling for us to modify our capital structure.

No Change in Business, Management or Physical Location

The merger and resulting change of domicile will not interrupt the existence of Surety Capital Corporation. Each share of our common stock will remain issued and outstanding as a share of the common stock of Surety Capital Corporation after the change of domicile from Delaware to Nevada.

Exchange of Share Certificates

As soon as practicable on or after the date the merger becomes effective, our stockholders of record immediately prior to the merger will be sent detailed instructions concerning the procedures to be followed for submission of certificates representing our common stock to our transfer agent, together with a form of transmittal letter to be sent to the transfer agent at the time such certificates are submitted.

After the merger is effective, the transfer agent will deliver to any holder who has previously submitted a duly completed and executed transmittal letter and a certificate representing the common stock, a certificate issued by us representing an equal number of shares of our common stock as a Nevada corporation into which such shares of the common stock were converted.

After the merger becomes effective, but before a certificate representing common stock is surrendered, certificates representing common stock of the Company, will represent the number of shares of our common stock as a Nevada corporation into which such common stock was converted pursuant to the terms of the Plan of Merger. Our transfer agent will deliver certificates representing the appropriate amount and type of our capital stock in accordance with the stockholder’s instructions for transfer or exchange.

Failure by a stockholder to return appropriate transmittal letters or to surrender certificates representing common stock will not affect such person’s rights as a stockholder, as such stockholder’s certificates representing common stock following the change of domicile merger will represent the number of shares of our common stock as a Nevada corporation into which such common stock was converted pursuant to the terms of the change of domicile merger.

Securities Act Consequences, Resales of Our Common Stock

The shares of Surety Nevada’s stock to be issued in exchange for shares of Surety Delaware’s common stock are not being registered under the Securities Act of 1933 (the “Securities Act”). In that regard, Surety Nevada is relying on Rule 145(a)(2) under the Securities Act, which provides that a merger which has “as its sole purpose” a change in the domicile of a corporation does not involve the sale of securities for purposes of the Securities Act, and on interpretations of the Rule by the Securities and Exchange Commission which indicate that the making of certain changes in Surety Nevada’s articles of incorporation which could otherwise be made only with the approval of the stockholders of either corporation does not render Rule 145(a)(2) inapplicable.

Pursuant to Rule 145 under the Securities Act, the merger of Surety Delaware corporation into Surety Nevada and the exchange of our shares of common stock in the Delaware corporation into the shares of the common stock of the Nevada corporation is exempt from registration under the Securities Act, since the purpose of the transaction is a change of our domicile within the United States. The effect of the exemption is that the shares of our common stock issuable in the change of domicile may be resold by the former stockholders without restriction to the same extent that such shares may have been sold before the change of domicile.

After the merger and change in domicile, Surety Nevada will be a publicly-held company, Surety Nevada’s stock will be quoted on the Pink Sheets, and Surety Nevada will file periodic reports and other documents with the Securities and Exchange Commission and provide to its stockholders the same types of information that we have previously filed and provided. Stockholders whose common stock was freely traded before the merger will continue to have freely traded shares of Surety Nevada’s stock after the merger. Stockholders holding restricted shares of common stock will have shares of Surety Nevada’s stock which are subject to the same restrictions on transfer as those to which their present shares of common stock are subject, and their stock certificates, when surrendered for

replacement certificates representing shares of Surety Nevada’s common stock, will bear the same restrictive legend as appears on their present stock certificates. For purposes of computing compliance with the holding period requirement of Rule 144 under the Securities Act, stockholders will be deemed to have acquired their shares of Surety Nevada’s common stock on the date they acquired their shares of Surety Delaware’s common stock. In summary, Surety Nevada and its stockholders will be in the same respective positions under the federal securities laws after the merger as were Surety Delaware and its stockholders prior to the merger.

Abandonment of the Merger and Change of Domicile

Mr. Abrams, sole director of the Company, has adopted a resolution to change the domicile of the Company to the state of Nevada in the event the stockholders of the Company do not vote to dissolve the Company.

The Plan of Merger may be terminated and the change in domicile abandoned, notwithstanding stockholder approval, by Mr. Abrams, sole director of the Company, at any time before consummation of the change in domicile if Mr. Abrams, sole director of the Company, determines that in his judgment the change in domicile does not appear to be in the best interests of our stockholders. In the event the Plan of Merger is terminated or the stockholders fail to approve the change in domicile, the Company would remain incorporated as a Delaware corporation.

Federal Tax Consequences

The following is a discussion of certain federal income tax considerations that may be relevant to holders of our common stock who receive the common stock of Surety Nevada as a result of the proposed merger to effect a change of domicile.

This discussion does not address the state, local, federal or foreign income tax consequences of the change of domicile merger that may be relevant to particular stockholders, such as dealers in securities, or our stockholders who exercise dissenters’ rights. In view of the varying nature of such tax considerations, each stockholder is urged to consult his own tax adviser as to the specific tax consequences of the proposed change of domicile merger, including the applicability of federal, state, local, or foreign tax laws. Subject to the limitations, qualifications and exceptions described herein, and assuming the change of domicile qualifies as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, the following federal income tax consequences generally should result:

• No gain or loss should be recognized by the stockholders of Surety Delaware upon conversion of their common stock into common stock of Surety Nevada pursuant to the change of domicile merger;
• The aggregate tax basis of the common stock received by each stockholder of Surety Delaware in the change of domicile merger should be equal to the aggregate tax basis of our common stock converted in exchange therefor;

• The holding period of our common stock received by each stockholder of Surety Delaware in the change of domicile should include the period during which the stockholder held his common stock converted therefor, provided such common stock is held by the stockholder as a capital asset on the effective date of the change of domicile; and
• Surety Delaware should not recognize gain or loss for federal income tax purposes as a result of the change of domicile merger.
Surety Delaware has not requested a ruling from the Internal Revenue Service with respect to the federal income tax consequences of the change of domicile under the Code. We believe the change of domicile will constitute a tax-free reorganization under Section 368(a) of the Code, inasmuch as Section 368(a)(1)(F) of the Code defines a reorganization as a mere change in identity, form, or place of organization of our corporation.

Vote Required

The affirmative vote of a majority of the total number of shares of our issued and outstanding capital stock is required to approve the merger. Mr. Abrams, sole director of the Company, recommends a vote FOR approval of the merger and change in our domicile.

Vote Required and Board Recommendation

The approval of the change of domicile merger requires the affirmative vote of the stockholders holding at least a majority of the outstanding shares of our common stock. Mr. Abrams, the sole member of the Board of Directors has indicated that he will vote his shares in favor of the proposal. Mr. Abrams believes that the merger for purposes of changing domicile of the Company from Delaware to Nevada is in the best interests of our Company and our stockholders and recommends a vote “FOR” the proposal.

A copy of the special resolution authorizing change of domicile and the merger to be voted on by our stockholders is contained in Attachment “C” hereto.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial ownership of the voting capital stock of the Company as of the Record Date for (a) each person known by us to own beneficially five percent or more of the voting capital stock, and (b) each Director and executive officer who owns capital stock. Except pursuant to applicable community property laws and except as otherwise indicated, to the knowledge of the Company, each stockholder identified in the table possesses sole voting and investment power with respect to his or her shares.

Title of Class	Name and Address of Beneficial Owner	Amount and Nature of Beneficial Owner	Percent of Class (1)
As a Group	Officers and Directors Post Office Box 1778 Fort Worth, TX 76101	393,537(2)	3.48%
As Individuals	Richard N. Abrams, Chief Executive Officer Post Office Box 1778 Fort Worth, TX 76101	393,537(2)	3.48%
	David Chappell 2501 Parkview, Suite 220 Fort Worth, TX 76102	646,275	5.71%
	Rodney Abrams(3) 32 Court of Cobblestone Northfield, IL 60062	1,694,290 (3)	14.87%
	Richard Hillsberg Trustee of, Abrams 2003 Family Trust (4)(5) 750 Lake Cook Road Suite 350 Buffalo Grove IL 60089-2073	1,267,600	11.20 %

(1) Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition

rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding on the Record Date. As of the Record Date, there were 11,320,973 shares of common stock issued and outstanding.
(2) This amount includes 11,250 shares owned by Funeral Financial Systems, Ltd. which is 99.99% owned by Richard Abrams. This amount also includes 47,037 shares owned by Mr. Abrams' spouse, although Mr. Abrams disclaims beneficial ownership of such shares.
(3) Includes 74,999 shares he can acquire upon the conversion of outstanding debentures.

(4) Rodney Abrams, the son of Richard Abrams, is one of three beneficiaries of the Abrams 2003 Family Trust. Rodney Abrams does not directly or indirectly have voting power or investment power over the voting capital stock of the Company held by the trust, nor has Rodney Abrams directly or indirectly created an arrangement with the purpose or effect of preventing vesting of voting or investment power over the voting capital stock of the Company held by the trust. Consequently, Rodney Abrams does not have beneficial ownership of the voting capital stock of the Company held by the trust.

(5) Richard Abrams is not a beneficial owner of the Abrams 2003 Family Trust.

(a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to § 228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder’s shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word “stockholder” means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words “stock” and “share” mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation; and the words “depository receipt” mean a receipt or other instrument issued by a depository representing an interest in one or more shares, or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository.

(b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to § 251 (other than a merger effected pursuant to § 251(g) of this title), § 252, § 254, § 257, § 258, § 263 or § 264 of this title:

(c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as is practicable.

(e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw such stockholder’s demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after such stockholder’s written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later.

(f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation.

(g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder.

(h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted such stockholder’s certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that such stockholder is not entitled to appraisal rights under this section.

(i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court’s decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state.

(j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney’s fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal.

(k) From and after the effective date of the merger or consolidation, no stockholder who has demanded appraisal rights as provided in subsection d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of such stockholder’s demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just.

(l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation.

(c) To record the $3.0 million cash down payment and the receivable for the balance owed for the sale. The sales price is equal to the Bank's equity plus $3.0 million. The Bank's equity was $6,913 million at December 31, 2006. Assuming $400 thousand in Bank losses and deal transaction costs, the pro forma sales price is $9.513 million.

(1) To eliminate the income and expense of Surety Bank. Noninterest income of Surety Bank includes $1.864 million in nonrecurring gains arising from the sale of the Bank's Whitesboro, Texas branch and the Bank's Insurance Premium Finance Division.

(2) To eliminate the interest expense and debt issue cost amortization related to Surety Capital's debentures. It is assumed that the debentures will be paid off with the proceeds from the sale.

The unaudited pro forma condensed balance sheet of the Bank at December 31, gives effect to the proposed sale of the Bank as if it had occurred on that date, as adjusted for additional losses prior to the closing of the sale.

(1) Noninterest income of Surety Bank includes $1.864 million in nonrecurring gains arising from the sale of the Bank's Whitesboro, Texas branch and the Bank’s Insurance Premium Finance Division.

ATTACHMENT H

SURETY CAPITAL CORPORATION

Consolidated Financial Statements

December 31, 2005 and 2004

(With Independent Auditors' Report Thereon)

Independent Auditors' Report

The Board of Directors

Surety Capital Corporation and Subsidiary

We were engaged to audit the accompanying consolidated balance sheet of Surety Capital Corporation and Subsidiary (collectively referred to as Company) as of December 31, 2005 and 2004 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management.

We were unable to independently confirm the amount of the Company's convertible subordinated debt as of December 31, 2005 and 2004 and the amount of common stock outstanding as of December 31, 2005 and 2004. The Company's internal accounting records were inadequate to obtain additional competent evidential matter with respect to the financial statements for the year ended December 31, 2004. We were unable to obtain written representations from certain management of the Company's subsidiary as required by generally accepted auditing standards as of and for the year ending December 31, 2004.

