UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
fiscal year ended December 31, 2008





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
Transition Period from ______ to ______





Commission
file number: 000-33167





KIWA
BIO-TECH PRODUCTS GROUP CORPORATION


(Exact
name of registrant as specified in its charter)





Delaware
              
              
              
              77-0632186(State
      or other jurisdiction of incorporation or organization)
              
              
              
              (I.R.S.
      Employer Identification No.)310
      N. Indian Hill Blvd., #702 Claremont, California 91711(Address
      of principal executive offices)(626)
      715-5855(Registrant’s
      telephone number, including area code)Securities
      registered pursuant to Section 12(b) of the Act:
              
              
              
              Name
      of each exchange on which registeredNone
              
              
              
              OTC
      Bulletin BoardSecurities
      registered pursuant to Section 12(g) of the Act:
                (Title
      of Each Class)Common
      Stock, $0.001 par value





Indicate
by check mark if the registrant is a well-know seasoned issuer, as defined in
Rule 405 of the Securities Act.£YesQNo





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.£YesQNo





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.QYes£No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ̈





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


Large
      accelerated filer £
              
              Accelerated
      filer £Non-accelerated
      filer £
              
              Smaller
      reporting company Q





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





The
aggregate market value of voting and non-voting common stock held by
non-affiliates of the registrant, based upon the closing bid quotation for the
registrant’s common stock, as reported on the OTC Bulletin Board quotation
service, as of June 30, 2008 was approximately $8,878,825.





The
number of shares of registrant’s common stock outstanding as of May 15, 2009 was
400,000,000.













Annual
Report on Form 10-K
 For the
Fiscal Year Ended December 31, 2008
 INDEX


TABLE
OF CONTENTS




PART I
                  
                  1SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS
                  
                  1ITEM
      1. BUSINESS
                  
                  1ITEM
      1A. RISK FACTORS
                  
                  14ITEM
      2. PROPERTY
                  
                  28ITEM
      3. LEGAL PROCEEDINGS
                  
                  28ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                  
                  28PART
      II
                  
                  30ITEM
      5. MARKET OF REGISTRANTS’ COMMON EQUITY, RELATED STOCKHOLDER MATTER AND
      ISSUER PURCHASES OF EQUITY SECURITY
                  
                  30ITEM
      6. SELECTED FINANCIAL DATE
                  
                  31ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
                  
                  31ITEM
      8. FINANCIAL STATEMENTS
                  
                  42ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE
                  
                  42ITEM
      9A(T). CONTROLS AND PROCEDURES
                  
                  42ITEM
      9B. OTHER INFORMATION
                  
                  44PART
      III
                  
                  44ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
                  
                  44ITEM
      11. EXECUTIVE COMPENSATION
                  
                  47ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATED STOCKHOLDER MATTERS
                  
                  50ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                  
                  52ITEM
      14. PRINCIPAL ACCOUNTING FEES AND SERVICES
                  
                  52PART
      IV
                  
                  53ITEM 15. EXHIBITS, FINANCIAL STATEMENT
      SCHEDULES
                  
                  53SIGNATURES
                  
                  54










Part
I




Special
Note Regarding Forward-Looking Statements




On one or
more occasions, we may make forward-looking statements in this Annual Report on
Form 10-K regarding our assumptions, projections, expectations, targets,
intentions or beliefs about future events.  Words or phrases such as
“anticipates,” “may,” “will,” “should,” “believes,” “estimates,” “expects,”
“intends,” “plans,” “predicts,” “projects,” “targets,” “will likely result,”
“will continue” or similar expressions identify forward-looking
statements.  These forward-looking statements are only our predictions
and involve numerous assumptions, risks and uncertainties, including, but not
limited to those listed below and those business risks and factors described
elsewhere in this report and our other Securities and Exchange Commission
filings.





We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.  However, your attention is directed to any further
disclosures made on related subjects in our subsequent annual and periodic
reports filed with the Securities and Exchange Commission on Forms 10-K, 10-Q
and 8-K and Proxy Statements on Schedule 14A.





References
herein to “we,” “us,” “our” or “the Company” refer to Kiwa Bio-Tech Products
Group Corporation and its wholly-owned and majority-owned subsidiaries unless
the context specifically states or implies otherwise.




Item
      1.
            Business




The
Company




We are
the result of a share exchange transaction completed in March 2004 between the
shareholders of Tintic Gold Mining Company (“Tintic”), a corporation originally
incorporated in the state of Utah on June 14, 1933 to perform mining operations
in Utah, and the shareholders of Kiwa Bio-Tech Products Group Ltd. (“Kiwa BVI”),
a company originally organized under the laws of the British Virgin Islands on
June 5, 2002.  The share exchange resulted in a change of control of
Tintic, with former Kiwa BVI stockholders owning approximately 89% of Tintic on
a fully diluted basis and Kiwa BVI surviving as a wholly-owned subsidiary of
Tintic.  Subsequent to the share exchange transaction, Tintic changed
its name to Kiwa Bio-Tech Products Group Corporation.  On July 21,
2004, we completed our reincorporation in the State of Delaware.





We have
established two subsidiaries in China: (1) Kiwa Bio-Tech Products (Shandong)
Co., Ltd. (“Kiwa Shandong”) in 2002 and (2) Tianjin Kiwa Feed Co., Ltd. (“Kiwa
Tianjin”) in July 2006.  The following chart summarizes our
organizational and ownership structure.








1





We
develop, manufacture, distribute and market innovative, cost-effective and
environmentally safe bio-technological products for agriculture.  Our
main product groups are bio-fertilizer, biologically enhanced livestock feed,
and animal drugs and disinfectants.  Our products are designed to
enhance the quality of human life by increasing the value, quality and
productivity of crops and decreasing the negative environmental impact of
chemicals and other wastes.




Bio-fertilizer




We have
developed a number of bio-fertilizer and other products for plants and are
developing more.  In 2002, Kiwa BVI chartered Kiwa Shandong, a
wholly-owned subsidiary organized under the laws of PRC, as its offshore
fertilizer manufacturing base to capitalize on low cost, high quality
manufacturing advantages available in China.  In October 2003, Kiwa
Shandong completed the first phase of construction of its manufacturing facility
in Shandong Province, China.  In November 2003, Kiwa Shandong began
shipping its first bio-fertilizer product to the agricultural market in
China.  Since then, we have been devoting ourselves to expand our
market share and further upgrade our facility.





In June
2008, Kiwa Shandong received approval from the Ministry of Commerce of the PRC
to sell fertilizer products of other manufacturers on a wholesale basis,
including chemical fertilizers, complex fertilizers and compound
fertilizers.  Based on applicable tax laws in China, Kiwa Shandong’s
new business items will be exempt from value-added tax.




Bio-enhanced
Feed




On July
11, 2006, we entered into a joint venture with Tianjin Challenge Feed Co., Ltd.
(“Challenge Feed”) to engage in the developing, manufacturing and marketing of
biologically enhanced feed for livestock.  The joint venture is
through Kiwa Tianjin, our 80% subsidiary formed under the laws of
PRC.  Pursuant to the joint venture agreement between the Company and
Challenge Feed, we invested $480,000 in cash for our 80% equity share of Kiwa
Tianjin and Challenge Feed invested machinery and equipment used in one of Kiwa
Tianjin’s two bio-enhanced feed production lines with an agreed value of
$120,000 for the remaining 20% equity.  We also lease another
production line from Challenge Feed.  With these two production lines,
Kiwa Tianjin’s total annual production capacity is approximately 40,000 metric
tons of concentrated and supportive feeds.  Actual amount of
production in fiscal year ended December 31, 2008 was 20,684 tons.




AF-01
Anti-viral Aerosol




On May 8,
2006 we entered into a Technology Transfer Agreement with Jinan Kelongboao
Bio-Tech Co., Ltd. (“JKB”), which will become fully effective when we have
finished paying the first installment of consideration according to the payment
schedule in the contract.  Pursuant to the agreement, JKB agreed to
transfer its AF-01 anti-viral aerosol technology for veterinary medicine
applications to the Company.  The AF-01 anti-viral aerosol technology
is a broad-spectrum antiviral agent with potent inhibitory and/or viricidal
effects on a variety of RNA viruses found in animals and fowls such as bird
flu.  We acquired the exclusive production right and other related
rights to produce an anti-viral aerosol veterinary drug.  Our hope is
to develop a commercialized product in the form of a spray for applying in fowl
houses and other animal holding facilities to prevent and cure virus-caused
diseases.





In
addition pursuant to the Technology Transfer Agreement, JKB will exclusively
supply to us the raw material medicine for AF-01 anti-viral aerosol, which must
have an index of 200,000 zymolysis units per milliliter.  There is no
alternative supplier if JKB fails to perform its supply obligations on the
contract.





2





We are
now in the process of applying for statutory licenses for the AF-01
technology.  Before marketing this product, we will need to: (1)
successfully complete a safety evaluation, pre-clinical study, pharmacological
and toxicological test, clinical trial report, stability test report,
environmental impact report, residue depletion test and other obligatory
experiments by statutory authorities; (2) pass an evaluation by the veterinary
drug evaluation institution established by Administrative Department for
Veterinary Medicine of State Council (the “Administrative Department”) and pass
a sample quality retrial by a test institution established by the Administrative
Department after the application is accepted; (3) acquire a Registration
Certificate of New Veterinary Drug from the Administrative Department compliant
with its drug qualification standards; (4) acquire a company or factory with GMP
qualification and submit the application for Approval Number of Veterinary Drug
Products in the name of the acquired company to the Administrative Department;
and (5) pass an evaluation of manufacturing requirements by the Administrative
Department and procure a Veterinary Drug Manufacturing License.  There
can be no assurance that we can acquire such prerequisite approvals and
licenses, or how much time it will take.





Such
procedures are subject to Regulations on Administration of Veterinary Drugs
promulgated by Decree No. 404 of the State Council of China on April 9, 2004,
Measures for Registering of Veterinary Drugs and Measures for Administration of
Approval Number of Veterinary Drug Products promulgated by Decree No. 44 and No.
45 respectively of the PRC Ministry of Agriculture on November 24, 2004, and
other applicable rules and regulations of China.





In May
2008, we had entered into a joint venture agreement with Hebei Huaxing
Pharmaceuticals Co., Ltd. (“Huaxing”), which would take effect when it is
approved by the local bureau of commerce in Hebei.  The Company
intended to set up a new joint venture engaging in the developing, manufacturing
and marketing of animal drugs and disinfectants, including applying for relevant
certificate of AF-01 anti-viral aerosol technology-based
products.  However, due to sharp change in macro economic climate,
both parties proposed to local bureau of commerce in Hebei to suspend the
approval of the joint venture agreement.  The joint venture agreement
was not taken effective.  Both parties will not be committed to any
responsibilities or making any capital contributions under the joint venture
agreement.  In the future, both parties may resume setting up a
joint-venture.  The Company is also actively looking for new targets
of acquisition to develop, manufacture and market the Company’s animal drugs and
disinfectants.




Strategies




With the
world’s largest population to feed, China’s demand for agricultural products is
immense.  Problems with pollution and soil contamination have
increased pressure on the Chinese government to conserve land and enhance
environmental protection. Serious diseases such as H5N1 avian flu are spreading
around the world and have threatened animal husbandry.  More
critically, such diseases have threatened the health and safety of humans
through possible bird to human and human to human transmission.  China
thus faces an urgent need to improve unit land yield, prevent and treat such
diseases, and reduce pollution.  We plan to address this need through
the development of our ag-biotech inputs which may resolve many of these
problems in environmentally friendly ways.  To exploit this
opportunity, our core strategies are as follows:





General Operational
Strategy


l
            Build
      a platform for world-class biotechnological research and development
      results to be commercialized into products for applications in
      agriculture;


l
            Invest
      in mature technologies that will not require large amounts of research
      expense to develop into commercial
products;


l
            Utilize
      proprietary technology to supply ag-biotech inputs to the market at lower
      cost than our competitors;


l
            Constructing
      or acquiring new production facilities, improving established facilities;
      to improve our manufacturing capability in
  China;


l
            Building
      and strengthening our “KIWA” brand so as to become one of the leading
      companies in China’s “biological, safe and environment-friendly”
      agricultural inputs industry;





3





l
            Establish
      strategic alliances for research and development, sales and distribution
      and customer acquisition with complimentary entities in the
      biological-agriculture industry;
and


l
            Enhance
      overall management systems, operational structure and corporate
      governance.





Sales
Strategy


l
            Our
      sales strategy involves utilizing both a direct sales force and
      distribution networks. Our distribution efforts are expected to include
      the following:


o
            Choosing
      green food/organic-food planting bases or other demonstrative agricultural
      products producers, carrying out regional field tests, fanning out from a
      point to an area, cultivating market
network;


o
            Leveraging
      government, industrial organizations (such as “China Green Food
      Association”) to strengthen existing sales network in rural areas, thereby
      reach end-users in a more cost-effective manner; cut off selling expenses
      occurred during middle tiers of supply chain to boost end-user’s
      value;


o
            Cooperating
      with special agricultural production materials distributors who also help
      farmers resell their products; focusing on large-to-medium size
      wholesalers of agricultural production materials at provincial and
      municipal levels;


o
            Establishing
      a three-level distribution network consisting of a company-centralized
      sales office, prefectural representative offices and direct distributors
      in villages and towns; and


o
            Leveraging
      existing sales channels and network of affiliates’ products to save costs
      of building the network from
scratch.





Strategy Regarding
Customers


l
            Our
      targeted customers include major agricultural companies and growers that
      can realize significant financial benefits from using our products
      including:


o
            Provide
      high value-added agricultural products (such as fruits, vegetables, meat,
      eggs that meet the requirements of green food/organic food) to Chinese
      agricultural products producers;


o
            Agricultural
      products producers located in China who are exporting to Japan, Korea,
      Europe, US and other regional markets of the
  world;


o
            Chinese
      agricultural products producers who have generated internal needs of
      ag-biotech inputs to solve the problems of soil-caused diseases,
      anti-biotic drug tolerance, leftover and others;
  and


o
            “Green”
      or organic growers throughout the
world.





Given the
global trend of customers favoring environmentally safe green food and
organically grown food, producers’ needs for higher yields and better quality
and increasing pressure of treating and preventing such diseases as H5N1 avian
flu, we also foresee strong market needs in other international markets
including East Asia and Southeast Asia.  We plan to explore these
markets when the time is right.




Intellectual Property and
Product Lines




Our goal
is to build a platform to commercialize bio-technological research and
development results for applications in agriculture and environmental
protection.  In this respect, we are working on developing cooperative
research relationships with several universities and institutions in
China.  When our liquidity position improves, we also intend to
continue to acquire technologies to reduce research and development costs and
shorten commercialization cycles.





4




Bio-fertilizer




We have
developed six series of bio-fertilizer products with bacillus spp and/or
photosynthetic bacteria as core ingredients.  Bacillus spp is one
species of bacteria that interacts with plants and promotes biological
processes.  It is highly effective for promoting plant growth,
enhancing yield, improving quality and elevating
resistances.  Photosynthetic bacteria are a group of green and purple
bacteria.  Bacterial photosynthesis differs from green plant
photosynthesis in that bacterial photosynthesis occurs in an anaerobic
environment and does not produce oxygen.  Photosynthetic bacteria can
help enhance the photosynthetic capacity of green plants by increasing the
utilization of sunlight.  This helps keep the photosynthetic process
at a vigorous level, enhance the capacity of plants to transform inorganic
materials to organic products.  It greatly boosts overall plant health
and the productivity of agricultural products.





Our
bacillus bacteria based fertilizers are protected by patents.  On
April 12, 2004, we entered into an agreement with China Agricultural University
(“CAU”) to acquire from the university Chinese patent no. ZL 93101635.5 entitled
“Highly Effective Composite Bacteria for Enhancing Yield and the Related
Methodology for Manufacturing.”  The aggregate purchase consideration
under the agreement was $480,411, of which $60,411 was paid in cash in
2004.  For the balance of the consideration, we issued 1,000,000
shares of our common stock to CAU in September 2004, valued at $0.42 per share
(aggregate value of $420,000) based on the market value on July 20, 2004, the
date when the transfer of the patent was approved.  Our photosynthetic
bacteria based fertilizers are protected by trade secret.





The
patent acquired from CAU covers six different species of bacillus which have
been tested as bio-fertilizers to enhance yield and plant health.  The
production methods of the six species are also patented.  The patent
will expire on February 9, 2013.  There are no limitations under this
agreement on our exclusive use of the patent.  Pursuant to our
agreement with CAU, the university agreed to provide research and technology
support services at no additional cost to us in the event we decide to use the
patent to produce commercial products.  These research and technology
support services include: (1) furnishing faculty or graduate-level researchers
to help bacteria culturing, sampling, testing, trial production and production
formula adjustment; (2) providing production technology and procedures to turn
the products into powder form while keeping live required bacteria in the
products; (3) establishing quality standards and quality control systems; (4)
providing testing and research support for us to obtain necessary sale permits
from the Chinese government; and (5) cooperation in developing derivative
products.





We have
obtained five fertilizer registration certificates from the Chinese government -
four covering our bacillus bacteria fertilizer and one covering our
photosynthetic bacteria fertilizer.  Some of our products contain
ingredients of both photosynthesis and bacillus bacteria.  The five
registration certificates are: (1) Microorganism Microbial Inoculum Fertilizer
Registration Certificate issued by the PRC Ministry of Agriculture; (2)
Photosynthetic Bacteria Fertilizer Registration Certificate issued by the PRC
Ministry of Agriculture; (3) Amino Acid Foliar Fomular Fertilizer Registration
Certificate issued by the PRC Ministry of Agriculture; (4) Organic Fertilizer
Registration Certificate issued by Agriculture Department of Shandong Province,
and (5) Organic Matter-Decomposing Inoculants Registration Certificate issued by
the PRC Ministry of Agriculture on February 16, 2008.  Protected by
these five Fertilizer Registration Certificates and five trademarks under the
names of “KANGTAN” (Chinese translation name for Kiwa), “ZHIGUANGYOU,”
“PUGUANGFU,” “JINWA” and “KANGGUAN,” we have developed six series of
bio-fertilizer products with bacillus spp and/or photosynthetic bacteria as core
ingredients.





We also
obtained two fertilizer product licenses from the Vietnamese government in
November 2006, one is used for leaf fertilizer and the other for organic
fertilizer.




Bio-enhanced
Feed




We have
developed our own special concentrated and supportive feeds prescriptions,
mainly for fowl, fish and pigs.  We add distilled materials from
animal blood, bacillus spp or other ingredients to standard livestock feed to
improve quality and function.  Our feed products can enhance digestion
and inhibit disease in animals, in some circumstances functioning as a
substitute for antibiotic additives.  Currently we have different feed
prescriptions for fowl, fish and swine at different growth stages.





5





The total
annual production capacity of Kiwa Tianjin is approximately 40,000 metric tons
of concentrated and supportive feeds.  During fiscal 2008, the actual
sales volume of our bio-enhanced feed products was approximately 20,700 tons,
which is about 52% of Kiwa Tianjin’s maximum production volume.




AF-01
Anti-viral Aerosol




AF-01
anti-viral aerosol is a broad-spectrum antiviral agent with potent inhibitory
and/or viricidal effects on a variety of RNA viruses found in fowl and other
animals, initially discovered and developed by the Institute of Medicinal
Biotechnology, Chinese Academy of Medical Sciences (“IMB”).  Pursuant
to a related technical appraisal report certified by the PRC Ministry of Health,
the current owners of technology rights are IMB and its medium test center,
Jinan Kelongboao Bio-Tech Co., Ltd. (“JKB”).  IMB designated JKB as
its custodian to apply and dispose all rights of the AF-01 technology on IMB’s
behalf.  Pursuant to a technical appraisal report certified by the PRC
Ministry of Health, no adverse effects have been found of this agent, and it is
not irritating or erosive to the skin, mucous membrane or the eyes of the
recipient animal after swallowing or inhalation.





On May 8,
2006 we entered into a Technology Transfer Agreement with
JKB.  Pursuant to the agreement, JKB agreed to transfer to us its
AF-01 anti-viral aerosol technology for veterinary medicine
applications.  The AF-01 technology, which can be used to prevent and
cure virus-caused diseases by aerosol spray, is recognized by a technological
achievement appraisal certificate issued by relevant administration of the
Chinese government.  Under the agreement JKB will facilitate
transferring of the technology by providing consulting services to us and to
cooperate with us in the development of an animal drug product for the
market.





We plan
to develop a commercialized product in the form of spray for applying in hen
houses and other animal holding facilities to prevent and cure virus-caused
diseases.  Before marketing this product, we must acquire statutory
licenses in accordance with rules and regulations of the PRC government. See
subsection entitled “The Company” under Business in Part I.




Kiwa-CAU
Research and Development Center




In July
2006 we established a new research center with CAU through our subsidiary, Kiwa
Shandong, which goes under the name, Kiwa-CAU Bio-Tech Research &
Development Center (the “Kiwa-CAU R&D Center”).  Pursuant to an
agreement reached between CAU and Kiwa Shandong on November 14, 2006, Kiwa
Shandong agreed to contribute RMB 1 million (approximately $146,300) each year
to fund research at Kiwa-CAU R&D Center.  Under the above
agreement, the Kiwa-CAU R&D Center is responsible for fulfilling the overall
research-and-development functions of Kiwa Shandong, including: (1) development
of new technologies and new products (which will be shared by Kiwa and CAU); (2)
subsequent perfection of existing product-related technologies; and (3) training
quality-control personnel and technicians and technical support for marketing
activities.





During
fiscal 2008, Kiwa-CAU R&D Center had concentrated on the following filed of
works:


1.
            Isolation
      and culture of microorganisms;


2.
            Screening
      of growth-promoting bacteria;


3.
            Screening
      of bio-control bacteria;


4.
            Screening
      of environmental microbiology;


5.
            Studies
      on fermentation technology and related production
  process;


6.
            Analysis
      of soil and fertilizer nutrients and fertilization program
      development;


7.
            Field
      demonstration test of Kiwa fertilizer
products;


8.
            Application
      of approval and certification of Kiwa fertilizer
  products;


9.
            Application
      of patents; and





6





10.
            Technical
      training and services.





During
fiscal 2008, Kiwa-CAU R&D Center had successfully isolated forty-one strains
of endophytic bacillus from plants.  In 2008, Ministry of Agriculture
of the PRC had granted Organic Product Certification to two of our
products.  A number of strains had been observed to have the
capability of boosting crop yield, dispelling chemical pesticide residual from
soil.  These strains could be used for not only developing new
biological preparation but also environmental protection
preparation.  We are applying for three patents.




Market
Overview




Modern
agricultural practices largely rely on heavy use of chemical fertilizers,
pesticides and veterinary drugs that can cause tremendous harm to the
environment, soils and human health.  Such practices have been under
increasing public scrutiny across the world, leading to increased consumer
demand for agricultural practices that are more environmentally
friendly.  China has only 9.26% of the world’s arable land but needs
to feed over 1.3 billion people, or approximately 22.9% of the world’s
population.  If the situation continues unchanged, the largest
population in the world could potentially face severe food and water shortages
and an increasingly polluted living environment.  One solution to the
environmental problem is to develop environmentally friendly fertilizer,
veterinary drugs and animal feed.





China’s
agricultural production has steadily increased for more than 20 years due to
agricultural policy reform, improved agricultural technology and recent
government support programs, including price supports, export incentives, direct
payment and tax incentives.  The following table shows the increase in
output of major agriculture products between 1970 and 2006:




Data item
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004
                    
                    
                    2003
                    
                    
                    2002
                    
                    
                    2001
                    
                    
                    2000
                    
                    
                    1999
                    
                    
                    1990
                    
                    
                    1980
                    
                    
                    1970Corn
                    
                    
                    145,482
                    
                    
                    
                    139,365
                    
                    
                    
                    130,287
                    
                    
                    
                    115,830
                    
                    
                    
                    121,310
                    
                    
                    
                    114,094
                    
                    
                    
                    106,001
                    
                    
                    
                    128,084
                    
                    
                    
                    96,821
                    
                    
                    
                    62,600
                    
                    
                    
                    33,030Cotton
                    
                    
                    6,746
                    
                    
                    
                    5,714
                    
                    
                    
                    6,324
                    
                    
                    
                    4,860
                    
                    
                    
                    4,916
                    
                    
                    
                    5,324
                    
                    
                    
                    4,417
                    
                    
                    
                    3,829
                    
                    
                    
                    4,508
                    
                    
                    
                    2,707
                    
                    
                    
                    2,277Early
      rice
                    
                    
                    31,868
                    
                    
                    
                    31,873
                    
                    
                    
                    32,217
                    
                    
                    
                    29,484
                    
                    
                    
                    30,288
                    
                    
                    
                    34,002
                    
                    
                    
                    37,623
                    
                    
                    
                    40,973
                    
                    
                    
                    51,649
                    
                    
                    
                    49,140
                    
                    
                    
                    37,410Late
      rice
                    
                    
                    34,669
                    
                    
                    
                    34,614
                    
                    
                    
                    32,959
                    
                    
                    
                    31,903
                    
                    
                    
                    35,244
                    
                    
                    
                    41,754
                    
                    
                    
                    41,423
                    
                    
                    
                    48,120
                    
                    
                    
                    50,438
                    
                    
                    
                    36,710
                    
                    
                    
                    26,320Middle
      rice
                    
                    
                    116,034
                    
                    
                    
                    114,104
                    
                    
                    
                    113,914
                    
                    
                    
                    99,268
                    
                    
                    
                    109,007
                    
                    
                    
                    101,382
                    
                    
                    
                    108,861
                    
                    
                    
                    109,394
                    
                    
                    
                    89,661
                    
                    
                    
                    44,410
                    
                    
                    
                    39,320Wheat
                    
                    
                    104,467
                    
                    
                    
                    97,445
                    
                    
                    
                    91,952
                    
                    
                    
                    86,488
                    
                    
                    
                    90,290
                    
                    
                    
                    93,874
                    
                    
                    
                    99,637
                    
                    
                    
                    113,879
                    
                    
                    
                    98,220
                    
                    
                    
                    55,210
                    
                    
                    
                    29,185




(All in
thousand tons)




Source:
ERS-United States Department of Agriculture




According
to Organic Products Market in China 2006, a publication issued by USDA in June
2006, China has the potential to become a world power in the organic foods
industry.  Home to one-fifth of the world’s population, a growing
number of its Chinese consumers are making more health-conscious
purchases.  The country continues to attempt to increase organic
export production as well as boost domestic demand.  With the growth
of the international market for organic products, some products in China are now
being grown to international organic standards for export with the help of
third-party global certification groups.  Other products continue to
target the domestic market with certification by local or provincial
bodies.  In 2003, the total turnover for the “Green Foods” market
reached approximately $11.9 billion with $8.7 billion wholesale for the domestic
market.  An initiative by the government to promote pure foods led to
development of an organic food market that continues to show growth
potential.  Organic farms in China are beginning to resemble Western
counterparts in farming practices, certification and retail
promotion.





In
response to the increasingly severe deterioration in food safety, environment
pollution, rural area stability and other challenges, the Chinese government
attaches high importance to the problems of farmers, rural areas and
agriculture.  From January 1, 2006, the agricultural tax had been
abolished. From 2004, the Central People’s Government of the PRC continuously
issued “Number One Document” regarding rural areas of China.  The
latest “Number One Document” issued on January 30, 2008, contains wider-range of
policies promoting sustainable development of agriculture, for example,
promoting income level of billions of farmers, strengthening supervision of farm
inputs and actively developing green-food and organic food.  In April
2007, the State Council of the PRC promulgated the “‘Eleven-Five’ National
Program on Boosting Food and Drug Safety”, calling for strengthening
agricultural input quality and safety control; setting up demonstrational bases
for agricultural products and food based on “recycling economy” model; speeding
up building bases for Uncontaminated Food/Agricultural Products), GAP (Good
Agricultural Practices), Green Food and Organic Food.  In July 2007,
the State Council of the PRC promulgated “Special Rules of the State Council on
Strengthening the Supervision and Management of the Safety of Food and Other
Products” requiring compliance of laws, administrative regulations and national
compulsory standards for producers when using agricultural input; producers and
dealers of export products must guarantee the compliance of importing country’s
relevant standards or contractual standards; any violators will face severe
punishment. These policies are in favor of our Company in the following three
ways:





7





l
            The
      trend in government policy development is propitious to expedite more
      agricultural products’ producers to accept ag-biotech input in a quicker
      fashion;


l
            Preferential
      policies in rural areas increase farmers’ income level, therefore they can
      afford to buy more of our products, thus increase our sales
      volume.


l
            Resulting
      from certain changes in new policies’ procedures, we expect to receive
      stronger support from relevant industrial associations and government
      departments when promoting our
products.




Bio-fertilizer
Market




To
increase the overall crop yield, farmers in China use vast amounts of chemical
fertilizers.  According to U.S. Department of Agriculture, the use of
fertilizer in China rocketed from 10,863,000 tons in 1979 to 47,662,000 tons in
2005, underpinning a compound annual growth rate of 5.85%.  Together
with the continuous growth of total fertilizer consumption, the way that Chinese
farmers apply fertilizer is also changing.  From 1979 to 2005, the
percentage of Nitrogenous fertilizer application to total amount of fertilizer
consumption decreased gradually from 76% to 47%. In the meanwhile, the
percentage of Phosphate fertilizer and Potash fertilizer increased steadily.
Most importantly, in 1976, 100% of China’s fertilizer consumption was chemical
fertilizer (including Nitrogenous fertilizer, Phosphate fertilizer and Potash
fertilizer); while in 2005, the rate decreased to 73%. Other fertilizer,
including bio-fertilizer has been gradually accepted by Chinese farmers. (Source: ERS-United States
Department of Agriculture)





The
excessive use of chemical fertilizer in China is also reflected by the
China-to-U.S. rate of chemical fertilizer application.  According to
data quoted from U.S. Department of Agriculture, Chinese farmers applied 2.05
times the nitrogen fertilizer and 1.8 times the phosphate fertilizer compared to
their U.S. counterparts in 2005.





Use of
chemical fertilizer in China is now higher than it has ever
been.  This increase in use of chemical fertilizer has led to a series
of severe problems including degradation of the soil structure, natural
biodiversity and ecological system stability.  Promoting the use of
bio-fertilizer together with chemical fertilizer is one of the solutions to
solve these problems.





In the
U.S. and European countries, the amount of bio-fertilizer consumption in the
agricultural production accounts for over 20% of the total amount of fertilizer
consumption. The output increased at the speed of 10% to 20% each year.
According to the statistics, total amount of bio-fertilizer production was 1.5
million tons, total sales volume about RMB4 billion Yuan in 2001, which accounts
for about 1% of total commercial fertilizer consumption. Analysis indicates that
bio-fertilizer will possess about 10% of market share in 2010, which is
forecasted to be about 14 million tons of market demands. Therefore, the market
potential of bio-fertilizer is immense.





Our
serial commercialized products, with bacillus and/or Photosynthesis Biological
Catalyst as core ingredients, capitalize on this market trend and we hope to
become one of the leaders in developing green technologies for productive, more
sustainable agriculture in China.





