**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**





**ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF**


**THE
      SECURITIES AND EXCHANGE ACT OF 1934**


**For
      the fiscal year ended December 31, 2006**





***Commission
      File Number:*** ** ***000-33167***




**KIWA
      BIO-TECH PRODUCTS GROUP CORPORATION**


(Name
      of
      small business issuer in its charter)




**Delaware******
              **77-0632186**(State
                  or other jurisdiction of
              (I.R.S.
                  Employerincorporation
                  or organization)
              Identification
                  Number)




415
      West
      Foothill Blvd, Suite 206


Claremont,
      California 91711-2766


**(909)
      626-2358**


(Address
      and telephone number of principal executive offices)




**Securities
      registered under Section 12(b) of the Exchange Act:**


None





**Securities
      registered under Section 12(g) of the Exchange Act:**




**Common
                  Stock, $0.001 par value**
              **OTC
                  Bulletin Board**(Title
                  of Each Class)
              (Name
                  of each exchange on which
                  registered)






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. **YES** **þ** **NO** ** ̈** ****





Indicate
      by check mark if no disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-B is contained herein, and no such disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. **o** ****





Registrant’s
      revenues for its fiscal year ended December 31, 2006 were
      $3,306,715.





The
      aggregate market value of voting and nonvoting 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 March 29, 2007 was approximately $9,111,022





The
      number of shares of registrant’s common stock outstanding as of March 29, 2007
      was 72,085,983.


Transitional
      Small Business Disclosure Format: **YES** ** ̈** **NO** **þ**









i


**TABLE
      OF CONTENTS**





**Page**


***PART
                  I***
              
              **1****ITEM****1**
              **BUSINESS**
              **1****The
                  Company**
              1**Strategies**
              2**Intellectual
                  Property and Product Lines**
              3**Market
                  Overview**
              5**Competition**
              8**Raw
                  Materials and Suppliers**
              10**Customers**
              11**Seasonality**
              11**Employees**
              12**Regulatory
                  Concerns**
              12**Environmental
                  Matters**
              12**Legal
                  Proceedings**
              12**Risk
                  Factors**
              12**ITEM
                  2**
              **PROPERTY**
              **23****ITEM
                  3**
              **LEGAL
                  PROCEEDINGS**
              **24****ITEM
                  4**
              **SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS**
              **24*****PART
                  ΙΙ***
              
              **25****ITEM****5**
              **MARKET
                  FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**
              **25****ITEM
                  6**
              **MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATION**
              **26****Overview**
              26**Going
                  Concern**
              26**Trends
                  and Uncertainties in Regulation and Government Policy in
                  China**
              27**Critical
                  Accounting Policies and Estimates**
              29**Major
                  Customers and Suppliers**
              30**Results
                  of Operations**
              31**Liquidity
                  and Capital Resources**
              33**Commitments
                  and Contingencies**
              34**Off-Balance
                  Sheet Arrangements**
              34**Related
                  Party Transactions**
              34**Recent
                  Accounting Pronouncements**
              34**ITEM
                  7**
              **FINANCIAL
                  STATEMENTS**
              **34****ITEM
                  8**
              **CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE**
              **34****ITEM
                  8A**
              **CONTROLS
                  AND PROCEDURES**
              **35****ITEM
                  8B**
              **OTHER
                  INFORMATION**
              **35*****PART
                  III***
              
              **36**
  
  **ITEM
                  9**
              **DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS, CORPORATE GOVERANCE, CONTROL PERSONS
                  AND
                  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT**
              **36****ITEM
                  10**
              **EXECUTIVE
                  COMPENSATION**
              **38****ITEM
                  11**
              **SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS**
              **41****ITEM
                  12**
              **CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                  INDEPENDENCE.**
              **43****ITEM
                  13**
              **EXHIBITS**
              **43****ITEM
                  14**
              **PRINCIPAL
                  ACCOUNTING FEES AND SERVICES**
              **45****SIGNATURES**
              **47****Index
                  to Consolidated Financial Statements**
              **F-1****Independent
                  Auditor’s Report**
              F-2**Consolidated
                  Balance Sheets**
              F-3**Consolidated
                  Statements of Operations and Comprehensive Income**
              F-4**Consolidated
                  Statement of Stockholders’ Equity (Deficiency)**
              F-5**Consolidated
                  Statements of Cash Flows**
              F-6**Notes
                  to Consolidated Financial Statements**
              F-7







**PART
      I**


ITEM
      1  BUSINESS





**The
      Company**




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.





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.











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 China, 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.





Sales
      of
      bio-fertilizer in 2006 and the second half of 2005 were disappointingly low.
      In
      order to develop bacillus fertilizer products, we closed our existing
      manufacturing facility in Shandong in mid 2005 for a facility upgrade and used
      our working capital to purchase raw materials for producing bacillus fertilizer.
      However, an anticipated financing in the fourth quarter of 2005 was not realized
      and the upgrade plan had to be suspended temporarily due to capital shortage.
      In
      2006, we resumed small-scale production, but the volume remained very low.
      We
      closed a financing in the second half 2006, which allowed us to resume the
      upgrade of our facility. We expect to complete the upgrade by June
      2007.




1




***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 China. 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 its two bio-feedstuff 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. Since it began operation
      in
      August, 2006, sales amounted to $2,459,789 through December 31,
      2006.





***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 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 drug for use with
      animals. 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.





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.





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.





**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 products which may resolve many
      of these problems in environmentally friendly ways. To exploit this opportunity,
      our core strategies are as follows:




2




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





l
            establish
                manufacturing capability in China by improving our existing facility,
                constructing new facilities or acquiring established
                facilities;





l
            enhance
                overall management systems, operational structure and corporate
                governance; and





l
            utilize
                proprietary technology to supply products at lower cost than our
                competitors.





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





l
            leveraging
                government support and existing rural area distribution networks
                to more
                effectively reach end-users;





l
            cooperating
                with special agricultural production materials distributors who also
                help
                farmers resell their products;





l
            focusing
                on large-to-medium size wholesalers of agricultural production materials
                at provincial and municipal levels;





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





l
            leveraging
                existing sales channel network of affiliates’ products to save costs of
                building the network from scratch.





We
      plan
      to target major agricultural companies and growers as customers that can realize
      significant financial benefits from using our products including:





l
            high
                value crop (such as fruits and vegetables) growers and breed bases
                in
                China that supply major cities;





l
            agricultural
                producers in China who export to Japan, Korea and other regional
                markets;
                and





l
            “green”
                or organic growers throughout the
                world.





Given
      the
      global trend of customers favoring environmentally safe organically grown food,
      growers’ 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.




3




***Bio-fertilizer***





We
      have
      developed four series of bio-fertilizer products with bacillus spp and/or
      photosynthetic bacteria as core ingredients. Bacillus spp is one type of species
      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, enhancing the capacity
      of
      plants to transform inorganic materials to organic products. It greatly boosts
      overall plant health and the productivity of agricultural products.





Our
      photosynthetic bacteria based fertilizers are protected by trade secret. 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, and 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 based on its fair market value on
      July
      20, 2004 (aggregate value of $420,000), the date when the transfer of the patent
      was approved.





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. CAU has been providing such services since
      August 2004. If the University fails to provide any of these support services,
      our remedy against the university would be to bring a breach of contract suit
      for damages.





We
      have
      obtained four fertilizer registration certificates from the Chinese government
      -
      three covering our bacillus bacteria fertilizer and one covering our
      photosynthetic bacteria fertilizer. Some of our products contains ingredients
      of
      both photosynthesis and bacillus bacteria. The four registration certificates
      are: (1) Microorganism Microbial Inoculum Fertilizer Registration Certificate
      issued by the PRC Ministry of Agriculture; (2) Amino Acid Foliar Fomular
      Fertilizer Registration Certificate issued by the PRC Ministry of Agriculture;
      (3) Organic Fertilizer Registration Certificate issued by Agriculture Department
      of Shandong Province, and (4) Water-run Fertilizer Registration Certificate
      issued by Agriculture Department of Shandong Province. Protected by these four
      Fertilizer Registration Certificates and three trademarks under the names of
      “KANGTAN”(Chinese translation name for Kiwa), “ZHIGUANGYOU” and “PUGUANGFU,” we
      have developed four series of bio-fertilizer products with bacillus spp and/or
      photosynthetic bacteria as core ingredients. In 2005 and 2006, lacking our
      own
      bacillus production capability, we purchased semi-manufactured bacillus goods
      and reprocessed our products with other fertilizer ingredients in accordance
      with our particular fertilizer formula. Our own manufacturing facility upgrade
      for bacillus fertilizer is expected to complete by June 2007.





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. We expect to produce sales in Vietnam in 2007.





***Bio-enhanced
      Feed***




4




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 uses functioning as a substitute for antibiotic additives.
      Currently we have different feed prescriptions for fowls, fishes and pigs at
      different growth stages.





With
      the formation of Kiwa Tianjin in July 2006, Challenge Feed, the minority
      shareholder, invested machinery and equipment used in one of its two animal
      feed
      production lines at an agreed value of $120,000. We also entered into an
      agreement with Challenge Feed to lease an additional feed product line from
      Challenge Feed. See Note 21 to Consolidated Financial Statements under Item
      7 in
      Part II. The total annual production capacity of these two production lines
      is
      approximately 40,000 metric tons of concentrated and supportive
      feeds




***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 irritant or erosive
      to the skin, mucous membrane or the eyes of the recipient animal after
      swallowing or inhalation. Furthermore, the report indicates that the anti-viral
      aerosol is not carcinogenic, teratogenic or mutagenic.