Because of the significance of the matters discussed in the preceding paragraph, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the consolidated financial statements referred to in the first paragraph.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred significant losses in all periods presented, and is operating under a Written Agreement with the Federal Reserve Bank, and the Company's subsidiary is operating under a Determination Letter with the Texas Department of Banking, all of which raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Payne Falkner Smith & Jones, P.C.

May 12, 2006

Consolidated Balance Sheet

December 31, 2005 and 2004

(In Thousands)

	2005	2004
ASSETS
Cash and due from banks	$8,554	$7,043
Interest bearing deposits in other banks	25	25
Securities available for sale	-	34
Loans	36,580	41,759
Bank premises and equipment	2,334	2,067
Other real estate owned	63	1,580
Goodwill, net	1,045	1,045
Other assets	894	1,219
	$49,495	$54,772

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest bearing	$ 6,902	$ 7,690
Interest bearing	35,598	36,234
Total Deposits	42,500	43,924

Advances from the Federal Home Loan Bank	-	3,000
Convertible subordinated debt	4,350	4,350
Other liabilities	2,031	2,618
Commitments and contingencies	-	-
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued at December 31, 2005 and 2004	-	-
Comon stock, $.01 par value; 20,000,000 shares authorized; 11,400,809 issued and 11,320,973 outstanding at December 31, 2005 and 2004 respectively	114	114
Additional paid-in capital	18,103	18,103
Accumulated deficit	(17,228)	(16,977)
Treasury stock, 79,836 shares at cost	(375)	(375)
Accumulated other comprehensivef income	-	15
Total stockholders' equity	614	880
	$ 49,495	$54,772

See accompanying notes to consolidated financial statements.

-1-

Consolidated Statement of Operations

For the Years Ended December 31, 2005 and 2004

(In Thousands)

	2005	2004
Interest income:
Interest and fees on loans	$3,899	$3,692
Interest and dividends on securities	8	2
Interest on federal funds sold	10	17
Interest on other investments	73	45
Total interest income	3,990	3,756

Interest expense:
Interest on deposits	978	964
Interest on advances from the Federal Home Loan Bank	20	17
Interest on subordinated debentures	392	392
Total interest expense	1,390	1,373
Net interest income	2,600	2,383
(Credit to) provision for loan losses	(357)	1,460
Net interest income after (credit to) provision for loan losses	2,957	923

Noninterest income:
Service charges on deposit accounts	228	354
Gain on sale of branches	-	265
Gain on sale of loan	642	642
Gain on sale of available for sale securities	17	-
Gain on sale of other real estate owned	129	-
Credit provision for compensatory damages	386	-
Other	126	363
Total noninterest income	1,528	1,624

Noninterest expense:
Salaries and employee benefits	1,960	1,772
Occupancy, furniture and equipment	444	489
Professional fees	930	792
Other	1,402	1,782
Total noninterest expense	4,736	4,835

Net loss before tax benefit	(251)	(2,288)
Tax benefit	-	-
Net loss	$(251)	$(2,930)
Net loss per share - basic and diluted	$(0.02)	$(0.28)

See accompanying notes to consolidated financial statements.

-2-

Consolidated Statement of Changes in Stockholders' Equity

For the Years Ended December 31, 2005 and 2004

(Unaudited)

(In Thousands)

					Accumulated
			Additional		Other
	Preferred	Common	Paid-in	Accumulated	Comprehensive	Treasury	Comprehensive
	Stock	Stock	Capital	Deficit	Income (Loss)	Stock	Income	Total
Balance at January 1, 2004	$-	$100	$18,086	$(14,047)	$(2)	$(375)		$3,762
Sale of common stock	-	14	17	-	-	-		31
Comprehensive loss:
Net loss	-	-	-	(2,930)	-	-	$(2,930)	(2,930)
Other comprehensive income:
Unrealized holding gains
arising during the period	-	-	-	-	17	-	17	17

Total comprehensive loss							$(2,913)
Dividends	-	-	-	-	-	-		-

Balance at December 31, 2004	-	114	18,103	(16,977)	15	(375)		880
Comprehensive loss:
Net loss	-	-	-	(251)	-	-	$(251)	(251)
Other comprehensive loss:
Reclassification adjustment
for gain included in net loss					(15)		(15)	(15)

Total comprehensive loss							$(266)
Dividends	-	-	-	-	-	-		-

Balance at December 31, 2005	$-	$114	$18,103	$(17,228)	$-	$(375)		$614

See accompanying notes to consolidated financial statements.

-3-

Consolidated Statement of Cash Flows

For the Years Ended December 31, 2005 and 2004

(Unaudited)

(In Thousands)

	2005	2004
Cash flows from operating activities:
Net loss	$(251)	$(2,930)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation	122	137
(Credit to) provision for loan losses	(357)	1,460
Amortization of deferred loan cost	41	41
Net gain on sale of available-for-sale securities	(17)	-
Net gain on sale of loan	(642)	-
Net gain on sale of branches	-	(265)
Net gain on sale of other real estate owned	(129)	-
Net gain on sale or disposal of other assets	(42)	(36)
Write down of other real estate owned	-	211
Proceeds from sale of loan	1,500	-
Decrease in other assets	317	148
(Decrease) increase in other liabilities	(282)	604
Net cash provided (used) by operating activities	260	(630)

Cash flows from investing activities:
Purchases of securities available for sale	-	(3,500)
Proceeds from maturities, calls and paydowns of
securities available for sale	36	4,236
Net decrease in interest bearing deposits in other banks	-	3
Net decrease in loans	5,772	6,591
Purchases of premises and equipment	(449)	(240)
Proceeds from sales of equipment	66	2,476
Proceeds from sales of other real estate	250	338
Net proceeds (expenditures) from the disposal of branches	-	(18,565)
Net cash provided (used) by investing activities	5,675	(8,661)

Cash flows from financing activities:
Net decrease in demand deposits, NOW and
savings accounts	(3,080)	(733)
Net increase (decrease) on certificates of deposit	1,656	(390)
Net (payoffs) advances from the FHLB	(3,000)	3,000
Proceeds from sale of common stock	-	31
Net cash (used) provided by financing activities	(4,424)	1,908

Net increase (decrease) in cash and cash equivalents	1,511	(7,383)
Cash and cash equivalents at beginning of year	7,043	14,426
Cash and cash equivalents at end of year	$8,554	$7,043

See accompanying notes to consolildated financial statements

-4-

Consolidated Statement of Cash Flows

For the Years Ended December 31, 2005 and 2004

(Unaudited)

1. Summary of Significant Accounting Policies

The accompanying consolidated financial statements include the accounts of Surety Capital Corporation (herein sometimes referred to as "SCC") and its wholly-owned subsidiary Surety Bank ("Bank"), together referred to in these Financial Statements as the Company. All significant intercompany accounts and transactions have been eliminated.

Business

The Company is principally engaged in traditional community banking activities. Community banking activities include the Company's commercial and retail lending, deposit gathering and investment, and liquidity management activities. In addition to its community banking services, as of December 31, 2005 and 2004, respectively, the Company offered insurance premium financing. Insurance premium finance (IPF) lending involves the lending of funds to companies and individuals for the purpose of financing its purchase of property and casualty insurance.

On June 1, 2005, Surety Bank, N.A. converted from a federal chartered bank to a state chartered bank and changed its name to Surety Bank. As a result of the conversion, the Texas Department of Banking issued a Determination Letter under which the Bank currently operates (see Note 23). Prior to the conversion, the Bank was operating under a written Consent Order with the Office of the Comptroller of the Currency (OCC) (see Note 23).

During 2004, the Bank sold four of its branches located in San Antonio, Texas. All liabilities were assumed by the buyer, and all real estate, furniture and equipment were purchased. In addition, loans were transferred to the buyer. As of December 31, 2005 and 2004, the Company had two bank branches located in Fort Worth and Whitesboro, Texas.

The 2005 and 2004 consolidated financial statements were prepared assuming the Company will continue as a going concern. The Company has suffered significant losses in its core business operations in all periods presented and is now operating under a Written Agreement with the Federal Reserve Bank, and the Company's subsidiary is operating under a Determination Letter with the Texas Department of Banking (see Note 23). As of December 31, 2005, the Bank was prohibited from paying dividends to SCC without the approval of the Texas Department of Banking and the Federal Reserve Bank. SCC is primarily dependent upon dividends received from the Bank to meet its cash obligations. SCC has convertible subordinated debt of $4,350,000 at December 31, 2005 and 2004, respectively. In February 2002 the Holding Company notified the holders of its convertible subordinated debt that SCC will not have funds to make future interest payments until the Bank obtains relief from restrictions prohibiting the Bank from paying dividends to SCC without regulatory approval. The interest payments due in 2002, 2003, 2004 and 2005 were not made. No agreement has been reached prior to December 31, 2005 regarding an alternative to the payment of interest due on the convertible subordinated debentures.

Management believes the Company will be able to return to profitability. Management's plans to improve the Company's profitability include selling the assets of Surety Bank and engaging in other financing product lines. Even if management is successful in its efforts to return the Company to profitability, there is substantial doubt about the Company's ability to continue as a going concern due to the uncertainty regarding its ability to meet its cash obligations.

Use of Estimates

The preparation of consolidated 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.

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and valuation of other real estate owned. While management uses available information to recognize losses on loans and other real estate owned, future provisions may be necessary based on changes in local economic conditions. In addition, banking regulators, as an integral part of their examination process, periodically review the Company's allowance for loan and other real estate losses. They may require the Company to record additional provisions for losses based on their judgment about information available to them at the time of their examination.

A significant portion of the Bank's loans are secured by real estate and related assets located in local markets. Accordingly, the ultimate collectibility of this portion of the Bank's loan portfolio is susceptible to changes in local market conditions.

Cash and Cash Equivalents

For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from Banks, other short-term investments and federal funds sold. All highly liquid investments with an initial maturity of less than ninety days are considered to be cash equivalents.

Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as "held-to-maturity" and recorded at amortized cost. Securities not classified as held-to-maturity or trading, including equity securities with readily determinable fair values, are classified as "available-for-sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Loans

The Bank grants commercial, real estate, agricultural, insurance premium financing, and consumer loans to customers. The ability of the Bank's debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Fees associated with originating loans to the extent they exceed the direct loan origination costs are generally deferred and recognized over the life of the loan as an adjustment of yield. The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

Off-Balance Sheet Credit Related Financial Instruments

In the ordinary course of business, the Bank has entered into, or intends to enter into in the future, commitments to extend credit, including commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.

Bank Premises and Equipment

Land is carried at cost. Bank premises and furniture and equipment are carried at cost, less accumulated depreciation and amortization computed using the straight-line method.

Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of cost or fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.

Goodwill

Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." Goodwill, which represents the excess of cost over the fair value of the net assets of an acquired business, was amortized on a straight-line method up to fifteen years prior to the adoption of SFAS No. 142. Effective January 1, 2002, goodwill is no longer amortized but tested for impairment annually or whenever events or changes in circumstances indicate that the carrying amount should be assessed. Impairment, if any, for goodwill is recognized as a permanent charge to noninterest expense. Management has determined that there is no goodwill impairment as of December 31, 2005 and 2004. All goodwill is associated with community banking activities of the Company.

Income Taxes

Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Advertising

Advertising consists of the Bank's advertising in its local market area. Advertising is expensed as incurred. Advertising expense was approximately $54,000 and $72,000 for the years ended December 31, 2005 and 2004, respectively.