8





Our main
markets have so far been in China, mostly in Shandong (sown area 10,736,100
hectares, accounted for 6.9% of China; value of crop output RMB203,400 million
Yuan, 10.4% of China in 2005), Jiangsu (sown area 7,641,200 hectares, accounted
for 4.9% of China; value of crop output RMB129,110 million Yuan, 6.6% of China
in 2005), Zhejiang (sown area 2,837,900 hectares, accounted for 1.8% of China;
value of crop output RMB65,480 million Yuan, 3.3% of China in 2005), Hebei
Provinces (sown area 8,785,500 hectares, accounted for 5.7% of China; value of
crop output RMB125,800 million Yuan, 6.4% of China in 2005), Xinjiang Uygur
Autonomous Region (sown area 3,731,200 hectares, accounted for 2.4%; value of
crop output RMB59,580 million Yuan, 3.0% of China in 2005), and Northeast area
of China all these are the primary large agricultural provinces in China. (Source: ERS-United States
Department of Agriculture)




Bio-enhanced
Feed Market




China is
one of the largest livestock products producing countries of the
world.  During the past two decades, livestock products production has
increased significantly.  For instance, China produced 16,547,000 tons
of pork in 1985 as compared with 50,106,000 tons in 2005.  The
compound annual growth rate of pork production is 5.70%.  Similar
trends can be identified in other livestock products, such as beef, meat and
poultry, etc. Since the trend of development has been unchanged for decades, it
is reasonable to forecast that the growth pattern will continue. (Source: ERS-United States
Department of Agriculture)





Accompanying
the continuous growth in livestock products, the nation’s demand for livestock
feed also increased. In 2004, the production of feed products in China increased
to 93 million tons, an 11% increase over the previous year, compared to
production of 35.7 million tons in 1991.  The total production value
of the livestock feed industry has increased 13.36% to approximately RMB242.8
billion. It is estimated that the market for livestock feed will continue to
grow in the foreseeable future (China Stockbreeding Industry Year Book
2005).  However, in recent years, some Chinese stock growers have
added various anti-bacterial medicines, hormone and other growth stimulants into
livestock feed and drinking water in order to prevent and cure diseases, promote
growth, enhance animal reproductivity, increase feed conversion rate and improve
animal products quality, which has led to medicine residue in animal
foods.  Serious consequences from such practices have attracted much
attention from both the Chinese government and those who have imported Chinese
animal foods. The Chinese livestock industry is suffering from lack of powerful
feed producers that are capable of manufacturing high-quality,
environment-friendly bio-enhanced feed in a cost-effective manner to satisfy the
increasing demand of the market.  In light of the huge potential of
the market, continuing growth in demand and other favorable conditions in the
industry, we have concluded that the livestock feed market is a good opportunity
for the Company.




Anti-viral
Veterinary Drug Market




Virus-caused
diseases remain the most deadly category of animal disease in
clinic.  They are not only spreading quickly but also claiming a high
fatality rate.  The unique nature of virus reproduction makes it
difficult to find a cure for it in the laboratory.  Virus-caused
diseases account for a large proportion of all animal infectious diseases; the
death rate is 36.8%, the second highest among all causes, second only to
bacteria.  However, in China only a very small proportion of
veterinary drugs are anti-viral.  The income breakdown of the Chinese
veterinary drug industry is as follows: antimicrobial agent 37%, medication
additive 21%, biological products 14%, insecticide-agent 14%, health-care
products 6%, environmental hygiene products 4%, and others 4%.





Virus can
be divided into two categories, one group is DNA virus and other group is RNA
virus.  Our planned anti-viral aerosol product is based on AF-01
technology.  It will be in the form of spray and be capable of
preventing/curing various RNA virus-caused diseases in various breading
farms.  Bird-flu is caused by typical RNA virus, it is the first virus
caused animal disease that AF-01 will target.





9





In recent
years, it was reported that human being could be infected by H5N1 and sometimes
it could be fatal.  According to the World Health Organization (the
“WHO”) to date, human cases have been reported in six countries, most of which
are in Asia: Cambodia, China, Indonesia, Thailand, Turkey, and
Vietnam.  The first patients in the current outbreak, which were
reported from Vietnam, developed symptoms in December 2003 but were not
confirmed as H5N1 infection until January 11, 2004.  Thailand reported
its first cases on January 23, 2004.  The first case in Cambodia was
reported on February 2, 2005.  The next country to report cases was
Indonesia, which confirmed its first infection on July 21,
2005.  China’s first two cases were reported on November 16,
2005.  Confirmation of the first cases in Turkey came on January 5,
2006, followed by the first reported case in Iraq on January 30,
2006.  All human cases have coincided with outbreaks of highly
pathogenic H5N1 avian influenza in poultry.  To date, Vietnam has been
the most severely affected country, with more than 90 cases.





The use
of appropriate antiseptics is an effective prevention method against avian
influenza. As indicated by our Technical Appraisal Report (No.
GuoWeiKeChengJianZi (2004) A0101) certified by the Ministry of Health of China,
our planned product with bio-active glycopeptides produced by actinomycetes as
the functioning element has been demonstrated to be an effective antiseptic to
prevent the spread of H5N1. Furthermore, we believe this product has competitive
differential compared with other existing chemical disinfectors. If we are able
to complete approval procedures to develop our intended anti-viral aerosol agent
product, we believe that it will have the potential to attract a significant
share of the Chinese market upon launching and benefit from large government
orders.




Competition




We have
three different product lines: (1) bio-fertilizer, (2) biologically enhanced
livestock feed, and (3) veterinary disinfectants and drugs.  The
market condition and competition confronting us are different and vary with
respect to each of the three product lines.




Bio-fertilizer




According
to statistics, so far there are about 400 microbial fertilizer producers in
China, most of which are small-scale, workshop producing enterprises with
backward equipment and production processes and poor quality.  Some of
the producers over-exaggerate product effectiveness, employ improper artifice
and even produce fake and shoddy products, all of which has caused losses to
farmers and lowered the reputation of bio-fertilizer.





Due to
the unique products that we offer and the very early stage of the bio-fertilizer
market in China, we believe there is limited direct competition for our products
in the Chinese marketplace.  We believe that we have product
differentiation and cost advantages (cost to customer) that will enable us to be
more profitable than our competitors, in terms of profitability, for the
following reasons, among others:


l
            Highly
      effective in boosting crop yield and quality while being environmentally
      friendly;


l
            Lower
      price point and higher return on investment to end users;
    and


l
            Complimentary
      to existing use of chemical fertilizer which will help minimize switching
      costs for end users.





In
addition, we face competition from large chemical fertilizer manufacturers in
China.  These chemical fertilizer manufacturers have provided chemical
fertilizers to farmers in China for more than ten years and customers are more
accustomed to using their established products as compared to our
products.




Bio-enhanced
Feed




The
livestock feed industry is fully developed in China.  The total
production of feedstuff in China exceeded 100 million metric tons in 2005, and
the number of producers with annual production capability of more than 10,000
metric tons exceeded 2,400, which reflects the huge market volume of
China.  We face fierce competition from our competitors though most of
them do not produce biologically enhanced feed for livestock.  As a
result of long-term price competition in the Chinese livestock feed industry,
the industry is now one with low margins and farmers have become more
price-sensitive.





10





We have
been in the livestock feed business for less than three years and our production
capacity remains relatively low as compared with that of the whole
industry.  However, we believe our products have differentiation
against other similar products, for example, by adding microbial ingredients to
increase feed conversion rate, prevent/cure animal diseases, and cut off stock
raisers’ input in veterinary drugs, which could give our products an edge in
competition.  So far, we are also developing and applying for relevant
approvals for microbial feed additives, which could further differentiate our
products.




AF-01
Anti-viral Aerosol




Our
planed AF-01 anti-viral aerosol belongs to the scope of bio-veterinary
drugs.  According to the Ministry of Agriculture of PRC, approximately
1,700 veterinary drug manufacturers were awarded GMP qualifications as of
December 31, 2007.  Few of these manufacturers have annual net sales
of over RMB100 million; some generate more than RMB50 million each year; while
most of these companies have annual net sales about RMB10 million.  In
the meantime, some of the manufacturers remain small scale workshop-production
level.





AF-01
anti-viral aerosol is very much different from other ordinary veterinary
drugs.  First of all, it is fundamentally a biological product; and
secondly it is an anti-viral biological product.  The combination of
these two features has equipped AF-01 with distinct product differentiation and
competitive advantage.  The income structure of Chinese veterinary
drug industry is as follows: antimicrobial agent 37%, medication additive 21%,
biological product 14%, insecticide-agent 14%, health-care product 6%,
environmental hygiene product 4%, and others 4%. From the perspective of income
structure, it can be seen that anti-viral veterinary drug holds a very small
proportion and that of biological product is as low as 14% (most of them are
vaccines); therefore our planned product will face limited competition once the
commercialized product has been developed.





One of
the most severe diseases that AF-01 anti-viral aerosol is against is avian
flu.  According to the Ministry of Agriculture of PRC, there are nine
Chinese companies that are developing/distributing anti-avian flu vaccine, which
can be regarded as substitutes of our product. However, as one of the two ways
to prevent/cure avian flu, anti-viral aerosol is different from vaccine in first
these is no residues; and second there will not be any drug failure in case
virus variation. Thus we believe once our commercialized product has been
successfully developed, it will have a greater market potential and social value
than vaccines.





Other
potential competitors of our veterinary drugs product line also include some
veterinary disinfector manufacturers.




Raw Materials and
Suppliers




The key
raw materials used in manufacturing of our products are available from a wide
variety of supply sources.  Historically, we have not experienced any
difficulties in procuring adequate quantities of raw materials for use in our
bio-fertilizer and biologically enhanced livestock feed
production.  We do not have long-term agreements with our suppliers
due to the availability of other numerous suppliers that have the ability to
supply our required raw materials to us on fairly short notice.  We
typically place purchase orders when we need raw material supplies.





11




Bio-fertilizer




The major
raw materials for our bio-fertilizer production can be divided into two
categories: (1) growth media such as sodium acetate, glucose and turf for
culturing bacillus spp. and (2) photosynthetic and bacillus bacteria, which are
the core ingredients for our finished products.  Some other main
ingredients include urea, aminophenol, humus, diammonium phosphate, and
dipotassium hydrogen phosphate.  Prior to the completion of our
bacillus manufacturing facility upgrade in Shandong, we had purchased
semi-manufactured bacillus goods.





Our top
five suppliers accounted for 16.3%, 11.6%, 11.4%, 11.1% and 10.4% of our net
purchases for the fiscal year ended December 31, 2008,
respectively.  No other single supplier accounted for more than
10%.




Bio-enhanced
feed




The major
raw materials for bio-feed products are microbes, animal blood as enhanced
ingredients, corn, grains, bean cake, cotton draff, greenstuff draff and trace
elements.





The three
largest suppliers accounted for 16.9%, 12.6% and 10.9% of our net purchases for
the fiscal year ended December 31, 2008, respectively.  No other
single supplier accounted for more than 10%.




Customers




Bio-fertilizer




With
respect to bio-fertilizer, we have a total of 42 customers as of December 31,
2008, of which three customers accounted for 40.6%, 10.9% and 7.8% of our net
sales for the fiscal year ended December 31, 2008, respectively.  No
other single customer accounted for more than 7% of our revenues in this product
line.




Bio-enhanced
feed




With
respect to bio-enhanced feed, we have a total of 116 customers, of which three
customers accounted for 10.9%, 9.9% and 8.2% of net sales in this product
line.  No other individual customer accounted for more than 5% of our
net sales for the fiscal year ended December 31, 2008.




Seasonality




Bio-fertilizer




Our
operating results have been and are expected to continue to be subject to
seasonal trends.  This trend is dependent on numerous factors,
including the markets in which we are operating in, growing seasons, climate,
economic conditions and numerous other factors beyond our
control.  Generally, we expect the second and third quarters will be
stronger than the first and fourth quarters, primarily because the second and
third quarters correspond with the growing seasons in our primary markets in
China.  It is during those growing seasons when application of our
products by our customers would be most beneficial and we therefore expect
greater demand for our products during those periods.  There can be no
assurance that these operating patterns will occur.





12




Bio-enhanced
feed




Our
operating results for livestock feed products are also expected to continue to
be subject to seasonal factors.  The main seasonal factors that would
influence our livestock feed product line operating results include farming
seasons, climate, traditional holidays, animal diseases as well as other factors
that the management cannot control.  Generally speaking, our operating
results in this product line in the second and third quarters are expected be
better than those from the first and fourth quarters since fishponds in the
first and fourth quarters are frozen and pisciculturists stop fishing by
then.  Consequently they do not purchase our fish feed products during
the first and fourth quarters of each year.  Our livestock feed
factory does not produce fish feed during most of the first and fourth
quarters.  There is no guarantee for those operating result circles
will repeat themselves and management would adjust our plan in accordance with
changes occurred.




AF-01
Anti-viral aerosol




We have
not identified any patterns from our AF-01 anti-viral aerosol product business,
as it is still in the development stage.




Employees




We
currently employ 87 full-time employees in China and one in the United
States.  We also have 43 seasonal employees in China.  We
have full-time workers of 53 and management staff of 34.




Regulatory
Concerns




Our
production must comply with bio-fertilizer, livestock feed production and
testing procedure standards promulgated by the PRC Ministry of Agriculture or
local administrative authorities.  We have complied with the
applicable PRC government standard production and testing
procedures.  As for AF-01 anti-viral aerosol, we are now in the
process of applying for statutory licenses for the AF-01 technology in
accordance with relevant regulations (See subsection entitled “The Company—
AF-01 Anti-viral Aerosol” in this Item 1).




Environmental
Matters




Our two
manufacturing facilities, Kiwa Shandong and Kiwa Tianjin, have passed
environmental impact assessment by local environmental
authorities.  Photosynthesis bacteria, bacillus ssp, and actinomycetes
are environmentally friendly and are not known to cause any environmental
problems.




Legal
Proceedings




Neither
our company nor any of our subsidiaries is a party to any legal proceedings
that, individually or in the aggregate, are material to our company as a
whole.





13







Item
      1A.
            Risk
      Factors




We
operate in a market environment that is difficult to predict and that involves
significant risks and uncertainties, many of which will be beyond our
control.  The following risk factors and other information included in
this annual report should be carefully considered.  The risks and
uncertainties described below are not the only ones we
face.  Additional risks and uncertainties not presently known to us or
that we currently deem immaterial also may impair our business
operations.  If any of the following risks occur, our business,
financial condition, operating results, and cash flows could be materially
adversely affected.




(1)
Risks Related to Our Business




We
have not yet generated any profits and if we do not become profitable or obtain
additional funding to implement our business plan our ability to continue as a
going concern is in doubt.




Overview of the Company’s
Financial Condition as of December 31, 2008


As of
December 31, 2008, the Company had accumulated deficit of $14,706,710, among
which, $3,632,188 and $3,307,868 were incurred during twelve months ended
December 31, 2008 and 2007, respectively.





As of
December 31, 2008, we had cash and cash equivalents of $18,986 and total current
assets of $3,910,254; at the same time, we had current liabilities of
$7,910,310, denoting current ratio of 0.49 and quick ratio of
0.45.  At the end of fiscal 2008, we also had long-term liabilities of
$1,807,413.





On June
29, 2006, the Company entered into a securities purchase agreement with six
institutional investors for the issuance and sale of (1) 6% secured convertible
notes, due three years from the date of issuance, in the aggregate principal
amount of $2,450,000, convertible into shares of the Company’s common stock, and
(2) warrants to purchase 12,250,000 shares of the Company’s common
stock.  As of December 31, 2008, the outstanding principal of 6% Notes
was $1,622,323.  The maturity date of the 6% Notes is June 29,
2009.





To the
extent that we are unable to successfully raise the capital necessary to fund
our future cash requirements on a timely basis and under acceptable terms and
conditions, we will not have sufficient cash resources to maintain operations
and repay our liabilities, and may have to curtail or cease operations and
consider a formal or informal restructuring or reorganization.





Overview of the Company’s
Operating Results for the Twelve Months Ended December 31, 2008 and
2007


During
twelve months ended December 31, 2008 and 2007, our sales revenue was $9,175,737
and $9,129,779, respectively.  However, the Company gross profit was
$217,518 and $525,984, denoting a gross profit margin of 2.4% and
5.8%.  During fiscal year of 2008 and 2007, our operating loss was
$2,097,575 and $2,126,616.  Net loss for both periods was $3,632,188
and $3,307,868, respectively.





Overview of the Company’s
Cash flow Status for the Twelve Months Ended December 31, 2008 and
2007


During
fiscal year ended December 31, 2008 and 2007, our operating activities used net
cash of $829,142 and $523,649, respectively.  We also invested $48,111
and $206,446 in purchasing property and equipment during both
periods.  Although our financing activities provided net cash of
$901,615 and $308,591 in the fiscal year of 2008 and 2007, we had cash of only
$18,986 and $61,073 on December 31, 2008 and 2007, respectively.





14





The Company’s Ability of
Raising New Finance


Continuous
losses and low share price has deteriorate the Company’s ability of raising new
finance.  As of December 31, 2008, the closing price of our common
stock reported by on the OTC Bulletin Board was $0.0019.  The market
value of the Company was $264,858, which makes it very hard to arrange new
financing on equity financing basis.  The Company’s obligations under
the 6% Notes and the Warrants are secured by a first priority security interest
in the Company’s intellectual property pursuant to an Intellectual Property
Security Agreement with the Purchasers, and by a first priority security
interest in all of the Company’s other assets pursuant to a Security Agreement
with the Purchasers.  In addition, the Company’s Chief Executive
Officer has pledged all of his common stock of the Company as collateral
security for the Company’s obligations under the 6% Notes and the
Warrants.  As a result, the Company does not have assets to security
the obligations of new debt.





The 6%
Notes require the Company to procure the Purchaser’s consent to take certain
actions including to pay dividends, repurchasing stock, incur debt, guaranty
obligations, merge or restructuring the Company, or selling significant
assets.  Our ability of raising new finance is limited.





Kiwa Shandong’s Ability to
Continue as a Going Concern is in Doubt


Kiwa
Shandong is our wholly-owned subsidiary of engaging in researching, developing,
producing and marketing bio-fertilizer.  However, since its inception
in 2002, Kiwa Shandong has not generated material revenue.  Moreover,
Kiwa Shandong has never been profitable.  As of December 31, 2008,
Kiwa Shandong has accumulated deficit of $2,180,030.





In June
2002, we entered into an agreement with Zoucheng Municipal Government granting
us the use of at least 15.7 acres in Shandong Province, China at no cost for 10
years to construct a manufacturing facility.  Pursuant to relevant
China laws and regulations, we had paid tenure tax on quarterly basis at the
rate of approximately $1,660 per acre.  However, from January 1, 2007,
China central government adopted a series of policies to strengthen land
management, including doubled tenure tax to $3,320 per acre.  In
February 2008, the Ministry of Land and Resources of China issued “Controlling
Indexes of Construction Land Use for Industrial Projects,” which requires the
building coverage should not be less than 30%.  Up to now, the current
situation in Kiwa Shandong does not meet this requirement.  There is
no assurance that local authority would not reduce the acreage of land granted
to us to use at no cost.





On
December 31, 2008, we launched a complete test on the recoverability of our
long-lived assets in Kiwa Shandong.  Based on our analysis, Kiwa
Shandong’s long-lived assets were impaired.  Management is assessing
the usage of our long-lived assets in Kiwa Shandong; it is possible that we
would dispose some of our long-lived assets in the future.





Given the
tight cash flow status of the Company, we may have to curtail or cease
operations and consider a formal or informal restructuring or reorganization in
Kiwa Shandong.  For example, we may consider reduce the acreage of
land we use in Kiwa Shandong to lower tax expenditure.





Kiwa Tianjin’s Ability to
Continue as a Going Concern is in Doubt


Kiwa
Tianjin is our majority-owned subsidiary engaging in the developing,
manufacturing and marketing of biologically enhanced feed for live
stock.  Since its inception in 2006, the gross profit margin of Kiwa
Tianjin has been reducing.  During fiscal year ended December 31,
2008, Kiwa Tianjin’s gross profit margin was less than 3%, underpinning its
limited profitability.  As of December 31, 2008, Kiwa Tianjin had
accumulated deficit of $303,507.





As of
December 31, 2008, Kiwa Tianjin has cash of only $377.  Given the
tight cash flow status of the Company, we may have to curtail or cease
operations and consider a formal or informal restructuring or reorganization in
Kiwa Tianjin.





15





In
Conclusion


The
Company’s ability to continue as a going concern is in doubt.  We
expect to continue to have operating losses for the foreseeable future as we are
still in the process of exploring market, further research and product
tests.  We will require additional capital to implement our business
plan and continue operating.  To the extent that we are unable to
successfully raise the capital necessary to fund our future cash requirements on
a timely basis and under acceptable terms and conditions, we will not have
sufficient cash resources to maintain operations, and may have to curtail or
cease operations and consider a formal or informal restructuring or
reorganization.





Our
independent auditors have added an explanatory paragraph to their audit opinion
issued in connection with our financial statements for the latest six fiscal
years, which states that the financial statements raise substantial doubt as to
our ability to continue as a going concern.  Our ability to make
operations profitable or obtain additional funding will determine our ability to
continue as a going concern.




We
depend on a few customers for a significant portion of our revenue and are still
in the initial stage of market development.




We do not
have long-term contracts with any of our customers.  Generally we sign
an annual distribution agreement with each customer and purchases in most cases
occur on an order-by-order basis.  Relationships exist as long as
there is a perceived benefit to both parties.  A decision by a major
customer, whether motivated by competitive considerations, financial
difficulties and economic conditions or otherwise, to decrease its purchases
from us or to change its manner of doing business with us, could adversely
affect our business and financial condition.





During
fiscal 2008, three customers accounted for 59.2% of our net sales in
bio-fertilizer product line.  During fiscal 2008, three customers
accounted for 29.0% of our net sales in bio-enhanced feed product
line.  The customer concentration in this production line has been
increasing.  The loss of any of our significant customers would result
in a material reduction in our sales and results of operations.





We are
still in the initial stage of market development and need more time to construct
a robust customer base.  There can be no assurances that we will be
able to retain these customers.  Our inability to generate new
customers and retain old customers could negatively impact our business and our
ability to continue as a going concern.




Our
business is subject to seasonal fluctuations.




Our
operating results have been and are expected to continue to be subject to
seasonal trends.  This trend is dependent on numerous factors,
including the markets in which we operate, growing seasons, climate, economic
conditions and numerous other factors beyond our control.





As for
bio-fertilizer products, we generally expect the second and third quarters will
be stronger than the first and fourth quarters, primarily because the second and
third quarters correspond with the growing seasons in our primary markets in
China.  It is during those growing seasons when application of our
products by our customers would be most beneficial and we therefore expect
greater demand for our products during those periods.  There can be no
assurance that these operating patterns will occur.





16







Our
operating results may fluctuate significantly, which may result in volatility or
have an adverse effect on the market price of our common stock.




We have
experienced, and expect to continue to experience, substantial variation in our
net sales and operating results from quarter to quarter.  Our business
is subject to seasonal fluctuations due to growing seasons in different
markets.  We believe the factors that influence this variability of
quarterly results include:


l
            the
      timing and size of orders from major
customers;


l
            budgeting
      and purchasing cycles of customers;


l
            the
      timing of enhancements to products or new products introduced by us or our
      competitors;


l
            changes
      in pricing policies made by us, our competitors or suppliers, including
      possible decreases in average selling prices of products in response to
      competitive pressures;


l
            fluctuations
      in general economic conditions;


l
            the
      status of operating cash flow; and


l
            natural
      disasters and contagious animal
diseases.





We may
also choose to reduce prices or to increase spending in response to competition
or to pursue new market opportunities.  Due to fluctuations in our
revenue and operating expenses, we believe that period-to-period comparisons of
our results of operations are not a good indication of our future
performance.  It is possible that in some future quarter or quarters
our operating results will be below the expectations of securities analysts or
investors.  In that case, our stock price could fluctuate
significantly or decline.





From
January 1, 2008 to December 31, 2008, the market close price for our common
stock as quoted on the OTC Bulletin Board has ranged from a low of $0.0009 to a
high of $0.21 per share.  High volatility in the market price of our
common stock may result in lower prices for our common stock, making it more
difficult for us to obtain equity financing on terms and conditions which are
favorable to us, if at all.  We expect to continue to incur losses in
the future as we develop and market our initial products.  As a
result, we will be dependent on additional debt or equity financing to fund our
operations.  If such financing is not available on terms which are
acceptable to us, we may have to delay development of new products and/or reduce
sales and marketing efforts for our existing products.  Such actions
may have an adverse effect on our results of operations.  In addition,
uncertainties with respect to our ability to raise additional capital would make
operational planning more difficult for management.




Revocation
of our right to use patents or other intellectual property rights could
adversely impact the growth of our business.




We
acquired a patent in April 2004 from CAU, entitled “Highly Effective Composite
Bacteria for Enhancing Yield and the Related Methodology for Manufacturing,”
issued by the China Intellectual Property Bureau.  On May 8, 2006, we
entered into a technology transfer agreement with JKB with respect to the
technology transfer and related technical service for the AF-01 anti-viral
aerosol, which will become fully effective when we have finished paying the
first installment of consideration according to the payment schedule in the
contract.  So far we have not yet fully paid the first
installment.  If our rights under this patent and technology transfer
agreement are challenged or if we default on our obligations under applicable
Chinese regulatory requirements, our right to use these forms of intellectual
property could be revoked and we would no longer be permitted to use them in our
research, development, manufacturing and sales activities.  Such a
revocation or default could have an adverse impact on the growth of our business
by reducing the introduction of new products, and consequently,
sales.





17




Our
success depends in part on our successful development and sale of products
currently in the research and development stage.




Some of
our product candidates are still in the research and development
stage.  The successful development of new products is uncertain and
subject to a number of significant risks.  Potential products that
appear to be promising at early stages of development may not reach the market
for a number of reasons, including but not limited to, the cost and time of
development.  Potential products may be found to be ineffective or
cause harmful side effects, fail to receive necessary regulatory approvals, be
difficult to manufacture on a large scale or be uneconomical or fail to win
market acceptance.  For example, before marketing of the planned
veterinary drug based on AF-01 technology, there are several tests, trial,
evaluation, government approval and other procedures that are
required.  Our failure to successfully develop and sell new products
may delay or eliminate future acquisition plans and would most likely slow our
development.  Our plans to introduce additional proprietary products
may not be realized as expected, if at all.





As above
mentioned, the China bio-fertilizer market is still in a very early stage and is
very fragmented with many potential customers, but with no single producer or
small group of producers dominating the market.  To some extent,
however, we also face competition from large chemical fertilizer manufacturers
in China.  These chemical fertilizer manufacturers have provided
chemical fertilizers to farmers in China for over twenty years and customers are
more accustomed to using their established products as compared with new
products.  The livestock feed industry is fully developed in
China.  We are new entrants to the livestock feed industry, and our
production capacity is small relative to that of the whole
industry.





We plan
to develop a commercialized product using AF-01 anti-viral aerosol
technology.  We are now in the process of applying for prerequisite
statutory licenses.  There can be no assurance that we can acquire
such prerequisite approvals and licenses, or how much time it will
take.





There can
be no assurance that any of our intended products will be successfully developed
or that we will achieve significant revenues from such products even if they are
successfully developed.  Our success is dependent upon our ability to
develop and market our products on a timely basis.  There can be no
assurance that we will be successful in developing or marketing such products or
taking advantage of the perceived demand for such products.  In
addition, there can be no assurance that products or technologies developed by
others will not render our products or technologies non-competitive or
obsolete.




Failure
to adequately expand to address expanding market opportunities could have a
material adverse effect on our business and results of operations.




We
anticipate that a significant expansion of operations will be required to
address potential market opportunities.  There can be no assurances
that we will expand our operations in a timely or sufficiently large manner to
capitalize on these market opportunities.  The anticipated substantial
growth is expected to place a significant strain on our managerial, operational
and financial resources and systems.  While management believes it
must implement, improve and effectively use our operational, management,
research and development, marketing, financial and employee training systems to
manage anticipated substantial growth, there can be no assurances that these
practices will be successful.





18




The
products we hope to develop based on AF-01 technology will depend on an
exclusive supply relationship for raw materials.




Pursuant
to our Technology Transfer Agreement with JKB, they will have the exclusive
right to supply us the raw material medicine for AF-01 anti-viral
aerosol.  Although the exclusive supply relationship may help to
prevent new entrants from producing similar products, our ability to produce our
products in a timely manner will depend on JKB fulfilling its supply obligation
for the raw material.  If we desired to produce raw material medicine
by ourselves, we would have to acquire additional technology and negotiate with
JKB and IMB. There can be no assurance that we can acquire the required
technology with an acceptable price.  Consequently without JKB’s
cooperation and performance of its obligations, we may not be able to execute
our business plan on this project, even if we successfully acquire all
prerequisite certificates for producing and marketing this veterinary drug
product.




Our
success depends in part upon our ability to retain and recruit key
personnel.




Our
success is highly dependent upon the continued services of our executive
officers, key product development personnel and key scientific
personnel.  Given the intense competition for qualified management and
product development personnel in our industry, the loss of the services of any
key management or product development personnel may significantly and
detrimentally affect our business and prospects.  We maintain
employment agreements with all members of management or key
personnel.  Pursuant to our joint agreement with CAU, it must make
available at least six R&D staff to join the Kiwa-CAU R&D Center, at
least three of whom must have professor or doctorate degrees, and at least two
who must have master degrees.  There can be no assurance that we will
be able to retain these personnel, and it may be time-consuming and costly to
recruit qualified replacement personnel.




We
currently do not have sufficient revenues to support our business activities,
expect operating losses continue, and will require additional financing which we
may not be able to secure.




We
require substantial working capital to fund our business.  In the
short term, we still need to continue building out our bio-fertilizer
manufacturing facility, adjust our product formula to improve product stability
and optimize our product offerings, expand our sales and marketing efforts in
China, expand our distribution base in China, maintain operation of Kiwa-CAU
R&D Center, introduce new veterinary drug products and acquire a small or
medium sized biotechnology company or a factory with GMP qualification for this
new product.  In the long term, we plan to become a commercialization
platform for world-class biotechnological research and development results for
applications in agriculture, natural resources conservation and environment
protection, launch our products in the Southeast Asia, United States and other
markets, continue our introduction of new products, create formal strategic
alliances with selected United States companies to co-develop and/or co-market
products in the United States and China, and form an international biotechnology
research center in China for the research and development of agricultural,
environmental and medical applications.





During
fiscal year of 2008, our sales revenue did not increase significantly as
compared to that of 2007, at the same time we are continuing to experience
losses.  We currently do not have sufficient revenues to support our
business activities and we expect operating losses to continue.  We
will require additional capital to fund our operations and finance our research
and development activities.  Funding, whether from a public or private
offering of debt or equity, a bank loan or a collaborative agreement, may not be
available when needed or on favorable terms.  Further, any significant
equity or debt financing will require us to give priority to holders of the 6%
secured convertible notes (“6% Notes”) under the terms of a securities purchase
agreement dated June 29, 2006, which may raise the difficulty level of
completing a financing. (For more details regarding the 6% Notes see Note 15 to
consolidated financial statements under Item 8, Part II.) If we are unable to
obtain necessary financing in the amounts and on terms deemed acceptable, we
will have to limit, delay, scale back or eliminate our research and development
activities or future operations.  Any of the foregoing may adversely
affect our business and cause us to discontinue as a going concern.





19




The
risks associated with raising capital through collaborations and licensing
agreements could adversely affect our business.