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
      deliver animal vaccines by aerosol spray, is recognized by a technological
      achievement appraisal certificate issued by the government of China. Under
      the
      agreement JKB will facilitate transfer of the technology by providing consulting
      services to us and to cooperate with us in the development of an animal vaccine
      product for the market. Pursuant to the agreement we will pay JKB a transfer
      fee
      of RMB 10 million (approximately US$1.25 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 RMB 3 million installment was initially
      set
      for payment on May 23, 2006. Of that amount RMB 1 million has been paid and
      both
      parties have agreed to extend the balance of 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.




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
      R&D Center***





In
      July
      2006 we opened a new research center with CAU through our subsidiary, Kiwa
      Shandong, which goes under the name, Kiwa-CAU Bio-Tech Research &
Development Center (the “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 $128,000) each year to the fund research
      at the R&D Center. Under the above agreement, the 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.





**Market
      Overview**




5




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
      9.1% 1 of
      the
      world’s agricultural land but needs to feed over 1.3 2 billion
      people, or approximately 22.9% 3 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 current consumption of bio-fertilizer consists of only 2.3% 4 of
      the
      total fertilizer consumption in China.




China’s
      agricultural production has steadily increased for more than 20 years due to
      agricultural policy reform, agricultural technology and recent government
      support programs, including price supports, export incentives, direct payment
      and tax incentives.




**Increases
      in Output of Major Agricultural Products**





**Variety**(1,000 tons)
            
            **1949**
            
            **1978**
            
            **%**
            
            **1999**
            
            **%**
            
            **2004**
            
            **%**Grain
            
            
            113,180
            
            
            304,770
            
            
            169
            %
            
            508,390
            
            
            67
            %
            
            469,472
            
            
            -8
            %Cotton
            
            
            444
            
            
            2,167
            
            
            388
            %
            
            3,831
            
            
            77
            %
            
            6,324
            
            
            65
            %Oil-bearing
                crops
            
            
            2,564
            
            
            5,218
            
            
            104
            %
            
            26,012
            
            
            399
            %
            
            30,659
            
            
            18
            %Sugar
                crops
            
            
            2,833
            
            
            23,818
            
            
            741
            %
            
            83,340
            
            
            250
            %
            
            95,707
            
            
            15
            %Flue-cured
                tobacco
            
            
            43
            
            
            1,052
            
            
            2347
            %
            
            2,185
            
            
            108
            %
            
            2,163
            
            
            -1
            %Tea
            
            
            41
            
            
            268
            
            
            554
            %
            
            676
            
            
            152
            %
            
            835
            
            
            24
            %Fruit
            
            
            1,200
            
            
            6,570
            
            
            448
            %
            
            62,376
            
            
            849
            %
            
            83,941
            
            
            35
            %Meat
            
            
            2,200
            
            
            8,563
            
            
            289
            %
            
            59,609
            
            
            596
            %
            
            72,448
            
            
            22
            %Aquatic
                products
            
            
            450
            
            
            4,660
            
            
            936
            %
            
            41,220
            
            
            785
            %
            
            49,018
            
            
            19
            %




Source:
      http://www.china.org.cn and China Agriculture Year Book 2005.




According
      to *China:
      Agriculture in Transition* , an
      official publication by the U.S. Department of Agriculture (USDA) in November,
      2001, rapid growth in the nonagricultural economy will bring changes in
      agricultural production, including both the demand for and the supply of food
      in
      China. Rising incomes are clearly changing food consumption patterns. Demand
      for
      meat, fruits, vegetables, and other high-value commodities are rising rapidly.
      The per capita demand for staple food grains, such as wheat and rice, however,
      is not increasing as fast and may even be falling as consumers substitute
      higher-value foods for staple food grains. Growing urban incomes will continue
      to put forward pressure on the demand for processed and higher quality foods.
      As
      these changes in food consumption patterns are transmitted back to farmers
      in
      the forms of price changes, agricultural production patterns are shifting to
      carter to the rising demand for meat, fruits, vegetables, and other high-valued
      crops.





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 or
      $8.7 billion wholesale for the domestic market. According to a report from
      the
      International Fund for Agricultural Development (IFAD), the value of Chinese
      organic exports grew from less than $1 million in the mid-1990s to roughly
      $142
      million in 2003. 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.




1  Total
        area of cultivated land of China is 127,082,000 hectares - as cited on page
        385
        in “China Statistical Yearbook” published by National Bureau of Statistics of
        China (September 2002). Total area of world cultivated land is 1,401,700,000
        hectares - as cited on page 17 in “Summary of Food and Agricultural Statistics
        2003” published by Food and Agricultural Organization of the United Nations
        (2003).
 2  Calculated
        based on data from the website of National Bureau of Statistics of China:
        http://www.stats.gov.cn.
 3  Calculated
        based on data from the website of National Bureau of Statistics of China
        :
        http://www.stats.gov.cn.
 4  Bio-fertilizer
        production and consumption of 1,000,000 metric tons, as cited on page 1 of
        “Bio-Fertilizer Present and Future,” by Linfeng Li, published by Jiangxi
        Agricultural University. Aggregate fertilizer consumption of
        43,390,000   metric tons, as cited on page 73 of “Current
        Agriculture Situation and Chemical Fertilizer Demand in China,” by Gao
        Xiangzhao, Ma Shangbao and Du Sen, published by Science Publication House
        (July
        2004).




6


***Bio-fertilizer
      Market***





To
      increase the overall crop yield, farmers in China use vast amounts of chemical
      fertilizers. According to the PRC Ministry of Agriculture and China Statistics
      Bureau, the use of fertilizer rocketed from 8,840,000 tons in 1978 to 55,928,000
      tons in 2006. According to the China Statistics Bureau and the Food &
Agriculture Organization of the United Nations, the use of chemical fertilizers
      in China increased 64.2% 5 in
      the
      past decade and accounted for one-third of total world fertilizer
      consumption.6 Long-term
      excessive use of chemical fertilizers in China has led to severe soil
      contamination and pollution.





The
      Chinese agricultural industry has started to recognize the importance of
      bio-fertilizers to sustainable long-term agriculture in China. Our serial
      commercialized products, with bacillus and/or Photosynthesis Biological Catalyst
      as main 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.





Our
      main
      markets have so far been in China, mostly in Shandong, Jiangsu and Zhejiang
      Provinces. In 2007, we will further expand the market in these areas and focus
      our new sales efforts on Xinjiang Uygur Autonomous Region, Hebei Province,
      and
      Northeast area of China, the primary large agricultural provinces in China.





***Bio-enhanced
      Feed Market***  **





According
      to *The
      Year Book of China Stockbreeding Industry 2005* ,
      the
      total amount of meat production in 2004 in the Chinese domestic market reached
      72.4482 million tons, an increase of 4.5% compared with the previous year.
      Meanwhile, total production of dairy products hit 23.684 million tons, for
      a
      28.1% increase. The total production value of the livestock industry exceeded
      RMB 1 trillion, and it is expected that the market will keep on expanding.
      In
      2004, the Chinese livestock industry has recovered from the shadow of SARS.
      The
      total production value of the livestock feed industry has increased 13.36%
      to
      approximately RMB 242.8 billion. The average margin of feed producers has
      increased 1% to 2 %. It is estimated that the livestock feed market will
      continue to grow for the foreseeable future.





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 livestock feed industry has increased 13.36%
      to approximately 242.8 billion RMB. It is estimated that the market for
      livestock feed will continue to grow in the foreseeable future ( *China
      Stockbreeding Industry Year Book 2005* ).
      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. Consequently, we have concluded that the livestock feed market
      is a
      good opportunity for the Company.





***Livestock
      Disinfectant and Drug Market***




Our
      planned anti-viral aerosol agent product is intended to prevent and cure various
      virus infections in fowl and livestock. We plan to implement the AF-01
      anti-viral aerosol agent technology and to develop a commercialized product
      in
      the form of aerosol spray for applying in poultry houses and other animal
      holding facilities to prevent the spread of various virus infections in fowl
      and
      livestock. Our product is aimed at inhibiting avian influenza in its first
      stage.




5  Calculated
        based on data published in the “China Statistical Yearbook” published by
        National Bureau of Statistics of China (September 2002), page 389.
 6  Calculated
        based on data published in “Current Agriculture Situation and Chemical
        Fertilizer Demand in China,” by Gao Xiangzhao, Ma Shangbao and Du Sen, published
        by Science Publication House (July 2004), page 73.




7




Beginning
      in December 2003, outbreaks of avian influenza (H5N1) in poultry populations
      occurred in seven countries in the East Asia and Pacific region (Cambodia,
      China, Indonesia, South Korea, Lao PDR, Thailand and Vietnam). Urgent
      policy measurements and swift government actions were taken after the outbreak
      of avian flu. After subsiding in March 2004, a new wave of avian flu resurfaced
      in July 2005, with an outbreak in Malaysia and increased outbreaks in Indonesia,
      Thailand, Vietnam and China.  Despite aggressive control measures involving
      the culling of more than 140 million birds since September 2005, outbreaks
      have
      continued. According to the World Bank, the H5N1 of Highly Pathogenic Avian
      Influenza (HPAI) is now considered to be endemic in many parts of East Asia,
      with Cambodia, Indonesia, Laos PDR, and Thailand as most severely
      affected.  According to the World Health Organization, the cumulative
      number of confirmed human cases of avian influenza A/(H5N1) is 272, with 166
      deaths from 2003 to February 2007, of which there were 116 confirmed human
      cases
      with 80 deaths in 2006. The situation is also severe in China. H5N1 of Highly
      Pathogenic Avian Influenza (HPAI) was first identified in China in 2005, with
      22
      reported cases and 14 deaths. There is no sign that the situation will improve
      in China. In 2006 alone, 13 cases have been reported and 8 of them have been
      fatal.