Fair Values of Financial Instruments

The following methods and assumptions were used by the Company in estimating the fair values of financial instruments as disclosed herein:

Cash and short-term instruments

The carrying amounts of cash and short-term instruments approximate their fair value.

Securities available for sale

Fair values for securities excluding restricted equity securities, are based on quoted market prices. The carrying values of restricted equity securities approximate fair values.

Loans

For variable-rate loans that reprice frequently and have no significant changes in credit risk, fair values are based on carrying values. Fair values for commercial real estate, mortgage, consumer and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposits

The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed term money market accounts and certificates of deposit (CD's) approximate their fair values at the reporting date. Fair values for fixed-

rate CD's are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings

The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Bank's current incremental borrowing rates for similar types of borrowing arrangements.

Long-term borrowings

The fair values of the Bank's long-term borrowings are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

Accrued interest

The carrying amounts of accrued interest approximate their fair values.

Off-balance sheet instruments

Fair values for off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the counter parties' credit standings.

Stock Based Compensation

The Company applies the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations, in accounting for its stock-based compensation plans. Under Opinion 25, compensation cost is measured as the excess, if any, of the market price of the Company's stock at the date of the grant above the amount an employee must pay to acquire the stock. No compensation expense is recognized when the exercise price is equal to the market value of the stock on the day of the grant. The Financial Accounting Standards Board ("FASB") published SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) on January 1, 1996 which encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on new fair value accounting rules. Companies that choose not to adopt the new rules will continue to apply the existing rules, but will be required to disclose pro forma net income under the new method.

The following table reflects no changes calculated under SFAS No. 123 for the years ending December 31, 2005 and 2004 (in thousands, except per share amounts):

	2005	2004
Net loss:
As reported	$(251)	$(2,930)
Proforma	$(251)	$(2,930)

Net loss per share:
As reported:
Basic	(0.02)	(0.28)
Diluted	(0.02)	(0.28)

Proforma:
Basic	(0.02)	(0.28)
Diluted	(0.02)	(0.28)

Earnings Per Share

Earnings per share is computed in accordance with SFAS No. 128, "Earnings Per Share," which requires dual presentation of basic and fully diluted earnings per share (EPS) for entities with complex capital structures. Basic EPS is based on net income divided by the weighted-average number of shares outstanding during the period. Diluted EPS includes the dilutive effect of potential common stock using the treasury stock method only if the effect on earnings per share is dilutive.

Earnings per common share is computed by dividing net income by the weighted-average number of shares outstanding for the year. The weighted-average number of common shares outstanding for basic and diluted earnings per share computations was 11,400,809 and 10,412,876 for the years ended December 31, 2005 and 2004, respectively.

The Company reported a loss for the years ended December 31, 2005 and 2004. Accordingly, the dilutive effect of stock options and warrants is not considered in the net loss per share calculations for these periods.

Dividend Restriction

Banking regulations require the maintenance of certain capital and net income levels that may limit the amount of dividends that may be paid. Additional regulatory restrictions placed on SCC and the Bank in connection with the payment of dividends are more fully disclosed in Note 23.

Restrictions on Cash

The Bank is required to have certain levels of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements. Deposits with the Federal Reserve Bank do not earn interest. Additionally, the Bank had time deposits with other financial institutions totaling approximately $25,000 at December 31, 2005 and 2004, respectively, pledged as security to its merchant card clearing agent.

Industry Segments

Internal financial information is primarily reported and aggregated in two lines of business consisting of community banking and insurance premium financing.

2. Recent Accounting Pronouncements

In December, 2004, the FASB issued a revision of SFAS No. 123, Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. The provisions of this statement are effective for nonpublic entities as of the beginning of the first annual reporting period that begins after December 15, 2005. Management anticipates this Statement will have no effect on the Company’s financial statements.

In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets-an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The provisions of this statement are effective for non monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Management anticipates this Statement will have no effect on the Company's financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The Statement also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. The provisions of this statement are effective for accounting changes and error corrections occurring in fiscal years beginning after December 15, 2005. Management anticipates this Statement will not have a significant effect of the Company's financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140. This statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to SFAS 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. Management anticipates this Statement will have no effect on the Company's financial statements.

In March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial Assets - an amendment of FASB Statement No.140. This Statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contact in specified circumstances; requires all separately recognized servicing assets and liabilities to be initially measured at fair value, if practicable; permits an entity to choose either the amortization or fair value measurement method for each class of separately recognized servicing assets and liabilities; at its initial adoption permits a one-time reclassification of available for sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available for sale securities provided certain requirements are met; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. This statement should be adopted as of the beginning of an entity's first fiscal year that begins after September 15, 2006. Management anticipates this Statement will have no effect on the Company's financial statements.

3. Sale of Branches

In January 2004, the Bank sold in accordance with the terms of a Branch Purchase and Assumption Agreement, certain assets and liabilities of its San Antonio branches. A net gain of $265,000 was recognized on the sale.

A summary of the recorded amounts of assets sold and liabilities assumed in the sale of the branches is as follows (in thousands):

Assets

Loans	$15,812
Bank premises and equipment	219
Goodwill	1,528
Total assets sold	17,559

Liabilities

Deposits	36,389
Other liabilities	-
Total liabilities assumed	36,389

Net liabilities assumed by purchaser	(18,830)
Cash paid	18,565
Gain on sale	$(265)

4. Statement of Cash Flows

The Company reports on a net basis its cash receipts and cash payments for time deposits accepted and repayments of those deposits, loans made to customers and principal collections on those loans.

The Company uses the indirect method to present cash flows from operating activities. Other supplemental cash flow information for the years ended December 31, 2005 and 2004 is presented as follows (in thousands):

	2005	2004
Cash transactions:
Interest income received	$3,982	$3,881
Interest expense paid	$1,008	$1,011
Income taxes paid	$-	$-

Noncash transactions:
Net disposition of other real estate	$2,765	$128
Reclassification adjustment for gain on sale
of securities available for sale	$(15)	$-
Net unrealized appreciation on
securities available for sale	$-	$17

Sale of branches (more fully discussed in Note 3):
Net liabilities assumed by purchaser	$-	$18,830
Net cash paid by Bank	-	18,565
Gain on sale of branches	$-	$(265)

5. Debt and Equity Securities

Debt and equity securities have been classified as available for sale in the consolidated balance sheet according to management's intent. The Company had no debt and equity securities on hand at December 31, 2005. The carrying amount of securities and their approximate fair values at December 31, 2004 are as follows (in thousands):

		Gross	Gross
	Amortized	Unrealized	Unrealized	Fair
	Cost	Gains	Losses	Value
Securities Classified as Available for Sale
December 31, 2004:
Other securities	19	15	-	34
	$19	$15	$-	$34

Proceeds from the sales of investment securities available for sale during 2005 and 2004 were approximately $36,000 and $3,500,000, respectively. Gross gains recognized on sales were approximately $17,000 during 2005. No losses were recognized on sales during 2005. No gains or losses were realized on sales during 2004.

6. Loans and Allowance for Loan Losses

Loans at December 31, 2005 and 2004 consisted of the following (in thousands):

	2005	2004
Commercial	$6,145	$6,265
Real estate	23,879	27,575
Consumer	1,961	4,116
Insurance premium financing	5,653	5,384
Other	456	410
	38,094	43,750

Unearned interest	(281)	(156)
Allowance for loan losses	(1,233)	(1,835)
	$36,580	$41,759

At December 31, 2005 and 2004 there were no loans which were contractually delinquent over ninety days that were continuing to accrue interest.

Impairment of loans having a recorded investment of approximately $156,000 and $1,777,000 at December 31, 2005 and 2004, respectively, has been recognized in conformity with SFAS No. 114 as amended by SFAS No. 118. The average recorded investment in impaired loans during 2005 and 2004 was approximately $966,000 and $4,080,000, respectively. The total allowance for loan losses related to these loans was approximately $33,000 and $253,000 at December 31, 2005 and 2004, respectively.

An analysis of the allowance for loan losses for the years ended December 31, 2005 and 2004 is as follows (in thousands):

	2005	2004
Balance at beginning of year	$1,835	$1,688
(Credit to) provision for loan losses	(357)	1,460
Loans charged to the allowance account	(757)	(1,932)
Recoveries of loans previously
charged off	512	619

Balance at end of year	$1,233	$1,835

The Company is not committed to lend additional funds to debtors whose loans have been modified.

7. Bank Premises and Equipment

Bank premises and equipment at December 31, 2005 and 2004 consisted of the following (in thousands):

	2005	2004
Land	$439	$439
Building and improvements	1,932	1,848
Furniture, fixtures and equipment	2,604	2,237
Autos	36	103
	5,011	4,627

Accumulated depreciation	(2,677)	(2,560)
	$2,334	$2,067

8. Deposits

Deposits at December 31, 2005 and 2004 are summarized as follows (in thousands):

	2005		2004
	Amount	Percent	Amount	Percent
Noninterest bearing demand
accounts	$6,902	16.2	$7,690	17.5
Interest bearing demand
accounts	3,426	8.1	3,683	8.4
Savings accounts	1,181	2.8	1,396	3.2
Limited access money market accounts	2,928	6.9	4,748	10.8

Certificates of deposit,
$100,000 and greater	10,166	23.9	9,712	22.1
Certificates of deposit, less
than $100,000	17,897	42.1	16,695	38.0
	$42,500	100.0	$43,924	100.0

At December 31, 2005, certificates of deposit accounts distributed by rate are as follows (in thousands):

Certificates of deposit:

0.00% to 0.99%	$29
1.00% to 1.99%	519
2.00% to 2.99%	3,338
3.00% to 3.99%	6,874
4.00% to 4.99%	16,935
5.00% and greater	368
	$28,063

At December 31, 2005, scheduled maturities of certificates of deposit accounts are as follows (in thousands):

Less than one year	$13,445
One to three years	12,948
Over three years	1,670
	$28,063

9. Income Taxes

The provision for income taxes for the years ended December 31, 2005 and 2004 consisted of the following (in thousands):

	2005	2004
Income tax benefit:
Current	$-	$-
Deferred	-	-
Income tax benefit	$-	$-

	2005	2004
	Percent	Percent
U.S. statutory rate	34.0	34.0
Effect of valuation allowance	(34.0)	(34.0)
Effective tax rate	-	$-

Deferred income taxes reflect the net tax effects of temporary differences between the recorded amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 2005 and 2004, are as follows (in thousands):

	2005	2004
Deferred tax assets:
Net operating loss carryforward	3,843	3,514
Allowance for loan losses for book in excess of tax	282	403
Other real estate basis for tax in excess of book	19	128
Other	6	5
Total deferred tax assets	4,150	4,050
Deferred tax liability:
Premises and equipment basis for book in excess of tax	513	498
Net deferred tax asset before valuation allowance	3,637	3,552
Less valuation allowance	(3,637)	(3,552)
Deferred tax asset	$-	$-

The realization of the net deferred tax asset is contingent upon the Company generating sufficient future taxable income during the carryforward period. Management has provided a 100% valuation allowance for its deferred tax asset due to the uncertainty of realization during the carryforward period.

For Federal income tax purposes, at December 31, 2005, the Company has a tax operating loss carryforward of approximately $11,303,000 that will expire if not utilized in 2018 through 2024.