We will
be required to raise additional capital to fund our operations and finance our
research and development activities through collaborative and/or licensing
agreements.  Under these agreements, we may be subject to various
restrictive covenants which could significantly limit our operating and
financial flexibility and may limit our ability to respond to changes in our
business or competitive environment.  If we are unable to obtain
necessary financing in the amounts and on terms deemed acceptable, we may have
to limit, delay, scale back or eliminate our research and development activities
or future operations.  Any of the foregoing may adversely affect our
business.




Restrictions
on currency exchange may limit our ability to effectively receive and use our
revenue.




Since
most of our future revenues may be in the form of China Renminbi, any future
restrictions on currency exchanges may limit our ability to use revenue
generated in Renminbi to fund our business activities outside China or to make
dividend or other payments in U.S. Dollars.  Although the Chinese
government introduced regulations since 1996 to allow greater convertibility of
Renminbi, for current account transactions significant restrictions still
remain, including primarily the restriction that foreign invested enterprises
may only buy, sell and/or remit foreign currencies at those banks authorized to
conduct foreign exchange business after providing valid commercial
documents.  In addition, conversion of Renminbi for capital account
items, including direct investment and loans, is subject to governmental
approval in China, and companies are required to open and maintain separate
foreign exchange accounts for capital account items.  We cannot be
certain that the Chinese regulatory authorities will not impose more stringent
restrictions on the convertibility of Renminbi, especially with respect to
foreign exchange transactions.





We may
also be subject to foreign exchange risk and foreign ownership
restrictions.  The Chinese government is loosening its control on
foreign exchange transactions, and has steadily appreciated Renminbi relative to
the U.S. dollar since July 2005.  However, there can be no assurance
that this policy will continue.  More liberal foreign exchange
policies will reduce our foreign exchange risk by increasing the liquidity of
revenues generated in Renminbi.  Fluctuations in the exchange rate of
Renminbi against the U.S. Dollar could adversely affect our results of
operations by affecting our reported earnings for any given
period.  In addition, foreign ownership restrictions could also impact
our ability to expand our business through investment and acquisition
opportunities.  If we are unable to pursue such strategic
opportunities due to foreign ownership regulations, the growth of our business
could be limited.




Changes
in China’s political, social, economic or legal systems could materially harm
our business.




All of
our manufacturing and production as well as the majority of our sales occur in
China.  Consequently, an investment in our common stock may be
adversely affected by the political, social and economic environment in
China.  Under its current leadership, China has been pursuing economic
reform policies, including the encouragement of private economic activities and
greater economic decentralization.  There can be no assurance,
however, that the Chinese government will continue to pursue such policies, that
such policies will be successful if pursued, or that such policies will not be
significantly altered from time to time.





Our
business and prospects are dependent upon agreements and regulatory approval
with various entities controlled by Chinese governmental
instrumentalities.  Historically, our operations in China have
received relatively favorable treatment from these instrumentalities as a result
of the Chinese government’s policies of encouraging economic development and
innovation, especially in underdeveloped regions.  However, our
operations and prospects would be materially and adversely affected by a change
in China’s economic policies, which could make it more difficult for us to
obtain necessary approvals from governmental authorities and to obtain economic
incentives from governmental authorities.  In addition, if the Chinese
government elects not to honor certain contracts as a result of political
change, it might be difficult to enforce these contracts against such
governmental entities in China.  In addition, the legal system of
China relating to foreign investments is both new and continually evolving, and
currently there can be no certainty as to the application of its laws and
regulations in particular instances.





20





For
example, in June 2002, we entered into an agreement with Zoucheng Municipal
Government granting us the use of at least 15.7 acres in Shandong Province,
China at no cost for 10 years to construct a manufacturing
facility.  Pursuant to relevant China laws and regulations, we had
paid tenure tax on quarterly basis at the rate of approximately $1,660 per
acre.  However, from January 1, 2007, China central government adopted
a series of policies to strengthen land management, including doubled tenure tax
to $3,320 per acre.  In February 2008, the Ministry of Land and
Resources of China issued “Controlling Indexes of Construction Land Use for
Industrial Projects,” which requires the building coverage should not be less
than 30%.  Up to now, the current situation in Kiwa Shandong does not
meet this requirement.  The Company is also considering reduce the
acreage that we leased and return part of the land to local authority to lower
down taxes.




A
slow-down in the Chinese economy may adversely affect our growth and
profitability.




The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors.  There can be no assurance that growth of the
Chinese economy will be steady or that any recessionary conditions will not have
a negative effect on our business.  To the extent that there is a
slow-down in the Chinese economy, the agricultural industry may be adversely
affected.  Consequently, the growth and profitability of our
bio-fertilizer business and bio-enhanced feed business may drop
down.  The financial tsunami has significantly slow down the growth of
world economy.  There can be no assurance that Chinese economy and our
growth and profitability will not be affected.




Any
recurrence of SARS, avian influenza or another widespread public health problem,
could adversely affect our business and results of operations.




A renewed
outbreak of SARS, Avian influenza, highly pathogenic blue-ear disease or another
widespread public health problem in China, where most of our revenue is derived,
could have a negative effect on our operations.  Our operations may be
impacted by a number of health-related factors, including the following: (1)
quarantines or closures of some of our offices and factories which would
severely disrupt our operations, (2) the sickness or death of our key officers
and employees, (3) a general slowdown in the Chinese economy, especially rapid
decrease of stockbreeding





Any of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our business and results of operations.




Our
ability to generate revenues could suffer if the Chinese ag-biotechnology market
does not develop as anticipated.




The
agriculture-biotechnology market in China, the primary market in which we do
business, is in the early stages of development.  While we believe the
market opportunity looks promising, we expect that the market will take several
years to develop.  While it is difficult to project exactly how long
it will take to develop the ag-biotechnology industry in China, we anticipate
that it will take at least ten years to reach a level of development that is
similar to the current state of the industry in the United
States.  Successful development of the ag-biotechnology market in
China depends on the following: (1) continuation of governmental and consumer
trends favoring the use of products and technologies designed to create
sustainable agriculture; (2) educating the Chinese agricultural community and
consumers about the uses of ag-biotechnology products; and (3) certain
institutional developments such as governmental agricultural subsidies designed
to promote the use of environmentally friendly ag-biotechnological
products.





21





There are
no assurances that these trends will continue, governmental subsidies will be
offered, or that the Chinese agricultural community and consumers will be
successfully educated about the uses of ag-biotechnology
products.  The conduct of business in the ag-biotechnology market
involves high risks.  There can be no assurances that the
ag-biotechnology market in China will develop sufficiently to facilitate our
profitable operation.  While we believe that we will benefit from our
first-mover advantage in a growing market, existing competitors and new entrants
in the ag-biotechnology market are expected to create fierce competition in the
future as the market evolves.  Competitors and new entrants may
introduce new products into the market that may detrimentally affect sales of
our existing products, and consequently our revenues.  We intend to
fund operations through sales, debt and equity financings until such time as the
ag-biotechnology market in China is sufficiently developed to support our
profitable operation.




We
may not be able to adequately protect our intellectual property rights, and may
be exposed to infringement claims from third parties.




Our
success will depend in part on our ability to obtain patent protection for our
technology, to preserve our trade secrets and to operate without infringing on
the proprietary rights of third parties.  We have several trademarks
registered in China, which will be protected by the trademark laws in China for
ten years and are renewable at the expiration of the initial ten-year
term.  In addition, we acquired a China patent in 2004 from CAU
entitled “Highly Effective Composite Bacteria for Enhancing Yield and the
Related Methodology for Manufacturing,” issued by the China Intellectual
Property Bureau, which has a remaining term of five years, and entered into a
Technology Transfer Agreement with JKB on the technology transfer and related
technical service for the AF-01 technology.





We may
also file patents with the PRC Intellectual Property Bureau and/or the U.S.
Patent and Trademark Office as we deem appropriate, or buy other patents such as
above said anti-viral aerosol technologies.  There can be no assurance
that the patents applied for will be reviewed in a timely manner, that any
additional patents will be issued or that any patents issued will afford
meaningful protection against competitors with similar technology or that any
patents issued will not be challenged by third parties.  There also
can be no assurance that others will not independently develop similar
technologies, duplicate our technologies or design around our technologies
whether or not patented.  There also can be no assurance that we will
have sufficient resources to maintain a patent infringement lawsuit should
anyone be found or believed to be infringing our patents.  There also
can be no assurance that the technology ultimately used by us will be covered in
any additional patent applications that we may file.  We do not
believe that our technology infringes on the patent rights of third
parties.  However, there can be no assurance that certain aspects of
our technology will not be challenged by the holders of other patents or that we
will not be required to license or otherwise acquire from third parties the
right to use additional technology.  The failure to overcome such
challenges or obtain such licenses or rights on acceptable terms could have a
material adverse affect on our results of operations and financial
condition.





The
processes and know-how of importance to our technology are dependent upon the
skills, knowledge and experience of our technical personnel, consultants and
advisors and such skills, knowledge and experience are not
patentable.  To help protect our rights, we require employees,
significant consultants and advisors with access to proprietary information to
enter into confidentiality and proprietary rights agreements.  There
can be no assurance, however, that these agreements will provide adequate
protection for our trade secrets, know-how or proprietary information in the
event of any unauthorized use or disclosure.  There can be no
assurance that we will be able to obtain a license for any technology that we
may require to conduct our business or that, if obtainable, such technology can
be licensed at a reasonable cost.  The cost of obtaining and enforcing
patent protection and of protecting proprietary technology may involve a
substantial commitment of our resources.  Any such commitment may
divert resources from other areas of our operations.  We may be
required to license or sublicense certain technology or patents in order to
commence operations.  There can be no assurance that we will be able
to obtain any necessary licenses or to do so on satisfactory
terms.  In addition, we could incur substantial costs in defending
ourselves against suits brought by other parties for infringement of
intellectual property rights and there are no assurances that we will have the
resources to do so.





22




We
may become involved in intellectual property litigation, the defense of which
could adversely impact our business operations.




Currently
we have one patent in China (Patent Number ZL93 101635.5 and International
patent classification Number A01N 63/00), which covers six different species of
bacillus which have been tested as bio-fertilizers to enhance yield and plant
health as well as the production methods of the six species.  The
patent will expire on February 19, 2013.  Pursuant to our Technology
Transfer Agreement with JKB, we will acquire the AF-01 anti-viral aerosol
technology when we have fully paid the first installment of the purchase price
and other conditions to the contract have been fulfilled, such as issuance by
the PRC Ministry of Agriculture of a new medicine certificate in respect of the
technology.





While we
have not received any allegations, complaints or threats of litigation relating
to any intellectual property rights, we may, from time to time, become involved
in litigation regarding patent and other intellectual property
rights.  From time to time, we may receive notices from third parties
of potential infringement and claims of potential
infringement.  Defending these claims could be costly and time
consuming and would divert the attention of management and key personnel from
other business issues.  The complexity of the technology involved and
the uncertainty of intellectual property litigation increase these
risks.  Claims of intellectual property infringement also might
require us to enter into costly royalty or license
agreements.  However, we may be unable to obtain royalty or license
agreements on terms acceptable to us, or at all. In addition, third parties may
attempt to appropriate the confidential information and proprietary technologies
and processes used in our business, which we may be unable to prevent and which
would harm the businesses and our prospects.




We
face technical risks associated with commercializing our technology which could
have a material adverse impact on our business results and
operations.




A key to
our future success is the ability to produce our planed animal flu disinfector,
livestock feed and bacillus series of products at lower costs than our
competitors.  Although we are currently utilizing our proprietary
technology to produce such products at lower costs, our method for producing
such products on a commercial basis has only recently begun.  Further,
although results from recent independent tests and our early production results
have been encouraging, the ability of our technology to commercially produce
such products at consistent levels is still being evaluated.  There
can be no assurance that we will continue to be able to produce such products at
lower costs than our competitors, nor that our technology will be able to
commercially produce such products at consistent levels.




We
have limited business insurance coverage.




We do not
have any business liability insurance coverage for our operations. Any business
disruption, litigation or natural disaster might result in substantial costs and
diversion of resources.





23







If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results. As a result, current and potential
stockholders could lose confidence in our financial reporting, which would harm
our business and the trading price of our stock.




As
a public company, we are subject to report our internal control structure and
procedures for financial reporting in our annual reports on Form 10-K, as a
requirement of Section 404 of the U.S. Sarbanes-Oxley Act of 2002 by the U.S.
Securities and Exchange Commission (the “SEC”).  The report must
contain an assessment by management about the effectiveness of our internal
controls over financial reporting.





Our
management has concluded that our internal controls over our financial reporting
are ineffective, as required by Section 404 of the U.S. Sarbanes-Oxley Act, for
the fiscal year ending December 31, 2008.  Any failure to implement
and maintain improvements in the controls over our financial reporting, or
difficulties encountered in the implementation of any improvements in our
controls, could cause us to fail to meet our reporting
obligations.  Any failure to improve our internal controls to address
these identified weaknesses could also cause invertors to lose confidence in our
reported financial information, which could have a negative impact on the
trading price of our stock.




(2)
Risk Related to Our Common Stock




If
an active trading market for our securities does not remain in existence, the
market price of our securities may decline and stockholders’ liquidity may be
reduced.




Our
common stock is quoted on the OTC Bulletin Board; however, trading volume is
very limited.  We cannot guarantee that trading volumes to sustain a
regular trading market will ever develop.  The OTC Bulletin Board is
an inter-dealer, over-the-counter market that provides significantly less
liquidity than the NASD’s automated quotation system.  Market prices
for our common stock will be influenced by a number of factors, including but
not limited to: (1) the issuance of new equity securities; (2) changes in
interest rates; (3) competitive developments, including announcements by
competitors of new products or services or significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments; (4) variations in
quarterly operating results; (5) change in financial estimates by securities
analysts; (6) the depth and liquidity of the market for our common stock; (7)
investor perceptions of our company and the ag-biotechnology industry generally;
and (8) general economic and other conditions.




The
designation of our common stock as “penny stock” could impact the trading market
for our common stock due to broker-dealer requirements imposed by the
designation of our common stock as “penny stock.”




Our
common stock is a “penny stock” as defined in Rules 15g-2 through 15g-6
promulgated under Section 15(g) of the Securities Exchange Act of 1934, as
amended, as it meets the following definitions: (i) the stock trades at a price
less than $5.00 per share; (ii) it is not traded on a “recognized” national
exchange, or even if so, has a price less than $5.00 per share; and (iii) is
issued by a company with net tangible assets less than $2.0 million, if in
business more than a continuous three years, or with average revenues of less
than $6.0 million for the past three years.  The principal result or
effect of being designated as a “penny stock” is that securities broker-dealers
cannot recommend the stock but must trade in it on an unsolicited
basis.





24





Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated thereunder by the Securities and Exchange Commission require
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document before effecting any transaction in a
penny stock for the investor’s account.





Potential
investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be “penny
stock.”  Moreover, Rule 15g-9 requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor.  This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor’s financial
situation, investment experience and investment
objectives.  Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.




Provisions
in our charter and the corporate law of our state of incorporation could deter
or prevent an acquisition or change of control.




Provisions
of our certificate of incorporation may deter or prevent a change in control of
management.  Specifically, our certificate of incorporation allows our
Board of Directors to issue 20,000,000 shares of preferred stock, in one or more
series and with such rights and preferences including voting rights, without
further stockholder approval.  In the event that the Board of
Directors designates additional series of preferred stock with rights and
preferences, including super-majority voting rights, and issues such preferred
stock, the preferred stock could make our acquisition by means of a tender
offer, a proxy contest or otherwise, more difficult, and could also make the
removal of incumbent officers and directors more difficult.  As a
result, these provisions may have an anti-takeover effect.  The
preferred stock authorized in our certificate of incorporation may inhibit
changes of control.





In
addition, we are subject to the provisions of Section 203 of the Delaware
General Corporation Law.  That section provides, with some exceptions,
that a Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of the person, who is an
“interested stockholder” for a period of three years from the date that the
person became an interested stockholder unless: (i) the transaction resulting in
a person becoming an interested stockholder, or the business combination, is
approved by the Board of Directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquires 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder, excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by some employee
stock ownership plans; or (iii) on or after the date the person becomes an
interested stockholder, the business combination is approved by the
corporation’s Board of Directors and by the holders of at least 66 2/3% of the
corporation’s outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder.  An “interested
stockholder” is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether the person is
an interested stockholder.





These
provisions could also limit the price that future investors might be willing to
pay in the future for our common stock.  This could have the effect of
delaying, deferring or preventing a change in control of our Company and/or a
change in the members our Board of Directors.  The issuance of
preferred stock could also effectively limit or dilute the voting power of our
stockholders.  Accordingly, such provisions of our certificate of
incorporation, as amended, may discourage or prevent an acquisition or
disposition of our business that could otherwise be in the best interest of our
stockholders.





25




Investors
should not rely on an investment in our common stock for dividend income as we
do not intend to pay dividends in the foreseeable future.




We do not
anticipate paying any cash dividends on our common stock in the foreseeable
future.  We intend to retain any earnings to finance the growth of our
business.  We cannot assure you that we will ever pay cash
dividends.  Therefore, investors should not rely on an investment in
our common stock if they require dividend income.  The only income in
the foreseeable future such investors will receive from an investment in our
common stock will come from increases in the market price of our common
stock.  There can be no assurances that the market price of our common
stock will increase or continue to increase, and such increases will most likely
be uncertain and unpredictable.  Whether we pay any cash dividends in
the future will depend on the financial condition, results of operations and
other factors that the Board of Directors will consider.




It
may be difficult for investors to enforce a service of process or enforce
liabilities against us.




We are
incorporated in the State of Delaware, and our principal executive offices are
located in the State of California.  However, substantially all our
fixed assets and operations are located in the PRC.  In addition, some
of our directors and officers are Chinese citizens and residents.  As
a result, it may be more difficult for investors or other third parties to
attach our assets in enforcement of a judgment against us or to enforce
liabilities and obligations against us in certain circumstances.  It
may also be difficult to enforce service of process against directors and
officers in China.




Entering
into equity or debt financings could result in dilution to existing
stockholders.




We will
be required to raise additional capital to fund our operations and finance our
research and development activities through a public or private offering of debt
or equity securities.  Any equity financing could result in dilution
to the existing stockholders as a direct result of our issuance of additional
shares of our capital stock.  Debt financings will result in interest
expense and likely subject us to negative covenants that would limit our
operational flexibility, and if convertible into equity, could also dilute
then-existing stockholders.





For
example, we issued $2,450,000 of convertible notes (6% Notes) in 2006, of which
$827,678 of principal have been converted into 58,112,615 shares and the balance
of $1,622,322 may be converted into an estimated 4,055,806,000 shares of our
common stock based on the average price of three lowest prices within 20 trading
days before December 31, 2008.  We also have outstanding 6% Note
Warrants to purchase 12,250,000 shares of common stock.  The
conversion ratio of the 6% Notes is based on the market price of our stock at
any given point in time.  Consequently, the number of shares of common
stock issuable upon conversion of the outstanding 6% Notes and certain of our
other outstanding convertible notes will increase if the market price of our
stock declines.  Such debt financings may cause immediate and
substantial dilution to our existing stockholders.





26




The
shares of common stock allocated for conversion of the 6% Notes are not adequate
and we are required to amend our certificate of incorporation to increase our
authorized shares of common stock.  We may incur substantial costs in
connection therewith.




Pursuant
to the securities purchase agreement in connection with the 6% Notes, we must
reserve for purposes of issuance a number of shares of common stock that is no
less than 110% of the number of shares of common stock issuable upon full
conversion of the 6% Notes based on the average conversion price of the 6% Notes
and full exercise of the 6% Note Warrants based on the average exercise price of
the 6% Note Warrants.  Based on our current market price and the
potential decrease in our market price as a result of the issuance of shares
upon conversion of the 6% Notes, we have made a good faith estimate as to the
amount of shares of common stock that we are required to allocate for conversion
of the 6% Notes.  Given the fact that the number of authorized shares
of the Company was amended from 200,000,000 to 400,000,000 at the Annual
Stockholders’ Meeting of 2008; as of December 31, 2008, amount of authorized
shares does not meet the requirements as set forth by security purchase
agreement in connection with 6% Notes.





In the
future, we may have to further amend our certificate of incorporation to
increase the number of authorized common stocks, which could incur substantial
costs.




Future
sales by our stockholders may negatively affect our stock price and our ability
to raise funds in new stock offerings.




Sales of
our common stock in the public market could lower the market price of our common
stock.  Sales may also make it more difficult for us to sell equity
securities or equity-related securities in the future at a time and price that
our management deems acceptable or at all.  As of December 31, 2008,
we had 139,399,206 shares of common stock outstanding, most of which we estimate
have been held more than two years and are freely tradable under Rule
144.  In the Form SB-2 declared effective on October 30, 2006, we
registered up to 27,685,365 shares of common stock for resale, which may be sold
without restriction under securities laws.  In November of 2007, the
SEC adopted significant amendments to Rule 144, pursuant to which holding period
of non-affiliates before resale of restricted shares of a reporting company has
been shortened to six months.  The sale of these shares may adversely
affect the market price of our common stock.




The
sale of our stock under the Securities Purchase Agreement could encourage short
sales by third parties, which could contribute to the future decline of our
stock price.




In many
circumstances the provision of financing based on the distribution of
equity/convertible notes for companies that are quoted on the OTC Bulletin Board
has the potential to cause a significant downward pressure on the price of
common stock.  Since the registration statement for this offering is
effective, the number of freely tradable shares will significantly increase,
thus there is a possibility that the balance of sell side pressure would
overwhelmingly exceed that of the buying side.  As a consequence, the
price of shares will drop considerably.  This is especially the case
if the shares being placed into the market exceed the market’s ability to take
up the increased stock or if we have not performed in such a manner to show that
the equity funds raised will be used to grow our business.  Such an
event could place further downward pressure on the price of our common
stock.





During
fiscal 2008, the lowest trading price of our common stocks was
$0.0009.  There is no assurance that the share price will not further
drop down.





If there
are significant short sales of stock, the price decline that would result from
this activity will cause the share price to decline more so which in turn may
cause long holders of the stock to sell their shares thereby contributing to
sales of stock in the market. If there is an imbalance on the sell side of the
market for the stock, the price will decline significantly and
quickly.  It is not possible to predict if the circumstances exist
under which short sales could materialize or to what level our stock price could
decline.  In some companies that have been subjected to short sales
the stock price has dropped to near zero.





27







Item
      2.
            Property




In June
2002, Kiwa Shandong entered into an agreement with Zoucheng Municipal Government
granting us the use of at least 15.7 acres in Shandong Province, China at no
cost for 10 years to construct a manufacturing facility.  Under the
agreement, we have the option to pay a fee of approximately RMB 480,000
($65,712) per acre for the land use right at the expiration of the 10-year
period.  We may not transfer or pledge the temporary land use
right.  In the same agreement, we have also committed to invest
approximately $18 million to $24 million for developing the manufacturing and
research facilities in Zoucheng, Shandong Province.  As of December
31, 2008, we had invested approximately $1.91 million in plant and equipment for
the project.





From
January 1, 2007, China central government adopted a series of policies to
strengthen land management, including doubled tenure tax to $3,320 per
acre.  In February 2008, the Ministry of Land and Resources of China
issued “Controlling Indexes of Construction Land Use for Industrial Projects,”
which requires the building coverage should not be less than 30%.  Up
to now, the current situation in Kiwa Shandong does not meet this requirement.
As a company operating ag-biotech business, the building coverage may differ
from that of typical manufacturers in other industries.  However,
there is no assurance that local authorities would not take back part of the
land.





The core
ingredient of our bio-fertilizer products is bacillus
spp.  Photosynthetic bacteria are one of the ingredients used in some
of our products.  However, the upgrade was not fully completed due to
shortage of capital.  The Company plans to finish upgrading bacillus
spp manufacturing facilities in 2009.





With the
formation of Kiwa Tianjin in July 2006, Challenge Feed, the minority
shareholder, invested machinery and equipment used in one of its two
bio-enhanced feed production lines at an agreed value of
$120,000.  The Company has also entered into a lease agreement with
Challenge Feed to lease another concentrated feed product line for three
years.  (For more details, see Note 19 to consolidated financial
statements under Item 7 in Part II.)  Under the lease agreement, we
also lease Challenge Feeds’s other facilities for three years commencing on
August 1, 2006: (1) an office building with floor area of approximately 800
square meters; (2) storehouses with floor area approximately 2,500 square
meters; and (3) two workshops with floor area of approximately 1,200 square
meters.  The total monthly rental is RMB 50,000
($7,300).  From January 1 to December 31, 2008 we have paid
approximately $87,800 as rent expenses.  The maximum amount of
production of Kiwa Tianjin was 40,000 tons per year and the actual amount was
approximately 20,700 tons in 2008.





The
Company has leased an office in Beijing from July 15, 2007.  The
monthly rental payment for the office is RMB .




Item
      3.
            Legal
      Proceedings




The
Company is not currently involved in any material pending legal
proceedings.




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




The
Company hosted annual stockholders’ meeting of 2008 on December 30,
2008.





28





Only
stockholders of record at the close of business on November 12, 2008 were
entitled to vote at the meeting.  As of November 12, 2008, number of
shares of common stock issued and outstanding and was entitled to vote was
105,063,107.  On December 30, 2008, 79,818,634 shares of common stock,
representing 76.0% of total number of shares entitled to vote, voted at the
meeting in person or through proxies.





At our
annual meeting held on, five nominees for director have been elected to serve a
one-year term on the Board of Directors set to expire at the 2009 annual meeting
of stockholders and until their respective successors are elected and
qualified.  Directors elected are Mr. Wei Li, Mr. Lianjun Luo, Mr.
Xucheng Hu, Mr. Yunlong Zhang and Prof. Qi Wang.





The
following table summarizes voting results of electing members of Board of
Directors.





FOR
                                                
                                                
                                                AGAINST
                                                
                                                
                                                WITHHELDMAIL-INWei
      Li
                                                
                                                
                                                46,120,127
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0Xucheng
      Hu
                                                
                                                
                                                46,120,127
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0Lianjun
      Luo
                                                
                                                
                                                46,120,127
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0Yunlong
      Zhang
                                                
                                                
                                                46,120,127
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0Qi
      Wang
                                                
                                                
                                                46,120,127
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                0ADPWei
      Li
                                                
                                                
                                                31,109,243
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                2,589,264Xucheng
      Hu
                                                
                                                
                                                31,047,243
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                2,651,264Lianjun
      Luo
                                                
                                                
                                                31,047,243
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                2,651,264Yunlong
      Zhang
                                                
                                                
                                                31,047,243
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                2,651,264Qi
      Wang
                                                
                                                
                                                31,047,243
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                2,651,264TOTALWei
      Li
                                                
                                                
                                                77,229,370
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                2,589,264Xucheng
      Hu
                                                
                                                
                                                77,167,370
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                2,651,264Lianjun
      Luo
                                                
                                                
                                                77,167,370
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                2,651,264Yunlong
      Zhang
                                                
                                                
                                                77,167,370
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                2,651,264Qi
      Wang
                                                
                                                
                                                77,167,370
                                                
                                                
                                                
                                                0
                                                
                                                
                                                
                                                2,651,264





The
annual meeting also ratified the appointment of Mao & Company, CPAs Inc. as
the Company’s independent auditor for fiscal 2008.





FOR
                  
                  
                  AGAINST
                  
                  
                  WITHHELDTOTAL
                  
                  
                  79,326,883
                  
                  
                  
                  491,752
                  
                  
                  
                  0





The
annual meeting of stockholders approved of changing our certificate of
incorporation by increasing the number of authorized common stocks from
200,000,000 to 400,000,000.





FOR
                  
                  
                  AGAINST
                  
                  
                  WITHHELDTOTAL
                  
                  
                  68,874,125
                  
                  
                  
                  10,932,509
                  
                  
                  
                  12,000





29




Part
II




Item
      5.
            Market
      for Registrants’ Common Equity, Related Stockholder Matters and Issuer
      Purchasers of Equity Securities




Market
Information




The
Company’s common stock has been quoted on the OTC Bulletin Board of the NASD
under the symbol “KWBT.OB” since March 30, 2004, and was quoted under the symbol
“TTGM.OB” prior to the merger in March 2004.  The merger transaction
is described in “Business-The Company” under Item 1.  During 2008, the
market price for our common stock has ranged from $0.0009 to $0.21.





The
following table sets forth the high and low bid quotations per share of our
common stock as reported on the OTC Bulletin Board for the periods
indicated.  The high and low bid quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.





Fiscal
      Year 2007
                      
                      High
                      
                      
                      LowFirst
      Quarter
                      
                      $
                      0.26
                      
                      
                      $
                      0.17Second
      Quarter
                      
                      $
                      0.21
                      
                      
                      $
                      0.085Third
      Quarter
                      
                      $
                      0.095
                      
                      
                      $
                      0.06Fourth
      Quarter
                      
                      $
                      0.19
                      
                      
                      $
                      0.083





Fiscal
      Year 2008
                      
                      High
                      
                      
                      LowFirst
      Quarter
                      
                      $
                      0.21
                      
                      
                      $
                      0.10Second
      Quarter
                      
                      $
                      0.115
                      
                      
                      $
                      0.058Third
      Quarter
                      
                      $
                      0.11
                      
                      
                      $
                      0.0125Fourth
      Quarter
                      
                      $
                      0.048
                      
                      
                      $
                      0.0009




Holders




As of May
15, 2009, there were approximately 433 shareholders of record of our common
shares.




Dividend
Policy




We have
not paid any dividends on our common shares since our inception and do not
anticipate that dividends will be paid at any time in the immediate
future.




Equity Compensation Plan
Information




The
information required by Item 5 regarding securities authorized for issuance
under equity compensation plans is included in Item 12 of this
report.





30




Item
      6.
            Selected
      Financial Data




Not
required.




Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation




This
Annual Report on Form 10-K for the fiscal year ended December 31, 2008 contains
“forward-looking” statements within the meaning of Section 21E of the Securities
and Exchange Act of 1934, as amended, including statements that include the
words “believes,” “expects,” “anticipates,” or similar
expressions.  These forward-looking statements include, among others,
statements concerning our expectations regarding our working capital
requirements, financing requirements, business, growth prospects, competition
and results of operations, and other statements of expectations, beliefs, future
plans and strategies, anticipated events or trends, and similar expressions
concerning matters that are not historical facts.  The forward-looking
statements in this Annual Report on Form 10-K for the fiscal year ended December
31, 2008 involve known and unknown risks, uncertainties and other factors
(described in “Business-Risk Factors” under Item 1) that could cause our actual
results, performance or achievements to differ materially from those expressed
in or implied by the forward-looking statements contained herein.




Overview




The
Company took its present corporate form in March 2004 when the shareholders of
Tintic Gold Mining Company, a Utah public corporation (“Tintic”), entered into a
share exchange transaction with the shareholders of Kiwa BVI, a privately-held
British Virgin Islands corporation that left the shareholders of Kiwa BVI owning
a majority of Tintic and Kiwa BVI a wholly-owned subsidiary of Tintic, See
“Business - The Company” under Item 1.  For accounting purposes this
transaction was treated as an acquisition of Tintic Gold Mining Company by Kiwa
BVI in the form of a reverse triangular merger and a recapitalization of Kiwa
BVI and its wholly owned subsidiary, Kiwa Shandong.  On July 21, 2004,
we completed our reincorporation in the State of Delaware.





We have
established two subsidiaries in China: (1) Kiwa Shandong in 2002, a wholly-owned
subsidiary, and (2) Kiwa Tianjin in July 2006, of which we hold 80%
equity.  Our company chart is presented and our businesses, including
bio-fertilizer, fertilizer trade, bio-enhanced feed and AF-01 anti-viral
aerosol, are described in detail in “Business - The Company” under Item
I.