Because
      of potential serious risks to human health and safety, scientists are now
      studying the possibility of bird-to-human transmission crossing over due to
      genetic changes to sustained human-to-human transmission in all affected
      countries.




According
      to one estimate given in an official report by the World Bank on January 13,
      2006, the total fund required for a global fight against bird flu is
      estimated to range between $1.2 to $1.4 billion. Most of such funding will
      likely to be put into use in the densely-populated East Asia and the Pacific
      regions; the remainder will likely be channeled to regions in Europe, Central
      Asia and Africa. After its consultation with the World Health Organization
      and
      the UN Food and Agricultural Organization, the Word Bank estimated that a global
      bird flu pandemic lasting more than one year could cost the global economy
      as
      much as $800 billion. (Source: http://english.people.com.cn).




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
      differentia compared with other existing chemical disinfectors. We also believe
      that if we are able to complete approval procedures to develop our intended
      anti-viral aerosol agent product, we expect that it will obtain 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 supplemented
      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***




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 may experience competition from existing products
      that are similar to Photosynthesis Biological Catalyst, bacillus and other
      organic fertilizers. 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 increasing crop yield and quality while being environmentally
                friendly;





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





l
            powder-based
                form making transportation and storage easier;
                and





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




We
      have
      conducted detailed research and analysis of the competitive landscape in the
      marketplace. From a broader view, there are about 12 companies, in different
      stages and of varied sizes of operations, which have or are producing similar
      photosynthesis related, microbial bio-fertilizer products in China, according
      to
      the categorization records from the Agriculture Fertilizer License Authority
      in
      China. Below is a brief summary of these 12 companies as of December
      2006:




8




***Company
                Name***
            
            ***Current
                Status***Bodisen
                Biotech, Inc.
            
            Manufacturer
                of bio compound fertilizers.
              Listed
                on AMEX.China
                Agritech, Inc.
            
            Developer,
                manufacturer and distributor of organic compound fertilizer, traded
                on
                OTCBB.Shanxi
                Kelin Environment Protection Center , Shanxi Province
            
            Products
                apparently still in the experimental stage.Xinjin
                Microbial Products Factory of Sichuan Agriculture University, Sichuan
                Province
            
            Currently
                only sells in part of Sichuan Province with a relatively low sales
                volume.Shenyang
                Fengyuan Bio-tech Products Co., Ltd ., Liaoning Province
            
            A
                wholly-owned Japanese company.
              Three
                years in production of photosynthesis-based fertilizer product.Annual
                production of 2,000 tons (liquid).Shanghai
                Pudong Yiyijou Bio-engineering Co., Ltd ., Shanghai
            
            In
                business since 1999.
              Covers
                more than 10 provincial markets.Chongyi
                Bio-technology Development Center, She County, Hebei
                Province
            
            A
                county-level plant.
              Small
                production scale.
              Products
                are sold in Linxi County in Shandong Province nearby.Bierfu
                Bio-engineering Co., Ltd ., Weihai, Shandong Province
            
            Products
                mostly sold in Jinan and Shouguang areas in Shandong
                Province.
              Sales
                branches in Hebei, Nanjing & Fujian.
              Annual
                sales of 100 tons.North
                Design Institute, Protection Sub-Institute
            
            Has
                no commercial production.
              Owns
                the related intellectual property rights.Wuhan
                Shiruifu Bio- Technology Co., Ltd., Wuhan, Hubei Province
            
            Its
                target market is in Hubei Province.
              Annual
                production of 3,000 tons (liquid).Harbin
                Tianye Bio- Technology Co., Ltd., Harbin, Heilongjiang
                Province
            
            For
                details, refer to the following section.Beijing
                Feishite Bio-engineering Co., Ltd ., Beijing
            
            Expected
                to establish two photosynthetic bacteria fertilizer production bases
                in
                Beijing with annual production of 5,000 tons
                (liquid).





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 livestock feed for livestock. As a result of long-term price wars
      in
      the Chinese livestock feed industry, the industry is now one with low margins
      and farmers have become more price sensitive. However, since we are new entrants
      to the livestock feed industry, and our production capacity is small relative
      to
      the whole industry, we believe our planned feed products have enough
      differentiation to give us competition advantages.




9




The
      competition in livestock feed market is intense. Some major feed producers
      are
      shown in the following table.





**Company
                Name**
            
            **Current
                Status**New
                Hope Group Co., Ltd.
            
            Yearly
                feed production capacity exceeds 3,500,000 metric tons More than
                200 sales
                points in rural areas of ChinaLiu
                He Group Co., Ltd.
            
            Sold
                3,400,000 metric tons of feed in 2005Tong
                Wei Group Co., Ltd.
            
            Yearly
                feed production capacity exceeds 4,000,000 metric tonsGuang
                Dong Heng Xing Group, Co., Ltd.
            
            Annual
                feed production capacity exceeds 1,000,000 metric tonsZheng
                Hong Technologies Group Co., Ltd.
            
            Annual
                feed production capacity exceeds 2,000,000 metric tonsXin
                Jiang Tian Kang Feed Bio-Tech Co., Ltd.
            
            Annual
                feed production capacity exceeds 240,000 metric tonsXing
                Da Group Co., Ltd.
            
            Annual
                feed production capacity exceeds 660,000 metric tonsGuang
                Dong Hai Da Group Co., Ltd.
            
            Sold
                approximately 800,000 metric tons of feed in the year
                2005Mu
                He Industry Co., Ltd.
            
            Annual
                feed production capacity approximately 1,000,000 metric
                tonsYue
                Yang Yue Tai Group Co., Ltd.
            
            Annual
                feed production capacity exceeds 1,200,000 metric
                tons





***AF-01
      Anti-viral Aerosol***





In
      the
      veterinary drugs product line, there are several Chinese veterinary drug
      manufactures that are developing anti-avian flu vaccine which can be regarded
      as
      substitutes of our product. According to the China Agriculture Department,
      there
      are nine Chinese companies that are working on the development and marketing
      of
      anti-avian flu vaccine.





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 production of our products are widely 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.





***Bio-fertilizer***





The
      major
      raw materials for our bio-fertilizer products can be divided into two
      categories: (1) growth media such as sodium acetate, glucose and turf for
      culturing bacillus spp. and (2) photosynthetic 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.




10





Four
      suppliers accounted for 18.0%, 15.1%, 11.3% and 10% of our net purchases for
      the
      fiscal year ended December 31, 2006, 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. In the second half of 2006, the market price of corn experienced
      great
      fluctuations, which undermined the profitability of our products.





Three
      suppliers accounted for 25.4%, 18.0%, and 12.5% of our net purchases for the
      fiscal year ended December 31, 2006, respectively. No other single supplier
      accounted for more than 10%. The first largest supplier is Challenge Feed,
      our
      joint venture partner in Kiwa Tianjin. See Note 12 to Consolidated Financial
      Statements under Item 7 in Part II.





**Customers**





***Bio-fertilizer***





With
      respect to bio-fertilizer, we have a total of 53 customers as of December 31,
      2006, of which two customers accounted for  28.5%
      and
      15.9% of our net sales for the fiscal year ended December 31, 2006,
      respectively. No other single customer accounted for more than 10% of our
      revenues.





***Bio-enhanced
      feed***





With
      respect to bio-enhanced feed, we have a total of 61 customers, of which no
      individual customer accounted for more than 8% of our net sales for the fiscal
      year ended December 31, 2006.





**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.
      But
      we will seek to develop markets outside China such as in Southeast Asia to
      reduce the impact of seasonality.





***Bio-enhanced
      feed***





Our
      operating results for livestock feed products are also expected to and continue
      to be subject to seasonal factors. Main seasonal factor that would influence
      our
      livestock feed product 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 quarter is expected be better than those
      from the first and fourth quarter since fishponds in first and fourth quarter
      are frozen and pisciculturists stop fishing by then. Consequently they do not
      purchase our fish feed products. Our livestock feed factory do not produce
      fish
      feed in most time of first and fourth quarter. There is no guarantee for those
      operating result circles would repeat itself 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.




11




**Employees**





We
      currently employ 80 full-time employees in China and one in the United States.
      We also have 15 seasonal employees in China.





**Regulatory
      Concerns** ****





Our
      production needs to comply with bio-fertilizer, livestock feed standard
      production and testing procedures issued 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 relating regulations (See subsection
      entitled “The Company” in this Item 1).





**Environmental
      Matters**





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


**Legal
      Proceedings** ****




There
      are
      no pending legal proceedings to which we or our properties are
      subject.





**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***





**Investors
      may not be able to adequately evaluate our business due to our short operating
      history, lack of significant revenue and limited product
      offerings.**





We
      have
      only been operating our current bio-fertilizer business since June 2002, and
      bio-enhanced feed business since July 2006, providing a limited period for
      investors to evaluate our business model. Because of this limited operating
      history and the uncertain nature of the rapidly changing markets that we serve,
      we believe any prediction of future results of operations is difficult. We
      have
      generated insignificant revenue, have not been profitable, and incurred a severe
      decrease of sales in the second half of 2005 and 2006 due to the temporary
      closure of our manufacturing facility to conduct a planned upgrade, coupled
      with
      the failure of an anticipated financing to fund the upgrade. From the inception
      of our current business in ag-biotechnology on June 5, 2002 to December 31,
      2006
      we had accumulated losses of $7,766,654. We also plan to introduce new
      innovative, cost-effective bio-tech products in the livestock industry such
      as
      veterinary drugs. Since we have never entered into these fields before, and
      our
      products have not been tested by the market, we cannot guarantee that the
      predicted market performance of our new products will materialize.