10. Advances from the Federal Home Loan Bank

As a member of the Federal Home Loan Bank (FHLB) system, the Bank has the ability to obtain borrowings up to a maximum total of 75% of its total assets subject to the level of qualified, pledgeable 1-4 family residential real estate loans and FHLB stock owned. As discussed in a separate note, under the Determination Letter with the Texas Department of Banking, the Bank is prohibited from incurring additional debt without prior approval. The advances are collateralized by a blanket pledge of the Bank's residential mortgage loan portfolio and FHLB stock. There were no outstanding advances at December 31, 2005. At December 31, 2004, there was $3,000,000 in FHLB advances outstanding. The advances had rates ranging from 2.15% to 2.41%, and matured in January, 2005.

11. Commitments and Contingencies

At December 31, 2005 and 2004, the Bank was party to certain claims and legal actions. Included in other liabilities at December 31, 2005 and 2004 are accruals relating to potential settlement amounts, and legal fees totaling approximately $30,000 and $430,000, respectively. The Bank's management believes no additional reserves are required at December 31, 2005 relating to the above mentioned legal issues. The amounts accrued as of December 31, 2004 relating to these potential claims approximated the ultimate settlement amount.

At December 31, 2004, the Bank was also in the process of resolving certain environmental issues relating to a property held in other real estate owned. The Bank sold the subject property during 2005, and was given indemnity regarding future environmental claims in return for a price concession. The Bank's management believes no additional reserves are required at December 31, 2005 relating to the above mentioned environmental issues.

12. Financial Instruments

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.

The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. At December 31, 2005 and 2004, the approximate amounts of these financial instruments were as follows (in thousands):

	2005	2004
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit	$2,608	$1,915
Standby letters of credit	150	175
	$2,758	$2,090

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank's management evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on the Bank management's credit evaluation of the counterparty.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank's policy for obtaining collateral and the nature of such collateral is essentially the same as that involved in making commitments to extend credit.

Although the maximum exposure to loss is the amount of such commitments, the Bank's management currently anticipates no material losses from such activities.

The estimated fair values of the Company's financial instruments at December 31, 2005 and 2004 were as follows (in thousands):

	2005		2004
	Carrying	Fair	Carrying	Fair
	Amount	Value	Amount	Value
Financial assets:
Cash and due from banks and
interest bearing deposits in other banks	$8,579	$8,579	$7,068	$7,068
Securities available for sale	-	-	34	34
Loans	36,580	37,801	41,759	41,759
Accrued interest receivable	189	189	181	181
Financial liabilities:
Deposits	42,500	42,619	43,924	43,924
Advances from the Federal Home
Loan Bank	-	-	3,000	3,000
Other borrowings	4,350	4,550	4,350	4,779
Accrued interest payable	1,739	1,739	1,358	1,358

Off-balance sheet assets:
Commitments to extend credit	-	-	-	-
Standby letters of credit	-	-	-	-

13. Significant Group Concentrations of Credit Risk

Most of the Bank's business activity is with customers located within Texas. Such customers are normally also depositors of the Bank. Additionally, the Bank has a significant concentration of credit, based upon like collateral. Insurance premium finance loans, secured by the residual value of unearned insurance premiums, comprise $5,653,000 or approximately 15% of gross loans at December 31, 2005.

The distribution of commitments to extend credit approximates the distribution of loans outstanding. Commercial and standby letters of credit were granted primarily to commercial borrowers.

The contractual amounts of credit related financial instruments such as commitments to extend credit, credit card arrangements, and letters of credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless.

14. Related Party Transactions

In the ordinary course of business, the Company has and expects to continue to have transactions, including borrowings, with its officers, directors and their affiliates. In the opinion of management, such transactions are on the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unaffiliated persons. At December 31, 2005 and 2004, the aggregate amounts of such loans were approximately $687,000 and $573,000, respectively. During 2005, approximately $260,000 of new loans were made, and payments received were approximately $146,000. During 2004, approximately $121,000 of new loans were made, and payments received were approximately $232,000. The Company does not anticipate any losses relating to the above mentioned violations.

15. Convertible Subordinated Debt and Notes Payable

On March 31, 1998, the Company issued $4,350,000 in 9% Convertible Subordinated Notes Due 2008 (Notes), pursuant to an indenture between the Company and Harris Trust and Savings Bank, Chicago, Illinois, as trustee (Trustee). The Notes are general unsecured obligations of the Company. The terms of the Notes are such that a

portion of the outstanding balance qualify as Tier II capital under the Federal Reserve Board's regulatory capital guidelines applicable to bank holding companies. The Notes bear interest at a rate of 9% per annum until maturity. Interest on the Notes is payable semi-annually on March 31 and September 30 of each year. No principal payments are due until maturity on March 31, 2008.

The amount of the principal and any accrued and unpaid interest on the Notes are subordinated in right of payment to the prior payment in full of all senior indebtedness of the Company, including the Bank's deposits. Upon the occurrence of certain events involving the bankruptcy, insolvency, reorganization, receivership or similar proceedings of the Company, either the Trustee or the holders of not less than 25% in aggregate principal amount of the outstanding Notes may declare the principal of the Notes, together with any accrued and unpaid interest, to be immediately due and payable. The Notes do not otherwise provide for any right of acceleration of the payment of principal thereof.

Each holder of Notes has the right at any time prior to maturity of the Notes, unless previously redeemed, at the holder's option, to convert such Notes, or any portion thereof which is an integral multiple of $10,000, into shares of Common Stock of the Company, at the conversion price of $6 per share, subject to certain antidilutive adjustments (Conversion Price).

The Notes are not subject to mandatory redemption or sinking fund provision. At any time after March 31, 2002 and prior to maturity, the Notes are redeemable for cash at the option of the Company, on at least 30 but no more than 60 days notice, in whole or in part, at the redemption prices set forth in the table below, plus accrued interest to the date of redemption.

If Redeemed During	Percentage of	If Redeemed During	Percentage of
12 Months Ended	Principal	12 Months Ended	Principal
March 31,	Amount	March 31,	Amount

2004	104%	2007	101%
2005	103%	2008	100%
2006	102%

In February 2002, the Company notified the holders of its convertible subordinated debt that it will not have funds to make future interest payments and offered the holders certain options as alternatives to interest payments. As of December 31, 2005 an agreement has not been reached as to any restructuring of the convertible subordinated debt. At December 31, 2005 and 2004, the accrued interest on the subordinated debt was $1,664,000 and $1,272,000, respectively.

16. Stock Options

A summary of the Company's stock option plan is as follows:

1995 Incentive Stock Option Plan: Under the provisions of the plan 100,000 shares were allocated for incentive stock options to be granted to officers and/or key employees. Grantees are awarded 10-year options to acquire shares at the market price on the date the option is granted. The options vest and become exercisable based on a vesting schedule determined by the Compensation Committee of the Board of Directors on the date of the grant. As of December 31, 2005, there were no options outstanding and 77,158 options available for grant under the plan. The options under this plan expired without being granted during 2005.

1996 Stock Option Plan for Directors: Under the provisions of the plan 100,000 shares were allocated for non-qualified stock options to be granted to directors. The plan is a formula plan pursuant to which annual options are automatically granted to directors of the Company, who are not employees of the Company or the Bank, at fair market value. On the first calendar business day of each year, each non-employee director is automatically granted 10-year options to purchase 2,000 shares of Common Stock of the Company at the market price on the grant date. The options fully vest and become exercisable after the first anniversary of the grant. As of December 31, 2005 and 2004, there were no options outstanding and 94,000 options available for grant under the plan.

1997 Non-Qualified Stock Option Plan for Officers and Key Employees: Under the provisions of the plan 500,000 shares were allocated for non-qualified stock options to be granted to officers and/or key employees. On January 2, 1997, grantees were awarded 10-year options to acquire 500,000 shares at the market price on that date. No additional options may be granted under the plan. The options fully vest and become exercisable in five equal installments commencing on December 31, 1997, and annually thereafter. As of December 31, 2005 and 2004, there were 475,000 options outstanding of which all were exercisable.

1997 Non-Qualified Stock Option Plan for Non-Employee Directors: Under the provisions of the plan 150,000 shares were allocated for non-qualified stock options to be granted to directors. In 1997, grantees were awarded 10-year options to acquire 150,000 shares at the market price on the date the options were granted. The options vest and become exercisable based on a vesting schedule as determined by the Stock Option Committee of the Board of Directors on the date of the grant. As of December 31, 2005 and 2004, there 140,000 options outstanding, all of which were exercisable, and no options were available for grant under the plan.

2001 Non-Qualified Stock Option Plan for Advisory Directors: Under the provisions of the plan 100,000 shares were allocated for non-qualified stock options to be granted to advisory directors. Grantees are awarded 10-year options to acquire shares at the market price on the date the option is granted. The options vest and become fully exercisable based on a vesting schedule as determined by the Stock Options Committee of the Board of Directors on the date of grant. As of December 31, 2005 and 2004, there were 131,000 options outstanding, all of which were exercisable, and there were no options available for grant under the plan.

2002 Amended and Restated 1998 Incentive Stock Option Plan: Under the provisions of the plan 500,000 shares were allocated for incentive stock options to be granted to officers and/or key employees. Grantees are awarded 10-year options to acquire shares at the market price on the date the option is granted. The options vest and become fully exercisable based on a vesting schedule as determined by the Stock Options Committee of the Board of Directors on the date of grant. As of December 31, 2005 and 2004, there were 114,915 options outstanding, all of which were exercisable, and 375,085 were options available for grant under the plan. All options must be granted within 10 years of the plan adoption date.

A summary of option transactions and options outstanding during the years ended December 31, 2005 and 2004 is as follows:

	2005		2004
	Number of	Weighted	Number of	Weighted
	Shares	Average	Shares	Average
	Underlying	Exercise	Underlying	Exercise
	Options	Prices	Options	Prices

Outstanding at beginning of year	860,915	$3.17	860,915	$3.17
Granted during the year	-	-	-	-
Exercised during the year	-	-	-	-
Expired or forfeited during the year	-	-	-	-
Outstanding at the end of year	860,915	$3.17	860,915	$3.17
Exercisable at the end of year	860,915	$3.17	860,915	$3.17
Available for grant at end of year	469,085	$-	546,243	$-

The weighted average remaining contractual life of the options outstanding at December 31, 2005 and 2004 was 1.79 and 2.79 years, respectively.

The following table summarizes information about stock options outstanding at December 31, 2005:

	Options Outstanding			Options Exercisable
		Weighted Average
Range of	Number	Remaining	Weighted Average	Number	Weighted Average
Exercise Prices	Outstanding	Contractual Life	Exercise Prices	Exercisable	Exercise Prices

$0.00 to $1.99	245,915	3.68	0.54	245,915	0.54
4.00 to 5.99	615,000	1.04	4.23	615,000	4.23
	860,915	1.79	3.17	860,915	3.17

There were no options granted during 2005 and 2004.

17. Employee Benefit Plan

The Company offers a 401(k) profit sharing plan (Plan) for the benefit of all full-time employees, age 21 or older. Participants may contribute up to 22.5% of their gross compensation, subject to statutory limits. In April 2003, the Company discontinued the match of employee contributions to the plan. Employee contributions are vested at all times and the Company's contributions, if any, vest at the end of three years of service. There were no contributions to the Plan during the years ended December 31, 2005 and 2004.

Effective February 9, 2005, the Bank entered into employment agreements with two executive officers. These agreements contain provisions in regard to each of these officers' employment. Additionally, these agreements provide for payments to the officers upon a change of control of SCC or the Bank.