We
generated approximately $9.18 million and $9.13 million in revenue from
continuing operations in fiscal years 2008 and 2007, respectively, reflecting an
increase of 0.5%.  The increase is mainly due to: (1) During fiscal
2008, revenue generated from our bio-fertilizer business decrease from
approximately $241,000 to $227,000, representing a 6.0% decrease; (2) net sales
contributed by the bio-enhanced feed business increased 0.7%, from $8.89 million
in 2007 to $8.95 million in 2008.  We incurred a net loss of $3.63
million (including non-cash expenses of approximately $1.5 million) and $3.31
million for fiscal years 2008 and 2007, respectively.





Due to
our limited revenues from sales and continuous losses, we have relied on the
proceeds from the sale of our equity securities and loans from both unrelated
and related parties to provide the resources necessary to fund the development
of our business plan and operations.  During fiscal 2008, we entered
into stock purchase agreement and received consideration of $650,000 for the
issuance and sales of 5,000,000 shares of common stocks.  Our
financing activities generated $900,000 net cash inflow in total during the
twelve months ended December 31, 2008.  These funds are insufficient
to execute our business plan as currently contemplated, which may result in the
risks described in “Business-Risk Factors” under Item 1.





31




Going
Concern




Our
consolidated financial statements have been prepared assuming that we will
continue as a going concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business.  The
carrying amounts of assets and liabilities presented in the consolidated
financial statements do not purport to represent the realizable or settlement
values.





Overview of the Company’s
Financial Condition as of December 31, 2008


As of
December 31, 2008, the Company had accumulated deficit of $14,706,710, among
which, $3,632,188 and $3,307,868 were incurred during twelve months ended
December 31, 2008 and 2007, respectively.





As of
December 31, 2008, we had cash and cash equivalents of $18,986 and total current
assets of $3,910,254; at the same time, we had current liabilities of
$7,910,310, denoting current ratio of 0.49 and quick ratio of
0.064.  At the end of fiscal 2008, we also had long-term liabilities
of $1,807,413.





On June
29, 2006, the Company entered into a securities purchase agreement with six
institutional investors for the issuance and sale of (1) 6% secured convertible
notes, due three years from the date of issuance, in the aggregate principal
amount of $2,450,000, convertible into shares of the Company’s common stock, and
(2) warrants to purchase 12,250,000 shares of the Company’s common
stock.  As of December 31, 2008, the outstanding principal of 6% Notes
was $1,622,323.  The maturity date of the 6% Notes is June 29,
2009.





To the
extent that we are unable to successfully raise the capital necessary to fund
our future cash requirements on a timely basis and under acceptable terms and
conditions, we will not have sufficient cash resources to maintain operations
and repay our liabilities, and may have to curtail or cease operations and
consider a formal or informal restructuring or reorganization.





Overview of the Company’s
Operating Results for the Twelve Months Ended December 31, 2008 and
2007


During
twelve months ended December 31, 2008 and 2007, our sales revenue was $9,175,737
and $9,129,779, respectively.  However, the Company gross profit was
$217,518 and $525,984, denoting a gross profit margin of 2.4% and
5.8%.  During fiscal year of 2008 and 2007, our operating loss was
$2,097,575 and $2,126,616.  Net loss for both periods was $3,632,188
and $3,307,868, respectively.





Overview of the Company’s
Cash flow Status for the Twelve Months Ended December 31, 2008 and
2007


During
fiscal year ended December 31, 2008 and 2007, our operating activities used net
cash of $829,142 and $523,649, respectively.  We also invested $48,111
and $206,446 in purchasing property and equipment during both
periods.  Although our financing activities provided net cash of
$901,615 and $308,591 in the fiscal year of 2008 and 2007, we had cash of only
$18,986 and $61,073 on December 31, 2008 and 2007, respectively.





The Company’s Ability of
Raising New Finance


Continuous
losses and low share price has deteriorate the Company’s ability of raising new
finance.  As of December 31, 2008, the closing price of our common
stock reported by on the OTC Bulletin Board was $0.0019.  The market
value of the Company was $264,858, which makes it very hard to arrange new
financing on equity financing basis.  The Company’s obligations under
the 6% Notes and the Warrants are secured by a first priority security interest
in the Company’s intellectual property pursuant to an Intellectual Property
Security Agreement with the Purchasers, and by a first priority security
interest in all of the Company’s other assets pursuant to a Security Agreement
with the Purchasers.  In addition, the Company’s Chief Executive
Officer has pledged all of his common stock of the Company as collateral
security for the Company’s obligations under the 6% Notes and the
Warrants.  As a result, the Company does not have assets to security
the obligations of new debt.





32




The 6%
Notes require the Company to procure the Purchaser’s consent before taking
certain actions including paying dividends, repurchasing stock, incurring debt,
guarantying obligations, merging or restructuring the Company, or selling
significant assets.  Our ability of raising new finance is
limited.


Kiwa Shandong’s Ability to
Continue as a Going Concern is in Doubt


Kiwa
Shandong is our wholly-owned subsidiary of engaging in researching, developing,
producing and marketing bio-fertilizer.  However, since its inception
in 2002, Kiwa Shandong has not generated material revenue.  Moreover,
Kiwa Shandong has never been profitable.  As of December 31, 2008,
Kiwa Shandong has accumulated deficit of $2,180,030.





In June
2002, we entered into an agreement with Zoucheng Municipal Government granting
us the use of at least 15.7 acres in Shandong Province, China at no cost for 10
years to construct a manufacturing facility.  Pursuant to relevant
China laws and regulations, we had paid tenure tax on quarterly basis at the
rate of approximately $1,660 per acre.  However, from January 1, 2007,
China central government adopted a series of policies to strengthen land
management, including doubled tenure tax to $3,320 per acre.  In
February 2008, the Ministry of Land and Resources of China issued “Controlling
Indexes of Construction Land Use for Industrial Projects,” which requires the
building coverage should not be less than 30%.  Up to now, the current
situation in Kiwa Shandong does not meet this requirement.  There is
no assurance that local authority would not reduce the acreage of land granted
to us to use at no cost.





On
December 31, 2008, we launched a complete test on the recoverability of our
long-lived assets in Kiwa Shandong.  Based on our analysis, Kiwa
Shandong’s long-lived assets were impaired.  Management is assessing
the usage of our long-lived assets in Kiwa Shandong; it is possible that we
would dispose some of our long-lived assets in the future.





Given the
tight cash flow status of the Company, we may have to curtail or cease
operations and consider a formal or informal restructuring or reorganization in
Kiwa Shandong.  For example, we may consider reduce the acreage of
land we use in Kiwa Shandong to lower tax expenditure.





Kiwa Tianjin’s Ability to
Continue as a Going Concern is in Doubt


Kiwa
Tianjin is our majority-owned subsidiary engaging in the developing,
manufacturing and marketing of biologically enhanced feed for live
stock.  Since its inception in 2006, the gross profit margin of Kiwa
Tianjin has been reducing.  During fiscal year ended December 31,
2008, Kiwa Tianjin’s gross profit margin was less than 3%, underpinning its
limited profitability.  As of December 31, 2008, Kiwa Tianjin had
accumulated deficit of $303,507.





As of
December 31, 2008, Kiwa Tianjin has cash of only $377.  Given the
tight cash flow status of the Company, we may have to curtail or cease
operations and consider a formal or informal restructuring or reorganization in
Kiwa Tianjin.





2009
Financing PlanIn short term, we are putting in place very strict control
over expenses.  We plan to raise new financing from related parties to
satisfy the Company’s daily demand of cash resources and maintain its
operation.  In the medium term, we are actively looking for new
financing from outside investors.  We expect to raise at least
$2,000,000 in the first half of 2009, which could allow us to repay outstanding
balance of 6% Notes at its maturity date of June 29, 2009.  If we
could successfully settle 6% Notes, our capital structure would be
improved.  We would be better positioned in raising new
finance.  In the long term, we anticipate to further adjust the
product mix of our bio-fertilizer and bio-enhanced feed products, enhancing
profitability so that to reach breakeven and eventually become
profitable.





33





In
Conclusion


The
Company’s ability to continue as a going concern is in doubt.  We
expect to continue to have operating losses for the foreseeable future as we are
still in the process of exploring market, further research and product
tests.  We will require additional capital to implement our business
plan and continue operating.  To the extent that we are unable to
successfully raise the capital necessary to fund our future cash requirements on
a timely basis and under acceptable terms and conditions, we will not have
sufficient cash resources to maintain operations, and may have to curtail or
cease operations and consider a formal or informal restructuring or
reorganization.





Our
independent auditors have added an explanatory paragraph to their audit opinion
issued in connection with our financial statements for the latest six fiscal
years, which states that the financial statements raise substantial doubt as to
our ability to continue as a going concern.  Our ability to make
operations profitable or obtain additional funding will determine our ability to
continue as a going concern.




Trends and Uncertainties in
Regulation and Government Policy in China




Foreign
Exchange Policy Changes




China is
considering allowing its currency to be freely exchangeable for other major
currencies.  This change will result in greater liquidity for revenues
generated in Renminbi (“RMB”).  We would benefit by having easier
access to and greater flexibility with capital generated in and held in the form
of RMB.  The majority of our assets are located in China and most of
our earnings are currently generated in China, and are therefore denominated in
RMB. Changes in the RMB-U.S. Dollar exchange rate will impact our reported
results of operations and financial condition. In the event that RMB appreciates
over the next year as compared to the U.S. Dollar, our earnings will benefit
from the appreciation of the RMB.  However, if we have to use U.S.
Dollars to invest in our Chinese operations, we will suffer from the
depreciation of U.S. Dollars against the RMB.  On the other hand, if
the value of the RMB were to depreciate compared to the U.S. Dollar, then our
reported earnings and financial condition would be adversely affected when
converted to U.S. Dollars.





On July
21, 2005, the People’s Bank of China announced it would appreciate the RMB,
increasing the RMB-U.S. Dollar exchange rate from approximately US$1.00 =
RMB8.28 to approximately US$1.00 = RMB8.11.  So far the trend of such
appreciation continues; the exchange rate of U.S. Dollar against RMB on December
31, 2008 was US$1.00 = RMB6.8346.




Critical Accounting Policies
and Estimates




We
prepared our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America.  The
preparation of these financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period.  Management periodically evaluates the estimates and judgments
made.  Management bases its estimates and judgments on historical
experience and on various factors that are believed to be reasonable under
current circumstances.  Actual results may differ from these estimates
as a result of different assumptions or conditions.





The
following critical accounting policies affect the more significant judgments and
estimates used in the preparation of our consolidated financial
statements.  In addition, you should refer to our accompanying audited
balance sheets as of December 31, 2008 and 2007, and the audited statements of
operations, equity movement and cash flows for the fiscal years ended December
31, 2008 and 2007, and the related notes thereto, for further discussion of our
accounting policies.





34




Accounts
Receivables




The
Company performs ongoing credit evaluations of its customers and establishes an
allowance for doubtful accounts when amounts are not considered fully
collectable.  According to the Company’s credit policy, the Company
generally provides 100% bad debt provision for the amounts outstanding over 365
days after the deduction of the amount subsequently settled after the balance
sheet date, which management believes is consistent with industry practice in
the China region.





As of
December 31, 2008, there was $352,896 in accounts receivable over 365 days old,
therefore we provided $352,896 in bad debt provision based on total accounts
receivable over one year.





Terms of
our sales vary from cash on delivery to a credit term up to three to twelve
months.  Ordinarily, we require our customers to pay between 20% and
60% of the purchase price of an order placed, depending on the results of our
credit investigations, prior to shipment.  The remaining balance is
due within twelve months, unless other terms are approved by
management.  As stated in the “Business - Risk Factors” under Item 1,
the agriculture-biotechnology market in China is in the early stages of
development and we are still in the process of exploring the new
market.  We may also distribute our bio-products to special
wholesalers with favorable payment terms with a focus on the
future.  We maintain a policy that all sales are final and we do not
allow returns.  However, in the event of defective products, we may
allow customers to exchange the defective products for new products within the
quality guarantee period.  In the event of any exchange, the customers
pay all transportation expenses.




Inventories




Inventories
are stated at the lower of cost, determined on the weighted average method, and
net realizable value.  Work in progress and finished goods are
composed of direct material, direct labor and a portion of manufacturing
overhead.  Net realizable value is the estimated selling price in the
ordinary course of business, less estimated costs to complete and
dispose.




Impairment of Long-Lived
Assets




Our
long-lived assets consist of property, equipment and intangible
assets.  As of December 31, 2008, the net value of property and
equipment and intangible assets was $1,016,086 and $151,231, respectively, which
represented approximately 19.1% and 2.8% of our total assets,
respectively.





We
periodically evaluate our investment in long-lived assets, including property
and equipment, for recoverability whenever events or changes in circumstances
indicate the net carrying amount may not be recoverable.  Our
judgments regarding potential impairment are based on legal factors, market
conditions and operational performance indicators, among others.  In
assessing the impairment of property and equipment, we make assumptions
regarding the estimated future cash flows and other factors to determine the
fair value of the respective assets.





Based on
our analysis, we charged $639,492 as loss from impairment of long-lived
assets.  No such costs were charged during fiscal 2007.




Fair value of warrants and
options




We have
adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” to recognize warrants relating to loans and warrants issued to
consultants as compensation as derivative instruments in our consolidated
financial statements.





35








We
calculate fair value of the warrants and options with Black-Schole
Model.




Revenue
Recognition




We
recognize revenue for our products in accordance with Securities and Exchange
Commission Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in
Financial Statements,” as amended by SAB No. 104, “Revenue
Recognition.”  Sales represent the invoiced value of goods, net of
value added tax, supplied to customers, and are recognized upon delivery of
goods and passage of title.





Pursuant
to EITF 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent,”
if the company carry out a transaction which has the following indicators: (1)
the supplier (not the company) is the primary obligor in the arrangement; (2)
the amount the company earns is fixed; (3) the supplier (and not the company)
has credit risk, then the company shall recognize revenue based on the net
amount retained (that is, the amount billed to the customer less the amount paid
to a supplier). We evaluate the relevant facts and circumstances of our urea
entrepot trade, and recognize revenue in accordance with this
principle.




Income
Taxes




The
Company accounts for income taxes under the provisions of SFAS No. 109,
“Accounting for Income Taxes,” which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the consolidated financial statements or tax
returns.  Deferred tax assets and liabilities are recognized for the
future tax consequence attributable to the difference between the tax bases of
assets and liabilities and their reported amounts in the financial
statements.  Deferred tax assets and liabilities are measured using
the enacted tax rate expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.  The Company establishes a valuation when it is more
likely than not that the assets will not be recovered.




Major Customers and
Suppliers




Bio-fertilizer
products




We had a
total of 42 customers as of December 31, 2008, of which three customers
accounted for 40.6%, 10.9% and 7.8% of our net sales for the fiscal year ended
December 31, 2008, respectively.  No other single customer accounted
for more than 7% of our revenues.  For the fiscal year ended December
31, 2007, we had three significant customers accounting for 36.1%, 24.7% and
17.1% of our net sales, respectively, and no other single customer accounted for
more than 5% of our revenues.





Three
suppliers accounted for 16.3%, 11.6% and 11.4% of our net sales of our net
purchase for the fiscal year ended December 31, 2008. Comparably, three
suppliers accounted for 17.9%, 17.6% and 13.3% of net purchases for fiscal 2007,
respectively.  Historically our existing suppliers have met our
needs.  In addition, the raw materials used in our bio-fertilizer
products are widely available from a variety of alternative
sources.





36




Bio-enhanced
feed




We had
116 customers in total for 2008, of which three customers accounted for 10.9%,
9.9% and 8.2% of our net sales.  No other individual customers
accounted for more than 7% of our net sales.  We have also developed a
total of 101 customers, of which two significant customers account for 12.2% and
5.5% of our net sales for the fiscal 2007.  No other individual
customers accounted for more than 5% of net sales during the
period.





Three
suppliers accounted for 16.9%, 12.6%, and 10.9% of our net purchases for the
fiscal year ended December 31, 2008, respectively.  The three largest
suppliers accounted for 11.3%, 9.5% and 7.9% of our net purchases for fiscal
2007, no other individual supplier account for more than 7.5% of our net
purchases.




Results of
Operations




Net
Sales




Net sales
from continuing operations were $9,175,737 and $9,129,779 for the twelve months
ended December 31, 2008 and 2007, respectively, representing an increase of
$45,958 or 0.5%.  Revenue contributed by bio-fertilizer business
dropped 6.0% from $241,357 in fiscal year of 2007 to $226,869 in fiscal year of
2008.  Our bio-enhanced feed business generated $8,948,868 revenue in
twelve months ended December 31, 2008 as compared to $8,888,422 in 2007,
representing 0.7% increase.





Item
                          
                          Fiscal
      Year Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006Bio-fertilizer:Net
      sales
                          
                          $
                          226,869
                          
                          
                          $
                          241,357
                          
                          
                          
                          46,926Quantity
      (Tons)
                          
                          
                          664
                          
                          
                          
                          247
                          
                          
                          
                          109Average
      price
                          
                          $
                          342
                          
                          
                          $
                          977
                          
                          
                          
                          431Bio-enhanced
      feed:Net
      sales
                          
                          $
                          8,948,868
                          
                          
                          $
                          8,888,422
                          
                          
                          
                          2,459,789Quantity
      (Tons)
                          
                          
                          20,684
                          
                          
                          
                          28,235
                          
                          
                          
                          9,244Average
      price
                          
                          $
                          433
                          
                          
                          $
                          315
                          
                          
                          
                          266Total
      net sales
                          
                          $
                          9,175,737
                          
                          
                          $
                          9,129,779
                          
                          
                          
                          2,506,715




Cost
of Sales




Cost of
sales was $8,958,219 and $8,603,795 for the twelve months ended December 31,
2008 and 2007, respectively.  The increase of $354,424 or 4.1% in cost
of sales was primarily due to increase of raw materials used in bio-enhanced
business.




Gross
Profit




Gross
profit from our continuing operations was $217,518 and $525,984, representing a
profit margin of 2.4% and 5.8% for the twelve months ended December 31, 2008 and
2007, respectively.





37





This
decrease of $308,466 in gross profit is mainly due to drop down of gross profit
in both bio-fertilizer and bio-enhanced feed business.  During twelve
months ended December 31, 2008, gross profit of bio-fertilizer business was
26.5% as compared with 42.2% of 2007.  The 15.7% drop in gross profit
was attributable to $14,488 or 6.0% decrease in net sales and $27,261 or 19.5%
increase in cost of sales.  Gross profit margin of bio-enhanced feed
business reduced 3.0% from 4.8% in fiscal year ended December 31, 2007 to 1.8%
in the comparable period of 2008.  The reduction in gross profit
margin was mainly due to $60,446 or 0.7% increase in net sales and $327,163 or
3.9% increase in cost of sales.





Bio-fertilizer
                
                
                Bio-enhanced
      feed2008
                
                
                2007
                
                
                2006
                
                
                2008
                
                
                2007
                
                
                2006Net
      Sales
                
                $
                226,869
                
                
                $
                241,357
                
                
                $
                46,926
                
                
                $
                8,948,868
                
                
                $
                8,888,422
                
                
                $
                2,459,789Cost
      of Sales
                
                
                166,834
                
                
                
                139,573
                
                
                
                37,140
                
                
                
                8,791,385
                
                
                
                8,464,222
                
                
                
                2,289,279Gross
      Profit
                
                $
                60,035
                
                
                $
                101,784
                
                
                $
                9,786
                
                
                $
                157,483
                
                
                $
                424,200
                
                
                $
                170,510Gross
      Profit Margin
                
                
                26.5
                %
                
                
                42.2
                %
                
                
                20.9
                %
                
                
                1.8
                %
                
                
                4.8
                %
                
                
                6.9
                %





Gross
profit margin of bio-fertilizer business reduced gradually from quarter to
quarter in 2008.  This was due to the fact that we sold higher
percentage (in terms of quantity of products sold) low-end products in 2008 than
did 2007, which has undermined our profitability of this segment.





Reduce in
gross profit margin in bio-enhanced feed business was largely due to its tight
cash flow status, which did not allow us to purchase raw materials at a more
favorable price but pay in cash.  Delayed payment to raw material
suppliers caused increase in accounts payable and higher purchasing price, which
further boosted cost of sales in the segment.




Consulting
and Professional Fees




Consulting
and professional fees occurred in principal operations were $359,831 and
$794,324 for the twelve months ended December 31, 2008 and 2007, respectively,
representing a decrease of $434,493 or 54.7%.  Most of these fees are
related to fundraising, investor relations and public company operations,
etc.  The decrease in consulting and professional fees is primarily
attributable to high consulting and professional fees relating to investor
relation service and financing commissions in connection with the financing of
6% Notes in 2006 in 2007.




Officers’
Compensation




Officers’
compensation was $240,993 and $285,941 for the twelve months ended December 31,
2008 and 2007, denoting $44,948 or 15.7% decrease.




General
and Administrative




General
and administrative expenses were $1,126,167 and $901,545 for the twelve months
ended December 31, 2008 and 2007, an increase of $224,622 or
24.9%.  General and administrative expenses include salaries, travel
and entertainment, rent, office expense, telephone expense and insurance costs.
The increase is mainly resulted from the expansion of our operating activities,
which led to the increased amount of rental, salaries, travel expenses and
office expenses.  During 2008, we also charged $152,750 of liquidated
damages in connection with 6% Notes into general and administrative
expenses.  (See Note15 of Notes to Consolidated Financial
Statements)





38




Selling
expenses




During
2008, selling expenses were $189,163, a $173,968 or 47.9% decrease from
$363,131, our selling expenses in 2007.  This decrease was mainly
attributable to our adjustment of marketing and sales policies in our
bio-enhanced feed business.  Tight cash flow status also limited our
capability of spending in order to boost sales.  We had adopted new
selling strategies that are less costly.




Research
and Development




Research
and development expenses increased by $15,204 or 8.6% to $192,977, for the
twelve months ended December 31, 2008, as compared to $177,773 for the twelve
months ended December 31, 2007.  The research and development expense
mainly consist of the expenses of maintaining Kiwa-CAU R&D Centre, which
began operation in July 2006. (See “Business-Intellectual Property and Product
Lines- Kiwa-CAU R&D Center” under Item 1 in Part I).




Depreciation
and Amortization




Depreciation
and amortization, excluding depreciation included in cost of production and
deprecation of research equipment, decreased $6,151 or 4.8% to $123,147, for the
twelve months ended December 31, 2008, as compared to $129,298 for the same
period of 2007.  The decrease in depreciation and amortization is
mainly due to the abnormally low production volume in Kiwa Shandong in both 2007
and 2008.  During 2008, more of the depreciation of manufacturing
facilities was booked as operating expense, which would normally be booked as
production costs when production capacity reaches an adequate
level.




Allowance
for Doubtful accounts




During
2008 we accrued allowance for doubtful accounts of $82,815 in total as compared
to $588 to 2007.  The increased amount of allowance and provision is
mainly due to a bad debt provision accrued during 2008.




Loss
from disposal of obsolete inventory




During
twelve months ended December 31, 2008, the Company incurred $192,798 loss
resulting from disposal of obsolete inventory.  Due to unique nature
of bio-fertilizer products, some raw materials of bio-fertilizer products have a
shorter term of validity than chemical substance.  Since the Company
kept on adjusting its product mix, some raw materials purchased years ago cannot
be used to in production of current products and had been stored for a period of
time that is longer than its period of validity.  We decided to
dispose these raw materials as obsolete inventory.




Loss
from impairment of long-lived assets




On
December 31, 2008, we launched a complete test of the recoverability of
long-lived assets.  We charged $639,492 into operating losses of
fiscal 2008.  There was no such expense for the comparable period of
2007.




Net
Interest Expenses




Net
interest expense was $753,956 in 2008 and $766,411 in 2007, representing a
$12,455 or 1.6% decrease.  The interest expenses for both periods are
consisted of amortization of fair value of warrants in connection with 6% Notes,
and (2) interest charges on our loans.





39




Net
Loss




Our net
loss for 2008 was $3,632,188 (including non-cash expenses of $1,532,958), an
increase of $324,320 or 9.8% compared to net loss in 2007, which was $3,307,868
(including non-cash expenses of $1,408,239).  This increase resulted
from the following factors: (1) decrease in gross profit of $308,466 or 58.6%;
(2) increase in operating expenses of $803,249 or 37.8%; (3) decrease in
interest expenses of $12,455 or 1.6%; and (4) positive 51,633 and negative $332
in minority interest in subsidiary in 2008 and 2007, respectively.




Discontinued
Operations-Urea Entrepot Trade




In July
2007, the Company entered three termination agreements with each party of the
urea entrepot trade for the termination of contracts between Kiwa BVI and
Shengkui Technologies (“Shengkui”), Hua Yang Roneo Corporation (“Hua Yang”) and
UPB International Sourcing Limited (“UPB”).  Pursuant to these
termination agreements, the Company will have neither rights nor obligations
under previous contracts in connection with the urea entrepot trade except for a
commission due to UPB.  Based on these facts, we recognized relevant
expenses in the second quarter of 2007.  Net loss of discontinued
operation, the urea entrepot trade was $414,509 for the fiscal year ended
December 31, 2007.  Since then, urea entrepot trade was completely
terminated.




Comprehensive
Loss




Comprehensive
loss increased by $287,405 or 8.5% to $3,656,383 for the twelve months ended
December 31, 2008, as compared to $3,368,979 for the comparable period of
2007.  The increase in comprehensive loss in the current year as
compared to fiscal 2007 is due to an increase of $324,320 in net loss and a
decrease of $36,915 in other comprehensive loss.




Liquidity and Capital
Resources




Since
inception of our ag-biotech business in 2002, we have relied on the proceeds
from the sale of our equity securities and loans from both unrelated and related
parties to provide the resources necessary to fund our operations and the
execution of our business plan.  During fiscal 2008, we raised
$650,000 from issuance of 5,000,000 shares of common stock and $802,574 in total
from our related parties through several advance and repaid $545,353 to related
parties.  To some extent, these fundraisings improved our short-term
liquidity, however as of December 31, 2008, our current liabilities exceeded
current assets by $4,000,056, reflecting a current ratio of 0.49:1, compared to
current liabilities exceeded current assets by $1,366,926, reflecting a current
ratio 0.52:1, as of December 31, 2007.  The sharp downturn of our
short-term liquidity was mainly due to reclassification of 6% Notes from
long-term liabilities into short-term liabilities, which will become due on June
29, 2009.  During twelve months ended December 31, 2008, we issued
52,739,530 shares resulting from the conversion of $436,302 principal and
$116,873 interest of 6% Notes into our common stock.  During
comparable period of 2007, 5,821,998 shares of common stock had been issued for
the conversion of $307,338 principal and $51,890 interest by 6% Notes
Purchasers.  Since the Company does not have sufficient financial
capability to repay or buy-back 6% Notes by means of cash, it is expected that
we will issue mores shares to repay principal and interest of 6%
Notes.  (See Note15 of Notes to Consolidated Financial
Statements).





As of
December 31, 2008 and 2007, we had cash of$18,986 and $61,073,
respectively.  The change is outlined as follows.





40





During
2008, our operations utilized cash of $829,142, as compared with $523,649 used
by operations in 2007.  Such cash was mainly used for working capital
for our bio-fertilizer and bio-enhanced feed businesses, purchase of inventory,
a market development fee for bio-fertilizer, and repayment of accounts payable
to venders and service providers.





During
2008, we utilized $48,111 in acquiring property and
equipment.  Comparatively, in 2007 we spent $206,446 for the purchase
of equipment to finish the first stage to upgrade our facility in Kiwa
Shandong.





During
the fiscal year ended December 31, 2008, we generated $901,615 from financing
activities, consisting of proceeds from issuance of common stocks of $650,000
and from related parties of $802,574, which was offset in part by repayment of
$545,353 to related parties and long-term borrowings of
$5,606.  During the twelve months ended December 31, 2007, we
generated 308,591 from financing activities, consisting of proceeds from related
parties of $720,172, which was offset in part by repayment of $388,196 to
related parties and long-term borrowings of $23,385.





As of
December 31, 2008, we had an accumulated deficit of $14,706,710, which was made
up in part of a net loss of $3,632,188 (including non-cash expenses of
$1,532,958) and $3,307,868 (including non-cash expenses of $1,408,239) during
2008 and 2007, respectively.  Our bio-fertilizer business incurred a
net loss of $1,133,013 in 2008.  Our bio-enhanced feed business
generated a net loss of $206,531 during fiscal year ended December 31,
2008.  Although the Company has made arrangements to engage in
bio-fertilizer trade business and we expect our operating cash flow to improve
in 2008, we do not anticipate generating sufficient positive operating cash
inflow to fund our planned operations.





In 2009,
we plan to keep on upgrading of Kiwa Shandong’s fermentation facilities, which
will allow us to fully utilize the patent we acquired from CAU and further
reduce production costs.  In the meantime, we will focus on expanding
our bio-fertilizer sales.  To achieve profitability in our
bio-enhanced feed business, we will concentrate on (1) adjusting our product mix
to increase the proportion of high-margin products, (2) improving our current
equipment, and (3) setting up new production lines.  With respect to
the AF-01 technology, our hope is to (1) close the acquisition of a
GMP-qualified veterinary factory, (2) close a first round of investment, and (3)
procure approval of a number of veterinary drug products for the AF-01
technology.





Currently
we have insufficient cash resources to accomplish our objectives.  We
will need to seek additional sources of funding to sustain our
operations.  In the next year, we intend to raise additional capital
through the issuance of debt or equity securities to fund the development of our
planned business operations, although there can be no assurance that we will be
successful in obtaining this financing.





To the
extent that we are unable to successfully raise the capital necessary to fund
our future cash requirements on a timely basis and under acceptable terms and
conditions, we will not have sufficient cash resources to maintain operations,
and may have to curtail operations and consider a formal or informal
restructuring or reorganization.




Off-Balance Sheet
Arrangements




At
December 31, 2008, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.  As such, we are not exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.




Recent Accounting
Pronouncements




See Note
2 to the Consolidated Financial Statements under Item 8, Part II.





41




Item
      8.
            Financial
      Statements




The
Consolidated Financial Statements of Kiwa Bio-Tech Products Group Corporation
and its subsidiaries including the notes thereto, together with the reports
thereon of Mao & Company, CPAs, Inc. are presented beginning on page
F-1.




Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure




At the
annual meeting of shareholders on December 30, 2008, the proposal of the
appointment of Mao & Company, CPAs, Inc. as the Company’s independent
auditors for the fiscal year ended December 31, 2008 was approved by the
required votes of our shareholders.  Mao & Company had also
audited our Annual Report on Form 10-KSB for the fiscal year ended December 31,
2007.





Through
April 13,, 2009, there was not any disagreement with our current certifying
accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope and procedures.




Item
      9A(T).
            Controls
      and Procedures




Disclosure Controls and
Procedures




Our
management, under the supervision and with the participation of our Chief
Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the
effectiveness of our disclosure controls and procedures as defined in SEC Rules
13a-15(e) and 15d-15(e) as of the end of the period covered by this Annual
Report.  Our disclosure controls and procedures are designed to ensure
that information required to be disclosed in the reports we file or submit under
the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s forms,
and that such information is accumulated and communicated to our management
including our CEO and CFO, to allow timely decisions regarding required
disclosures.  Based on their evaluation, our CEO and CFO have
concluded that, as of December 31, 2008, our disclosure controls and procedures
were ineffective.