**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.**





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
      prospects must be evaluated in light of risks, uncertainties, expenses and
      difficulties frequently encountered by companies in an early growth stage.
      For
      example, in the second half of 2005, we temporarily suspended the planned
      manufacturing facility upgrade for bacillus fertilizer due to failure to close
      an anticipated financing in the fourth quarter of 2005. We were not able to
      restart the upgrade until November 2006 when we completed another fundraising.
      Our ability to execute our business plan is subject to these types of funding
      risks and there can be no assurance that we can achieve necessary financing
      to
      fund our business plan in the future.




12




Our
      independent auditors have added an explanatory paragraph to their audit opinion
      issued in connection with our financial statements for the latest four 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
      used to 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, and 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.





Two
      customers together accounted for approximately 96.6% of our net sales for the
      fiscal year ended December 31, 2005. Since the close of the existing
      manufacturing facility from the second half of 2005 and low-volume production
      in
      2006, we lost these two customers in 2006 and the total revenue in 2006 declined
      to $46,926 although we developed 53 individual customers. The loss of any of
      our
      significant customers would result in a material reduction in our sales and
      results of operations.





In
      2006
      the extent of concentration of customers has been decreasing. As above
      mentioned, we developed 61 bio-enhanced feed customers in 2006, of which no
      individual customer accounted for more than 10% of net sales, and 53
      bio-fertilizer customers, of which three
      customers accounted for 28.5%, 15.9% and 7.2% of net sales
      respectively .
      However
      we are still in the initial stage of market development and need more time
      to
      construct a steady customer base. There can be no assurances that we will be
      able to retain these customers. Our inability to generate new customers could
      negatively impact our business and our ability to continue as a going
      concern.





**Our
      business is subject to seasonal fluctuations.**





See
      “Business-Seasonality” section under this item.





**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; and





l
            natural
                disasters and contagious animal
                diseases.




13




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, 2006 to December 31, 2006, the market close price for our common
      stock as quoted on the OTC Bulletin Board has ranged from a low of $0.0062
      to a
      high of $0.32 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 China Agricultural University, 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. 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 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.





**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
      states 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 achieve market acceptance. For example,
      before marketing of the planned AF-01 Anti-viral Aerosol, 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 several years and customers are more accustomed to using their
      established products as compared to 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 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.




14




**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.





**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 the Chinese Academy
      of
      Medical Sciences. 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 three of our
      key
      personnel in China - Wei Li, Lian jun Luo and Ju hua Wang. We do not have
      employment agreements with any other members of management or key personnel.
      Pursuant to our joint agreement with the CAU, they 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
      bio-technology 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 environmental 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.




15




We
      incurred a severe decrease of bio-fertilizer sales in 2006 and the second half
      of 2005 due to the temporary closing of our manufacturing facility for a planned
      upgrade and the failure of an anticipated financing that would have allowed
      us
      to construct a facility to produce bacillus fertilizer. Our bio-enhanced feed
      business has been operating only for half a year and so far we still incurred
      net loss in a small quantity. 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 obtain consents from holders of the 6% secured
      convertible notes under the terms of a securities purchase agreement dated
      June
      29, 2006 (“6% Notes”). (For more details, see Note 15 to consolidated financial
      statements under Item 7 of Part II.) If the holders of the 6% Notes do not
      give
      their consent in such case, we may not be able to access sufficient funds when
      needed. 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.





**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.





**In
      the event that our stock price declines, the shares of common stock allocated
      for conversion of the 6% Notes and registered with the SEC on October 30, 2006
      may not be adequate and we may be required to further amend our certificate
      of
      incorporation to increase our authorized shares of common stock and file a
      subsequent registration statement covering additional shares. If so, we may
      incur substantial costs in connection therewith.**




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 register and allocate for conversion of the 6% Notes. Accordingly,
      we have allocated an aggregate of 18,310,912 shares of common stock to cover
      the
      conversion of the 6% Notes. In the event that our stock price decreases, the
      shares of common stock we have allocated for conversion of the 6% Notes and
      registered may not be adequate. If the shares we intend to allocate to the
      registration statement are not adequate and we are required to file an
      additional registration statement and further amend our Certificate of
      Incorporation to increase our authorized shares of common stock, we may incur
      substantial costs in connection with the preparation and filing of such
      registration statement. Specifically, pursuant to the registration rights
      agreement relating to the 6% Notes, if the registered shares of common stock
      are
      insufficient to cover all of the 6% Notes upon conversion, we must file a
      registration statement within 15 days and cause it to go effective in 120 days
      thereafter. If we fail to do that we shall be obligated to pay the 6% Note
      holders liquidated damages of 2% of the outstanding principal amount of the
      6%
      Notes per month, prorated for partial months. Registration penalties are limited
      to 10% of the principal amount of the Notes.





Pursuant
      to the securities purchase agreement relating to the sale of the 6% Notes,
      we
      must reserve for purposes of issuance a number of shares of common stock that
      is
      not 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. Where the authorized shares of common stock are
      insufficient, if we fail to obtain shareholder approval to increase authorized
      shares within 60 days, we are obligated to pay the 6% Note holders liquidated
      damages of 2% of the outstanding amount of the 6% Notes per month plus accrued
      and unpaid interest on the 6% Notes, prorated for partial months, in cash or
      in
      shares of common stock at our option. At our annual meeting held on September
      12, 2006, a proposal to amend our Certificate of Incorporation to increase
      the
      number of authorized shares of common stock, from 100,000,000 shares to
      200,000,000 shares was approved by the required vote of our
      stockholders.




16




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





Because
      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 relative to 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 activity 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.





**A
      slow-down in the Chinese economy may adversely effect 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. Several years ago, the Chinese economy experienced
      deflation, which may reoccur in the foreseeable future. The performance of
      the
      Chinese economy overall affects our profitability as expenditures for
      agricultural technological products may decrease due to slowing domestic
      demand.




**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 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, and (3) a general slowdown
      in the Chinese economy.




17




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.





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.




**The
      admission of the People’s Republic of China into the World Trade Organization
      could lead to increased foreign competition for us.**





Domestic
      competition in the compound fertilizer industry is largely fragmented and
      foreign competition is minimal. However, as a result of The People’s Republic of
      China becoming a member of the World Trade Organization (“WTO”), import
      restrictions on agricultural products are expected to be reduced. With the
      lowering of import restrictions and the WTO’s requirement for a reduction of
      import tariffs as condition of membership, such reduced import restrictions
      and
      tariffs for us may result in an increase of foreign products and could in turn
      lead to increased competition in the domestic agricultural market.





**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 China Intellectual Property Bureau, which has a remaining term of
      seven years, and entered into a Technology Transfer Agreement with JKB on the
      technology transfer and related technical service for the AF-01
      Anti-viral.





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 agent patents. 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 us, our business, results of operations and financial
      condition.




18




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 confidential 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.





**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.




19




**We
      have limited business insurance coverage.**





The
      insurance industry in China is still in its early stage of development.
      Insurance companies in China offer limited business insurance. As a result,
      we
      do not have any business liability insurance coverage for our operations.
      Moreover, while business disruption insurance is available, we have determined
      that the risks of disruption and cost of the insurance are such that we do
      not
      require it at this time. Any business disruption, litigation or natural disaster
      might result in substantial costs and diversion of resources.





**We
      have risks associated with urea contracts.**





On
      July
      31, 2006, we entered into an irrevocable agreement with Shengkui Technologies,
      Inc. to purchase from Shengkui 1,200,000 metric tons of urea conforming to
      certain specifications set forth in the agreement. Pursuant to the agreement,
      Shengkui is committed to deliver to us the entire stated quantity in multiple
      shipments of 25,000 metric tons within 18 months from the date of the agreement.
      The aggregate value of contracted deliveries under the agreement is
      approximately US$162,000,000, based on a value of US$135 per metric ton. On
      July
      28, 2006, we entered into an irrevocable agreement with Hua Yang Roneo
      Corporation to sell to Hua Yang Roneo 200,000 metric tons of urea conforming
      to
      certain specifications set forth in the agreement. Pursuant to the agreement,
      we
      are committed to deliver to Hua Yang Roneo the entire stated quantity in
      multiple shipments of 25,000 metric tons within 18 months from the date of
      the
      agreement. The aggregate value of contracted deliveries under the agreement
      is
      approximately US$34,000,000, based on a value of US$170 per metric ton. By
      the
      end of December 31, 2006, two shipments were delivered to their destinations,
      the purchase price and selling price of which were $139 and $155 per metric
      ton,
      respectively.





The
      Shengkui contract may create the potential for significant revenue generation
      for us, but also imposes significant financial risk on us if we are unable
      to
      procure commitments to purchase the remaining 1,000,000 metric tons of urea
      in
      excess of that committed to by Hua Yang Roneo. If we cannot procure such
      commitments, and are unable to renegotiate our contract with Shengkui, we may
      be
      subject to claims by Shengkui for damages due to breach of contract. The
      enforcement of such a claim would reduce our net worth, and potentially exceed
      our ability to pay, resulting in loss of some or all of our stockholders’
investment in the Company.