18. Stockholders' Equity and Regulatory Matters

The Bank is a Texas state chartered commercial bank and, therefore, is subject to regulation, supervision and examination by the Texas Department of Banking (TDB). The Bank is also a member of the Federal Deposit Insurance Corporation (FDIC). Because the FRB regulated the bank holding company parent of the Bank, the FRB also has supervisory authority that directly affects the Bank. In addition, upon making certain determinations with respect to the condition of any insured bank, the FDIC may begin proceedings to terminate a bank's federal deposit insurance.

On October 10, 2005, the Company entered into a Written Agreement with the FRB. Among the items specified in the Written Agreement (see Note 23), the Company is not allowed to declare or pay dividends without the approval of the FRB and is required to develop a plan to maintain an adequate capital position. The Bank is not allowed to pay dividends to the Company without the prior permission of the FRB or the Texas Department of Banking.

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). At December 31, 2005 and 2004 the Bank met all of the capital adequacy requirements to which it is subject. Additionally, the Bank met the federal definition of a well capitalized bank as shown in the table below and as required by the Letter with the TDB.

The Bank's actual capital amounts and ratios are presented in the following table as of December 31, 2005 and 2004 (in thousands):

				To Be Adequately				To Be Well
				Capitalized Under				Capitalized Under
				Prompt Corrective				Prompt Corrective
	Actual			Action Provisions				Action Provisions
	Amount	Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2005:
Total capital (to risk weighted assets)	$6,049	16.5%	>	$2,940	>	8.0%	>	$3,671	>	10.0%
Tier I capital (to risk weighted assets)	$5,581	15.2%	>	$1,468	>	4.0%	>	$2,203	>	6.0%
Tier I capital (to average assets)	$5,581	11.3%	>	$1,980	>	4.0%	>	$2,475	>	5.0%

As of December 31, 2004:
Total capital (to risk weighted assets)	$5,929	14.5%	>	$3,280	>	8.0%	>	$4,101	>	10.0%
Tier I capital (to risk weighted assets)	$5,399	13.2%	>	$1,640	>	4.0%	>	$2,460	>	6.0%
Tier I capital (to average assets)	$5,399	10.3%	>	$2,104	>	4.0%	>	$2,629	>	5.0%

19. Credit Provision for Compensatory Damages

During 1999, the Bank credited an internal use deposit account to establish a reserve for estimated reimbursement costs to Insurance Premium Financing customers who had funds misappropriated from their accounts as a result of a fraud perpetuated by certain former bank officials. The Bank also accrued for potential compensatory damages (imputed interest) on the relating amounts. Approximately $1,500,000 of the amounts originally allocated were subsequently paid in claims, or escheated to the State of Texas. Management believed the portion of the reserve which had been allocated for potential compensatory damages was not a contractual obligation of the Bank, and therefore, was not subject to the unclaimed property laws of the State of Texas. The Bank's position was confirmed by an attorney's opinion which concluded the funds allocated for potential compensatory damages were not subject to unclaimed property laws of the State of Texas. Subsequent to the Bank's conversion to a state banking charter in June 2005, the Bank recorded a credit provision of $386,000 to reverse the reserve for compensatory damages. The relating amount is included in noninterest income in the Statement of Operations for the year ending December 31, 2005.

20. Other Noninterest Expense

Following is a listing of other noninterest expenses for the years ended December 31, 2005 and 2004.

	2005	2004
Office expense	$184	$185
Data processing	163	20
Discount fees	159	52
Other real estate	155	378
Insurance	145	196
Regulatory assessment	126	211
Other losses	105	149
Advertising	54	72
Delivery	43	46
Amortization of debt issue costs	41	41
Loan and collection expense	21	128
Other	206	304

	$1,402	$1,782

21. Business Segments

The accounting policies of the segments are the same as those described in Note 1. The Bank evaluates segment performance based on net interest income and profit or loss from operations. The following table summarizes segment performance as of and for the years ended December 31, 2005 and 2004 (in thousands):

		Insurance
	Community	Premium
	Banking	Financing	Total
2005
Net interest income	$1,818	$2,600	$2,600
(Credit to) provision for loan losses	(613)	256	(357)
Noninterest income	971	557	1,528
Noninterest expense	4,056	4,736	4,736
Net (loss) income	(654)	403	(251)
Loans, gross	32,441	5,653	38,094
Total assets	$43,933	$49,495	$49,495

2004
Net interest income	$1,682	$701	$2,383
Provision for loan losses	1,417	43	1,460
Noninterest income	854	128	1,460
Noninterest expense	4,292	543	4,835
Net (loss) income	(3,173)	243	(2,930)
Loans, gross	38,366	5,384	43,750
Total assets	$49,680	$5,092	$54,772

22. Condensed Financial Information on Surety Capital Corporation

The condensed balance sheet and statement of operations of SCC as of and for the years ended December 31, 2005 and 2004 consisted of the following (in thousands):

Condensed Balance Sheet
Assets	2005	2004
Cash and cash equivalents	$-	$2
Investment in subsidiary	6,626	6,458
Other	115	159
	$6,741	$6,619
Liabilities and Stockholders' Equity
Convertible subordinated debt	$4,350	$4,350
Accrued liabilities	1,777	1,271
Other liabilities	-	118
Stockholders' equity	614	880
	$6,741	$6,619

Condensed Statement of Operations
Operating expenses	$(434)	$(478)
Loss before income tax expense and equity in the net loss of the subsidiary	(434)	(478)
Income tax benefit	-	-
Loss before equity in the net income (loss) of the subsidiary	(434)	(478)
Equity in the net income (loss) of the subsidiary	183	(2,452)
Net loss	(251)	(2,930)
Other comprehensive (loss) income - net change in unrealized holding (losses) gains on securities available for sale	(15)	17
Comprehensive loss	(266)	(2,913)

23. Formal Agreements

SCC Effective October 28, 1999, SCC entered into a Written Agreement (1999 Agreement) with the Federal Reserve Bank of Dallas (FRB). The 1999 Agreement required the following plans, policies and procedures:

• SCC shall not declare or pay dividends or accept dividends from Surety Bank without the approval of the FRB,

• SCC shall develop and submit a plan to maintain an adequate capital position,

• SCC shall not increase its borrowings or incur any additional debt without the prior approval of the FRB,

• SCC shall not participate in any transaction with the Bank that would cause the Bank to violate Section 23A of the Federal Reserve Act, shall not further violate Section 225.73 of Regulation Y, and must develop and submit to the FRB acceptable written policies and procedures for the review of intercompany transactions and expenses, and submit to the FRB proper notification prior to the election or appointment of any director or senior executive officer,

• SCC shall develop and submit to the FRB acceptable written procedures designed to strengthen and maintain internal records and controls to ensure regulatory reports are filed on a timely and accurate basis.

As of October 10, 2005, SCC entered into another Written Agreement (2005 Agreement) with the FRB that replaced the 1999 Agreement. The 2005 Agreement required the following plans, policies, and procedures:

• Within 45 days of the 2005 Agreement, SCC shall submit an acceptable plan to achieve and maintain sufficient capital at the Bank,

• SCC shall not increase its debt without prior written approval of the FRB,

• Within 60 days of the 2005 Agreement, SCC shall submit an acceptable plan to service its current debt,

• SCC shall not purchase or redeem any shares of its stock without written approval of the FRB,

• SCC shall not take dividends or any other form of payment representing a reduction of capital from the Bank without written approval of the FRB,

• SCC shall not declare any dividends without the written approval of the FRB,

• SCC shall take all steps necessary to ensure that all transactions between SCC and the Bank comply with the requirements of sections 23A and 23B of the Federal Reserve Act and Regulation W of the Board of Governors,

• Within 60 days of this Agreement, SCC shall submit to the FRB, acceptable written procedures designed to strengthen and maintain SCC's books and records,

• SCC shall take all available actions as are necessary to elect qualified directors, the majority of whom shall be outside directors with banking experience,

• In appointing any new officers or directors, SCC shall comply with the notice provisions of section 32 of the FDI Act and Subpart H of Regulation Y of the Board of Governors,

• SCC shall comply with the restrictions on indemnification and severance payments of section 18(k) of the FDI Act and Part 359 of the Federal Insurance Corporation's regulations,

• Within 30 days after the end of each calendar quarter following the date of the 2005 Agreement, the board of directors shall furnish to the FRB written progress reports detailing the form and manner of all actions taken to secure compliance with the 2005 Agreement and the results thereof.

SCC has been notified by the FRB that it is in partial compliance with the 2005 Agreement and is vigorously pursuing full compliance with the articles of this agreement.

Bank

The Bank entered into a Formal Agreement dated February 18, 2003 with the Comptroller of the Currency (OCC) which provided among other things the Bank achieve capital ratios of Tier 1 capital to average assets of at least 8.0% and total capital to adjusted total assets of 12.0%. The Formal Agreement prohibited the Board of Directors from declaring or paying any dividends unless the Bank was in compliance with 12 U.S.C. Section 56 and 60, was in compliance with the required capital ratios and obtained the prior written approval of the OCC. Additionally, the Board of Directors was required to develop a plan detailing the Board's assessment of how to improve the operations and financial position of the Bank.

The Bank entered into a Consent Order (Order) dated June 22, 2004 with the (OCC) that replaced the 2003 Formal Agreement. The Order provided among other things that the Bank would:

• Appoint a Compliance Committee,

• Develop a written strategic plan,

• Develop, implement and thereafter ensure adherence to a written profit plan,

• Maintain minimum capital levels,

• Identify new senior executive officers,

• Ensure the Bank maintains competent management,

• Maintain adequate sources of liquidity,

• Develop, implement, and thereafter ensure Bank adherence to a written program to improve the Bank's loan portfolio management,

• Employ or designate sufficiently experienced and qualified persons for the independent identification of problem loans and leases,

• Protect the Bank's interest (as defined) in criticized assets,

• Obtain current and satisfactory credit information on all loans identified as lacking such information,

• Review the adequacy of the Allowance for Loan and Lease Losses and establish a program for the maintenance of an adequate Allowance,

• Adopt, implement and ensure adherence to an independent internal audit program,

• Adopt, implement and thereafter ensure adherence to a written interest rate risk policy,

• Adopt, implement and thereafter ensure adherence to a written consumer compliance program,

• Appoint a capable officer of the Bank to monitor and ensure the Bank's compliance with the Bank Secrecy Act,

• Not renew or enter into new contracts or engagements exceeding an aggregate threshold of $10,000 on an annual basis with a third party,

• Not engage in significant expansion regarding existing products and services or new products and services.

Effective June 1, 2005, the Bank converted from a national banking charter to a state banking charter. At the time of the conversion, the existing Consent Order with the OCC was terminated and the Bank entered into a Determination Letter (Letter) with the Texas Department of Banking. The Letter provided among other things that the Bank would:

• Develop a written capital plan,

• Adopt a reasonable strategic plan,

• Not declare or pay dividends or bonuses without the prior approval of the Commissioner and the FDIC,

• Appoint a compliance committee,

• Review and revise the Bank's present loan policy,

• Improve the Bank's position with respect to each asset adversely classified in the examination report,

• Not advance any funds either directly or indirectly on lines of credit subject to classification in the examination report, unless prior approval of the Board has been obtained and such advances are necessary to protect the Bank's interest,

• Make any necessary provision to the allowance for loan losses to compensate for risk in the loan portfolio, • Review and revise the Bank's asset liability policy,

• Make every effort to correct all violations of laws or regulations cited in the examination report,

• Review and revise the Bank's information systems,

• Correct the internal control and procedure weaknesses noted in the examination report,

• Adopt an audit policy and appoint an audit committee,

• Provide 30 days prior written notice of any proposed addition of any individual to the Board or employment of any executive officer,

• Provide quarterly progress reports,

• Meet the federal definition of a well capitalized bank for a period of three years.