Management Report on
Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f).  Our internal control over financial
reporting was designed to provide reasonable assurance to the Company’s
management and board of directors regarding the preparation and fair
presentation of published consolidated financial statements.  Internal
control over financial reporting is promulgated under the Exchange Act as a
process designed by, or under the supervision of, the Company’s principal
executive and principal financial officers and effected by the Company’s board
of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.  Internal control over financial reporting, no
matter how well designed, has inherent limitations and may not prevent or detect
misstatements.  Therefore, even effective internal control over
financial reporting can only provide reasonable assurance with respect to the
financial statement preparation and presentation.





42





Our
management has conducted, with the participation of our CEO and CFO, an
assessment, including testing of the effectiveness, of our internal control over
financial reporting as of December 31, 2008.  Management’s assessment
of internal control over financial reporting was conducted using the criteria in
Internal Control over Financial Reporting - Guidance for Smaller Public
Companies issued by the Committee of Sponsoring Organizations of the Treadway
Commission.  Based on such evaluation, management identified
deficiencies that were determined to be a material weakness.





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely
basis.  Because of the material weakness described below, management
concluded that our internal control over financial reporting was ineffective as
of December 31, 2008.





The
specific material weakness identified by the Company’s management as of December
31, 2008 is described as follows:




•           The
Company is lacking qualified resources to perform the internal audit functions
properly.  In addition, the scope and effectiveness of the Company’s
internal audit function are yet to be developed.




•           We
currently do not have an audit committee.




Remediation
Initiative




•           We
are committed to establishing the internal audit functions but due to limited
qualified resources in the region, we were not able to hire sufficient internal
audit resources before the end of 2008.  However, internally we
established a central management center to recruit more senior qualified people
in order to improve our internal control procedures.  Externally, we
are looking forward to engage an accounting firm to assist the Company in
improving the Company’s internal control system based on COSO
Framework.  We also will increase our efforts to hire the qualified
resources.




•           We
intend to establish an audit committee of the board of directors as soon as
practicable.  We envision that the audit committee will be primarily
responsible for reviewing the services performed by our independent auditors,
evaluating our accounting policies and our system of internal
controls.




Conclusion




The
Company did not have sufficient and skilled accounting personnel with an
appropriate level of technical accounting knowledge and experience in the
application of generally accepted accounting principles accepted in the United
States of America commensurate with the Company’s financial reporting
requirements, which resulted in a number of internal control deficiencies that
were identified as being significant.  The Company’s management
believes that the number and nature of these significant deficiencies, when
aggregated, was determined to be a material weakness.





Despite
of the material weakness and deficiencies reported above, the Company’s
management believes that its consolidated financial statements included in this
report fairly present in all material respects the Company’s financial
condition, results of operations and cash flows for the periods presented and
that this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with
respect to the period covered by this report.


43





This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management's report in this Annual
Report.




Changes in Internal Control
over Financial Reporting




There
were no changes in our internal control over financial reporting during the
fiscal year ended December 31, 2008 that materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.




Item
      9B.
            Other
      Information




None.




Part
III




Item
      10.
            Directors,
      Executive Officers and Corporate
Governance




Directors and Executive
Officers




Set forth
below are the names of our directors and executive officers, their ages, their
offices with us, if any, their principal occupations or employment for the past
five years.  The directors listed below will serve until the Company’s
next annual meeting of the stockholders:





Name
                  
                  Age
                  
                  PositionWei
      Li
                  
                  48
                  
                  Chief
      Executive Officer, Chief Financial Officer (from January 4, 2009 to
      February 17, 2009) and Chairman of the Board of
  DirectorsSteven
      Ning Ma
                  
                  52
                  
                  Chief
      Financial Officer and Chief Operating Officer (from February 18,
      2009)Lianjun
      Luo
                  
                  39
                  
                  Chief
      Financial Officer (to December 31, 2008), DirectorXucheng
      Hu
                  
                  46
                  
                  Director
      (since December 30, 2008)Dachang
      Ju
                  
                  68
                  
                  Director
      (to December 30, 2008)Yunlong
      Zhang
                  
                  45
                  
                  Director
      (General Manager of Kiwa Shandong to February 2009)Qi
      Wang
                  
                  42
                  
                  Director
      and Vice President - TechnicalYvonne
      Wang
                  
                  30
                  
                  Corporate
      SecretaryDianyuan
      Song
                  
                  49
                  
                  Vice
      President - MarketingXin
      Ma
                  
                  32
                  
                  Vice
      President (since January 4, 2009) Associate Chief Financial Officer (from
      January 2006 to January 3,
2009)





Wei Li
became our Chief Executive Officer and Chairman of the Board of Directors on
March 12, 2004.  Mr. Li was appointed as Chief Financial Officer on
January 4, 2009 by the Board of Directors.  From January 1, 2004 to
the time of the Tintic/Kiwa merger, Mr. Li was the acting Chief Executive
Officer of Kiwa Bio-Tech Products Group Ltd.  Mr. Li founded Kiwa
Bio-Tech Products Group Ltd. to capitalize on the growth of the ag-biotechnology
industry in China.  Prior to founding Kiwa Bio-Tech Products Group
Ltd., Mr. Li founded China Star, an entity which provides integrated financial
services and/or venture investments to growth businesses in
China.  Mr. Li served as President of China Star from June 1993 to
January 2004. In 1989, Mr. Li founded Xinhua International Market Development
Co. Ltd., a company which engaged in investing in China’s high tech,
pharmaceutical, medical device, media, entertainment and real estate industries.
Mr. Li holds a B.S. in Finance from Hunan Finance and Economics
University.


44





Steven Ning
Ma became our Chief Financial Officer and Chief Operating Officer on
February 18, 2009.  Prior to joining the Company, Mr. Ma served as
Managing Director of SAS Conserve de Provence from 2006 to
2008.  Prior to that, Mr. Ma was the Senior Managing Partner of HJV
(Hejun) Consulting (Ltd.) from 2004 to 2005.  Mr. Ma received his
Master degree in Economics/Finance from the Graduate School of Chinese Academy
of Sciences.  He is also Ph.D. Candidate in Financial Economics from
Wageningen University, Netherlands.





Lianjun
Luo became our Chief Financial Officer on March 12, 2004, and one of our
directors on March 27, 2004.  On December 31, 2008, the employment
agreement between the Company and Mr. Lianjun Luo expired, Mr. Luo does not
serve as Chief Financial Officer since then.  Mr. Luo served as the
Chief Executive Officer of Kiwa Bio-Tech Products Group Ltd. from October 2002
to December 2003.  From January 2002 to October 2002, Mr. Luo served
as the Chief Financial Officer of China Star.  From August 2000 to
December 2001, Mr. Luo served as manager of Security Department and Assistant to
President at Jilin Hengfa Group Ltd., a Chinese drug manufacturing company,
responsible for the company’s preparation for an aborted IPO and for merger and
acquisition activities.  From May 1998 to July 2000, Mr. Luo worked as
manager of Investment Department and Associate General Manager for Hongli
Enterprise Ltd., a Chinese investment company on merger and acquisition
transactions.  Mr. Luo obtained his law degree from China University
of Political Science and Law in 1993. Mr. Luo is a certified public accountant
and lawyer in China.





Xucheng Hu
became one of our directors since December 30, 2008.  He has been the
Executive Director of New Capital International Investment Limited, a listed
company on the Hong Kong Stock Exchange, since August 2003.  Prior to
that engagement, Mr. Hu acted as Executive Director of China Property
Development (Holdings) Limited and Asia Director of ING Real
Estate.  Over the past 10 years, he has been working with the Beijing
International Trade Association and the Beijing International Trade Research
Institute, during which period his responsibilities included performing
financial and economic research and providing professional advice on the Beijing
municipal government’s cross-provincial investments and foreign investments,
participating in the decision-making process for granting export rights to
Beijing government-owned enterprises, evaluating investment proposal, and
supervising sino-foreign investments in Beijing.  Mr. Hu graduated
with a bachelor degree in economics from Beijing Economics College in
1983.





Dachang Jubecame one of our directors on March 12, 2004.  From 1987 to
1999 when he retired, Mr. Ju worked as General Manager of XinShen Company, an
investment firm in China.  He was responsible for the company's daily
operations and investment decision making.  He served as a board
member of Kiwa Bio-Tech Products Group Ltd. since 2003 and a board member of
China Star from 1999 to 2000.  Mr. Ju holds a B.S. in mathematics from
Capital Normal University in Beijing, China.





Yunlong
Zhang became one of our directors on March 27, 2004. From May 2000 to
2007, Mr. Zhang had been the General Manager of China Star, responsible for the
group’s daily operations. From 1994 to 2000, Mr. Zhang served as the head of the
Investment Department at China National Economic and Systems Reform Research and
Services Center, an economic reform think tank for the central government. Mr.
Zhang holds a degree in statistics.





Qi Wang
became our Vice President - Technical on July 19, 2005 and was elected one of
our directors of the Company on July 18, 2007. Prof. Wang also acts as Director
of Kiwa-CAU R&D Center since July 2006. Prof. Wang served as a Professor and
Advisor for Ph.D. students in Department of Plant Pathology, China Agricultural
University since January 2005. Prior to that, he served as an assistant
professor and lecturer of CAU since June 1997. He obtained his master degree and
Ph.D. in agricultural science from CAU in July 1994 and July 1997, respectively.
Prof. Wang received his bachelor’s degree of science from Inner Mongolia
Agricultural University in July 1989. He is a committee member of various
scientific institutes in China, including the National Research and Application
Center for Increasing-Yield Bacteria, Chinese Society of Plant Pathology,
Chinese Association of Animal Science and Veterinary Medicine.


45





Yvonne
Wang became our Secretary in September 2005. Prior to that, she served as
an executive assistant and a manager of the Company’s US office between April
2003 and September 2005. She obtained her B.S. degree of Business Administration
in July 2001 from University of Phoenix. She is also a Realtor and committees in
California, and a certified Notary Public from California’s Secretary of
State.





Dianyuan
Song became our Vice President-Marketing in February 2008, prior to that
Mr. Song served as Marketing and Sales Director of Kiwa since he joined Kiwa in
October 2007. Mr. Song served as a member of senior management of HuaKen Group
of China, which is a large enterprise group specializing in marketing and
distributing of fertilizer in China. Mr. Song holds a Bachelor’s degree from
Agriculture University of Shenyang.





Xin Ma
became our Vice President on January 4, 2009, prior to that Mr. Ma was our
Associate Chief Financial Officer in January 2006.  Prior to that Mr.
Ma served as financial controller of LangChao Group.  He obtained his
MSc. Degrees of Management and of Finance in 2005 and 2006 respectively from the
University of Leicester.




Family
Relationships




There are
no family relationships among our directors or executive officers.




Section 16(a) Beneficial
Ownership Compliance




Section
16(a) of the Securities Exchange Act of 1934 requires our officers, directors
and certain persons holding more than 10 percent of a registered class of our
common stock to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes in ownership of our common
stock.  Officers, directors and certain other shareholders are
required by the Securities and Exchange Commission to furnish the Company with
copies of all Section 16(a) forms they file.  To the best of the
Company’s knowledge, based solely upon a review of the copies of such reports,
during 2008, all of the required filings were made on a timely
basis.




Code of
Ethics




We have
adopted a Code of Business Conduct and Ethics (the “Code”) that is applicable to
all employees, consultants and members of the Board of Directors, including the
Chief Executive Officer, Chief Financial Officer and Secretary.  This
Code embodies our commitment to conduct business in accordance with the highest
ethical standards and applicable laws, rules and regulations.  We will
provide any person a copy of the Code, without charge, upon written request to
the Company’s Secretary.  Requests should be addressed in writing to
Ms. Yvonne Wang; 310 N. Indian Hill Blvd., #702 Claremont, California
91711.




Director Nominees
Recommended by Stockholders




We have
not implemented any changes to the procedures by which stockholders may
recommend nominees to our board of directors since we last disclosed those
procedures in our most recent proxy statement.




Board Composition; Audit
Committee and Financial Expert




Our Board
of Directors is currently composed of five members: Wei Li, Lianjun Luo, Xucheng
Hu, Yunlong Zhang and Qi Wang.  All board actions require the approval
of a majority of the directors in attendance at a meeting at which a quorum is
present.


46





We
currently do not have an audit committee.  We intend, however, to
establish an audit committee of the board of directors as soon as
practicable.  We envision that the audit committee will be primarily
responsible for reviewing the services performed by our independent auditors,
evaluating our accounting policies and our system of internal
controls.  Currently such functions are performed by our Board of
Directors.





The Board
has determined that at least one person on the Board, Lianjun Luo, qualifies as
a “financial expert” as defined by SEC rules implementing Section 407 of the
Sarbanes-Oxley Act.  Mr. Luo does not meet the definition of an
“independent” director set forth in Rule 4200(a)(15) of the Market Place Rules
of the Nasdaq Stock Market, which is the independence standard that we have
chosen to report under.




Board meetings and
committees; annual meeting attendance.




During
fiscal year 2008, the Board of Directors had three meetings in
total.  All member of the Board of Directors attended all three
meetings.  The Company requires all members of the Board of Directors
are required to attend the annual meetings of securities holders.  On
December 30, 2008, all members of the Board of Directors attended the annual
meetings of securities holders for 2008.




Item
      11.
            Executive
      compensation




We
currently have no Compensation Committee.  The Board of Directors is
currently performing the duties and responsibilities of Compensation
Committee.  In addition, we have no formal compensation
policy.  We decide on our executives’ compensation based on average
compensation levels of similar companies in U.S. or China, depending on
consideration of many factors such as where the executive works.  Our
Chief Executive Officer’s compensation is approved by the Board of
Directors.  Other named executive officers’ compensation are proposed
by our Chief Executive Officer and approved by the Board of
Directors.





Our Stock
Incentive Plan is administered by the Board of Directors.  Any
amendment to our Stock Incentive Plan requires majority approval of the
stockholders of the Company.  We presently do not have a non-equity
incentive plan in effect.





The
Company had no officers or directors whose total annual salary and bonus during
either 2008 or 2007 exceeded $100,000.





Currently,
the main forms of compensation provided to each of our executive officers are:
(1) annual salary; (2) performance bonus stipulated in their respective
employment agreements; and (3) the granting of incentive stock options subject
to approval by our Board of Directors.


47




Summary Compensation
Table


Summary Compensation Table


Nameand
                      principalposition
                    
                    Year
                    
                    Salary
                      ($)
                    
                    
                    Bonus
                      ($)
                    
                    
                    Stock
                      Awards
                      ($)
                    
                    
                    Option
                      Awards
                      ($)(1)
                    
                    
                    Non-Equity
                      IncentivePlan
                      Compensation
                      ($)
                    
                    
                    Nonqualified
                      Deferred
                      Compensation
                      Earnings($)
                    
                    
                    AllOther
                      Compensation
                      ($)
                    
                    
                    Total
                      ($)(a)
                    
                    (b)
                    
                    (c)
                    
                    
                    (d)
                    
                    
                    (e)
                    
                    
                    (f)
                    
                    
                    (g)
                    
                    
                    (h)
                    
                    
                    (i)
                    
                    
                    (j)Wei
      Li, CEO
                    
                    2008
                    
                    
                    75,000
                    
                    
                    
                    Nil
                    
                    
                    
                    Nil
                    
                    
                    
                    Nil
                    
                    
                    
                    Nil
                    
                    
                    
                    Nil
                    
                    
                    
                    Nil
                    
                    
                    
                    75,000Wei
      Li, CEO
                    
                    2007
                    
                    
                    75,000
                    
                    
                    Nil
                    
                    
                    Nil
                    
                    
                    Nil
                    
                    
                    Nil
                    
                    
                    Nil
                    
                    
                    Nil
                    
                    
                    
                    75,000Lianjun
      Luo, CFO
                    
                    2008
                    
                    
                    48,000
                    
                    
                    Nil
                    
                    
                    Nil
                    
                    
                    Nil
                    
                    
                    Nil
                    
                    
                    Nil
                    
                    
                    Nil
                    
                    
                    
                    48,000Lianjun
      Luo, CFO
                    
                    2007
                    
                    
                    48,000
                    
                    
                    
                    12,000
                    
                    
                    Nil
                    
                    
                    Nil
                    
                    
                    Nil
                    
                    
                    Nil
                    
                    
                    Nil
                    
                    
                    
                    60,000





(1)
            Options
      granted on December 12, 2006.  For material terms of the grant,
      see additional information below under subheading entitled “2004 Stock
      Incentive Plan” under this Item 10.  The fair value of these
      options at the date of grant was estimated using a Black-Scholes option
      pricing model.




Employment Contracts and
Termination of Employment and Change of Control Arrangements




On
February 2, 2009, we entered into an employment agreement with our Chief
Executive Officer and Chief Financial Officer, Wei Li, for a three-year term,
commencing on January 1, 2009.  Pursuant to this agreement, Mr. Li
receives a salary at the rate of $96,000 per annum, of which $72,000 will be
paid in equal monthly installments of $6,000 during the period of employment,
prorated for any partial employment period, and $24,000 is paid as an annual
performance bonus in three months after each employment year.  Mr. Li
may receive such annual increases in salary as may be determined by our Board of
Directors at our annual meeting.  Mr. Li is also entitled to an annual
grant of stock options under our employee stock option plan as determined by the
Board of Directors.  Mr. Li is entitled to three-month’s severance if
his employment is terminated without cause.





On July
31, 2006, we entered into an employment agreement with our Chief Financial
Officer, Lianjun Luo, for a three-year term, commencing on January 1, 2006.
Pursuant to this 2006 agreement, we paid pay Mr. Luo an annual salary at the
rate per annum of RMB480,000 (approximately $65,700), of which RMB384,000 was
paid in equal monthly installments of RMB32,000 during the period of employment,
prorated for any partial employment period, and RMB96,000 was paid as an annual
performance bonus in three months after each employment year for the successful
completion of all goals and objectives of that year. Mr. Luo was entitled to an
annual grant of stock options under our employee stock option plan as determined
by the Board of Directors. Mr. Luo was entitled to three month’s severance if
his employment is terminated without cause.  The employment agreement
between the Company and Mr. Lianjun Luo expired on December 31,
2008.  Both parties agreed not to renew the contract.





On
February 18, 2009, the Company and Mr. Steven Ning Ma entered into an employment
agreement with the Company.  Pursuant to the employment agreement, Mr.
Ma is entitled to annual salary of RMB636,000 (approximately US$93,000), among
which RMB42,400 (approximately US$6,200) payable monthly and RMB127,200
(approximately $18,600) in one lump sum, as a performance bonus, three months
following the anniversary of his employment provided that Mr. Ma meets all goals
and objectives set by the Company.  Mr. Ma’s employment may be
terminated at any time for cause or with thirty days’ written notice without
cause.  The employment agreement is automatically terminated upon
death or permanent disability.  Upon termination without cause, Mr. Ma
is entitled to severance payment equal to three months’ salary including all
non-cash benefits, if the termination is due to death or permanent disability;
Mr. Ma is entitled to six months’ salary.  The employment agreement
also contains confidentiality provisions and provisions against competition with
the Company and solicitation of customers for 12 months following termination of
employment.





There are
no compensatory plans or arrangements with respect to a named executive officer
that would result in payments or installments in excess of $100,000 upon the
resignation, retirement or other termination of such executive officer's
employment with us or from a change-in-control.


48




Stock Incentive Plan and
Option Grant




2004
Stock Incentive Plan




On May
10, 2004, our Board of Directors approved equity incentive awards to certain of
our directors, officers and employees and/or consultants and adopted, subject to
stockholder approval, our 2004 Stock Incentive Plan (the “Plan”).  Our
stockholders approved the Plan on June 3, 2004, and an amendment to the Plan on
September 12. 2006.  There are 3,047,907 shares reserved for issuance
of options and other stock awards under the Plan.  The number of
shares that may be granted to any participant in a fiscal year is
500,000.  Options issued under the Plan will expire not more than ten
years from the date of grant.





The Plan
is a key aspect of our compensation program, designed to attract, retain, and
motivate the highly qualified individuals required for our long-term
success.




Stock
Option Grant




On
December 12, 2006, our Board of Directors granted 2,000,000 options under the
Plan, of which 823,700 shares were granted to the current executive officers and
directors.  The exercise price was $0.175, equal to the closing price
of our common stock on December 12, 2006.  Pursuant to the approval of
Board of Directors, after each of the first and second anniversaries of the
grant date, 33% percent of the options will become exercisable.  After
the third anniversary of the grant date, 34% of the options will become
exercisable.





During
2008, a total number of 222,500 unexercised stock options were returned to the
Plan pool following the separation of certain company
employees.  These stock options are available for future
grant.





On
December 12, 2008, 471,800 outstanding stock options were vested, among which
179.200 stock options in total are held by our current executive
officers.





No
options were granted under the Plan during 2008.




Outstanding
Equity Awards at 2008 Fiscal Year-End




The
following table sets forth the status of all outstanding equity awards of the
Company as of December 31, 2008.


Outstanding
Equity Awards at Fiscal Year-End


Option Awards
                  
                  Stock AwardsName
                  
                  Number of
                    Securities
                    Underlying
                    Unexercised
                    Options (#)
                    Exercisible
                  
                  
                  Number of
                    Securities
                    Underlying
                    Unexercised
                    Options (#)
                    Unexercisable
                  
                  
                  Equity
                    Incentive
                    Plan
                    Awards:
                    Number of
                    Securities
                    Underlying
                    Unexercised
                    Unearned
                    Options (#)
                  
                  
                  Option
                    Exercise
                    Price ($)
                  
                  Option
                    Expiration
                    Date
                  
                  Number
                    of
                    Shares
                    or Units
                    of
                    Stock
                    That
                    Have
                    Not
                    Vested
                    (#)
                  
                  
                  Value
                    of
                    Shares
                    or
                    Units
                    of
                    Stock
                    That
                    Have
                    Not
                    Vested
                    ($)
                  
                  
                  Equity
                    Incentive
                    Plan
                    Awards:
                    Number
                    of
                    Unearned
                    Shares,
                    Units or
                    Other
                    Rights
                    That
                    Have Not
                    Vested
                    (#)
                  
                  
                  Equity
                    Incentive
                    Plan
                    Awards:
                    Market
                    or Payout
                    Value of
                    Unearned
                    Shares,
                    Units or
                    Other
                    Rights
                    That
                    Have Not
                    Vested
                    (#)(a)
                  
                  (b)
                  
                  
                  (c)
                  
                  
                  (d)
                  
                  
                  (e)
                  
                  (f)
                  
                  (g)
                  
                  
                  (h)
                  
                  
                  (i)
                  
                  
                  (j)Wei
      Li
                  
                  
                  120,648
                  
                  
                  
                  62,152
                  
                  
                  
                  182,800
                  
                  
                  
                  0.175
                  
                  12/04/06
                  
                  
                  Nil
                  
                  
                  
                  Nil
                  
                  
                  
                  Nil
                  
                  
                  
                  NilLianjun
      Luo
                  
                  
                  87,252
                  
                  
                  
                  44,948
                  
                  
                  
                  132,200
                  
                  
                  
                  0.175
                  
                  12/04/06
                  
                  Nil
                  
                  
                  Nil
                  
                  
                  Nil
                  
                  
                  NilYunlong
      Zhang
                  
                  
                  101,574
                  
                  
                  
                  52,326
                  
                  
                  
                  153,900
                  
                  
                  
                  0.175
                  
                  12/04/06
                  
                  Nil
                  
                  
                  Nil
                  
                  
                  Nil
                  
                  
                  NilQi
      Wang
                  
                  
                  80,190
                  
                  
                  
                  41,310
                  
                  
                  
                  121,500
                  
                  
                  
                  0.175
                  
                  12/04/06
                  
                  Nil
                  
                  
                  Nil
                  
                  
                  Nil
                  
                  
                  NilYvonne
      Wang
                  
                  
                  82,566
                  
                  
                  
                  42,534
                  
                  
                  
                  125,100
                  
                  
                  
                  0.175
                  
                  12/04/06
                  
                  Nil
                  
                  
                  Nil
                  
                  
                  Nil
                  
                  
                  NilXin
      Ma
                  
                  
                  71,412
                  
                  
                  
                  36,788
                  
                  
                  
                  108,200
                  
                  
                  
                  0.175
                  
                  12/04/06
                  
                  Nil
                  
                  
                  Nil
                  
                  
                  Nil
                  
                  
                  NilTotal
                  
                  
                  543,642
                  
                  
                  
                  280,058
                  
                  
                  
                  823,700
                  
                  
                  
                  
                  
                  
                  
                  Nil
                  
                  
                  Nil
                  
                  
                  Nil
                  
                  
                  Nil





(1)
            See
      information contained in subheading entitled “Stock Option Grant” under
      heading “2004 Stock Incentive
Plan.”


49




Option
exercises and stock vested




No stock
options were exercised by any officers or directors during 2007 and
2008.  We did not adjust or amend the exercise price of any stock
options previously awarded to any named executive officers during 2007 and
2008.


Option
Exercises and Stock Vested


Option Awards
                
                
                Stock AwardsName
                
                Number of Shares
                  Acquired on
                  Exericse (#)
                
                
                Value Realized on
                  Exercise ($)
                
                
                Number of Shares
                  Acquired on
                  Vesting (#)
                
                
                Value Realized on
                  Vesting ($)(a)
                
                (b)
                
                
                (c)
                
                
                (d)
                
                
                (e)Wei
      Li
                
                
                Nil
                
                
                
                Nil
                
                
                
                Nil
                
                
                
                NilLianjun
      Luo
                
                Nil
                
                
                Nil
                
                
                Nil
                
                
                NilYunlong
      Zhang
                
                Nil
                
                
                Nil
                
                
                Nil
                
                
                NilQi
      Wang
                
                Nil
                
                
                Nil
                
                
                Nil
                
                
                NilYvonne
      Wang
                
                Nil
                
                
                Nil
                
                
                Nil
                
                
                NilXin
      Ma
                
                Nil
                
                
                Nil
                
                
                Nil
                
                
                NilTotal
                
                Nil
                
                
                Nil
                
                
                Nil
                
                
                Nil




Director
Compensation for 2008




We
currently have no policy in effect for providing compensation to our directors
for their services on our Board of Directors, and did not compensate our
directors in 2008 for services performed as directors.




Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters




The
following table sets forth as of December 31, 2008 certain information with
respect to the beneficial ownership of our common stock by (i) each of our
executive officers, (ii) each person who is known by us to beneficially own more
than 5% of our outstanding common stock, and (iii) all of our directors and
executive officers as a group.  Percentage ownership is calculated
based on 139,399,206 shares of our common stock outstanding as of December 31,
2008.  None of the shares listed below are issuable pursuant to stock
options or warrants of the Company.


Title of class
                    
                    Name and Address of Beneficial Ownership
                    
                    Amount and Nature of
                      Beneficial Owner
                    
                    
                    Percentage of classCommon
      Stock
                    
                    Wei
      Li(1)
                    
                    
                    13,064,794
                    
                    
                    
                    9.37
                    %Common
      Stock
                    
                    Dachang
      Ju(2)
                    
                    
                    10,062,088
                    
                    
                    
                    7.22
                    %Common
      Stock
                    
                    Lianjun
      Luo
                    
                    
                    1,305,562
                    
                    
                    
                    
                    ÜCommon
      Stock
                    
                    Qi
      Wang
                    
                    
                    -
                    
                    
                    
                    -Common
      Stock
                    
                    Yunlong
      Zhang
                    
                    
                    308,916
                    
                    
                    
                    
                    ÜCommon
      Stock
                    
                    All
      Star Technology Inc.
                    
                    
                    12,356,672
                    
                    
                    
                    8.86
                    %Common
      Stock
                    
                    InvestLink
      (China) Limited
                    
                    
                    10,062,288
                    
                    
                    
                    7.22
                    %Common
      Stock
                    
                    All
      officers and directors as a group (5 persons)
                    
                    
                    24,741,360
                    
                    
                    
                    17.75
                    %


50





Ü
            Less
      than 1%


(1).
            Consists
      of shares held by All Star Technology Inc., a British Virgin Islands
      international business company.  Wei Li exercises voting and
      investment control over the shares held by All Star Technology
      Inc.  Wei Li is a principal stockholder of All Star Technology
      Inc. and may be deemed to beneficially own such shares, but disclaims
      beneficial ownership in such shares held by All Star Technology Inc.
      except to the extent of his pecuniary interest
  therein.


(2).
            Consists
      of 7,812,088 shares of common stock held directly by InvestLink (China)
      Limited (“Investlink”) and 2,250,000 shares of common stock held by
      InvestLink as custodian for Guisheng Chen.  InvestLink has the
      sole power to vote or direct the vote and dispose or direct the
      disposition of 10,062,088 shares but disclaims beneficial ownership of
      such shares except to the extent of its pecuniary interest
      therein.  Dachang Ju exercises voting and investment control
      over the shares held by InvestLink.  Dachang Ju is a principal
      stockholder of InvestLink and may be deemed to beneficially own such
      shares, but disclaims beneficial ownership in such shares held by
      InvestLink except to the extent of his pecuniary interest
      therein.





Under the
terms of the 6% Notes and 6% Note Warrants, the notes and warrants are
exercisable by any holder only to the extent that the number of shares of common
stock issuable pursuant to such securities, together with the number of shares
of common stock owned by such holder and its affiliates (but not including
shares of common stock underlying unconverted shares of callable secured
convertible notes or unexercised portions of the warrants) would not exceed
4.99% of the then outstanding common stock as determined in accordance with
Section 13(d) of the Exchange Act.  Therefore, the table above does
not include beneficial ownership information of the following holders of the 6%
Notes and 6% Note Warrants of the Company: AJW Partners, LLC, AJW Offshore,
Ltd., AJW Qualified Partners, LLC, New Millennium Capital Partners II, LLC,
Double U Master Fund LP, and Nite Capital LP.




Equity Compensation Plan
Information




The
following table sets forth certain information as of December 31, 2008 about our
equity compensation plans under which our equity securities are authorized for
issuance.


Equity
Compensation Plan Information


Plan category
                  
                  Number of securities to be
                    issued upon exercise of
                    outstanding options,
                    warrants and rights
                  
                  
                  Weighted-average exercise
                    price of outstanding options,
                    warrants and rights
                  
                  
                  Number of securities
                    remaining available for future
                    issuance under equity
                    compensation plans
                    (excluding securities reflected
                    in column (a))(a)
                  
                  
                  (b)
                  
                  
                  (c)Equity
      compensation plans approved by security holders
                  
                  
                  1,637,900
                  
                  
                  $
                  0.175
                  
                  
                  
                  1,410,007Equity
      compensation plans not approved by security holders
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  
                  1,637,900
                  
                  
                  
                  -
                  
                  
                  
                  1,410,007




Change in
Control




None.


51




Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence.




For
description of transactions with related parties, see Note 13 to Consolidated
Financial Statements under Item 8 in Part II.





Under the
independence standard set forth in Rule 4200(a) (15) of the Market Place Rules
of the Nasdaq Stock Market, which is the independence standard that we have
chosen to report under, none of the members of the Board of Directors are
independent.





The
relationships between our directors and the Company are as follows:





Mr. Wei
Li is a principal stockholder of All Star Technology Inc, which holds 12,356,672
shares of our common stock.  Mr. Li may be deemed to beneficially own
such shares and exercises voting and investment control over such shares. Mr. Li
is also Chief Executive Officer of the Company.