On
      August
      8, 2006, and amended as of August 20, 2006, the Company entered into a letter
      of
      credit contract with UPB International Sourcing Limited (“UPB”), a related
      party, pursuant to which the Company engaged UPB to issue a $38,500,000 letter
      of credit in favor of the Company to a urea supplier under the Shengkui
      contract. The letter of credit is for a term of 90 days and can be reissued
      each
      time its term expires until the expiration of the stated term of the urea
      purchase agreement. The Company shall pay UPB a commission equal to 2% of the
      total credit line, of which 50% must be paid in one month from the date of
      execution, and the balance must be paid upon the close of the first shipment
      of
      urea under the urea purchase contract. As of December 31, 2006, we had paid
      UPB
      the first installment and other minor costs.





UPB
      is a
      wholly-owned company of Wei Li, our Chairman of the Board and CEO, and a holder
      of 17.61% of our outstanding stock. Consequently, UPB’s obligations under the
      above letters of credit are material relative to their scale. A default by
      UPB
      of its obligations on the letters of credit could have material adverse impact
      on the ability of the company to continue as a going concern.





***(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: (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.




20




**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; (iii) it is not quoted on the NASDAQ Stock Market, or even if so,
      has
      a price less than $5.00 per share; and (iv) 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 a “penny stock”
is that securities broker-dealers cannot recommend the stock but must trade
      in
      it on an unsolicited basis.




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.




21




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.





**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 that
      may
      be converted into an estimated 30,100,000 shares of our common stock based
      on
      the average price of three lowest prices within 20 trading days before December
      31, 2006 and we had 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.




**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, 2006, we had 70,149,556 shares
      of
      common stock outstanding, of which approximately 34,150,000 of which we estimate
      have been held more than two years and are freely tradable under Rule 144,
      and
      of which 4,446,646 were registered for resale in Form SB-2 declared effective
      on
      October 30, 2006. In this Form SB-2, we registered up to 27,685,365 shares
      of
      common stock for resale, which may be sold without restriction under securities
      laws. The sale of these shares may adversely affect the market price of our
      common stock.




22





**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. 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.





ITEM
      2  PROPERTY





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. Under the agreement, we have the
      option to pay a fee of approximately RMB 480,000 ($61,470) 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,
      2006,
      we had invested approximately $1.64 million for the project. Management believes
      that neither the company nor management will be liable for compensation or
      penalty if the investment commitment is not fulfilled. In October 2003, we
      completed the first phase construction and began production in the facility.
      An
      upgrade plan for bacillus fertilizer in the last half of 2005 was postponed
      and
      the facility temporarily shut down when an anticipated financing for the
      construction was not realized. With realization of new financing in the second
      half of 2006, we began the upgrade, which is expected to be completed by June
      2007. After the completion of the upgrade plan, the manufacturing capacity
      will
      be 1,000 tons per month and will enable us to produce bacillus
      fertilizer.





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
      21
      to consolidated financial statements under Item 7 in Part II.) The total annual
      production capacity of these two production lines is approximately 40,000 metric
      tons of concentrated and supportive feeds. Under the lease agreement, we also
      lease Challenge feed’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 approximately 1,200 square meters. The total monthly
      rental is RMB 50,000 ($6,404). Rent expenses $32,016 from August 1 to December
      30, 2006 have been paid.





We
      lease
      our principal executive offices located at 415 West Foothill Blvd, Suite 206,
      Claremont, California 91711-2766. The lease has a term of three years and
      expires in March 2008. We currently expect that we will renew this lease prior
      to its expiration.




23




We
      also
      lease an office in Beijing under an operating lease expiring in June 2008 with
      an aggregate monthly lease payment of approximately $5,107. We currently expect
      that we will renew this lease prior to its expiration. Prior to relocating
      to
      our existing Beijing office, we leased another office in Beijing under an
      operating lease expiring in April 2005 with an aggregate monthly lease payment
      of approximately $2,882.




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


At
      our
      annual meeting held on September 12, 2006, a proposal to amend our Certificate
      of Incorporation to increase the number of authorized shares of common stock
      from 100,000,000 shares to 200,000,000 shares was approved by the required
      vote
      of our stockholders.





At
      the
      annual meeting of the stockholders held on September 12, 2006, an amendment
      to
      our Stock Incentive Plan was approved by the required vote of the Company’s
      stockholders, increasing the number of shares reserved for issuance under the
      plan from 1,047,907 to 3,047,907 shares and increasing the limit of shares
      granted to any participant from 350,000 to 500,000 shares.




24





**PART
      ΙΙ**





ITEM
      5  MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS





**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 2006, the market price for our
      common stock has ranged from $0.32 to $0.0062.





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 2005
            
            High
            
            LowFirst
                Quarter
            
            $
            0.059
            
            $
            0.0122Second
                Quarter
            
            $
            0.023
            
            $
            0.007Third
                Quarter
            
            $
            0.0155
            
            $
            0.0102Fourth
                Quarter
            
            $
            0.014
            
            $
            0.0091


Fiscal
                Year 2006
            
            High
            
            LowFirst
                Quarter
            
            $
            0.085
            
            $
            0.0062Second
                Quarter
            
            $
            0.30
            
            $
            0.11Third
                Quarter
            
            $
            0.32
            
            $
            0.171Fourth
                Quarter
            
            $
            0.26
            
            $
            0.13


Fiscal
                Year 2007
            
            High
            
            LowJanuary
                1, 2007 through March 29, 2007
            
            $
            0.26
            
            $
            0.17





**Shareholders**





As
      of
      March 29, 2007, there were approximately 430 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.





**Recent
      Sales of Unregistered Securities**





We
      have
      previously reported in our filings with the SEC information about unregistered
      sales of our securities made during the period covered by this report pursuant
      to applicable exemptions from the registration requirements of the Securities
      Act of 1933, as amended.





**Equity
      Compensation Plan Information**





The
      information required by Item 5 regarding securities authorized for issuance
      under equity compensation plans is included in Item 11 of this
      report.





25





ITEM
      6  MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AN


RESULTS OF OPERATION





*This
      Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006
      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-KSB for the fiscal year ended December 31, 2006 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,
      bio-enhanced feed and AF-01 anti-viral aerosol, are described in detail in
      “Business - The Company” under Item I.





We
      generated approximately $3.31 million and $0.63 million in revenue from
      principal operations in fiscal years 2006 and 2005, respectively, reflecting
      an
      increase of 423.4%. The marked increase is due to the expansion of our business
      into a variety of new segments. During the year 2006, we entered into the
      business of bio-enhanced livestock feed through our joint-venture company,
      Kiwa
      Tianjin. Kiwa Tianjin has generated approximately $2.46 million revenues in
      five
      months since it began operating in August 2006. We have also entered into Urea
      entrepot trade in late July 2006, which contributed $800,000 in revenue in
      2006.
      The revenues generated from our bio-fertilizer business in 2006 were $46,926,
      a
      decrease of $584,868 compared to the same period in 2005. We incurred a net
      loss
      of $2.28 million (including
      non-cash expenses of $759,681) and
      $1.33
      million for the fiscal year ended December 31, 2006 and 2005,
      respectively.





Due
      to
      our limited revenues from sales and continuous loss, 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. In June 2006 ,
      we
      entered into a securities purchase agreement with six institutional investors
      for the issuance and sale of 6% Notes in the aggregate principal amount of
      $2,450,000. As of December 31, 2006, we have received the proceeds in full
      and
      issued 6% Notes to the investors. See Note 15 to the Condensed Consolidated
      Financial Statements under Item 7. In 2006, we raised $685,903 in debt financing
      from related parties and $754,416 for the issuance of common stock under a
      stock
      purchase agreement dated March 10, 2006. 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.





**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.




26




As
      of
      December 31, 2006, we had an accumulated deficit of $7,766,654, of which
      $2,284,099 and $1,327,759 occurred during the fiscal years ended
      December 31, 2006 and 2005, respectively. We generated approximately $3.31
      million in sales during fiscal year 2006 from sales of our products and Urea
      entrepot transactions. However we incurred a severe decrease in bio-fertilizer
      sales in 2006 and the second half of 2005 due to the temporarily closing of
      our
      manufacturing facility for a planned upgrade and the failure of an anticipated
      financing that would have allowed us to construct a facility to produce bacillus
      fertilizer. Our bio-enhanced feed business has been operating only for half
      a
      year and so far we have incurred losses. We currently do not have sufficient
      revenues to support our business activities and we expect operating losses
      to
      continue.





In
      the
      short term, we still need to continue building 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
      bio-technology 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 environmental 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.





As
      mentioned in “Business-Risk Factors” under Item I, we will require additional
      capital to fund our operations. 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 obtain consent from holders of the 6% secured
      convertible notes under the terms of a securities purchase agreement dated
      June
      29, 2006, which consent may not be given and we therefore may not be able to
      access sufficient funds when needed. See Note 15 to Consolidated Financial
      Statements under Item 7 of 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, and may have to curtail operations and consider a formal or informal
      restructuring or reorganization. Any of the foregoing may adversely affect
      our
      business and cause us to discontinue as a going concern.





As
      of
      December 31, 2006, our current assets exceeded current liabilities by $474,837,
      although our current liabilities exceeded our current assets by $1,006,983
      at
      December 31, 2005. The improvement of short-term liquidity is mainly due to
      a
      long-term (3 year) debt financing in the aggregate principal amount of
      $2,450,000 (i.e., 6% Notes) under the securities purchase agreement with six
      institutional investors in June 2006, and an equity financing amounted to
      $754,416 for the issuance of common stock under a stock purchase agreement
      dated
      March 10, 2006. If we can achieve the necessary financing to increase its
      working capital, we believe the Company will be well-positioned to further
      increase sales of these products and to generate more revenues in 2007. There
      can be no assurances that we will be successful in obtaining this
      financing.