The Bank has been notified by the Texas Department of Banking that it is in partial compliance with the Determination Letter and is vigorously pursuing full compliance with the articles of this agreement.

24. Financial Reporting

At December 31, 2005, the Company was not in compliance with the financial reporting required by the Securities and Exchange Commission (SEC). The Company is vigorously attempting to accumulate all necessary information to comply with the reporting requirements of the SEC. The Company's management believes no additional reserves are necessary in regard to penalties that may be assessed by the SEC with respect to the non-compliance in financial reporting.

25. Subsequent Event

On January 20, 2006, the Bank, with the approval of SCC, sold its Whitesboro, Texas branch to Legend Bank, N.A. (Legend). In connection with the sale, Legend assumed approximately $20,314,000 of deposits and purchased, among other assets, approximately $12,898,000 in loans. The Bank paid $4,172,000 in cash in addition to the assets purchased and liabilities assumed by Legend. As a result of the sale, the Bank eliminated the goodwill associated with the Whitesboro branch of $1,045,000 recorded in its balance sheet and has included a gain of approximately $1,541,000 in its 2006 statement of operations.

On May 5, 2006, the Bank, without the approval of SCC, sold its Insurance Premium Financing (IPF) loan portfolio to American Federal Savings Bank, Silver Springs, Maryland (American). In connection with the sale of the IPF loan portfolio, the Bank sold loans with a balance of approximately $3,721,000 and American remitted proceeds in the amount of $4,044,000. The Bank has included a gain resulting from this sale of approximately $323,000 in its 2006 statement of operations.

ATTACHMENT I

SURETY CAPITAL CORPORATION

FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2006

SURETY CAPITAL CORPORATION

CONSOLIDATED BALANCE SHEETS

($000 omitted)

	December 31
	2006	2005
	(Unaudited)	(Unaudited)
Assets
Cash and due from banks	$4,537	$8,554
Federal funds sold	5,000	0
Total cash and cash equivalents	9,537	8,554
Interest-bearing time deposits in other financial institutions	227	25
Loans, net	21,457	36,580
Premises and equipment, net	1,744	2,334
Accrued interest receivable	103	189
Other real estate and repossessed assets	-	63
Goodwill, net	-	1,045
Other assets	432	705
Total assets	$ 33,500	$49,495

Liabilities:
Noninterest-bearing demand deposits	$3,577	$6,902
Savings, NOW and money market accounts	1,014	7,535
Time deposits, $100,000 and over	9,890	10,166
Other time deposits	11,860	17,897
Total deposits	26,341	42,500
FHLB Borrowing
Convertible subordinated debt	4,350	4,350
Accrued interest payable and other liabilities	2,261	2,031
Total liabilities	32,952	48,881

Shareholders’ Equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued
Common stock, $0.01 par value, 20,000,000 shares authorized, 11,400,809 issued at September 30, 2006 and December 31, 2005.	114	114
Additional paid-in capital	18,103	18,103
Accumulated deficit	(17,294)	(17,228)
Treasury stock, 79,836 shares at cost	(375)	(375)
Accumulated other comprehensive income (loss)	-	-
Total shareholders’ equity	548	614
Total liabilities and shareholders’ equity	$33,500	$49,495

See accompanying notes to consolidated financial statements.

SURETY CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended		Nine Months Ended
	December 31,	December 31,	December 31,	December 31,
	2006	2005	2006	2005
Interest income:
Loans, including fees	$ 443	$1,078	$2,043	$3,899
Securities, all taxable	24	1	36	8
Federal funds sold and interest bearing deposits	81	45	396	83
Total interest income	548	1,124	2,475	3,990

Interest expense:
Deposits	212	284	861	978
Borrowings	98	98	392	412
Total interest expense	310	382	1,253	1,390
Net interest income	238	742	1,222	2,600
Provision for credit losses	-	(630)	39	(630)
Net interest income after provision for credit losses	238	1,372	1,183	2,957

Non-interest income:
Service charges on deposit accounts	-	46	113	228
Gain on sale of loan	-	39	78	642
Gain (loss) on sale of other real estate owned	-	-	190	129
Gain (loss) on sale of branches	-	-	1,541	-
Gain on sale of Insurance Premium Financing	-	-	323	-
Gain on sale of available for sale securities	-	-	-	17
Credit provision for compensatory damages	-	-	-	386
Other income	65	14	252	126
Total non-interest income	65	99	2,497	1,528

Non-interest expense:
Salaries and employee benefits	678	462	1,807	1,960
Occupancy and equipment	78	124	400	444
Other expenses	335	616	1,541	2,332
Total non-interest expense	1,091	1,202	3,748	4,736

Net income (loss) before income taxes	(788)	269	(68)	(251)
Income tax expense (benefit)	-	-	-	-
Net income (loss)	$ (788)	$ 269	$ (68)	$ (251)
Net income (loss) per share – Basic and Diluted	$ (0.07)	$ 0.02	$ (0.01)	$ (0.02)

See accompanying notes to consolidated financial statements.

SURETY CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended		Nine Months Ended
	December 31		December 31
	2006	2005	2006	2005
Net income (loss)	$ (788)	$ 269	$ (68)	$ (251)

Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale
securities arising during the period, net of taxes	-	-	-	(15)

Comprehensive loss	$ (788)	$ 269	$ (68)	$ (266)

See accompanying notes to consolidated financial statements.

SURETY CAPITAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

	Year Ended
	December 31,
	2006	2005
Balance at January 1, 2006 and 2005	$614	$880
Net income (loss)	68	(251)
Change in fair value of securities available-for-sale, net of tax	-	(15)

Balance at end of period	$ 548	$ 614

See accompanying notes to consolidated financial statements.

SURETY CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

	December 31,
	2006	2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$ (68)	$(251)
Adjustments to reconcile net loss to net cash provided
by operating activities
Provision for credit losses	39	(357)
Depreciation	212	122
Net gain on sale of loans	-	(642)
Net gain on sale of AFS securities	-	(17)
Net gain on sale of Insurance Premium Financing	(323)	-
Net gain on sale of branch	(1,541)	-
Net gain on sale of other real estate owned	(190)	(129)
Net gain on sale of property and equipment	-	-
Accrued interest receivable	23	(42)
Proceeds from sale of loan	-	1,500
Other assets	294	358
Increase (decrease) in other liabilities	272	(282)
Net cash provided (used) by operating activities	(1,225)	260

Net change in loans	(1,636)	5,772
Securities available for sale		36
Disposal of Federal Reserve Bank stock	-	-
Purchase of interest-bearing time deposits	(202)	-
Expenditures for premises and equipment	(45)	(449)
Proceeds from sale of premises and equipment		66
Proceeds from sale of other real estate owned	63	250
Net expenditures from sale of branch	(4,172)
Net proceeds from sale of Insurance Premium Financing	4,045
Net cash provided (used) by investing activities	(1,947)	5,675

CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits	4,155	(1,424)
Notes payable	-	(3,000)
Net cash provided (used) by financing activities	4,155	(4,424)
Net change in cash and equivalents	983	1,511
Cash and cash equivalents, beginning of year	8,554	7,043
Cash and cash equivalents, end of year	$ 9,537	$ 8,554

See accompanying notes to consolidated financial statements.

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements include the accounts of Surety Capital Corporation (the "Holding Company") and its wholly-owned subsidiary, Surety Bank (the "Bank" and, together with the Holding Company, the "Company"). All significant inter-company accounts and transactions have been eliminated in consolidation.

These financial statements are unaudited and reflect all adjustments that, in the opinion of management, are necessary to make the financial statements not misleading and to present fairly the financial position of the Company at December 31, 2006, and its results of operations and cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accompanying financial statements have been prepared in accordance with the instructions of Form 10-QSB and, therefore, do not purport to contain all necessary financial disclosures required by generally accepted accounting principles that might otherwise be necessary in the circumstances. Some items in prior financial statements have been reclassified to conform to the current presentation.

Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and other Intangible Assets." Goodwill, which represents the excess of cost over the fair value of the net assets of an acquired business, was amortized on a straight-line method up to fifteen years prior to the adoption of SFAS No. 142. Effe ctive January 1, 2002, goodwill is no longer amortized but tested for impairment annually or whenever events or changes in circumstances indicate that the carrying amount should be assessed. Impairment, if any, for goodwill is recognized as a permanent charge to non-interest expense. Management determined that there was no goodwill impairment as of December 31, 2005. During January 2006, the Company sold its Whitesboro, Texas branch and eliminated the goodwill related to that branch. The Company no longer has goodwill on its books.

The financial statements have been prepared on a going concern basis, which contemplates realization of assets and liquidation of liabilities in the ordinary course of business. The Company has incurred significant losses, is in default on the interest payments on its subordinated debt, is operating under both a Determination Letter (the "Determination Letter") with the Texas Department of Banking ("TDOB") and a Written Agreement (the "Written Agreement") with the Board of Governors of the Federal Reserve Bank of Dallas (the "Federal Reserve"), and, prior to September1, 2005, operated under a Consent Order (the "Consent Order") with the Office of the Comptroller of the Currency (the "OCC"). The appropriateness of using the going concern basis is dependent upon the Company's ability to improve profitability through increasing marketing efforts, introducing new deposit products, emphasizing loan growth and reducing non-interest expense. The uncertainty of these conditions raises substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Note 2. Earnings Per Share

Earnings per share is computed in accordance with SFAS No. 128, which requires dual presentation of basic and diluted earnings per share ("EPS") for entities with complex capital structures. Basic EPS is based on net income divided by the weighted-average number of shares outstanding during the period. Diluted EPS includes the dilutive effect of stock options granted using the treasury stock method.

Earnings per common share are computed by dividing net income by the weighted-average number of shares outstanding for the year. The weighted-average number of common shares outstanding for basic and diluted earnings per share computations was as follows:

	Three Months Ended ($000 omitted)		Year Ended ($000 omitted)
	December 31	December 31	December 31	December 31
	2006	2005	2006	2005
Weighted average shares outstanding-Basic	11,320,973	11,320,973	11,320,973	11,320,973
Effect of stock options
Weighted average shares outstanding - diluted	11,320,973	11,320,973	11,320,973	11,320,973

The Company reported net losses for the three-month period ended December 31, 2006 and for the years ended ended December 31, 2006 and 2005. For the three-month period ended December 31, 2005, option exercise prices exceeded market prices of the stock. Accordingly, the dilutive effect of stock options is not considered in the net income (loss) per share calculations for these periods.