Mr.
Dachang Ju is a principal stockholder of InvestLink (China) Limited, which holds
directly 7,812,088 shares of our common stock and 2,250,000 shares of common
stock as custodian, Mr. Ju may be deemed to beneficially own such shares. Mr. Ju
exercises voting and investment control over such shares.





Mr.
Lianjun Luo was Chief Financial Officer of the Company for the fiscal year of
2008.  On December 31, 2008, the employment agreement between the
Company and Mr. Lianjun Luo expired.  Both parties agreed not to
review this agreement.





Prof. Qi
Wang is the Director of Kiwa-CAU R&D centre and also Vice President of the
Company.





Mr.
Yunlong Zhang is General Manager of Kiwa Shandong.




Item
      14.
            Principal
      Accounting Fees and Services




Fees Paid
to Independent Public Accountants for 2008 and 2007.




Audit
Fees




Mao &
Company, CPAs, Inc. audited our financial statements for year-end 2008 and 2007,
and reviewed our quarterly financial statements for 2008.  Since we do
not have a formal audit committee, our entire Board of Directors serves as our
audit committee.  We have not adopted pre-approval policies and
procedures with respect to the Company’s accountants, but our shareholders’
meeting and board of directors approved the engagement of Mao & Company,
CPAs, Inc. before engagement.  All of the services described below
were approved by our board of directors prior to performance.  The
board of directors has determined that the payments made to its independent
accountant for these services are compatible with maintaining such auditor's
independence.





The
aggregate audit fees for 2008 were approximately $74,612.  The amounts
include fees for professional services rendered by Mao & Company, CPAs, Inc.
in connection with the audit of our consolidated financial statements for the
2008 fiscal year and reviews of our quarterly reports on the Form 10-Q for the
first, second and third quarters of 2008 fiscal year.


52





The
aggregate audit fees for 2007 were approximately $77,900.  The amounts
include fees for professional services rendered by Mao & Company, CPAs, Inc.
in connection with the audit of our consolidated financial statements for the
2007 fiscal year and reviews of our quarterly reports on the Form 10-QSB for the
first, second and third quarters of 2007 fiscal year.




Audit-Related
Fees




Audit-related
fees for 2008 were nil.





Audit-related
fees for 2007 for assurance and related services by Mao & Company, CPAs,
Inc. were $5,600.  The amounts include fees for auditing the financial
statements in relation to the preparation and filing of the post-effective
amendments for our registration statement on Form SB-2.




Tax Fees




Tax
service fees billed to a tax consultant for 2008 and 2007 were $4,500 in each
year..




All Other
Fees




There
were no additional aggregate fees billed by Mao & Company, CPAs, Inc. for
2008 and 2007 for other services rendered to the Company.




Policy on Audit Committee
Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Auditors




Since we
did not have a formal audit committee, our board of directors served as our
audit committee.  We have not adopted pre-approval policies and
procedures with respect to our accountants in 2008.  All of the
services provided and fees charged by our independent registered accounting
firms in 2008 were approved by the board of directors.




Part
IV




Item
      15.
            Exhibits
      and Financial Statement Schedules




Exhibit
                No.
              
              Description
              
              Incorporated by
                Reference in
                Document
              
              Exhibit No. in
                Incorporated
                Document3.1
              
              Certificate
      of Incorporation, effective as of July 21, 2004
              
              Form
      8-K filed on July 23, 2004
              
              3.13.2
              
              Bylaws,
      effective as of July 22, 2004
              
              Form
      8-K filed on July 23, 2004
              
              3.23.3
              
              Certificate
      of Amendment to Certificate of Incorporation, effective as of January 9,
      2009
              
              Filed
      herewith
              
              3.310.1
              
              Advance
      Agreement by and between Wei Li and the Company dated January 10,
      2008
              
              Form
      8-K filed on January 11, 2008
              
              10.0110.2
              
              Stock
      Purchase Agreement between Kiwa Bio-Tech Products Group Corporation and
      Yuxin Zhou dated February 19, 2008
              
              Form
      8-K filed on February 22, 2008
              
              10.0110.3
              
              Consulting
      Agreement between the Company and Robert Schechter dated January 10,
      2008
              
              Form
      10-Q filed on August 11, 2008
              
              10.110.4
              
              Contract
      for Joint Venture between the Company and Hebei Huaxing Pharmaceuticals
      Co., Ltd. dated May 22, 2008
              
              Form
      8-K filed on May 27, 2008
              
              10.110.5
              
              Term
      Sheet for Redemption Convertible Notes dated September 25, 2008 between
      the Company and AJW Offshore Ltd., AJW Qualified Partners LLC, AJW
      Partners LLC, and New Millennium Capital Partners II LLC
              
              Form
      10-Q filed on November 12, 2008
              
              10.310.6
              
              Term
      Sheet for Redemption Convertible Notes dated September 25, 2008 between
      the Company and FirsTrust Group, Inc. dated October 7,
2008
              
              Form
      10-Q filed on November 12, 2008
              
              10.410.7
              
              2004
      Stock Incentive Plan, amended in 2006
              
              Form
      Pre 14A filed on July 28, 2006
              
              Appendix
      A14.1
              
              Code
      of Ethics
              
              Filed
      herewith.21
              
              List
      of Subsidiaries
              
              Form
      10-KSB filed on April 2, 2007
              
              2131.1
              
              Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934
              
              Filed
      herewith.31.2
              
              Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934
              
              Filed
      herewith.32.1
              
              Certification
      of Chief Executive Officer and Chief Financial Officer, pursuant to 18
      U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002
              
              Filed
      herewith.


53




Signatures




Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.




Date: May
15, 2009




KIWA
      BIO-TECH PRODUCTS GROUP
                    CORPORATION.By:
                  /s/
      Wei LiWei
      Li
                    Chief
      Executive Officer
                    (Principal
      Executive Officer)By:
                  /s/
      Steven Ning MaSteven
      Ning Ma
                    Chief
      Financial Officer
                    (Principal
      Financial and Accounting
Officer)




Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
registrant and in the capacities and on the dates indicated.





/s/
      Wei Li
                          
                          Chief Executive Officer
      and
                            Chairman
      of the Board of Directors (Principal Executive Officer)
                          
                          May
      15, 2009Wei
      Li/s/
      Steven Ning Ma
                          
                          Chief
      Financial Officer
                            (Principal
      Financial and Accounting Officer)
                          
                          May
      15, 2009Steven
      Ning Ma/s/
      Xucheng Hu
                          
                          Director
                          
                          May
      15, 2009Xucheng
      Hu/s/
      Yunlong Zhang
                          
                          Director
                          
                          May
      15, 2009Yunlong
      Zhang/s/
      Lianjun Luo
                          
                          Director
                          
                          May
      15, 2009Lianjun
      Luo/s/
      Qi Wang
                          
                          Director
                          
                          May
      15, 2009Qi
      Wang


54


Kiwa
Bio-Tech Products Group Corporation





Index
to Consolidated Financial Statements





Report
      of Independent Registered Public Accounting Firm
                F-1Consolidated
      Balance Sheets
                F-2Consolidated
      Statements of Operations and Comprehensive Income
                F-3Consolidated
      Statement of Stockholders’ Equity
                F-4Consolidated
      Statements of Cash Flows
                F-5Notes
      to Consolidated Financial Statements
                F-6







Report
of Independent Registered Public Accounting Firm




To the
Board of Directors and Stockholders of


Kiwa
Bio-Tech Products Group Corporation:





We have
audited the accompanying consolidated balance sheets of Kiwa Bio-Tech Products
Group Corporation and its subsidiaries (the “Company”) as of December 31, 2008
and 2007, and the related consolidated statements of operations and
comprehensive income, stockholders’ equity (deficiency), and cash flows for each
of the years in the two-year period ended December 31, 2008. The Company’s
management is responsible for these financial statements. Our responsibility is
to express an opinion on these financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2008 and 2007, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has debts maturing in 2009 but a working capital deficit and a
net capital deficiency as of December 31, 2008 that raise substantial doubt
about its ability to continue as a going concern. Management’s plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





New York,
New York


March 6,
2009 – except for the subsequent event as disclosed in note 21 and going concern
disclosure in note 1, for which the date is May 14, 2009.


F-1


KIWA
BIO-TECH PRODUCTS GROUP CORPORATION
 CONSOLIDATED
BALANCE SHEETS
  Item
                                  
                                  December 31,2008
                                  
                                  
                                  2007ASSETSCurrent
      assetsCash
      and cash equivalents
                                  
                                  $
                                  18,986
                                  
                                  
                                  $
                                  61,073Accounts
      receivable, net of allowance for doubtfulaccounts
      of $352,896 and $277,140, respectively
                                  
                                  
                                  490,060
                                  
                                  
                                  
                                  470,298Inventories
                                  
                                  
                                  351,786
                                  
                                  
                                  
                                  818,329Prepaid
      expenses
                                  
                                  
                                  20,440
                                  
                                  
                                  
                                  70,460Prepayment
      for fertilizer trade
                                  
                                  
                                  2,955,550
                                  
                                  
                                  
                                  -Other
      current assets
                                  
                                  
                                  73,432
                                  
                                  
                                  
                                  67,372Total
      current assets
                                  
                                  
                                  3,910,254
                                  
                                  
                                  
                                  1,487,532Property,
      Plant and EquipmentBuildings
                                  
                                  
                                  1,241,972
                                  
                                  
                                  
                                  1,162,060Machinery
      and equipment
                                  
                                  
                                  705,680
                                  
                                  
                                  
                                  660,273Automobiles
                                  
                                  
                                  81,390
                                  
                                  
                                  
                                  76,154Office
      equipment
                                  
                                  
                                  108,759
                                  
                                  
                                  
                                  93,231Computer
      software
                                  
                                  
                                  21,166
                                  
                                  
                                  
                                  9,877Property,
      plant and equipment - total
                                  
                                  
                                  2,158,967
                                  
                                  
                                  
                                  2,001,595Less:
      accumulated depreciation
                                  
                                  
                                  (600,596
                                  )
                                  
                                  
                                  (433,690
                                  )Less:
      impairment on long-lived assets
                                  
                                  
                                  (542,285
                                  )
                                  
                                  
                                  -Property,
      plant and equipment - net
                                  
                                  
                                  1,016,086
                                  
                                  
                                  
                                  1,567,905Construction
      in progress
                                  
                                  
                                  71,887
                                  
                                  
                                  
                                  67,262Intangible
      asset - net
                                  
                                  
                                  151,231
                                  
                                  
                                  
                                  296,245Deferred
      financing costs
                                  
                                  
                                  47,793
                                  
                                  
                                  
                                  129,793Deposit
      to purchase proprietary technology
                                  
                                  
                                  126,443
                                  
                                  
                                  
                                  126,443Total
      assets
                                  
                                  $
                                  5,323,694
                                  
                                  
                                  $
                                  3,675,180LIABILITIES
      AND SHAREHOLDERS’ EQUITY(DEFICIENCY)Current
      liabilitiesAccounts
      payable
                                  
                                  $
                                  1,935,698
                                  
                                  
                                  $
                                  1,635,490Advances
      from customers
                                  
                                  
                                  159,200
                                  
                                  
                                  
                                  169,553Construction
      costs payable
                                  
                                  
                                  297,472
                                  
                                  
                                  
                                  316,902Due
      to related parties - trade
                                  
                                  
                                  3,190,872
                                  
                                  
                                  
                                  177,970Due
      to related parties - non-trade
                                  
                                  
                                  897,070
                                  
                                  
                                  
                                  551,654Convertible
      notes payable, net of $348,932 discount
                                  
                                  
                                  1,273,391
                                  
                                  
                                  
                                  -Penalty
      payable
                                  
                                  
                                  152,750
                                  
                                  
                                  
                                  -Current
      portion of long-term liabilities
                                  
                                  
                                  3,857
                                  
                                  
                                  
                                  2,889Total
      current liabilities
                                  
                                  
                                  7,910,310
                                  
                                  
                                  
                                  2,854,458Long-term
      liabilities, less current portionUnsecured
      loans payable
                                  
                                  
                                  1,682,615
                                  
                                  
                                  
                                  1,574,350Bank
      notes payable
                                  
                                  
                                  11,881
                                  
                                  
                                  
                                  17,988Long-term
      convertible notes payable
                                  
                                  
                                  112,917
                                  
                                  
                                  
                                  2,058,625Less:
      discount relating to long-termconvertible
      notes payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (856,308
                                  )Long-term
      convertible notes payable - net
                                  
                                  
                                  112,917
                                  
                                  
                                  
                                  1,202,317Total
      long-term liabilities
                                  
                                  
                                  1,807,413
                                  
                                  
                                  
                                  2,794,655Minority
      interest in a subsidiary
                                  
                                  
                                  66,057
                                  
                                  
                                  
                                  110,838Shareholders’
      equity (deficiency)Common
      stock - $0.001 par value Authorized 200,000,000 shares. Issued and
      outstanding 139,399,206 and 81,519,676 shares at December 31, 2008 and
      December 31, 2007
                                  
                                  
                                  139,399
                                  
                                  
                                  
                                  81,520Preferred
      stock - $0.001 par value Authorized 20,000,000 shares, none
      issued
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Additional
      paid-in capital
                                  
                                  
                                  10,269,855
                                  
                                  
                                  
                                  9,217,876Stock-based
      compensation reserve
                                  
                                  
                                  (135,843
                                  )
                                  
                                  
                                  (307,053
                                  )Deficit
      accumulated
                                  
                                  
                                  (14,706,710
                                  )
                                  
                                  
                                  (11,074,522
                                  )Accumulated
      other comprehensive income
                                  
                                  
                                  (26,787
                                  )
                                  
                                  
                                  (2,592
                                  )Total
      shareholders’ equity (deficiency)
                                  
                                  
                                  (4,460,086
                                  )
                                  
                                  
                                  (2,084,771
                                  )Total
      liabilities and stockholders’ equity
                                  
                                  $
                                  5,323,694
                                  
                                  
                                  $
                                  3,675,180
 
 SEE
ACCOMPANYING NOTES
  F-2
  KIWA
BIO-TECH PRODUCTS GROUP CORPORATION
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
 Item
                  
                  Fiscal Year Ended December
    31,2008
                  
                  
                  2007Net
      sales
                  
                  $
                  9,175,737
                  
                  
                  $
                  9,129,779Cost
      of sales
                  
                  
                  8,958,219
                  
                  
                  
                  8,603,795Gross
      profit
                  
                  
                  217,518
                  
                  
                  
                  525,984Operating
      expensesConsulting
      and professional fees
                  
                  
                  359,831
                  
                  
                  
                  794,324Officers’
      compensation
                  
                  
                  240,993
                  
                  
                  
                  285,941General
      and administrative
                  
                  
                  1,126,167
                  
                  
                  
                  901,545Selling
      expenses
                  
                  
                  189,163
                  
                  
                  
                  363,131Research
      and development
                  
                  
                  192,977
                  
                  
                  
                  177,773Depreciation
      and amortization
                  
                  
                  123,147
                  
                  
                  
                  129,298Allowance
      for doubtful accounts
                  
                  
                  82,815
                  
                  
                  
                  588Total
      operating expenses
                  
                  
                  2,315,093
                  
                  
                  
                  2,652,600Operating
      loss
                  
                  
                  (2,097,575
                  )
                  
                  
                  (2,126,616
                  )Loss
      from disposal of obsolete inventory
                  
                  
                  (192,798
                  )
                  
                  
                  -Loss
      from impairment of long-lived assets
                  
                  
                  (639,492
                  )
                  
                  
                  -Interest
      expense
                  
                  
                  (753,956
                  )
                  
                  
                  (766,411
                  )Loss
      before minority interest in a subsidiary’s deficit
                  
                  
                  (3,683,821
                  )
                  
                  
                  (2,893,027
                  )Minority
      interest in a subsidiary’s deficit (profit)
                  
                  
                  51,633
                  
                  
                  
                  (332
                  )Loss
      from continuing operations
                  
                  
                  (3,632,188
                  )
                  
                  
                  (2,893,359
                  )Loss
      on discontinued operations:Discountinued
      urea entrepot trade -Commission
      paid to a related party
                  
                  
                  -
                  
                  
                  
                  (414,509
                  )Net
      loss
                  
                  $
                  (3,632,188
                  )
                  
                  $
                  (3,307,868
                  )Other
      comprehensive lossTranslation
      adjustment
                  
                  
                  (24,195
                  )
                  
                  
                  (61,111
                  )Comprehensive
      loss
                  
                  $
                  (3,656,383
                  )
                  
                  $
                  (3,368,979
                  )Net
      (loss) from continuing operations per common share - basic and
      diluted
                  
                  $
                  (0.039
                  )
                  
                  $
                  (0.038
                  )Net
      loss on discontinued operations per common share - basic and
      diluted
                  
                  $
                  -
                  
                  
                  $
                  (0.005
                  )Weighted
      average number of common shares outstanding-basic and
    diluted
                  
                  
                  93,624,204
                  
                  
                  
                  75,543,446
 
 SEE
ACCOMPANYING NOTES
  F-3
  KIWA
BIO-TECH PRODUCTS GROUP CORPORATION
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
  Common Stock
                                
                                
                                Additional
                                  Paid-in
                                
                                
                                Stock-based
                                  Compensation
                                
                                
                                Accumulated
                                
                                
                                Other
                                  Comprehensive
                                
                                
                                Total
                                  Stockholders’Shares
                                
                                
                                Amount
                                
                                
                                Capital
                                
                                
                                Reserve
                                
                                
                                Deficits
                                
                                
                                Income
                                
                                
                                DeficiencyBalance,
      January 1, 2007
                                
                                
                                70,149,556
                                
                                
                                
                                70,150
                                
                                
                                
                                8,311,975
                                
                                
                                
                                (523,468
                                )
                                
                                
                                (7,766,654
                                )
                                
                                
                                1,166
                                
                                
                                
                                93,169Issuance
      of common stock for exercise of warrants at January 5,
2007
                                
                                
                                1,000,000
                                
                                
                                
                                1,000
                                
                                
                                
                                (1,000
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Issuance
      of common stock for cashless exercise of warrants on April 11,
      2007
                                
                                
                                610,278
                                
                                
                                
                                610
                                
                                
                                
                                (610
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Issuance
      of common stock for cashless exercise of warrants on April 20,
      2007
                                
                                
                                97,844
                                
                                
                                
                                98
                                
                                
                                
                                (98
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Issuance
      of common stock for conversion of principal andinterest of 6%
      Notes during 12 months ended December 31, 2007
                                
                                
                                5,821,998
                                
                                
                                
                                5,822
                                
                                
                                
                                353,405
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                359,227Issuance
      of 700,000 shares of common stock to a consultant on April 18,
      2007
                                
                                
                                700,000
                                
                                
                                
                                700
                                
                                
                                
                                125,300
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                126,000Issuance
      of 140,000 shares of common stock to an investor relations consultant on
      October 24, 2007
                                
                                
                                140,000
                                
                                
                                
                                140
                                
                                
                                
                                20,860
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                21,000Issuance
      of 3,000,000 shares to two Chinese citizens designated by a related party
      on October 30, 2007
                                
                                
                                3,000,000
                                
                                
                                
                                3,000
                                
                                
                                
                                222,300
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                225,300Issuance
      of 250,000 shares of warrants to a consultant
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                44,414
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                44,414Amortizaton of fair
      value of warrants issued to a financing consultant
      during fiscal year ended December 31,
      2007
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                77,181
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                77,181Amortization
      of fair value of employee stock option cancelled
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                55,792
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                55,792Amortization
      of fair value of employee stock options granted in 2006
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                83,442
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                83,442Fair
      value of warrants issued to a related party in June
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                15,172
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                15,172Fair
      value of warrants issued to a related party in September
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                60,742
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                60,742Fair
      value of warrants issued to a related party in December
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                65,416
                                
                                
                                
                                -
                                
                                
                                _
                                
                                
                                
                                -
                                
                                
                                
                                65,416Net
      loss for fiscal ended December 31, 2007
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (3,307,868
                                )
                                
                                
                                -
                                
                                
                                
                                (3,307,868
                                )Other
      comprehensive income fiscal year ended December 31, 2007
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (3,758
                                )
                                
                                
                                (3,758
                                )Balance,
      December 31, 2007
                                
                                
                                81,519,676
                                
                                
                                
                                81,520
                                
                                
                                
                                9,217,876
                                
                                
                                
                                (307,053
                                )
                                
                                
                                (11,074,522
                                )
                                
                                
                                (2,592
                                )
                                
                                
                                (2,084,771
                                )Issuance
      of 140,000 shares of common stock to an InvestorRelations
      consultant on February 27, 2008
                                
                                
                                140,000
                                
                                
                                
                                140
                                
                                
                                
                                19,460
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                19,600Issuance
      of 5,000,000 shares of common stock to an investorfor the
      consideration of $650,000 on March 14, 2008
                                
                                
                                5,000,000
                                
                                
                                
                                5,000
                                
                                
                                
                                645,000
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                650,000Issuance
      of common stock for conversion of principal and interest of 6% Notes
      during fiscal year ended December 31, 2008
                                
                                
                                52,739,530
                                
                                
                                
                                52,739
                                
                                
                                
                                387,519
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                440,258Amortizaton
      of fair value of warrants issued to a financing consultant during fiscal
      year ended December 31, 2008
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                77,181
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                77,181Amortization
      of fari value of employee stock options granted in 2006
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                94,029
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                94,029Net
      loss for the fiscal year ended December 31, 2008
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (3,632,188
                                )
                                
                                
                                -
                                
                                
                                
                                (3,632,188
                                )Other
      comprehensive income for the fiscal year ended December 31,
      2008
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (24,195
                                )
                                
                                
                                (24,195
                                )Balance,
      December 31, 2008
                                
                                
                                139,399,206
                                
                                
                                
                                139,399
                                
                                
                                
                                10,269,855
                                
                                
                                
                                (135,843
                                )
                                
                                
                                (14,706,710
                                )
                                
                                
                                (26,787
                                )
                                
                                
                                (4,460,086
                                )
 
 SEE
ACCOMPANYING NOTES
  F-4
  KIWA
BIO-TECH PRODUCTS GROUP CORPORATION
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 Item
                        
                        Fiscal Year Ended December
    31,2008
                        
                        
                        2007Cash
      flows from operating activities:Net
      loss
                        
                        $
                        (3,632,188
                        )
                        
                        $
                        (3,307,868
                        )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                        
                        
                        317,379
                        
                        
                        
                        291,309Impairment
      loss on long-lived assets
                        
                        
                        639,492
                        
                        
                        
                        -Amortization
      of detachable warrants, options and stocks as compensation
                        
                        
                        844,069
                        
                        
                        
                        1,132,902Provision
      for doubtful debt and inventory impairment
                        
                        
                        275,613
                        
                        
                        
                        588Provision
      for panalty payable
                        
                        
                        152,750
                        
                        
                        
                        -(Gain)/Loss
      on disposal of fixed assets
                        
                        
                        -
                        
                        
                        
                        2,033Minority
      interest in a subsidiary
                        
                        
                        (51,633
                        )
                        
                        
                        332Changes
      in operating assets and liabilities:Accounts
      receivable
                        
                        
                        (102,577
                        )
                        
                        
                        458,560Inventories
                        
                        
                        273,745
                        
                        
                        
                        (276,989
                        )Prepaid
      expenses
                        
                        
                        (7,669
                        )
                        
                        
                        21,612Prepayment
      to supplier - fertilizer trade
                        
                        
                        (2,955,550
                        )
                        
                        
                        -Other
      current assets
                        
                        
                        (6,060
                        )
                        
                        
                        (10,361
                        )Accounts
      payable
                        
                        
                        420,938
                        
                        
                        
                        955,565Advances
      from customers
                        
                        
                        (10,353
                        )
                        
                        
                        -Due
      to related parties-trade
                        
                        
                        57,352
                        
                        
                        
                        208,668Advances
      from related party - fertilizer trade
                        
                        
                        2,955,550
                        
                        
                        
                        -Net
      cash provided by (used in) operating activities
                        
                        
                        (829,142
                        )
                        
                        
                        (523,649
                        )Cash
      flows from investing activities:Purchase
      of property and equipment
                        
                        
                        (48,111
                        )
                        
                        
                        (206,446
                        )Net
      cash used in investing activities
                        
                        
                        (48,111
                        )
                        
                        
                        (206,446
                        )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                        
                        
                        650,000
                        
                        
                        
                        -Proceeds
      from related parties
                        
                        
                        802,574
                        
                        
                        
                        720,172Repayment
      to related parties
                        
                        
                        (545,353
                        )
                        
                        
                        (388,196
                        )Repayment
      of long-term borrowings
                        
                        
                        (5,606
                        )
                        
                        
                        (23,385
                        )Net
      cash provided by financing activities
                        
                        
                        901,615
                        
                        
                        
                        308,591Effect
      of exchange rate changes on cash and cash equivalents
                        
                        
                        (66,449
                        )
                        
                        
                        (15,526
                        )Cash
      and cash equivalents:Net
      increase (decrease)
                        
                        
                        (42,087
                        )
                        
                        
                        (437,030
                        )Balance
      at beginning of period
                        
                        
                        61,073
                        
                        
                        
                        498,103Balance
      at end of period
                        
                        $
                        18,986
                        
                        
                        $
                        61,073Supplemental
      Disclosures of Cash flow Information:Cash
      paid for interest
                        
                        $
                        1,715
                        
                        
                        $
                        247Cash
      paid for income taxes
                        
                        $
                        -
                        
                        
                        $
                        -Non-cash
      investing and financing activities:Issuance
      of detachable warrants in conjunction with loans
                        
                        
                        -
                        
                        
                        
                        141,330Issuance
      of detachable warrants as compensation to consultants
                        
                        
                        -
                        
                        
                        
                        44,414Issuance
      of common stock for conversion of long-termconvertible
      notes payable and interest
                        
                        
                        440,258
                        
                        
                        
                        359,227Issuance
      of stock as compensation to consultants
                        
                        
                        19,600
                        
                        
                        
                        147,000Issuance
      of stock to repay related-party
                        
                        
                        -
                        
                        
                        
                        225,300Issuance
      of stock for cashless exercise of Warrants
                        
                        
                        -
                        
                        
                        
                        1,708Conversion
      of accrued interests into principal
                        
                        
                        112,917
                        
                        
                        
                        -
 
 SEE
ACCOMPANYING NOTES




F-5




Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)




Notes
to Consolidated Financial Statements




References
herein to “we,” “us,” “our” or “the Company” refer to Kiwa Bio-Tech Products
Group Corporation and its wholly-owned and majority-owned subsidiaries unless
the context specifically states or implies otherwise.




1.
            Background
      and Basis of Presentation




Organization - We are the
result of a share exchange transaction accomplished on March 12, 2004 between
Tintic Gold Mining Company, a Utah corporation, and Kiwa Bio-Tech Products Group
Ltd. (“Kiwa BVI”).  The exchange transaction resulted in a change of
control of Tintic, with former Kiwa BVI stockholders owning approximately 89% of
Tintic on a fully diluted basis, and Kiwa BVI became Tintic’s wholly-owned
subsidiary.  Subsequent to the share exchange, Tintic changed its name
to Kiwa Bio-Tech Products Group Corporation.  On July 21, 2004, we
completed our reincorporation in the State of Delaware.





Business - Our business plan
is to develop, manufacture, distribute and market innovative, cost-effective and
environmentally safe bio-technological products for agriculture markets located
primarily in China.  We have acquired technologies to produce and
market bio-fertilizer and bio-enhanced feed products, and also are developing a
veterinary drug based on AF-01 anti-viral aerosol technology.





Basis of Presentation - The
consolidated financial statements include the operations of the Company and its
wholly-owned subsidiaries, Kiwa BVI and Kiwa Bio-Tech Products (Shandong) Co.,
Ltd. (“Kiwa Shandong”), and also its majority-owned subsidiary, Tianjin Kiwa
Feed Co., Ltd. (“Kiwa Tianjin”).  These consolidated financial
statements are presented in accordance with accounting principles generally
accepted in the United States.  All significant intercompany balances
and transactions have been eliminated in consolidation.





Use of Estimates - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period.  Actual results could differ from those
estimates.  Significant accounting estimates include bad debt
provision, impairment of inventory and long-lived assets, depreciation and
amortization and fair value of warrant.





Country Risk - As the
Company’s principal operations are conducted in China, the Company is subject to
special considerations and significant risks not typically associated with
companies in North America and Western Europe.  These risks include,
among others, risks associated with the political, economic and legal
environments and foreign currency exchange limitations encountered in
China.  The Company’s results of operations may be adversely affected
by changes in the political and social conditions in China, and by changes in
governmental policies with respect to laws and regulations, among other
things.





In
addition, all of the Company’s transactions undertaken in China are denominated
in Renminbi (“RMB”), which must be converted into other currencies before
remittance out of China may be made.  Both the conversion of RMB into
foreign currencies and the remittance of foreign currencies abroad require the
approval of the Chinese government.  In recent years, the Chinese
government has gradually loosed its control over foreign exchange, especially on
current foreign exchange accounts, for instance, canceling of advanced
examination and approval for the opening of current foreign exchange accounts
and enhancing of quota of current foreign exchange accounts.


F-6


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)





Credit Risk - The Company
performs ongoing credit evaluations of its customers and intends to establish an
allowance for doubtful accounts when amounts are not considered fully
collectable.  According to the Company’s credit policy, the Company
generally provides 100% bad debt provision for the amounts outstanding over 365
days after the deduction of the amount subsequently settled after the balance
sheet date, which management believes is consistent with industry practice in
the China region.





As of
December 31, 2008, there was $359,955 in accounts receivable aged over 365 days
old, we have provided $352,896 bad debt provision based on all accounts
receivable over one year as of December 31, 2008.





Going Concern - The
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business.  The carrying amounts of assets and liabilities presented in
the consolidated financial statements do not purport to represent the realizable
or settlement values, should the company not be able to continue in
existence.





Overview of the Company’s
Financial Condition as of December 31, 2008


As of
December 31, 2008, the Company had accumulated deficit of $14,706,710, among
which, $3,632,188 and $3,307,868 were incurred during twelve months ended
December 31, 2008 and 2007, respectively.





As of
December 31, 2008, we had cash and cash equivalents of $18,986 and total current
assets of $3,910,254; at the same time, we had current liabilities of
$7,910,310, denoting current ratio of 0.49 and quick ratio of
0.45.  At the end of fiscal 2008, we also had long-term liabilities of
$1,807,413.





On June
29, 2006, the Company entered into a securities purchase agreement with six
institutional investors for the issuance and sale of (1) 6% secured convertible
notes, due three years from the date of issuance, in the aggregate principal
amount of $2,450,000, convertible into shares of the Company’s common stock, and
(2) warrants to purchase 12,250,000 shares of the Company’s common
stock.  As of December 31, 2008, the outstanding principal of 6% Notes
was $1,622,323.  The maturity date of the 6% Notes is June 29,
2009.





To the
extent that we are unable to successfully raise the capital necessary to fund
our future cash requirements on a timely basis and under acceptable terms and
conditions, we will not have sufficient cash resources to maintain operations
and repay our liabilities, and may have to curtail or cease operations and
consider a formal or informal restructuring or reorganization.