Our
      independent auditors have added an explanatory paragraph to their audit opinion
      issued in connection with our financial statements for the latest four 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** ****





***Agricultural
      Policy Changes in China***





Economic
      growth in China has averaged 9.5% over the past two decades and seems likely
      to
      continue at that pace for some time. Per China Statistics Bureau, gross domestic
      product in 2006 increased 10.7% compared to 2005. However China now faces an
      imbalance between urban and rural environments as well as the manufacturing
      and
      agricultural industries. Since 2004, the Chinese central government has
      consecutively announced a so-called No. 1 Document each year concerning the
      countryside. The latest No.1 document unveiled on January 29, 2007 contains
      wide-ranging polices to improve sustainable agriculture and raise the incomes
      of
      hundreds of millions of farmers, such as to encourage farmers to use more
      environmentally-friendly fertilizers and pesticides to reduce pollution of
      the
      soil, rivers and lakes. On December 29, 2005, the Standing Committee of the
      National People's Congress decided to abolish the agricultural tax starting
      January 1, 2006. The abolition of the agricultural tax would increase incomes
      of
      farmers and ease their financial burdens. Other programs and regulations such
      as
      (1) *Decision
      of the State Council on Implementing the Interim Regulation on Promoting the
      Adjustment of Industrial Structure* promulgated by the State Council on December 7, 2005, (2) *Guiding
      Catalogue for the Adjustment of Industrial Structure* issued
      by the State Council, the National Development and Reform Commission on December
      7, 2005, and (3) *Outline
      of National Medium and Long-Term Plans for Science & Technology Development
      (2006-2020)* promulgated by the State Council on February 9, 2006 adopted policies favorable
      to agriculture. We should benefit from these favorable policies as farmers
      will
      retain more of their income and will most likely spend some of that income
      on
      our products, resulting in greater sales. In addition, we anticipate receiving
      additional governmental support in marketing our products to farmers due to
      additional procedural changes included with the new policy.




27




***General
      Fiscal and Monetary Policy Changes in China***





The
      volatility in the inflation rate in China in the past decade (almost eight
      times
      that in the United States and four times that in Western Europe) suggests that
      China’s domestic monetary policy has not always been successful in maintaining
      low and stable inflation. In recent years, China has been adopting restricted
      or
      prudent fiscal and monetary policies to fight potential inflation. However,
      the
      agricultural area has been one of a few industries which will continue to enjoy
      expansionary policy. We have previously benefited from these policies, as
      evidenced by our receipt of non-interest bearing loans of over $1.5 million
      from
      the Chinese government so far and value-added tax exemption for our bio-enhanced
      feed products. As the government further increases investment in the
      agricultural area, we believe that similar loans or other favorable financing
      programs will be made available to us in the future, which we anticipate will
      assist us with managing liquidity and capital resources during our growth
      period. However, if these financing programs are not made available in the
      future, we may have to borrow on terms which are less favorable to us, or we
      may
      not be able to borrow additional funds at all on terms which are acceptable.





***Foreign
      Investment Policy Change***





On
      March
      16, 2007, China's parliament, the National People's Congress, adopted the
      Enterprise Income Tax Law, which will take effective on January 1, 2008. The
      new
      income tax law sets unified income tax rate for domestic and foreign companies
      at 25 percent and abolishes the favorable policy for foreign invested
      enterprises. After this law takes effect, newly established foreign invested
      enterprises will not, in general, enjoy favorable tax treatment as in effect
      under current tax laws. However, a 15 percent corporate income tax rate for
      qualified high and new technology enterprises survives and will not be
      geographically restricted to high and new tech areas recognized by the Central
      Government. Foreign invested enterprises that currently benefit from other
      favorable tax treatment will continue to enjoy favorable tax treatment, although
      the conditions under which the benefit is available are narrowed. For example,
      according to the enterprise income tax law currently in effect, our PRC
      subsidiaries, 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. However after the new income tax
      law
      takes effect, fiscal year 2008 shall be regarded as the first profitable year
      even if Kiwa Shandong or Kiwa Tianjin have not been profitable, thereby
      narrowing the time period when the favorable tax treatment may be available
      to
      us. Although less favorable than before the adoption of the Enterprise Income
      Tax Law, we believe the beneficial tax status we enjoy will make an investment
      in our Company relatively more attractive to both foreign and domestic investors
      in China, which could improve our liquidity or provide additional capital
      resources. However, the PRC is undergoing a significant transition period in
      the
      development of its tax policy for private industry and it is possible that
      the
      tax laws could be modified in the future such that we would be ineligible for
      these benefits. In such case our tax liability will increase and our liquidity
      will decrease.





***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.




28




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 =
      RMB
      8.28 to approximately US$ 1.00 = RMB 8.11. So far the trend of such appreciation
      is still continuous; the exchange rate of U.S. Dollar against RMB on December
      31, 2006 was US$ 1.00 = RMB 1:7.8087.





**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 the 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 sheet as of
      December 31, 2006, and the audited statements of operations, equity movement
      and
      cash flows for the fiscal years ended December, 2006 and 2005, and the related
      notes thereto, for further discussion of our accounting policies.





***Accounts
      Receivables***





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.





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.





As
      of
      December 31, 2006, there was $258,667 in accounts receivable over 365 days
      old,
      of which $251,630 is attributable to two certain fertilizer customers. We had
      established repayment schedules with these two customers in April 2006 to extend
      credit periods of their accounts receivable over one year at that time to
      October 2006. Before September 30, 2006, these two customers made repayments
      on
      schedule. As of March 29, 2007, RMB 4,291,900 (approximately $542,680) was
      collected against those receivables. However the installment committed in the
      fourth quarter of 2006 was not paid on schedule. In addition, these two
      customers did not carry out any transaction with us in 2006 and therefore we
      provided $258,667 in bad debt provision based on total accounts receivable
      over
      one year.





***Inventories***





Inventories
      are stated at the lower of cost, determined on the weighted average method
      or
      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.





As
      of
      December 31, 2006, there were $48,039 in finished goods exceeding their quality
      guarantee period, and we accrued impairment allowance for these
      inventories..




29




***Impairment
      of Long-Lived Assets***





Our
      long-lived assets consist of property and equipment and intangible assets.
      As of
      December 31, 2006, the net value of property and equipment and intangible
      assets was $1,466,779 and $337,027, respectively, which represented
      approximately 32.56% and 7.22% 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.
      If
      these estimates or the related assumptions change in the future, we may be
      required to record impairment charges for these assets.





Based
      on
      our analysis, we have determined that there was no impairment to our current
      production facilities and intangible assets as of December 31, 2006 and
      2005.





***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, 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 53 customers as of December 31, 2006, of which two customers accounted
      for 28.5% and 15.9% of our net sales for the fiscal year ended December 31,
      2006, respectively. No other single customer accounted for more than 8 %
      of our
      revenues. For the fiscal year ended December 31, 2005, we had two significant
      customers accounting for 51.3% and 45.3% of our net sales, respectively, and
      no
      other single customer accounted for more than 3% of our revenues.





Four
      suppliers accounted for 18.0%, 15.1%, 11.3% and 10% of our net purchases for
      the
      fiscal year ended December 31, 2006, respectively. Three suppliers accounted
      for
      64.0%, 17.2% and 12.5% of our net purchases for the fiscal year ended December
      31, 2005, 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.




30





***Bio-enhanced
      feed***





Our
      bio-enhanced feed business began in August 2006. We have also developed a total
      of 61 customers, of which no individual customer accounted for more than 8%
      of
      our net sales for the fiscal year ended December 31, 2006.





Three
      suppliers accounted for 25.4%, 18.0%, and 12.5% of our net purchases for the
      fiscal year ended December 31, 2006, respectively. No other single supplier
      accounted for more than 10%. The first largest supplier is Challenge Feed,
      our
      joint venture partner in Kiwa Tianjin. See Note 12 to Consolidated Financial
      Statements under Item 7 of Part II.





***Urea
      entrepot trade***





Because
      of the unique nature of our urea entrepot trade, the supplier and customer
      have
      all been pre-arranged. We purchase urea from Shengkui Technologies,
      Inc. **** and
      we
      sell urea to China Hua Yang Roneo Corporation pursuant to certain purchase
      and
      selling agreements we had entered into with these entities. In 2006, we
      purchased and also sold $50,000 metric ton of urea. For accounting purposes,
      we
      only recognize the difference between purchase and selling prices as our
      revenues.





**Results
      of Operations**





***Net
      Sales***





Net
      sales
      were $3,306,715 and $631,794 for the twelve months ended December 31, 2006
      and
      2005, respectively, representing an increase of 423.4%. The significant increase
      in sales is due to the expansion of our business into a variety of new segments,
      of which bio-enhanced feed business and entrepot trade business generated
      significant revenue amounting to $2,459,789 and $800,000 in 2006, respectively.
      The revenues generated from our bio-fertilizer business for the twelve months
      ended December 31, 2006 were $46,926. The significant drop in bio-fertilizer
      is
      due to temporarily closing of our manufacturing facility for the planned upgrade
      to manufacture bacillus fertilizer in the fourth quarter of 2005 as a result
      of
      incompletion of an anticipated fundraising. W e
      resumed
      our small-scale production in 2006, but the production volume has remained
      low .





***Cost
      of Sales***





Cost
      of
      sales was $2,711,419 and $232,692 for the twelve months ended December 31,
      2006 and 2005, respectively. The increase of $2,478,727 or 10.6 fold in cost
      of
      sales was primarily due to the rapid increase of sales.