Note 3. Branch Sale

On January 20, 2006, the Bank sold its Whitesboro, Texas branch. Set forth below is a summary of the transaction ($000 's):

Recap of Assets and Liabilities Sold:	000 omitted
Deposits sold	$20,314
Loans sold	12,998
Other assets sold	558
Cash transferred	4,172

Recap of Gain on Branch Sale:
Deposit premium	$ 2,526
Loan discount	(162)
Gain on sale of premises	222
Goodwill associated with branch sold	(1,045)
Net gain	$ 1,541

Note 4. Loans

Loans consisted of the following:

	December 31, 2006 (000 omitted)	December 31, 2005 (000 omitted)
Real estate loans	$18,013	$23,879
Insurance premium financing	-	5,653
Commercial loans	3,752	6,145
Consumer loans	519	1,961
Agriculture	-	358

Other	23	98
Total gross loans	22,307	38,094
Deferred income	(82)	(281)
Allowance for credit losses	(768)	(1,233)

Loans, net	$21,457	$36,580

Activity in the allowance for credit losses on loans was as follows:

	Three Months Ended		Year Ended
	December 31	December 31	December 31	December 31
	2006	2005	2006	2005
Beginning balance	$782	$1,930	$1,233	$1,835
Provision for credit losses	-	(630)	39	(357)
Charge-offs	(32)	(235)	(772)	(757)
Recoveries	18	168	268	512
Ending balance	$768	$1,233	$768	$1,233

Impaired and non-performing loans were as follows:

	December 31, 2006 (000 omitted)	December 31, 2006 (000 omitted)
Impaired loans with allowance allocated	$3,283	$156
Impaired loans with no allowance allocated	-	-
Impaired loans	3,283	156
Amount of allowance allocated	409	33
Non-performing loans:	-	-
Loans past due over 90 days and still accruing	-	-
Non-accrual loans	488	131
Total non-performing loans	488	$137

Note 5. Convertible Subordinated Debt and Notes Payable

On March 31, 1998, the Holding Company issued $4,350,000 in 9% Convertible Subordinated Notes Due 2008 (the "Notes"), pursuant to an indenture between the Holding Company and Harris Trust and Savings Bank, Chicago, Illinois, as trustee (the "Trustee"). The Notes are general unsecured obligations of the Holding Company. The Notes bear interest at a rate of 9% per annum until maturity. Interest on the Notes is payable semi-annually on March 31 and September 30 of each year. No principal payments are due until maturity on March 31, 2008. The amount of the interest accrued at December 31, 2006 is $2,055,375. The amount of interest in arrears at December 31, 2006 is $1,957,500.

The Company did not pay the interest due March 31, 2002, September 30, 2002, March 31, 2003, September 30, 2003, March 31, 2004, September 30, 2004, March 31, 2005, September 30, 2005, March 31, 2006 or September 30, 2006. In February 2002, the Company notified holders of the Notes that it would not have funds to make future interest payments and offered the holders certain options as alternatives to interest payments. As of December 31, 2006, no agreement had been reached as to any restructuring of the Notes.

The amount of the principal and any accrued and unpaid interest on the Notes is subordinated in right of payment to the prior payment in full of all senior indebtedness of the Company, including the Bank's deposits. Upon the occurrence of certain events involving the bankruptcy, insolvency, reorganization, receivership or similar proceedings of the Company, either the Trustee or the holders of not less than 25% in aggregate principal amount of the outstanding Notes may declare the principal of the Notes, together with any accrued and unpaid interest, to be immediately due and payable.

The Notes are not subject to mandatory redemption or sinking fund provisions. At any time after March 31, 2002 and prior to maturity, the Notes are redeemable for cash at the option of the Company, on at least 30 but not more than 60 days' notice, in whole or in part, at the redemption prices set forth in the table below, plus accrued interest to the date of redemption.

If Redeemed During 12	Percentage of
months Ended March 31,	Principal Amount
2007	101%
2008	100%

Note 6. Financial Instruments with Off-Balance-Sheet Risk and Concentration of Credit Risk

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued in the normal course of business to meet the financing needs of customers. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met. These agreements usually have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being used, the total commitments do not necessarily represent future cash requirements. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

Financial instruments with off-balance sheet risk at December 31, 2006 and 2005 included unfunded loan commitments of $4,551,000 and $2,608,000 and letters of credit of $0 and $150,000, respectively.

There was $5,000,000 in Federal funds sold at December 31, 2006.

The Company has geographic concentrations of credit in its principal market area of Tarrant County, Texas. Prior to the sale of the Whitesboro, Texas branch in January 2006, it also had concentrations in Grayson County, Texas. When the Bank sold its four branches in San Antonio, Texas (the "San Antonio Branches"), it was required to retain several loans as part of the transaction. Therefore, there is also some geographic concentration of credit in Bexar County, Texas. Insurance Premium Finance ("IPF") loans, secured by the residual value of unearned insurance premiums, comprised $5,653,000, or 14.8%, of gross loans at December 31, 2005. On May 5, 2006, the Company sold its IPF loan portfolio. See current developments.

Note 7. Other Non-interest Expense

Other non-interest expense consisted of the following:

	Three Months Ended		Year Ended
	December 31	December 31	December 31	December 31
	2006	2005	2006	2005
Legal, audit and other professional services	$144	$204	$676	$930
Postage and delivery	6	26	39	105
Telephone	(11)	11	22	38
Office supplies	7	30	34	84
Amortization of debt issuance costs	10	11	41	41
Insurance	16	31	53	145
FDIC and OCC assessments	19	28	94	126
Other	144	655	582	1,243
Total other non-interest expense	$335	$996	$1,541	$2,712

Note 8. Business Segments

The accounting policies of the segments are the same as those described above in Note 1. The Company evaluates segment performance based on interest income and profit or loss from operations.

		Insurance
	Community	Premium
	Banking	Financing	Total
Nine month period ended December 31, 2006:
Net interest income	$955	$267	$1,222
Provision for credit losses	(39)	-	(39)
Non-interest income	2,430	67	2,497
Non-interest expense	(3,466)	(282)	(3,748)
Net income (loss)	(120)	52	(68)

Nine month period ended December 31, 2005:
Net interest income	$1,818	$782	$2,600
Provision for credit losses	613	(256)	357
Non-interest income	971	557	1,528
Non-interest expense	(4,056)	(680)	(4,736)
Net income (loss)	(654)	403	(251)

At December 31, 2005
Loans, gross	$32,441	$5,653	$38,094
Total assets	43,933	5,562	49,495

On May 5, 2006, the Company sold its IPF loan portfolio and business segment. See Note 9.

Note 9. Sale of Insurance Premium Financing

On May 5, 2005, the Company sold its Insurance Premium Financing (IPF) business segment to a Maryland bank. The tangible assets sold consisted on IPF loans of $3,722,000. The Company recorded a $323,000 gain on the sale.

Note 10. Current Developments

On June 1, 2005, the Bank converted its charter to a Texas state charter and the Bank's name changed to Surety Bank. Both the TDOB and the Bank's shareholder approved the charter conversion. The Holding Company is the only shareholder of the Bank. Except for the change in the form of the charter and the resulting regulatory oversight by the TDOB, no major changes in the operation of the Bank are contemplated. The reason for the conversion was the Board of Directors' belief that the Bank can operate more effectively and efficiently as a state bank. When the conversion was consummated and as a part of the conversion, all shares of stock in the Bank were cancelled and an identical number of shares of stock in the state bank were issued. All of the issued and outstanding shares of the state bank after conversion are owned by the Holding Company, so there is no new or different shareholder. There was no change of facilities as a result of the conversion; the Bank continues to operate from the same facilities and locations as a state bank that it had as a national bank. The directors and the executive officers of the Bank continue to serve as directors and hold the same offices after the conversion. As a result of the conversion, the Texas Department of Banking issued a Determination Letter under which the Company is to operate.

On October 10, 2005, the Board of Directors of the Company entered into the Written Agreement with the Federal Reserve. Under the Written Agreement, the Company is not permitted to declare or pay any corporate dividends or incur any additional debt without the prior approval of the Federal Reserve. Also, the Company is required to develop and submit to the Federal Reserve a written three-year capital plan for the Bank, a plan to service the Company's existing debt without incurring any additional debt, and written procedures designed to strengthen and maintain the Company's internal records and controls to ensure that future regulatory reports are filed in a timely and accurate manner.

On January 20, 2006, the Bank sold its Whitesboro branch to Legend Bank, N.A. and recorded a gain on sale of approximately $1,541,000. See Note 3 for additional details related to the branch sale.

On May 5, 2006, the Bank sold its Insurance Premium Finance loan portfolio and recorded a gain of approximately $323,000. In connection with the sale, the Bank sold approximately $3.7 million in loans and received approximately $4.0 million in cash. See Note 9.

On October 11, 2006, the Company entered into a Stock Purchase Agreement for the sale of 100% of the stock of the Bank. Closing of the transaction is subject to a satisfactory due diligence review on the part of the purchaser and other standard closing conditions, including Regulatory approval and approval by the Company's shareholders. In connection with the sale of the Bank, the Company will receive an aggregate of approximately $9,000,000 plus the Bank's ½ mineral interest in approximately 27 acres of land in Fort Worth, Texas. The Company is attempting to close this transaction during the first quarter of 2007.

On October 16, 2006, the Bank disbursed and charged to expense an aggregate of $470,000, representing payments to one current and one former Bank executive under the "change of control" provisions of their respective Employment Agreements. Each Employment Agreement defines a "change in control" as a sale of all or substantially all of the assets of the Bank, which shall be deemed to occur if any persons, entities, or groups acquire gross assets of the Bank that have an aggregate fair market value equal to 50% of the fair market value of all the gross assets of the Bank immediately prior to such acquisition or acquisitions. The Bank's Board of Directors determined the change of control payments were triggered under provisions of the Agreements related to a sale of more than 50% of the Bank's assets at its August, 2006 Board meeting. The Company disagrees with the determination by the Board of the Bank as to these employees' eligibility for such change of control payments, has determined these payments were not earned, and is pursuing its remedies on behalf of the Company's shareholders.

SURETY CAPITAL CORPORATION
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
To Be Held March 30 , 2007

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned stockholder of SURETY CAPITAL CORPORATION (the “Company”), a Delaware corporation, hereby acknowledges receipt of the Notice of the Special Meeting of Stockholders dated March 5, 2007, and the related Proxy Statement and hereby appoints Richard N. Abrams, proxy and attorney-in-fact, with full power of substitution, on behalf and in the name of the undersigned, to represent the undersigned at the Special Meeting of Stockholders of the Company, to be held on MArch 30 , 2007 at 10:00 a.m., local time at the Fort Worth Club, 306 W. Seventh Street, Fort Worth, Texas 76102, and any adjournment(s) thereof, and to vote all shares of Common Stock which the undersigned would be entitled to vote if then and there personally present, on the matters set forth below and on the reverse side.

THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS INDICATED, WILL BE VOTED “FOR” ITEMS 1 and 3, and “AGAINST” ITEM 2.

1. To approve the proposed sale of all of the shares of common stock of our who

lly-owned subsidiary, Surety Bank, to PAX Holdings, Inc., a Texas corporation, pursuant to the terms of a Stock Purchase Agreement between PAX Holdings, Inc. and the Company dated as of October 11, 2006.

FOR |_|

AGAINST |_|

ABSTAIN |_|

2. To approve the dissolution and the related Plan of Complete Liquidation and Dissolution of the Company, pursuant to which stockholders would receive approximately $0. 28 per share.

FOR |_|

AGAINST |_|

ABSTAIN |_|

3. In the event that Proposal 2 (dissolution of the Company) is NOT approved, to approve the merger of the Company with and into Surety Capital Corporation, a Nevada corporation formed for the sole purpose of merging with the Company, thereby changing the domicile of the Company from Delaware to Nevada, and the related resolutions set forth in Attachment “C” to the Proxy Statement.

FOR |_|

AGAINST |_|

ABSTAIN |_|

MARK HERE FOR ADDRESS CHANGE AND NOTE TO THE LEFT |_|

4. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the meeting any adjournment thereof.

IMPORTANT - PLEASE SIGN AND RETURN PROMPTLY. This Proxy should be marked, dated, signed by the stockholder(s) exactly as his or her name appears hereon. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee, or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by an authorized person.