Overview of the Company’s
Operating Results for the Twelve Months Ended December 31, 2008 and
2007


During
twelve months ended December 31, 2008 and 2007, our sales revenue was $9,175,737
and $9,129,779, respectively.  However, the Company gross profit was
$217,518 and $525,984, denoting a gross profit margin of 2.4% and
5.8%.  During fiscal year of 2008 and 2007, our operating loss was
$2,097,575 and $2,126,616.  Net loss for both periods was $3,632,188
and $3,307,868, respectively.





Overview of the Company’s
Cash flow Status for the Twelve Months Ended December 31, 2008 and
2007


During
fiscal year ended December 31, 2008 and 2007, our operating activities used net
cash of $829,142 and $523,649, respectively.  We also invested $48,111
and $206,446 in purchasing property and equipment during both
periods.  Although our financing activities provided net cash of
$901,615 and $308,591 in the fiscal year of 2008 and 2007, we had cash of only
$18,986 and $61,073 on December 31, 2008 and 2007,
respectively.


F-7


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)





The Company’s Ability of
Raising New Finance


Continuous
losses and low share price has deteriorate the Company’s ability of raising new
finance.  As of December 31, 2008, the closing price of our common
stock reported by on the OTC Bulletin Board was $0.0019.  The market
value of the Company was $264,858, which makes it very hard to arrange new
financing on equity financing basis.  The Company’s obligations under
the 6% Notes and the Warrants are secured by a first priority security interest
in the Company’s intellectual property pursuant to an Intellectual Property
Security Agreement with the Purchasers, and by a first priority security
interest in all of the Company’s other assets pursuant to a Security Agreement
with the Purchasers.  In addition, the Company’s Chief Executive
Officer has pledged all of his common stock of the Company as collateral
security for the Company’s obligations under the 6% Notes and the
Warrants.  As a result, the Company does not have assets to security
the obligations of new debt.





The 6%
Notes require the Company to procure the Purchaser’s consent to take certain
actions including to pay dividends, repurchasing stock, incur debt, guaranty
obligations, merge or restructuring the Company, or selling significant
assets.  Our ability of raising new finance is limited.





Kiwa Shandong’s Ability to
Continue as a Going Concern is in Doubt


Kiwa
Shandong is our wholly-owned subsidiary of engaging in researching, developing,
producing and marketing bio-fertilizer.  However, since its inception
in 2002, Kiwa Shandong has not generated material revenue.  Moreover,
Kiwa Shandong has never been profitable.  As of December 31, 2008,
Kiwa Shandong has accumulated deficit of $2,180,030.





In June
2002, we entered into an agreement with Zoucheng Municipal Government granting
us the use of at least 15.7 acres in Shandong Province, China at no cost for 10
years to construct a manufacturing facility.  Pursuant to relevant
China laws and regulations, we had paid tenure tax on quarterly basis at the
rate of approximately $1,660 per acre.  However, from January 1, 2007,
China central government adopted a series of policies to strengthen land
management, including doubled tenure tax to $3,320 per acre.  In
February 2008, the Ministry of Land and Resources of China issued “Controlling
Indexes of Construction Land Use for Industrial Projects,” which requires the
building coverage should not be less than 30%.  Up to now, the current
situation in Kiwa Shandong does not meet this requirement.  There is
no assurance that local authority would not reduce the acreage of land granted
to us to use at no cost.





During
the first half of 2009, Kiwa Shandong plan to raise working capital from related
parties to meet Kiwa Shandong’s daily requirements of cash, including repayment
to raw material and service suppliers and other costs of daily
operations.  We are also actively looking for new financing from
outside investors, for instance, financial institutions.





Kiwa
Shandong is also further strengthening its effort of expanding the
market.  It is planned to expand the market within Shandong Province
so as to reduce selling expenses.  We also plan to sell our
bio-fertilizer products directly to end-users so as to reduce costs to
end-users.  We also plan to lower down prices of our bio-fertilizer
products to enhance competitiveness in the market.





On
December 31, 2008, we launched a complete test on the recoverability of our
long-lived assets in Kiwa Shandong.  Based on our analysis, Kiwa
Shandong’s long-lived assets were impaired.  Management is assessing
the usage of our long-lived assets in Kiwa Shandong; it is possible that we
would dispose some of our long-lived assets when necessary.





Given the
tight cash flow status of the Company, we may have to curtail or cease
operations and consider a formal or informal restructuring or reorganization in
Kiwa Shandong.  For example, we may consider reduce the acreage of
land we use in Kiwa Shandong to lower tax expenditure.


F-8


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)





Kiwa Tianjin’s Ability to
Continue as a Going Concern is in Doubt


Kiwa
Tianjin is our majority-owned subsidiary engaging in the developing,
manufacturing and marketing of biologically enhanced feed for live
stock.  Since its inception in 2006, the gross profit margin of Kiwa
Tianjin has been declining.  During fiscal year ended December 31,
2008, Kiwa Tianjin’s gross profit margin was less than 3%, underpinning its
limited profitability.  As of December 31, 2008, Kiwa Tianjin had
accumulated deficit of $303,507.





As of
December 31, 2008, Kiwa Tianjin has cash of only $377.  Given the
tight cash flow status of the Company, we may have to curtail or cease
operations and consider a formal or informal restructuring or reorganization in
Kiwa Tianjin.





During
the first half of 2009, Kiwa Tianjin plan to raise working capital from related
parties to meet Kiwa Tianjin’s daily requirements of cash, including repayment
to raw material and service suppliers and other costs of daily
operations.  We are also actively looking for new financing from
outside investors, for instance, financial institutions.





Kiwa
Tianjin is also adjusting its product mix to reduce the amount of production of
those low-gross profit margin products.  Specifically, Tianjin will
gradually reduce the amount of product of fowl feed, which typically has a gross
profit margin of less than 3%.  We also plan to increase the amount of
production of fish feeds, which has a larger-than-average gross profit
margin.  In the short term, total amount of revenue of Kiwa Tianjin
may drop down, resulting from these adjustments; however it is expected that the
profitability of our bio-enhanced feed business will be improved.





2009
Financing PlanFrom the fourth quarter of 2008, we are putting in place
very strict control over expenses.  We plan to raise new financing
from related parties to satisfy the Company’s daily demand of cash resources and
maintain its operation.  At the same time, we are actively looking for
new financing from outside investors.  We expect to raise at least
$2,000,000 in the first half of 2009, which could allow us to repay outstanding
balance of 6% Notes at its maturity date of June 29, 2009.  If we
could successfully settle 6% Notes, our capital structure would be
improved.  We would be better positioned in raising new
finance.  We are also adjusting product mix to reduce the amount of
production of those low-gross profit margin products.





In
Conclusion


The
Company’s ability to continue as a going concern is in doubt.  We
expect to continue to have operating losses for the foreseeable future as we are
still in the process of exploring market, further research and product
tests.  We will require additional capital to implement our business
plan and continue operating.  To the extent that we are unable to
successfully raise the capital necessary to fund our future cash requirements on
a timely basis and under acceptable terms and conditions, we will not have
sufficient cash resources to maintain operations, and may have to curtail or
cease operations and consider a formal or informal restructuring or
reorganization.





Our
independent auditors have added an explanatory paragraph to their audit opinion
issued in connection with our financial statements for the latest six fiscal
years, which states that the financial statements raise substantial doubt as to
our ability to continue as a going concern.  Our ability to make
operations profitable or obtain additional funding will determine our ability to
continue as a going concern.





Foreign Currency Translation -
The functional currency of the Company is China RMB, which is the primary medium
of exchange where Kiwa Shandong and Kiwa Tianjin operate.  The Company
reports its financial results in United States dollars (“U.S. dollars” or
“US$”).


F-9


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)





Translations
of amounts from RMB into U.S. dollars were at approximately US$1.00 = RMB8.28
for all periods prior to July 21, 2005.  Due to the stability of the
RMB during the periods covered by the consolidated financial statements prior to
July 21, 2005, no material exchange differences exist during the aforesaid
period.  On July 21, 2005, the People’s Bank of China announced it
would appreciate the RMB, increasing the RMB-US$ exchange rate from
approximately US$ 1.00 = RMB 8.28 to approximately US$1.00 =
RMB8.00.  The Company translates it’s China subsidiaries’ assets and
liabilities into U.S. dollars using the rate of exchange prevailing at the
balance sheet date (on December 31, 2008, the prevailing exchange rate of the
U.S. dollar against the RMB was US$1.00 = RMB6.8346), and the statement of
operations is translated at the average rates over each quarterly reporting
period.  Equity items are translated at historical exchange
rates.  Adjustments resulting from the translation from RMB into U.S.
dollars are recorded in shareholders’ equity as part of accumulated
comprehensive income (loss).  Gains or losses resulting from
transactions in currencies other than RMB are reflected in the results of
operations as incurred.





Revenue
Recognition - The Company recognizes sales of its products in accordance with
Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No.
101, “Revenue Recognition in Financial Statements”, as amended by SAB No. 104,
“Revenue Recognition”. Sales represent the invoiced value of goods, net of value
added tax (“VAT”), if any, and are recognized upon delivery of goods and passage
of title.





Pursuant
to China’s value-added tax (“VAT”) rules and regulations, Kiwa Shandong as an
ordinary VAT taxpayer is subject to a tax rate of 13% (“output VAT”). Such
output VAT is payable after offsetting VAT paid by Kiwa Shandong on purchases
(“input VAT”).





The VAT
rate applied for Kiwa Tianjin, as a small-scale VAT taxpayer, is 6%. However as
a livestock feed producer, it is exempted from VAT. Such VAT exemption shall be
approved by the local tax authority each year. On January 27, 2007, the local
tax authority approved the exemption from VAT for Kiwa Tianjin’s revenues for
fiscal year 2007.





Pursuant
to EITF 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent”,
the company must recognize revenue based on the net amount retained (that is,
the amount billed to the customer less the amount paid to a supplier) if the
company carries out a transaction which has the following indicators: (1) the
supplier (not the company) is the primary obligor in the arrangement; (2) the
amount the company earns is fixed; and (3) the supplier (and not the company)
has credit risk. We evaluate the relevant facts and circumstances of our urea
entrepot trade, and recognize net amount as revenue for Urea entrepot business.
During the fiscal year December 31, 2006, we recognized $800,000 revenue from
urea entrepot trade; no revenues were earned during fiscal 2007. urea entrepot
trade operation was discontinued and has been classified as a discontinued
operation.





Advertising
- The Company charges all advertising costs to expense as incurred.





Research
and development - Research and development costs are charged to expense as
incurred.





Operating
Leases - Operating leases represent those leases under which substantially all
the risks and rewards of ownership of the leased assets remain with the lessors.
Rental payments under operating leases are charged to expense on the
straight-line basis over the period of the relevant lease
contracts.





Net Loss
Per Common Share - Basic loss per common share is calculated by dividing net
loss by the weighted average number of shares of common stock outstanding during
the period. Diluted loss per common share reflects the potential dilution that
would occur if dilutive securities (stock options, warrants, convertible debt,
stock subscription and other stock commitments issuable) were exercised. These
potentially dilutive securities were not included in the calculation of loss per
share for the periods presented because the Company incurred a loss during such
periods and thus their effect would have been anti-dilutive. Accordingly, basic
and diluted loss per common share is the same for all periods
presented.  As of December 31, 2008, potentially dilutive securities
aggregated 4,666,414,111 shares of common stock.


F-10


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)





Comprehensive (Loss) Income -
The Company has adopted the SFAS No. 130, “Reporting Comprehensive Income,”
which establishes standards for reporting and presentation of comprehensive
income (loss) and its components in a full set of general-purpose financial
statements.  The Company has chosen to report comprehensive income
(loss) in the statements of operations and comprehensive income.





Income Taxes - The Company
accounts for income taxes under the provisions of SFAS No. 109, “Accounting for
Income Taxes,” which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the consolidated financial statements or tax returns.  Deferred tax
assets and liabilities are recognized for the future tax consequence
attributable to the difference between the tax bases of assets and liabilities
and their reported amounts in the financial statements.  Deferred tax
assets and liabilities are measured using the enacted tax rate expected to apply
to taxable income in the years in which those temporary differences are expected
to be recovered or settled.  The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.  The Company establishes a valuation when
it is more likely than not that the assets will not be recovered.





We
adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”
(FIN 48), which supplements SFAS No. 109, by defining the confidence level that
a tax position must meet in order to be recognized in the financial
statements.  FIN 48 requires that the tax effect(s) of a position be
recognized only if it is “morelikely-than-not” to be sustained based solely on
its technical merits as of the reporting date.  The
morelikely-than-not threshold represents a positive assertion by management that
a company is entitled to the economic benefits of a tax position.  If
a tax position is not considered more-likely-than-not to be sustained based
solely on its technical merits, no benefits of the tax position are to be
recognized.  The more-likelythan-not threshold must continue to be met
in each reporting period to support continued recognition of a
benefit.  With the adoption of FIN 48, companies are required to
adjust their financial statements to reflect only those tax positions that are
more-likely-than-not to be sustained.  Any necessary adjustment would
be recorded directly to retained earnings and reported as a change in accounting
principle.  We evaluated our tax positions and believe there is no
material uncertainty on our income tax issues for fiscal 2008.





Cash and Cash Equivalents -
Highly liquid investments with a maturity of three months or less at the time of
acquisition are considered to be cash equivalents.





Inventories - Inventories are
stated at the lower of cost, determined on a weighted average basis, and net
realizable value.  Work in progress and finished goods are composed of
direct material, direct labor and a portion of manufacturing
overhead.  Net realizable value is the estimated selling price, in the
ordinary course of business, less estimated costs to complete and
dispose.





Property, Plant and Equipment
- Property, plant and equipment are stated at cost.  Major
expenditures for betterments and renewals are capitalized while ordinary repairs
and maintenance costs are expensed as incurred.  Depreciation and
amortization is provided using the straight-line method over the estimated
useful lives of the assets after taking into account the estimated residual
value.  The estimated useful lives of property, plant and equipment
are as follows:





Buildings
              
              20-35
      yearsMachinery
      and equipment
              
              4-12
      yearsAutomobiles
              
              8
      yearsOffice
      equipments
              
              5
      yearsComputer
      software
              
              3
      years


F-11


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)





Construction
in progress represents factory and office buildings under
construction.  The Company capitalizes interest during the
construction phase of qualifying assets in accordance with SFAS No. 34,
“Capitalization of Interest Cost.”  No interest was capitalized during
twelve months ended December 31, 2008 and 2007.





Depreciation
costs were charged into costs of production or periodic expenses in accordance
with the utilization of relating property, plant and
equipment.  However, due to the abnormally low production capacity in
Kiwa Shandong in 2008 and 2007, we pro rata charged part of the depreciation of
production facilities into production cost in accordance with the proportion of
actual capacity to normal capacity, and the rest into operating
expenses.





We
periodically evaluate our investment in long-lived assets, including property
and equipment, for recoverability whenever events or changes in circumstances
indicate the net carrying amount may not be recoverable.  Our
judgments regarding potential impairment are based on legal factors, market
conditions and operational performance indicators, among others. In assessing
the impairment of property and equipment, we make assumptions regarding the
estimated future cash flows and other factors to determine the fair value of the
respective assets. Based on our analysis, we charged $639,492 as loss from
impairment of long-lived assets.  No such costs were charged during
fiscal 2007.





Derivative Instruments - The
Company accounts for financial instruments under the provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” which requires that all derivative
financial instruments be recognized in the consolidated financial statements and
maintained at fair value regardless of the purpose or intent for holding
them.  Changes in fair value of derivative financial instruments are
either recognized periodically in income or stockholders’ equity (as a component
of comprehensive income), depending on whether the derivative is being used to
hedge changes in fair value or cash flows.





Financial
Instruments and Fair Value - SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments”, requires that the Company disclose estimated fair values
of financial instruments.





The
carrying amounts for cash and cash equivalents, accounts receivable, other
receivables, deposits and prepayments, short-term borrowings, accounts payable,
other payables and accruals approximate their fair values because of the short
maturity period of those instruments.





Stock Issued for Compensation and
Financing - Effective January 1, 2006, the Company adopted SFAS No.
123(R) (revised 2004), “Share Based Payment,” which revises SFAS No. 123 and
supersedes APB 25.  SFAS No. 123(R) requires that all share-based
payments to employees be recognized in the financial statements based on their
fair values at the date of grant.  The calculated fair value is
recognized as expense (net of any capitalization) over the requisite service
period, net of estimated forfeitures, using the straight-line attribution method
under SFAS No. 123(R).





Related Parties - Parties are
considered to be related if one party has the ability, directly or indirectly,
to control the other party, or exercise significant influence over the other
party in making financial and operating decisions.  Parties are also
considered to be related if they are subject to common control or common
significant influence.





Reclassification from Prior Year
Financial Statements - Certain prior year comparative figures have been
reclassified to conform to the current year presentation.


F-12


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)




2.
            Recent
      Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS 141R
replaces SFAS No. 141, Business Combinations ("FAS 141"). SFAS 141R retains the
fundamental requirements in FAS 141 that the purchase method of accounting be
used for all business combinations, that an acquirer be identified for each
business combination and for goodwill to be recognized and measured as a
residual. SFAS 141R expands the definition of transactions and events that
qualify as business combinations to all transactions and other events in which
one entity obtains control over one or more other businesses. SFAS 141R broadens
the fair value measurement and recognition of assets acquired, liabilities
assumed, and interests transferred as a result of business combinations. SFAS
141R also increases the disclosure requirements for business combinations in the
financial statements. SFAS 141R is effective for fiscal periods beginning after
December 15, 2008. Therefore, the Company was required to adopt SFAS 141R on
January 1, 2009.  There was no business combination consummated during
2008 and the Company does not expect the adoption of SFAS No. 141R to have a
material effect on the Company's financial position and results of
operations.





In
December 2007, the FASB ratified the consensus reached on Emerging Issues Task
Force Issue No. 07-1, "Accounting for Collaborative Arrangements Related to the
Development and Commercialization of Intellectual Property" ("EITF 07-1"). EITF
07-1 defines collaborative arrangements and establishes reporting requirements
for transactions between participants in a collaborative arrangement and between
participants in the arrangement and third parties. EITF 07-1 shall be effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Therefore, the Company was
required to adopt EITF07-1 on January 1, 2009. We are currently evaluating the
potential impact of this standard on our financial statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities-an amendment of FASB Statement No. 133.”  SFAS
No. 161 gives financial statement users better information about the reporting
entity’s hedges by providing for qualitative disclosures about the objectives
and strategies for using derivatives, quantitative data about the fair value of
and gains and losses on derivative contracts, and details of credit-risk-related
contingent features in their hedged positions. SFAS No. 161 is effective for
financial statements issued for fiscal years beginning after November 15, 2008
and interim periods within those years. The Company does not expect the adoption
of SFAS No. 161 to have a material effect on the Company’s financial
statements.





In April
2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). FSP 142-3 removes the requirement under SFAS No.
142, Goodwill and Other Intangible Assets to consider whether an intangible
asset can be renewed without substantial cost or material modifications to the
existing terms and conditions, and replaces it with a requirement that an entity
consider its own historical experience in renewing similar arrangements, or a
consideration of market participant assumptions in the absence of historical
experience. FSP 142-3 also requires entities to disclose information that
enables users of financial statements to assess the extent to which the expected
future cash flows associated with the asset are affected by the entity’s intent
and/or ability to renew or extend the arrangement. The Company was required to
adopt FSP 142-3 on January 1, 2009. The adoption of FSP 142-3 did not have an
impact on our consolidated financial statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.”  SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP.  SFAS No. 162 directs the GAAP
hierarchy to the entity, not the independent auditors, as the entity is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP.  SFAS No. 162 is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to remove the GAAP hierarchy from the auditing
standards.  SFAS No. 162 is not expected to have an impact on the
Company’s financial statements.


F-13


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)





In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60.”  SFAS
No. 163 is primarily geared towards financial guarantee insurance contracts by
insurance enterprises.  It is not expected to have any material effect
on the reporting of the Company’s results of operations.





In
November 2008, the Emerging Issues Task Force ("EITF") issued Issue No. 08-7,
Accounting for Defensive Intangible Assets ("EITF 08-7"). EITF 08-7 applies to
all acquired intangible assets in which the acquirer does not intend to actively
use the asset but intends to hold (lock up) the asset to prevent its competitors
from obtaining access to the asset (a defensive asset), assets that the acquirer
will never actually use, as well as assets that will be used by the acquirer
during a transition period when the intention of the acquirer is to discontinue
the use of those assets. EITF 08-7 is effective as of January 1, 2009. The
Company does not expect the adoption of EITF 08-7 to have a material impact on
its financial statements.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company’s present or future
consolidated financial statements.




3.
            Accounts
      Receivable




As of
December 31, 2008, the balance of $490,060 was net of bad debt provision of
$352,896.  During fiscal year 2008, accounts receivable totaled
$296,199 of Kiwa Shandong was determined to be uncollectible and therefore
written off from book, after being approved by General Manager of Kiwa Shandong
and CEO of the Company.





$303,258
of the bad debt provision in 2008  was related to bio-fertilizer
business and the rest ($56,697) was related to bio-enhanced feed
business.





Item
                      
                      December31,2008
                      
                      
                      December31,2007Accounts
      receivables - gross
                      
                      $
                      842,956
                      
                      
                      $
                      747,438Allowance
      for doubtful accounts
                      
                      
                      (352,896
                      )
                      
                      
                      (277,140
                      )Accounts
      receivables - net
                      
                      $
                      490,060
                      
                      
                      $
                      470,298





As of
December 31, 2007, bad debt provision of $277,140 was relates to our
bio-fertilizer business.




4.
            Inventories




Inventories
consisted of the following as of December 31, 2008 and December 31,
2007:





Item
                      
                      December31,2008
                      
                      
                      December31,2007Raw
      materials
                      
                      $
                      283,770
                      
                      
                      $
                      686,290Finished
      goods
                      
                      
                      68,016
                      
                      
                      
                      132,039Total
                      
                      $
                      351,786
                      
                      
                      $
                      818,329


F-14


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)





During
fiscal year ended December 31, 2008, we wrote off $192,798 and disposed of
obsolete inventory which exceeded the guarantee period. The General Manager of
Kiwa Shandong and CEO of the Company had approved the disposal.  There
was no inventory exceeding their quality guarantee period as of December 31,
2007.




5.
            Prepayment
      for fertilizer trade




On
November 25, 2008, Kiwa Shandong and Oriental Chemical Industrial Corp., Ltd.
(the “Oriental Chemical”) entered into “Chemical Fertilizer Sales Agreement,”
(the “Chemical Fertilizer Purchase Agreement”) pursuant to which Oriental
Chemical will sell to Kiwa Shandong 6,700 tons of chemical fertilizer products
at the tentative price of RMB3,000 per ton.  Under this agreement,
Kiwa Shandong prepaid $2,955,550 to Oriental Chemical.  As of December
31, 2008, Kiwa Shandong did not purchase any chemical fertilizer under the
Chemical Fertilizer Purchase Agreement. Please also refer to Note 13 “Related
Party Transaction – Kangtai – Fertilizer trade” section below.




6.
            Prepaid
      expenses




Prepaid
expenses consisted of the following as of December 31, 2008 and December 31,
2007:





Item
                    
                    December31,2008
                    
                    
                    December31,2007Prepaid
      stock-based compensation to consultants
                    
                    $
                    -
                    
                    
                    $
                    46,865Others
                    
                    
                    20,440
                    
                    
                    
                    23,595Total
                    
                    $
                    20,440
                    
                    
                    $
                    70,460





(i)
Prepaid stock-based compensation to investor relation consultant





Pursuant
to a consulting agreement with an investor relation consultant, on April 18,
2007 we issued to the consultant 700,000 shares of common stock and warrants to
purchase 250,000 shares of the Company’s common stock with an exercise price
equal to $0.25. The fair value of the stock and warrants were amortized over the
period that services were rendered (The year ended March 31, 2008).





On
December 18, 2008, we entered into an engagement letter with our new
attorney.  Pursuant to which, we paid $1,500 in cash as service fees
for one month.  Kiwa Tianjin and Kiwa Shandong also prepaid minor fees
and expenses to suppliers and service providers.




7.
            Property,
      Plant and Equipment




The total
gross amount of property, plant and equipment was $2,158,967 and $2,001,595 as
of December 31, 2008 and 2007, respectively.  The increase of $157,372
or 7.9% is mainly due to purchase of property and equipment for upgrading the
Kiwa Shandong facility.





Depreciation
expense was $166,906 and $147,651 for the twelve months ended December 31, 2008
and 2007, respectively.





Impairment
on long-lived assets was $542,285 and nil as of December 31, 2008 and 2007,
respectively.


F-15


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)





All of
our property, plant and equipment have been used as collateral to secure the 6%
Notes (See Note 15 below).




8.
            Intangible
      Assets




The
Company’s intangible asset as of December 31, 2008 consisted of a patent as
follows:





AmortizationYear
                    
                    Grosscarrying
                      value
                    
                    
                    Accumulated
                      amountof
                      amortization
                    
                    
                    Impairmenton
                      Intangible
                      Assets
                    
                    
                    NetValueat
                      December31,
                      20088.5
                    
                    $
                    480,411
                    
                    
                    $
                    232,238
                    
                    
                    $
                    96,942
                    
                    
                    $
                    151,231





The
following table presents future expected amortization expense related to the
patent:





Futureexpectedamortization
                    
                    Amount2009
                    
                    
                    37,0362010
                    
                    
                    37,0362011
                    
                    
                    37,0362012
                    
                    
                    37,0362013
                    
                    $
                    3,086





This
patent has been used as collateral to secure the 6% Notes (See Note 15
below).




9.
            Deferred
      Financing Costs




The
financing costs relating to 6% Notes (See Note 15 below) were $47,793 and
129,793 as of December 31, 2008 and 2007, respectively.  These costs
consist of financing commission paid to an investment bank, legal service fees,
insurance premium and other related costs. The costs are being amortized over
the three-year term of the 6% Notes, starting at various dates of each tranche
of 6% Notes in 2006.




10.
            Deposit
      to Purchase the Proprietary
Technology




The
balance of $126,443 as of December 31, 2008 and 2007 is partial payment of the
first installment of the transfer fee for the Anti-viral Aerosol technology
pursuant to a Technology Transfer Agreement dated May 8, 2006 (See Note 20
below).




11.
            Accounts
      Payable




Accounts
payable consisted of the following at December 31, 2008 and December 31,
2007:





Item
                  
                  December 31, 2008
                  
                  
                  December 31, 2007Consulting
      and professional payables
                  
                  $
                  436,560
                  
                  
                  $
                  436,381Payables
      to material suppliers
                  
                  
                  607,146
                  
                  
                  
                  425,306Interest
      payable
                  
                  
                  190,431
                  
                  
                  
                  192,275Salary
      payable
                  
                  
                  318,864
                  
                  
                  
                  212,219Insurance
      payable
                  
                  
                  103,394
                  
                  
                  
                  95,247Office
      rental payable
                  
                  
                  86,528
                  
                  
                  
                  80,960Credit
      card balance
                  
                  
                  80,591
                  
                  
                  
                  84,042Others
                  
                  
                  112,184
                  
                  
                  
                  109,060Total
                  
                  $
                  1,935,698
                  
                  
                  $
                  1,635,490


F-16


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)




12.
            Construction
      Costs Payable




Construction
costs payable represents remaining amounts to be paid for the first phase of
construction of our bio-fertilizer facility in Shandong.




13.
            Related
      Party Transactions




Amounts
due to related parties consisted of the following as of December 31, 2008 and
December 31, 2007:





Item
                    
                    Nature
                    
                    Notes
                    
                    
                    31
      December 2008
                    
                    
                    31
      December 2007Mr.
      Wei Li ("Mr. Li")
                    
                    Non-trade
                    
                    
                    (1)
                    
                    
                    $
                    837,347
                    
                    
                    $
                    377,218Discount
      of loans due to Mr. Li with detachable warrants
                    
                    Non-trade
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    (88,195
                    )Kangtai
      International Logistics (Beijing) Co., Ltd. ("Kangtai")
                    
                    Non-trade
                    
                    
                    (2)
                    
                    
                    
                    (57,277
                    )
                    
                    
                    205,631Ms.
      Yvonne Wang ("Ms. Wang")
                    
                    Non-trade
                    
                    
                    (3)
                    
                    
                    
                    117,000
                    
                    
                    
                    57,000Subtotal
                    
                    
                    
                    
                    
                    
                    
                    $
                    897,070
                    
                    
                    $
                    551,654Kiwa-CAU
      R&D Center
                    
                    Trade
                    
                    
                    (4)
                    
                    
                    
                    234,103
                    
                    
                    
                    164,280Tianjin
      Challenge Feed Co., Ltd.
                    
                    Trade
                    
                    
                    (5)("Challenge
      Feed")
                    
                    
                    
                    
                    
                    
                    
                    
                    1,219
                    
                    
                    
                    13,690Kantai
      International Logistics (Beijing) Co., Ltd.
                    
                    
                    
                    
                    (6)
                    
                    
                    
                    2,955,550
                    
                    
                    
                    -Subtotal
                    
                    
                    
                    
                    
                    
                    
                    $
                    3,190,872
                    
                    
                    $
                    177,970Total
                    
                    
                    
                    
                    
                    
                    
                    $
                    4,087,942
                    
                    
                    $
                    729,624




(i)
Mr. Li




Mr. Li is
the Chairman of the Board, Chief Executive Officer and Chief Financial Officer
of the Company.




Advances
and Loans




As of
December 31, 2007, the remaining balance due to Mr. Li was
$377,218.  During the twelve months ended December 31, 2008, Mr. Li
advanced $669,846 to the Company and was repaid $209,717.  As of
December 31, 2008, the balance due to Mr. Li was $837,347.  Mr. Li has
agreed that the Company may repay the balance when its cash flow circumstance
allows.




Motor
Vehicle Lease




In
December 2004, we entered into an agreement with Mr. Li, pursuant to which Mr.
Li leases to the Company a motor vehicle.  The monthly rental payment
is $2,200.  We have extended this lease agreement with Mr. Li to the
end of fiscal 2009.


F-17


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)




Guarantees
for the Company




Mr. Li
has pledged without any compensation from the Company all of his common stock of
the Company as collateral security for the Company’s obligations under the 6%
Notes.  (See Note 15 below).




(2)
Kangtai




Non-trade


Kangtai
International Logistics (Beijing) Co., Ltd., formerly named China Star
Investment Management Co., Ltd., is a private company, 28% owned by Mr. Li. Mr.
Li is the Chairman of Kantai.





On
December 31, 2007, the amount due to Kangtai was $205,631.  During the
twelve months ended December 31, 2008, Kangtai advanced $72,728 and was repaid
$335,636.  The balance due from Kangtai on December 31, 2008 was
$57,277.





Fertilizer
trade


On
December 12, 2008, Kiwa Shandong and Kangtai entered into “Chemical Fertilizer
Sales Agreement,” (the “Chemical Fertilizer Sales Agreement”) pursuant to which,
Kiwa Shandong will sell to Kangtai 6,700 tons of chemical fertilizer products at
the tentative price of RMB3,130 per ton.  Under this agreement,
Kangtai prepaid to Kiwa Shandong $2,955,550.  As of December 31, 2008,
Kiwa Shandong did not sell any chemical fertilizer to Kangtai under the Chemical
Fertilizer Sales Agreement.