***Gross*** **** ***Profit***





Gross
      profit was $595,296 and $399,102, representing a profit margin of 18.0% and
      63.2% for the twelve months ended December 31, 2006 and 2005, respectively.
      This increase of $196,194 (49.2%) resulted from generation of significant
      revenues from commencement of our new business segments in 2006 of bio-enhanced
      feed and urea entrepot trade. We produced only bio-fertilizer in 2005. For
      detailed segment information, see Note 19 to Consolidated Financial Statements
      under Item 7 in part II.





***Consulting
      and Professional Fees***





Consulting
      and professional fees were $852,107 and $614,532 for the twelve months ended
      December 31, 2006 and 2005, respectively, representing an increase of $237,575
      or 38.7%. Most of these fees are related to fundraising, investor relations,
      public company operations and marketing. The increase in consulting and
      professional fees in 2006 is primarily attributable to consulting and
      professional fees relating to investor relation service, financing commissions
      and legal fees in connection with the financing of 6% Notes.





***Officers’
      Compensation***





Officers’
      compensation was $176,528 and $38,727 for the twelve months ended December
      31,
      2006 and 2005. The $137,801 or 355.8% increase is mainly due to the recruitment
      of new senior management staff and amortization of fair value of stocks issued
      and option granted to directors and officers.





31


***General
      and Administrative***





General
      and administrative expenses were $605,071 and $509,674 for the twelve months
      ended December 31, 2006 and 2005, an increase of $95,397 or 18.7%. The increase
      is largely attributable to the expansion of our business into bio-enhanced
      feed
      industry. General and administrative expenses include salaries, marketing
      expenses, travel and entertainment, rent, office expense, telephone expense
      and
      insurance costs.





***Selling
      expenses***





During
      the fiscal year ended December 31, 2006, selling expenses were $521,608, with
      $449,587 or 6.2 folds increase compared to $72,021 for the fiscal year of 2005.
      The reasons of this increase included: (1) we incurred $208,284 in selling
      expenses in bio-enhanced feed, one of our new segments in 2006; (2) we incurred
      selling expenses of $313, 324 in bio-fertilizer business in 2006, an increase
      of
      $241,303 as compared to the same period of last year, most of which incurred
      in
      the fourth quarter of 2006 in connection with our new-round market development
      in Shandong Province and Xinjiang Region. Management believes that such expenses
      are expected to benefit the Company in 2007.





***Research
      and Development***





Research
      and development expenses increased by $108,455 or 9.6 folds to $119,719, for
      the
      twelve months ended December 31, 2006, as compared to $11,264 for the twelve
      months ended December 31, 2005. This increase is attributable to operating
      expenses of Kiwa-CAU R&D Center (see “Business-Intellectual Property and
      Product Lines- Kiwa-CAU R&D Center” under Item 1 in Part I), depreciation of
      experimental equipments, field test fees paid to Soil and Fertilizer Stations
      and fertilizer license fees paid to relating approval authorities in 2006.





***Depreciation
      and Amortization***





Depreciation
      and amortization, excluding depreciation included in cost of production and
      deprecation of research equipment, increased $65,728 to $172,011, or 61.8%,
      for
      the twelve months ended December 31, 2006, as compared to $106,283 for the
      same period of 2005. The increase is mainly due to very low-volume production
      of
      Kiwa Shandong and, as a result, part of the depreciation of its manufacturing
      facility was recorded as operating expenses.





***Allowance
      and Provision***





During
      the fiscal year ended December 31, 2006, we accrued allowance and provision
      of
      $220,148 in total, among which bad debt provision was $172,109 and inventory
      impairment allowance was $48,039 (see subsection entitled “Critical Accounting
      Policies and Estimates” in this Item). With comparison to the fiscal year of
      2005, there is an increase of 165.4%, which is due to both the increase of
      accounts receivable over one year and finished
      goods exceeding their quality guarantee period.





***Net
      Interest Expenses***





Net
      interest expenses were respectively $231,559 and $293,834 for the fiscal year
      ended December 31, 2006 and 2005, representing $62,275 or 21.2% decrease. The
      factors associated with this decrease
      mainly include the following: (1) amortization of beneficial conversion feature
      of convertible loan charged as interest expenses was nil in 2006 and $106,666
      in
      2005; (2) amortization of fair value of warrants in 2006 was $102,488,
      representing an increase of $24,042, compared to $78,446 in 2005; and (3)
      financing cost relating to financing advisor of 6% Notes was $16,385 in 2006,
      and no expense of the same kind was incurred in 2005.





***Net
      Loss***





Our
      net
      loss for the fiscal year of 2006 was $2,284,099 (including non-cash expenses
      $759,681), an increase of $956,340 or 72.0% compared to $1,327,759 for the
      fiscal year of 2005. This increase resulted from the following factors: (1)
      increase in gross profit of $196,194; (2) increase in operating expenses of
      $1,231,749; (3) decrease in interest expenses of $62,275;
      (4) there was $2,416 in other income in 2005 and no such income in 2006; and
      (5)
      there was negative $19,356 in minority interest in subsidiary in 2006 and nil
      in
      2005.





32


***Comprehensive
      Loss***





Comprehensive
      loss increased by $1,074,474 to $2,379,875 for the twelve months ended
      December 31, 2006, as compared to $1,305,401 for the comparable period of
      2005. The increase in comprehensive
      loss in the current year as compared to the fiscal year of 2005 is due to an
      increase of $956,340 in net loss and an increase of $118,134 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 year 2006, we raised a long-term
      (3 year) debt financing in the aggregate principal amount of $2,450,000 under
      the securities purchase agreement with six institutional investors in June
      2006
      (see Note 15 to the Condensed Consolidated Financial Statements under Item
      7 in
      Part II), and an equity financing amounted to $754,416 for the issuance of
      common stock under a stock purchase agreement dated March 10, 2006. We also
      raised $685,906 in debt financing from related parties. These fundraisings
      improved our short-term liquidity. As of December 31, 2006, our current assets
      exceeded current liabilities by $474,837, reflecting a current ratio of 1.26:1,
      compared to net working capital negative 1,006,983, reflecting a current ratio
      0.55:1, as of December 31, 2005.





As
      of
      December 31, 2006 and 2005, we had cash of $498,103 and $14,576, respectively.
      The change is outlined as follows.





During
      the fiscal year ended December 31, 2006, our operations utilized cash of
      $2,066,248 as compared with $419,827 used by operations for the fiscal year
      ended December 31, 2005. Such cash was mainly used in working capital of
      bio-enhanced feed business, cost of urea entrepot trade, market development
      fee
      for bio-fertilizer, partial payment of technology transfer fee of AF-01
      anti-viral aerosol, and repayment of accounts payable to venders and service
      providers.





During
      the fiscal year ended December 31, 2006, we utilized $126,443 to acquire AF-01
      anti-viral aerosol technology and $36,600 for the purchase of property and
      equipment and repayment of construction costs payable, as compared to $229,989
      utilized for the purchase of equipment for the fiscal year ended December 31,
      2005.





During
      the fiscal year ended December 31, 2006, we generated $2,655,333 from financing
      activities, consisting of the proceeds of $754,416 from issuance of common
      stock, issuance of the 6% Notes in the amount of $2,204,000 (net of financing
      costs of $246,000) and several advances or loans from related parties in the
      total amount of $685,906, offset by the repayments of amounts of $651,069due
      to
      related parties, convertible notes of $307,135 and long-term borrowings of
      $20,785. During the fiscal year ended December 31, 2005, we generated $632,570
      from financing activities, consisting of the proceeds from convertible notes
      payable of $720,000 and loans from related parties of $488,501, offset in part
      by the repayment of a short-term loan of $50,000, to related parties of
      $163,741, convertible notes payable of $350,000 and long-term borrowings of
      $12,190.





As
      of
      December 31, 2006, we had an accumulated deficit of $7,766,654, among which
      we
      incurred a net loss of $2,284,099 (including non-cash expenses of $759,681)
      and
      $1,327,759 during the fiscal years ended December 31, 2006 and 2005,
      respectively. In addition we incurred a severe decrease of bio-fertilizer sales
      in 2006 and the second half of 2005. Our bio-enhanced feed business has been
      operating only for half a year and we have yet to break even (net loss for
      that
      sector of $78,103 in 2006). Although we expect our operating cash flow to be
      improved in 2007, we do not anticipate generating sufficient positive operating
      cash inflow to fund our planned operations.





Consequently
      our foreseeable cash flow position in the short term is tight. In the next
      year
      we estimate that we will need at least $1 million to make payments on debt
      obligations due within one year, satisfy accounts payable to venders and service
      providers, the upgrade of our bio-fertilizer facility is expected to cost
      $500,000, and as soon as we have sufficient cash, our plan is to invest $2
      million on the development of our AF-01 anti-viral aerosol agent project
      associated with research, development, acquirement of a Good Manufacturing
      Practice (GMP) factory and sale of anti-viral aerosol agents. In addition,
      our marketing fee in 2007 is expected to be more than $1 million.




33





We
      expect
      that 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 assurances that we will be
      successful in obtaining this financing. To raise additional capital we will
      need
      to procure the consent of the holders of the 6% Notes. In addition, if the
      number of shares issuable upon conversion of the 6% Notes increases
      significantly, we may need to increase the number of shares authorized for
      issuance under our certificate of incorporation. There can be no assurance
      that
      we can procure these consents in the even necessary, which may prevent us from
      raising capital. 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.





**Commitments
      and Contingencies**





See
      Note
      21 to the Consolidated Financial Statements under Item 7 in Part
      II.





**Off-Balance
      Sheet Arrangements** ****





At
      December 31, 2006, 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, which would have been
      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.





**Related
      Party Transactions**





See
      Note
      12 to the Consolidated Financial Statements under Item 7 in Part II.