Signature:___________________________________________
Date:______________________________________________
Signature if held jointly_________________________________
Date: ______________________________________________

	Page

Summary Term Sheet	1
Questions and Answers About the Special Meeting, Sale of the Bank and the Merger to Effect Change of Domicile	8
Special Meeting of Stockholders to be held on March 30 ,2007	14
Proposal 1:Approval of the Proposed Sale of All of the Common Stock of our Wholly-Owned Subsidiary, Surety Bank, to PAX Holdings, Inc. Pursuant to the Terms of the Stock Purchase Agreement	15
Proposal 2: Dissolution of the Company	24
Proposal 3: In the Event that the Proposal to Dissolve the Company is Not Approved, Approval of the Merger of Surety Capital Corporation, a Delaware Corporation, With and Into Surety Capital Corporation, a Nevada Corporation	31
Appraisal Rights of Our Stockholders	35
Security Ownership of Certain Beneficial Owners and Management	40
Pro Forma Financial Statements	41
Incorporation of Certain Documents By Reference	41
Delivery of Documents to Stockholders Sharing an Address	42
Stockholder Proposals for 2007 Annual Meeting	42
Other Matters	42

Attachment A –	Stock Purchase Agreement
Attachment B –	Plan of Complete Liquidation and Dissolution of Surety Capital Corporation
Attachment C –	Special Resolution Approving Plan of Merger and Change in Domicile
Attachment D –	Plan and Agreement of Merger Between Surety Capital Corporation (A Delaware Corporation) and Surety Capital Corporation (a Nevada Corporation)
Attachment E –	Section 262 of the Delaware General Corporation Law
Attachment F –	Unaudited Pro Forma Condensed Financial Statements / Surety Capital Corporation
Attachment G –	Unaudited Pro Forma Condensed Financial Statements / Surety Bank
Attachment H –	Surety Capital Corporation Consolidated Financial Statements, December 31, 2005 and 2004 (With Independent Auditors’ Report Thereon)
Attachment I –	Surety Capital Corporation Financial Statements (Unaudited) December 31, 2006

Calculation of Purchase Price
Bank Equity as of December 31, 2006	$6,913,000
Premium	3,000,000
Estimated Bank losses as of closing	(400,000)
Total Consideration	$9,513,000

ARTICLE I	PURCHASE AND SALE OF THE SHARES
Section 1.01	Acquisition and Sale of the Shares
Section 1.02	Purchase Price
Section 1.03	Adjustment of Purchase Price
Section 1.04	Payment of Purchase Price
Section 1.05	Certificates
Section 1.06	Tax Treatment of Acquisition
Section 1.07	Alternative Structure
ARTICLE II	CLOSING; CLOSING DATE
Section 2.01	Closing and Closing Date
Section 2.02	Actions to be Taken at the Closing by the Company
Section 2.03	Actions to be Taken at the Closing by the Purchaser
Section 2.04	Further Assurances
ARTICLE III	REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COMPANY
Section 3.01	Organization and Qualification
Section 3.02	Ownership of Common Stock
Section 3.03	Authority and Enforceability
Section 3.04	Execution and Delivery
Section 3.05	No Breach of Contract
Section 3.06	Consents and Approvals
Section 3.07	Compliance with Applicable Laws
Section 3.08	Regulatory Compliance
Section 3.09	Litigation
Section 3.10	No Claims
Section 3.11	Transactions with Certain Persons and Entities
Section 3.12	Absence of Certain Business Practices
Section 3.13	Deposits
Section 3.14	Full Disclosure
ARTICLE IV	REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE BANK
Section 4.01	Organization and Qualification
Section 4.02	Bank Capitalization
Section 4.03	No Breach of Contract
Section 4.04	Consents and Approvals
Section 4.05	Compliance with Applicable Laws
Section 4.06	Bank Financial Statements and Call Reports
Section 4.07	Undisclosed Liabilities
Section 4.08	Tax Matters
Section 4.09	Tax Returns
Section 4.10	Regulatory Compliance.
Section 4.11	Litigation
Section 4.12	Absence of Certain Changes or Events
Section 4.13	Leases, Contracts and Agreements
Section 4.14	No Guaranties
Section 4.15	Employee Benefit Plans
Section 4.16	Employee Relationships
Section 4.17	No Claims
Section 4.18	Transactions with Certain Persons and Entities
Section 4.19	Title to Assets and Properties
Section 4.20	Condition of Assets
Section 4.21	Environmental Compliance
Section 4.22	Insurance
Section 4.23	Evidences of Indebtedness
Section 4.24	No Derivative Contracts
Section 4.25	Privacy
Section 4.26	Patents, Trademarks and Copyrights
Section 4.27	Forms of Instruments, Etc
Section 4.28	Fiduciary Responsibilities
Section 4.29	Books and Records
Section 4.30	IPF Business Segment and Operations
Section 4.31	Absence of Certain Business Practices
Section 4.32	No Adverse Change
Section 4.33	Full Disclosure
ARTICLE V	REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
Section 5.01	Organization and Qualification
Section 5.02	Authority and Enforceability
Section 5.03	Execution and Delivery
Section 5.04	No Breach of Contract
Section 5.05	Litigation
Section 5.06	Consents and Approvals
Section 5.07	Representations Not Misleading
ARTICLE VI	OBLIGATIONS AND COVENANTS WITH RESPECT TO THE COMPANY
Section 6.01	Reasonable Best Efforts
Section 6.02	Compliance with Transfer Requirements
Section 6.03	Information for Applications and Statements
Section 6.04	Required Acts
Section 6.05	Prohibited Acts
Section 6.06	Untrue Representations
Section 6.07	Litigation and Claims
Section 6.08	Adverse Change
Section 6.09	No Negotiation with Others
Section 6.10	Shareholders’ Meeting
Section 6.11	Confidentiality
Section 6.12	Section 338(h)(10) Election
Section 6.13	Continue Existence
ARTICLE VII	OBLIGATIONS AND COVENANTS WITH RESPECT TO THE BANK
Section 7.01	Invitations to Meeting
Section 7.02	Untrue Representations
Section 7.03	Litigation and Claims
Section 7.04	Adverse Change
Section 7.05	Criticized Assets; Reports
Section 7.06	Transition
Section 7.07	Environmental Investigation; Right to Terminate Agreement
Section 7.08	Employees
Section 7.09	Taxes
ARTICLE VIII	OBLIGATIONS AND COVENANTS OF THE PURCHASER
Section 8.01	Regulatory Approvals
Section 8.02	Information for Applications and Statements
Section 8.03	Untrue Representations
Section 8.04	Confidentiality
Section 8.05	Litigation and Claims
Section 8.06	Employee Benefit Matters
Section 8.07	Adverse Change
ARTICLE IX	CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY
Section 9.01	Compliance with Representations, Warranties and Agreements
Section 9.02	Shareholder Approvals
Section 9.03	Government and Other Approvals
Section 9.04	No Litigation
ARTICLE X	CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PURCHASER
Section 10.01	Compliance with Representations, Warranties and Agreements
Section 10.02	Shareholder Approvals
Section 10.03	Government and Other Approvals
Section 10.04	No Litigation
Section 10.05	Opinion of Legal Counsel to the Company
Section 10.06	Accounting Treatment
Section 10.07	No Material Adverse Change
Section 10.08	Required Acts
Section 10.09	Prohibited Acts
ARTICLE XI	TERMINATION AND ABANDONMENT
Section 11.01	Right of Termination
Section 11.02	Notice of Termination
Section 11.03	Effect of Termination
Section 11.04	Due Diligence Review; Right to Terminate
ARTICLE XI	TERMINATION AND ABANDONMENT
Section 12.01	Definition of Recipient, Disclosing Party, Representative and Person
Section 12.02	Definition of Subject Information
Section 12.03	Confidentiality
Section 12.04	Securities Law Concerns
Section 12.05	Return of Subject Information
Section 12.06	Specific Performance/Injunctive Relief
ARTICLE XIII	MISCELLANEOUS
Section 13.01	Survival of Representations, Warranties and Covenants
Section 13.02	Indemnification
Section 13.03	Expenses
Section 13.04	Brokerage Fees and Commissions
Section 13.05	Entire Agreement
Section 13.06	Further Cooperation
Section 13.07	Severability
Section 13.08	Notices
Section 13.09	GOVERNING LAW
Section 13.10	Multiple Counterparts
Section 13.11	Certain Definitions
Section 13.12	Specific Performance
Section 13.13	Attorneys’ Fees and Costs
Section 13.14	Rules of Construction
Section 13.15	Binding Effect; Assignment
Section 13.16	Public Disclosure
Section 13.17	Extension; Waiver
Section 13.18	Amendments

		Historical	Pro forma Adjustments (In Thousands)		Pro Forma
Total cash and equivalents	$ 9,499		$ (400)	(a)	$ 9,099
Interest-bearing time deposits in other financial institutions	227				227
Loans, net	21,457				21,457
Premises and equipment, net	1,743				1,743
Other assets	463				463
Total assets	$ 33,389		$ (400)		$ 33,989

Deposits	$ 26,341		$ -		$ 26,341
Borrowings	-		-		-
Other liabilities	135				135

Total liabilities	26,476		-		26,476

Shareholders' equity	6,913		(400)	(a)	6,513
Total liabilities and equity	$ 33,389		$ (400)		$ 33,989

PRO FORMA BALANCE SHEET

		Pro Forma
	Historical	Adjustments		Pro forma
	(In thousands, except per share data)

Total cash and equivalents	$ 9,538	$ (9,099)	(a)	$ 3,039
		3,000	(c)
		(400)	(b)
Interest-bearing time deposits in
other financial institutions	227	(227)	(a)	-
Loans, net	21,457	(21,457 )	(a)	-
Premises and equipment, net	1,743	(1,743)	(a)	-
Other assets	535	(463)	(a)	72
Receivable from bank sale		6,513	(c)	6,513
Total assets	$ 33,500	$ (23,876)		$ 9,624

Deposits	$ 26,341	$ (26,341)	(a)	$ -
Borrowings	4,350	-		4,350
Other liabilities	2,261	(135)	(a)	2,126

Total liabilities	32,952	(26,476)		6,476

Shareholders' equity	548	3,000	(c)	3,148
		(400)	(b)

Total liabilities and equity	$ 33,500	$ (23,876)		$ 9,624

Shares of common stock outstanding	11,320,973	-		11,320,973

Book value per share	$ 0.05			$ 0.28

PRO FORMA STATEMENT OF OPERATIONS

		Pro Forma
	Historical	Adjustments		Pro forma
	(In thousands, except per share data)

Interest income	$ 2,476	$ (2,476)	(1)	$ -
Interest expense	1,253	(861)	(1)	-
		(392)	(2)
Net interest income	1,223	(1,223)		-
Provision for loan losses	39	(39)	(1)	-
Net interest income after
provision for loan losses	1,184	(1,184 )		-

Noninterest income	2,496	(2,496)	(1)	-

Noninterest expense	(3,748)	(3,748)	(1)	(99)
		(42)	(2)

Income (loss) before income taxes	(68)	(31)		(99)
				-
Income taxes
Net income (loss)	$ (68)	$ (31)		$ (99)

Average common shares	11,320,973			11,320,973

Basic and diluted
earnings (loss) per share	$ 0.01			$ (0.01)

STATEMENT OF OPERATIONS

	Historical (in thousands)

Interest income	$ 2,476
Interest expense	861
	___________
Net interest income	1,615
Provision for loan losses	_________39
Net interest income after provision for loan Losses	1,576

Noninterest income	2,496	(1)

Noninterest expense	(3,607)
	___________
Income (loss) before income taxes	465

Income taxes	- __________

Net income (loss)	____$ 465