On
November 25, 2008, Kiwa Shandong and Oriental Chemical Industrial Corp., Ltd.
(the “Oriental Chemical”) entered into “Chemical Fertilizer Sales Agreement,”
(the “Chemical Fertilizer Purchase Agreement”) pursuant to which Oriental
Chemical will sell to Kiwa Shandong 6,700 tons of chemical fertilizer products
at the tentative price of RMB3,000 per ton.  Under this agreement,
Kiwa Shandong prepaid to Oriental Chemical $2,955,550.  As of December
31, 2008, Kiwa Shandong did not purchase any chemical fertilizer under the
Chemical Fertilizer Purchase Agreement.




(3)
Ms. Wang




Ms. Wang
is the Secretary of the Company.





On
December 31, 2007, the amount due to Ms. Wang was $57,000.  During the
twelve months ended December 31, 2008, Ms. Wang advanced $60,000 to the
Company.  As of December 31, 2008, the amount due to Ms. Wang was
$117,000.  Ms. Wang has agreed that the Company may repay the balance
when its cash flow circumstance allows.




(4)
Kiwa-CAU R&D Center




In
November 2006 Kiwa and China Agricultural University (the “CAU”) agreed to
jointly set up a new research and development center, named Kiwa-CAU R&D
Center.  The term of the agreement was ten years commencing from July
1, 2006.





Pursuant
to the agreement, Kiwa agree to invest RMB 1 million (approximately $146,300)
each year to fund research at Kiwa-CAU R&D Center.  Prof. Qi Wang,
one of our directors, is also the director of Kiwa-CAU R&D
Center.  The agreement also stipulated that the Kiwa-CAU R&D
Center shall complete the following tasks each year:


F-18


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)





l
            Three
      new technological achievements get
patented;


l
            Two
      technological achievements pass the provincial level or ministerial level
      scientific and technological achievements
  qualification;


l
            Develop
      two new products which can be
commercialized..





During
fiscal 2008, Kiwa-CAU R&D Center had concentrated on the following filed of
works:


1.
            Isolation
      and culture of microorganisms;


2.
            Screening
      of growth-promoting bacteria;


3.
            Screening
      of bio-control bacteria;


4.
            Screening
      of environmental microbiology;


5.
            Studies
      on fermentation technology and related production
  process;


6.
            Analysis
      of soil and fertilizer nutrients and fertilization program
      development;


7.
            Field
      demonstration test of Kiwa fertilizer
products;


8.
            Application
      of approval and certification of Kiwa fertilizer
  products;


9.
            Application
      of patents; and


10.
            Technical
      training and services.





During
fiscal 2008, Kiwa-CAU R&D Center had successfully isolated forty-one strains
of endophytic bacillus from plants.  In 2008, Ministry of Agriculture
of the PRC had granted Organic Product Certification to two of our
products.  A number of strains had been observed to have the
capability of boosting crop yield, dispelling chemical pesticide residual from
soil.  These strains could be used for not only developing new
biological preparation but also environmental protection
preparation.  We are applying for three patents.





Management
has assessed Kiwa-CAU R&D center’s performance for the fiscal year ended
December 31, 2008; it is believed that Kiwa-CAU R&D center has achieved its
goals.





On
December 31, 2007, the amount due to Kiwa-CAU R&D Center was
$164,280.  During the twelve months ended December 31, 2008, we paid
approximately $87,800 to Kiwa-CAU R&D Center.  As of December 31,
2008, the outstanding balance due to Kiwa-CAU R&D Center was
$234,103.




(5)
Challenge Feed




Challenge
Feed owns 20% of Kiwa Tianjin’s equity, and Mr. Wenbin Li, one of Challenge
Feed’s shareholders, is also in charge of daily operations of Kiwa
Tianjin.





The
Company has entered into an agreement with Challenge Feed to lease the following
facilities for three years commencing on August 1, 2006: (1) an office building
with floor area of approximately 800 square meters; (2) storehouses with floor
area of approximately 2,500 square meters; (3) a concentrated feed production
line for fowl and livestock; and (4) two workshops with floor area of
approximately 1,200 square meters.  The total monthly rent is
RMB50,000 (approximately $7,300).  During the twelve months ended
December 31, 2008, all scheduled rent payments were paid.





The
Company also paid $3,015 taxes on behalf of Challenge feed.  As of
December 31, 2008, the outstanding balance due to Challenge Feed was $1,219,
which was unpaid rental from operating lease.


F-19


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)




14.
            Unsecured
      Loans Payable




The
balance of unsecured loans payable was $1,682,615 and $1,574,350 as of December
31, 2008 and December 31, 2007, respectively.  The difference of
$108,265 was due to the different exchange rates prevailing at the two
dates.  Unsecured loans payable consisted of the following at December
31, 2008 and December 31, 2007:





Item
                
                December31,2008
                
                
                December31,2007Unsecured
      loan payable to Zoucheng Municipal Government, non-interest bearing,
      becoming due within three years from Kiwa Shandong’s first profitable year
      on a formula basis, interest has not been imputed due to the
      undeterminable repayment date
                
                $
                1,316,829
                
                
                $
                1,232,100Unsecured
      loan payable to Zoucheng Science & Technology Bureau, non-interest
      bearing, it is due in Kiwa Shandong’s first profitable year, interest has
      not been imputed due to the undeterminable repayment date
                
                
                365,786
                
                
                
                342,250Total
                
                $
                1,682,615
                
                
                $
                1,574,350





The
Company qualifies for non-interest bearing loans under a Chinese government
sponsored program to encourage economic development in certain industries and
locations in China.  To qualify for the favorable loan terms, a
company must meet the following criteria: (1) be a technology company with
innovative technology or product (as determined by the Science Bureau of the
central Chinese government); (2) operate in specific industries that the Chinese
government has determined are important to encourage development, such as
agriculture, environmental, education, and others; and (3) be located in an
undeveloped area such as Zoucheng, Shandong Province, where the manufacturing
facility of the Company is located.





According
to our project agreement, Zoucheng Municipal Government granted the Company use
of at least 15.7 acres in Shandong Province, China at no cost for 10 years to
construct a manufacturing facility.  Under the agreement, the Company
has the option to pay a fee of RMB480,000 ($70,400) per acre for the land use
right after the 10-year period.  The Company may not transfer or
pledge the temporary land use right.  The Company also committed to
invest approximately $18 million to $24 million for developing the manufacturing
and research facilities in Zoucheng, Shandong Province.  As of
December 31, 2008, the Company invested approximately $1.91 million for the
property, plant and equipment of the project.




15.
            Long-Term
      Convertible Notes Payable




On June
29, 2006, the Company entered into a securities purchase agreement (the
“Purchase Agreement”) with six institutional investors (collectively, the
“Purchasers”) for the issuance and sale of (1) 6% secured convertible notes, due
three years from the date of issuance, in the aggregate principal amount of
$2,450,000 (the “6% Notes”), convertible into shares of the Company’s common
stock, and (2) warrants (the “Warrants”) to purchase 12,250,000 shares of the
Company’s common stock.





In
conjunction with the sale and issuance of the 6% Notes, the Company entered into
a Registration Rights Agreement, amended in October 2006, the requirements of
which the Company met by filing its registration statement on Form SB-2 on
August 11, 2006 and subsequently amended on October 20, 2006 and June 29,
2007.





Closings
for the sale of the 6% Notes occurred on June 29, August 15 and October 31, 2006
for $857,500, $735,000 and $857,500 principal amount,
respectively.  The Company received $2,450,000 in aggregate from the
three sales of the 6% Notes.


F-20


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)





The
conversion price of the 6% Notes is based on a 40% discount to the average of
the trading price of the Company’s common stock on the OTC Bulletin Board over a
20-day trading period.  The conversion price is also adjusted for
certain subsequent issuances of equity securities of the Company at prices below
the conversion price then in effect.  The 6% Notes contain a volume
limitation that prohibits the holder from converting further 6% Notes if doing
so would cause the holder and its affiliates to hold more than 4.99% of the
Company’s outstanding common stock.  In addition, each holder of 6%
Notes agrees that they may not convert more than their pro-rata share (based on
original principal amount) of the greater of $120,000 principal amount of 6%
Notes per calendar month or the average daily dollar volume calculated during
the 10 business days prior to a conversion, per conversion.  This
conversion limit has since been eliminated pursuant to an agreement by the
Company and the Purchasers (see discussion below).





The
exercise price of the Warrants is $0.45 per share, subject to anti-dilution
adjustments pursuant to a broad-based weighted average formula for subsequent
issues of equity securities by the Company below the trading price of the
shares.  The Purchase Agreement requires the Company to maintain a
reserve of authorized common stock equal to 110% of the number of shares
issuable upon full conversion of the 6% Notes and exercise of the
Warrants.  The Purchase Agreement imposes financial penalties in cash
(equal to 2% of the number of shares that the Purchaser is entitled to
multiplied by the market price for each day) if the authorized number of shares
of common stock is insufficient to satisfy the reserve
requirements.  The 6% Notes and the Warrants also impose financial
penalties on the Company if it fails to timely deliver common stock upon
conversion of the 6% Notes and exercise of the Warrants,
respectively.





To enable
reservation of a sufficient amount of authorized shares that may be issued
pursuant to conversion of the 6% Notes and exercise of the Warrants, the
Purchase Agreement required the Company to amend its Certificate of
Incorporation to increase the number of authorized shares of common
stock.  At our annual meeting held on December30, 2008, a proposal to
amend our Certificate of Incorporation to increase the number of authorized
shares of common stock, from 200,000,000 shares to 400,000,000 shares was
approved by the required vote of our stockholders.  The Company incurs
a financial penalty in cash or shares at the option of the Company (equal to 2%
of the outstanding amount of the Notes per months plus accrued and unpaid
interest on the Notes, prorated for partial months) if it breaches this or other
affirmative covenants in the Purchase Agreement, including a covenant to
maintain a sufficient number of authorized shares under its Certificate of
Incorporation to cover at least 110% of the stock issuable upon full conversion
of the Notes and the Warrants.





The
Purchasers of the 6% Notes and Warrants were introduced to the Company by an
investment bank pursuant to an engagement letter agreement with the
Company.  Pursuant to the engagement, the investment bank received a
cash fee equal to 8% of the aggregate proceeds raised in the financing and to
warrants in the quantity equal to 8% of the securities issued in the
financing.  The Company recorded the cash fee and other direct costs
incurred for the issuance of the convertible loan in aggregate of $30,000 as
deferred debt issuance costs.  Debt issuance costs were amortized on
the straight-line method over the term of the 6% Notes, with the amounts
amortized being recognized as interest expense.





The
warrants issued to the investment bank in connection with each tranche of 6%
Notes (amounting to 343,000 shares, 294,000 shares and 343,000 shares) are
exercisable for three years and have an exercise price equal to
$0.2598.  The fair value of these warrants at the time of their
issuance was determined to be $94,005, $60,324 and $77,214 calculated pursuant
to the Black-Scholes option pricing mode.





During
fiscal year ended December 31, 2008, the Purchasers converted principal amount
of $436,302 and interest amount of $116,873 into 59,254,970 shares of common
stocks.


F-21


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)





On
January 31, 2008, we entered into three Callable Secured Convertible Notes
Agreements (“2% Notes”) with four of our 6% Notes purchasers converting their
unpaid interest of $112,917 in total, into principal with an interest rate of 2%
per annum, which will be due on January 31, 2011. Other terms of the 2% Notes
are similar to the 6% Notes. No principal of the 2% Notes has been converted so
far.  As of December 31, 2008, the outstanding principal balance on
the 2% Notes was $112,917.





On
September 25 and October 7, 2008, we entered into an agreement with the
Purchasers to redeem all of the 6% Notes and 2% Notes.  Under the
redemption agreement, the Purchasers agreed to waive their participation right
with respect to any new financing that closes before October 31, 2008, and
suspend conversions of principal and interest under the 6% Notes and 2% Notes
from September 25 to October 31, 2008.  The Company agreed to redeem
the notes for a specified price if a new financing was completed before October
31, 2008. Under the redemption agreement, if the Company failed to redeem the
notes by October 31, 2008, the 6% Notes and 2% Notes would be automatically
amended to remove limitations on the Purchasers’ right to convert under the 6%
Notes and 2% Notes no more than (1) $120,000 per calendar month; and (2) the
average daily dollar volume calculated during the ten (10) business days prior
to a conversion, per conversion.





On
October 27, 2008, we had informed the Purchasers that the Company would not be
able to redeem the 6% Notes and the 2% Notes due to failure to close an
anticipated new financing.  Therefore, the amendment to 6% Notes and
2% Notes took effective and the Purchasers resumed conversion.





The 6%
Notes require the Company to procure the Purchaser’s consent to take certain
actions including to pay dividends, repurchase stock, incur debt, guaranty
obligations, merge or restructure the Company, or sell significant
assets.





The
Company’s obligations under the 6% Notes and the Warrants are secured by a first
priority security interest in the Company’s intellectual property pursuant to an
Intellectual Property Security Agreement with the Purchasers, and by a first
priority security interest in all of the Company’s other assets pursuant to a
Security Agreement with the Purchasers. In addition, the Company’s Chief
Executive Officer has pledged all of his common stock of the Company as
collateral security for the Company’s obligations under the 6% Notes and the
Warrants. The Purchasers are accredited investors as defined under the
Securities Act and the 6% Notes and the Warrants and the underlying common stock
upon conversion and exercise will be issued without registration under the
Securities Act in reliance on the exemption provided by Rule 506 under
Regulation D under the Securities Act.





The fair
value of the Warrants underlying the three sales of the 6% Notes (amounting to
4,287,500 shares, 3,675,000 shares and 4,287,500 shares, respectively) at the
time of their issuance was determined to be $545,477, $416,976 and $505,503
calculated pursuant to the Black-Scholes option pricing model.  The
fair value was recorded as a reduction to 6% Notes payable and was charged to
operations as interest expense in accordance with effective interest method
within the period of the 6% Notes.





Pursuant
to security purchase agreement dated June 29, 2006, the Company shall, at the
end of each month that the 6% Notes and 2% Notes or Warrants are outstanding,
have authorized and reserved for the purpose of issuance, a number of shares of
Common Stock that is not less than one hundred ten percent of the number of
shares of Common Stock actually issuable upon full conversion of the 6% Notes
and 2% Notes and exercise of the Warrants based on the average Conversion Price
of the Notes and the average Exercise Price of the Warrants during such calendar
month (“Reserved Amount”).  Our month-end calculation shows that the
amount of authorized shares did not meet the above-mentioned requirements as of
December 31, 2008.  Therefore,
we  accrued  liquidated damages amount, which equals to 2%
of the outstanding amount of the 6% Notes and 2% Notes per month plus accrued
and unpaid interest on the Notes.


F-22


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)




16.
            Equity-Based
      Transactions




As of
December 31, 2008 and December 31, 2007, the Company had 139,399,206 and
81,519,676 shares of common stock outstanding, respectively.  From
January 1, 2008 to December 31, 2008, the Company has engaged in the following
equity-based transactions:





On
February 27, 2008, we issued 140,000 shares of common stock as partial
compensation to an investor relation consultant for consulting
services.





On March
14, 2008, the Company issued 5,000,000 shares of common stock to an investor for
consideration of $650,000 cash pursuant to a stock purchase agreement dated
February 19, 2008.





During
the twelve months ended December 31, 2008, the Company issued 52,739,530 shares
of common stock for conversions of principal and interest under our 6%
Notes.




17.
            Stock-based
      Compensation




(a)
Summary Description of 2004 Stock Incentive Plan, as amended




The 2004
Stock Incentive Plan originally reserved 3,047,907 shares of our common stock
for the issuance of options and other stock awards after the amendment approved
by the 2006 annual shareholder meeting.  Under the Plan, not more than
500,000 options or other stock awards may be granted to any participant in any
fiscal year.  Currently, the Stock Plan is administered by the Board.
Employees, consultants and directors who are selected by the Board are eligible
to receive options or stock purchase rights under the Plan subject to
limitations set forth therein; provided, however, that only employees are
eligible to be granted options intended to qualify as “incentive stock options”
under the Internal Revenue Code of 1986, as amended (the “Code”).  The
exercise price of stock option awards may not be less than the fair market value
on the date of grant, while nonstatutory stock options must have an exercise
price of at least 85% of the fair market value on the date of
grant.  The exercise price of stock purchase rights may not be less
than 85% of the fair market value of the shares of stock on either the date of
grant or the date of purchase of the stock purchase right.




(b)
Option Grant




On
December 12, 2006, we granted 2,000,000 shares of stock option under our 2004
Stock Incentive Plan as amended.  During fiscal 2007, 362,100 stock
options were returned to the Company when the holders separated from the Company
without exercising the options.  During fiscal 2008, 222,500 stock
options were returned to the company for the same
reason.  Consequently, as of December 31, 2008, 1,415,400 options were
issued and outstanding.





Pursuant
to the approval of Board of Directors, the exercise price of all our outstanding
options was $0.175 per share, equal to the closing price of our common stock on
December 12, 2006.  On the first and second anniversaries of the grant
date, 33% percent of the options will become exercisable.  On the
third anniversary of the grant date, 34% of the options will become
exercisable.


F-23


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)





The
Company has adopted SFAS 123R effective as of January 1 2006.  The
fair value of the options granted at the grant date was determined to be
$320,154 (approximately $0.16 per share), calculated pursuant to the
Black-Scholes option pricing model.  The calculated fair value is
recognized as expense over the applicable vesting periods, using the
straight-line attribution method.  Unamortized fair value of stock
options granted to those who separated from the Company has been charged to
expense, while the options returned to the Company.  We charged
$94,029 and $139,233 as compensation expense in 2008 and 2007,
respectively.





As of
December 31, 2008, 934,164 shares of our issued and outstanding options vested
and none were exercised.  The closing price of our common stock on
December 31, 2008 was $0.0019 (lower than the exercise price), thus the year-end
intrinsic value of options granted was nil.




18.
            Segment
      Reporting




We had
three principal business segments, bio-fertilizer, livestock feed and urea
entrepot trade for fiscal 2006.  Commencing from July 2007 when we
terminated all agreements related to urea entrepot trade, we treated urea
entrepot trade as discontinued and have been operating in the rest two segments
during 2008, we made arrangements to engage in fertilizer trade
business.  Management believes that the following table highlights
relevant information to the chief operation decision makers for measuring
business performances and financing needs and preparing the corporate budget and
other items.  As most of the Company’s customers are located in China,
no geographical segment information is presented.


Item
                                        
                                        Bio-fertilizer
                                        
                                        
                                        Livestock
      Feed
                                        
                                        
                                        Urea Entrepot Trade(1)
                                        
                                        
                                        Chemical Fertilizer
                                          Trade (2)
                                        
                                        
                                        Corporate (3)
                                        
                                        
                                        TotalFiscal
      Year Ended December 31, 2008Net
      sales
                                        
                                        $
                                        226,869
                                        
                                        
                                        $
                                        8,948,868
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        9,175,737Gross
      profit
                                        
                                        
                                        60,035
                                        
                                        
                                        
                                        157,483
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        217,518Operating
      expenses
                                        
                                        
                                        360,320
                                        
                                        
                                        
                                        415,608
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,323
                                        
                                        
                                        
                                        1,536,842
                                        
                                        
                                        
                                        2,315,093Operating
      profit (loss)
                                        
                                        
                                        (300,285
                                        )
                                        
                                        
                                        (258,125
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2,323
                                        )
                                        
                                        
                                        (1,536,842
                                        )
                                        
                                        
                                        (2,097,575
                                        )Loss
      from disposal of obsolete inventory
                                        
                                        
                                        (192,798
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (192,798
                                        )Loss
      from impairment of long-lived assets
                                        
                                        
                                        (639,492
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (639,492
                                        )Interest
      income (expense)
                                        
                                        
                                        (438
                                        )
                                        
                                        
                                        (39
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (753,479
                                        )
                                        
                                        
                                        (753,956
                                        )Minority
      interest in subsidiary
                                        
                                        
                                        -
                                        
                                        
                                        
                                        51,633
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        51,633Net
      income (loss)
                                        
                                        $
                                        (1,133,013
                                        )
                                        
                                        $
                                        (206,531
                                        )
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        (2,323
                                        )
                                        
                                        $
                                        (2,290,321
                                        )
                                        
                                        $
                                        (3,632,188
                                        )Total
      assets as of December 31, 2008
                                        
                                        
                                        1,223,645
                                        
                                        
                                        
                                        846,175
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,955,550
                                        
                                        
                                        
                                        298,324
                                        
                                        
                                        
                                        5,323,694Fiscal
      Year Ended December 31, 2007Net
      sales
                                        
                                        $
                                        241,357
                                        
                                        
                                        $
                                        8,888,422
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        9,129,779Gross
      profit
                                        
                                        
                                        101,784
                                        
                                        
                                        
                                        424,200
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        525,984Operating
      expenses
                                        
                                        
                                        403,984
                                        
                                        
                                        
                                        442,833
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,805,783
                                        
                                        
                                        
                                        2,652,600Operating
      profit (loss)
                                        
                                        
                                        (302,200
                                        )
                                        
                                        
                                        (18,633
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,805,783
                                        )
                                        
                                        
                                        (2,126,616
                                        )Interest
      income (expense)
                                        
                                        
                                        (3,739
                                        )
                                        
                                        
                                        89
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (762,761
                                        )
                                        
                                        
                                        (766,411
                                        )Minority
      interest in subsidiary
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (332
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (332
                                        )(Loss)
      from discontinued operations
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        414,509
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        414,509Net
      income (loss)
                                        
                                        $
                                        (305,939
                                        )
                                        
                                        $
                                        (18,876
                                        )
                                        
                                        $
                                        (414,509
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        (2,568,544
                                        )
                                        
                                        $
                                        (3,307,868
                                        )Total
      assets as of December 31, 2007
                                        
                                        $
                                        2,178,912
                                        
                                        
                                        $
                                        1,080,602
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        415,666
                                        
                                        
                                        $
                                        3,675,180
  (1) In July 2007,
the Company has entered three termination agreements with each party of the Urea
entrepot trade for the termination of contracts between Kiwa BVI and Shengkui
Technologies, Hua Yang Roneo Corporation and UPB International Sourcing Limited.
Pursuant to these termination agreements, the Company will have neither rights
nor obligations under previous contracts in connection with the urea entrepot
trade except for a commission due to UPB. Based on these facts, we recognized
relevant expenses in the second quarter of 2007.
 
 (2) On June 23rd,
2008, Kiwa Bio-Tech Products (Shangdong) Co., Ltd. (Kiwa Shandong) received
approval documents from the Ministry of Commerce of the People’s Republic of
China, ratifying Kiwa Shandong to wholesale other companies’ fertilizer
products, including chemical fertilizers, complex fertilizers and compound
fertilizers.
 
 (3) Beijing
Representative Office of Kiwa Shandong fulfills part of corporate managerial
function. Most of its expenses relating to this function were categorized into
corporate segment.




19.
            Income
      Tax




There is
no provision (benefit) for income taxes for the years ended December 31, 2008
and 2007 since the Company and its subsidiaries have incurred operating losses
and have established a valuation allowance equal to the total deferred tax
asset.





The loss
generated in the U.S., British Virgin Islands and China (Kiwa Shandong and Kiwa
Tianjin) before income taxes in 2008 and 2007, respectively, was as
follows:


F-24


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)





Years Ended December 31,2008
                  
                  
                  2007Income
      (Loss) in U.S. before income taxes
                  
                  $
                  (1,228,183
                  )
                  
                  $
                  (1,693,745
                  )Income
      (Loss) in British Virgin Islands before income taxes
                  
                  
                  (120,000
                  )
                  
                  
                  (612,592
                  )Income
      (Loss) in Kiwa Shandong before income taxes
                  
                  
                  (2,093,534
                  )
                  
                  
                  (982,656
                  )Income
      (Loss) in Kiwa Tianjin before income taxes
                  
                  
                  (190,471
                  )
                  
                  
                  (18,875
                  )Total
                  
                  $
                  (3,632,188
                  )
                  
                  $
                  (3,307,868
                  )





The tax
effect of temporary differences and operating loss carryforwards is as follows
as of December 31, 2008 and 2007:





YearEndedDecember31,2008
                  
                  
                  2007Deferred
      tax assetsNet
      operating loss carryforwards
                  
                  $
                  1,183,364
                  
                  
                  $
                  904,035Allowance
      for doubtful accounts receivable
                  
                  
                  59,037
                  
                  
                  
                  41,571Value
      difference of intangible assets
                  
                  
                  27,987
                  
                  
                  
                  19,173Impairment
      of inventories
                  
                  
                  28,920
                  
                  
                  
                  -Impairment
      of long-lived asset
                  
                  
                  73,239
                  
                  
                  
                  -Accrued
      expenses
                  
                  
                  40,286
                  
                  
                  
                  141,8671,412,833
                  
                  
                  
                  1,106,646Deferred
      tax liabilities
                  
                  
                  
                  
                  
                  
                  0Prepaid
      expenses
                  
                  
                  (375
                  )
                  
                  
                  (3,539
                  )Deferred
      financing cost
                  
                  
                  (7,169
                  )
                  
                  
                  (19,469
                  )(7,544
                  )
                  
                  
                  (23,008
                  )Valuation
      allowance
                  
                  
                  (1,405,289
                  )
                  
                  
                  (1,083,638
                  )Net
      deferred tax assets
                  
                  $
                  -
                  
                  
                  $
                  -





In
accordance with the current tax laws in China, Kiwa Shandong and Kiwa Tianjin
would normally be subject to a corporate income tax rate of 33% on its taxable
income. However, in accordance with the relevant income laws in China, Kiwa
Shandong and Kiwa Tianjin are exempt from corporate income taxes for their first
two profitable years and are entitled to a 50% tax reduction for the succeeding
three years.  After the Enterprise Income Tax Law of the PRC
promulgated on March 16, 2007 took effect as of January 1, 2008, fiscal year
2008 shall be regarded as the first profitable year for determining eligibility
of these benefits even if Kiwa Shandong or Kiwa Tianjin have not been profitable
in 2008. Kiwa Shandong and Kiwa Tianjin have not provided for any corporate
income taxes since they had no taxable income for the years ended December 31,
2006 and 2005. The difference between the effective income tax rate and the
expected statutory rate for Kiwa Shandong and Kiwa Tianjin was as
follows:





Year Ended December 31, 2008
                  
                  
                  Year Ended December 31, 2007Statutory
      rate
                  
                  
                  25.0
                  %
                  
                  
                  33.0
                  %Income
      tax holiday
                  
                  
                  (25.0
                  )%
                  
                  
                  (33.0
                  )%Effective
      income tax rate
                  
                  
                  -
                  
                  
                  
                  -





In
accordance with the relevant tax laws in the British Virgin Islands, Kiwa BVI,
as an International Business Company, is exempt from income
taxes.


F-25


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)





Our net
operating loss of the Company could be carried forward and taken against any
taxable income for a period of not more than twenty years from the year of the
initial loss pursuant to Section 172 of the Internal Revenue Code of 1986, as
amended. The net operating loss of Kiwa Shandong and Kiwa Tianjin could be
carried forward for a period of not more than five years from the year of the
initial loss pursuant to relevant P.R.C. tax laws and regulations.




20.
            Commitments
      and Contingencies




The
Company has the following material contractual obligations:




Operating
lease commitments




The
Company has leased an office in Beijing from July 15, 2007.  The
operating lease agreement will expire at January 14, 2009.  The
Company has renewed this lease agreement for the period from January 15, 2009 to
January 14, 2010.  The monthly rental payment for the new office is
RMB 80,323.74 ($11,753).  Rent expense under the operating leases for
the fiscal year ended December 31, 2008 and 2007 was $132,000 and $92,570,
respectively.





The
Company has entered into an agreement with Challenge Feed, its joint venture
partner in Kiwa Tianjin, to lease several facilities for three years commencing
on August 1, 2006.  The total monthly rental is RMB 50,000
($7,316).  Pursuant to the lease agreement, rent expense for the
fiscal year ended December 31, 2008 was $87,789 and 2007 was $82,140 (See Note
13 above).





Lease
commitments under the foregoing lease agreements are as follows:





Fiscal Year
                    
                    Amount2009
                    
                    $
                    180,495Total
                    
                    $
                    180,495




Technology
acquisition




On May 8,
2006 the Company entered into a Technology Transfer Agreement with Jinan
Kelongboao Bio-Tech Co. Ltd. (“JKB”). Pursuant to the agreement, JKB agreed to
transfer its AF-01 Anti-viral Aerosol technology for veterinary medicines to the
Company. Pursuant to the agreement the Company will pay JKB a transfer fee of
RMB10 million (approximately $1.369 million), of which RMB 6 million will be
paid in cash and RMB 4 million will be paid in stock. The cash portion will be
paid in installments, the first installment RMB 3 million was set for May 23,
2006 initially, of which RMB 1 million has been paid and both parties have
agreed to extend the remaining RMB 2 million to the date when the application
for new veterinary drug certificate is accepted.  Three other
installments of RMB 1 million are due upon the achievement of certain
milestones, the last milestone being the issuance by the PRC Ministry of
Agriculture of a new medicine certificate in respect of the
technology.  The RMB 4 million stock payment will be due 90 days after
the AF-01 technology is approved by the appropriate PRC department for use as a
livestock disinfector for preventing bird flu. The agreement will become
effective when the first installment has been fully paid.





During
twelve months ended December 31, 2008, no payment was made to
JKB.  The Company is still pursuing to acquire AF-01 technology and
develop veterinary drug product based on this technology.  There were
no changes to the terms of the Technology Transfer Agreement.


F-26


Kiwa
Bio-Tech Products Group Corporation


Notes to
Consolidated Financial Statements


(Audited)




Operation
of Kiwa-CAU R&D Center




Pursuant
to the agreement on joint incorporation of the research and development center
between CAU and Kiwa Shandong dated November 14, 2006, Kiwa Shandong agrees to
invest RMB1 million (approximately $137,000) each year to fund research at the
R&D Center.  The term of this Agreement is ten years starting from
July 1, 2006.  Qi Wang, one of our director commencing in July 2007
acts as Director of Kiwa-CAU R&D Center since July 2006.




Investment
in manufacturing and research facilities in Zoucheng, Shandong Province in
China




According
to the Project Agreement with Zoucheng Municipal Government in 2002, the Company
committed to invest approximately $18 million to $24 million for developing the
manufacturing and research facilities in Zoucheng, Shandong Province. As of
December 31, 2008, the Company had invested approximately $1.91 million for the
project.




Investment
commitment under the joint venture agreement entered into in May




In May
2008, the Company entered into a joint venture agreement with Hebei Huaxing
Pharmaceuticals Co., Ltd. (“Huaxing”), which committed us to invest $1,534,000
in cash for 70% of the equity of a new joint venture (“Kiwa
Hebei”).  Under the joint venture agreement, the Company is required
to complete its capital contribution within one year after the date Kiwa Hebei
receives its business license from Chinese government authorities, with the
first installment payment of 25% of the investment due at the end of the first
month after the license is received and an installment of another 25% due at the
end of second month.  The agreement will take effect at the date of
approval of local bureau of commerce.  However, due to sharp change in
macro economic climate, both parties proposed to local bureau of commerce in
Hebei to suspend the approval of the joint venture agreement.  The
joint venture agreement was not taken effective.  Both parties will
not be committed to any responsibilities or making any capital contributions
under the joint venture agreement.




21.
            Subsequent
      Event




From
January 1, 2009 to May 14, 2009, purchasers of 6% Notes (See Note 15 above) had
converted principal amount of $104,151 into 260,285,794 shares of our common
stocks, resulting in a quick expansion of the Company’s issued and outstanding
shares. As of May 14, 2009, the amount of issued and outstanding shares of
common stocks totaled 400,000,000.


F-27