**Recent
      Accounting Pronouncements**





See
      Note
      2 to the Consolidated Financial Statements under Item 7 in Part II.





ITEM
      7  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 8
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE





On
      March
      13, 2006, Grobstein, Horwath & Company LLP informed the Company by written
      letter that it was resigning as the certifying accounting firm for the Company
      and its subsidiaries effective immediately. Effective March 14, 2006, our board
      of directors approved the selection of Mao & Company, CPAs, Inc. as our
      certifying accounting firm for the fiscal year ending December 31, 2005. At
      the
      annual meeting of shareholders on September 12, 2006, the proposal of the
      appointment of Mao & Company, CPAs, Inc. as the Company’s independent
      auditors for the fiscal year ending December 31, 2006 was approved by required
      votes of our shareholders.




34





Through
      March 29, 2007, there was not any disagreement with our current and prior
      certifying accountants on any matter of accounting principles or practices,
      financial statement disclosure, or auditing scope and procedures.





ITEM
      8A  CONTROLS
      AND PROCEDURES





*Evaluation
      of Disclosure Controls.* Our
      Chief Executive Officer and Chief Financial Officer evaluated the effectiveness
      of our disclosure controls and procedures as of the end of our 2006 fiscal
      year.
      Disclosure controls and procedures are designed to ensure that information
      required to be disclosed by us in the reports that we file or submit under
      the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in the SEC’s rules and forms. Disclosure controls and
      procedures include, without limitation, controls and procedures designed to
      ensure that information required to be disclosed by us in the reports that
      we
      file under the Exchange Act is accumulated and communicated to our management,
      as appropriate to allow timely decisions regarding required disclosure.





Under
      the
      supervision and with the participation of management, including the Chief
      Executive Officer and Chief Financial Officer, we have evaluated the
      effectiveness of our disclosure controls and procedures pursuant to
      Rule 13a-15(b) of the Securities and Exchange Act of 1934 as of the end of
      the period covered by this Annual Report on Form 10-KSB. Based on that
      evaluation, the Chief Executive Officer and Chief Financial Officer have
      concluded that these disclosure controls and procedures are effective.





*Changes
      in internal control over financial reporting.*  There
      were no changes in the Company’s internal control over financial reporting
      during the fiscal year ended December 31, 2006 that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting. Our
      management team will continue to evaluate our internal control over financial
      reporting in 2007 as we implement our Sarbanes Oxley testing
      methodologies.




ITEM
      8B  OTHER
      INFORMATION





Not
      applicable.




35




**PART
      III**


ITEM 9
              DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS, CORPORATE GOVERANCE, CONTROL PERSONS
                  AND
                  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
                  ACT


**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. None of our directors or executive officers holds directorships
      in
      other public companies as of March 29, 2007. The directors listed below will
      serve until the Company’s next annual meeting of the stockholders:





**Name**
            
            **Age**
            
            **Position**Wei
                Li
            
            45
            
            Chief
                Executive Officer and Chairman of the Board of
                DirectorsLian
                jun Luo
            
            37
            
            Chief
                Financial Officer and DirectorDa
                chang Ju
            
            66
            
            DirectorYun
                long Zhang
            
            43
            
            DirectorJuhua
                Wang
            
            52
            
            Chief
                Operating OfficerWenbin
                Li
            
            43
            
            Vice
                president-MarketingQi
                Wang
            
            40
            
            Vice
                President - TechnicalXiaonan
                Wu
            
            41
            
            Vice
                PresidentYvonne
                Wang
            
            28
            
            Secretary





***Wei
      Li*** became
      our Chief Executive Officer and Chairman of the Board of Directors on
      March 12, 2004. 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 financing 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
      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.





***Lian
      jun Luo*** became
      our Chief Financial Officer on March 12, 2004, and one of our directors on
      March 27, 2004. 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.





***Da
      chang Ju*** became
      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.




36




***Yun
      long Zhang*** became
      one of our directors on March 27, 2004. From May 2000 to present, Mr. Zhang
      has 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.





***Juhua
      Wang*** became
      our Chief Operating Officer on September 13, 2006. Juhua Wang previously worked
      as the Vice General Manager of Shenyin Wanguo Securities Co. Ltd, Beijing
      Administrative Department and as the Manager of Beijing Jingsong Branch. Prior
      to that, she worked as the Vice Manager of Shanghai Wanguo Securities Northeast
      Administrative Department and the Manager of its Ha'erbin Sales Department.
      She
      was also Chief Economic Engineer of Ha'erbin Investment Group, Mechanic and
      Electrical Investment Co. Ms. Wang graduated from the Administrative Department
      of Ha'erbin Industry University with a Masters degree.





***Wenbin
      Li*** became
      our Vice President-Marketing on January 21, 2007. Mr. Li also acts as General
      Manager both of Kiwa Tianjin from July 2006 and Kiwa Shandong from March 2007.
      Mr Li took the position of General Manager of Challenge Feed from 1999 until
      July 2006. Prior to that, from 1996 to 1999, Mr. Li acted as Manager of Business
      Operation Department, General Manager of Shenyang Challenge Feed Co., Ltd.
      From
      1989 to 1996, he worked in Luzhou feed administrative authority. Mr. Li holds
      a
      master degree from Henan Agricultural University specialising in Animal
      nutrition.





***Qi
      Wang*** became
      our Vice President - Technical on July 19, 2005. Mr. Wang also acts as Director
      of Kiwa-CAU R&D Center since July 2006. Mr. Wang served as a Professor and
      Advisor for Ph.D students in Department of Plant Pathology, China Agricultural
      University (“CAU”) 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.
      Mr. 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.





***Xiaonan
      Wu*** became
      our Vice President on September 18, 2006. Mr. Wu has 17 years of experience
      in
      medical product distribution and market operations. He has substantial
      experience and resources in market development including work arising from
      his
      employment with Beijing Medicine Economical Technology Management Company as
      the
      General Manager Assistant and Assistant Manager in charge of drugs, and later
      as
      its Deputy General Manager.   Mr. Wu has also served as the Deputy General
      Manager of Beijing Medicine Limited Liability Company. At the same time he
      was
      the General Manager of its subordinate Medicine Guarantee Brand - New Pharmacy
      Chain Company as well as the General Manager of its subordinate joint-venture
      pharmaceutical company, Beijing Unit Medicine Company. Mr. Wu graduated from
      the
      College of Pharmacy, Beijing Medical University with a Bachelor of Science
      degree.





***Yvonne
      Wang*** became
      our Secretary since September 2005. Prior to that, she served as assistant
      of
      Executive and manager of the Company’s US office since April 2003. 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.





**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.





During
      the fiscal year ended December 31, 2006, our executive officers, directors
      or
      beneficial owners of more than ten percent (10%) of our capital shares were
      required to file reports on Form 3 or Form 4. During 2006, the following
      directors and executive officers failed to timely report option grants on Form
      3
      or Form 4: Wei Li, Lian jun Luo, Ju hua Wang, Yun long Zhang, Qi Wang, Xiao
      nan
      Wu, Yvonne Wang. These late filings all were with respect to the options granted
      on December 11, 2006 as specified under “Outstanding Equity Awards At 2006
      Fiscal Year-End”, below.. The reporting persons subsequently reported these
      option grants on Form 3 or Form 4.




37




The
      Company is putting in place an enhanced compliance program to assist officers
      and directors with these filings.





**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;
      415 West Foothill Blvd, Suite 206; Claremont, California
      91711-2766.





**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 four members: Wei Li, Lian jun Luo, Da
      chang Ju and Yun long Zhang. All board actions require the approval of a
      majority of the directors in attendance at a meeting at which a quorum is
      present.





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.





The
      Board
      has determined that at least one person on the Board, Lian jun 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.





ITEM
      10EXECUTIVE
      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
      each of 2006 and 2005 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 his respective employment
      agreement; and (3) granting of incentive stock options subject to approval
      by
      our Board of Directors.




38




**Summary
      Compensation Table**




**Name
                and Principal Position**
            
            **Year**
            
            **Salary**
              **($)**
            
            **Bonus**
              **($)(1)**
            
            **Stock
                Awards**
              **($)**
            
            **Option
                Awards**
              **($)(2)**
            
            **All
                Other**
              **Compensation**
              **($)**
            
            **Total**
              **($)**Wei
                Li, CEO
            
            
            2006
            
            
            75,000
            
            
            21,000
            
            
            Nil
            
            
            29,262
            
            
            Nil
            
            
            125,262Wei
                Li, CEO
            
            
            2005
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            NilLian
                jun Luo, CFO
            
            
            2006
            
            
            48,000
            
            
            12,000
            
            
            Nil
            
            
            21,162
            
            
            Nil
            
            
            81,162Lianjun
                Luo, CFO
            
            
            2005
            
            
            22,500
            
            
            7,000
            
            
            5,924
            
            
            Nil
            
            
            Nil
            
            
            35,424Yvonne
                Wang, Secretary
            
            
            2006
            
            
            48,000
            
            
            Nil
            
            
            Nil
            
            
            20,026
            
            
            Nil
            
            
            68,026Yvonne
                Wang, Secretary
            
            
            2005
            
            
            21,000
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            21,000Ju
                hua Wang, COO
            
            
            2006
            
            
            12,500
            
            
            3,125
            
            
            Nil
            
            
            19,257
            
            
            Nil
            
            
            34,882Ju
                hua Wang, COO
            
            
            2005
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            NilXiao
                nan Wu
            
            
            2006
            
            
            9,000
            
            
            Nil
            
            
            Nil
            
            
            16,936
            
            
            Nil
            
            
            25,936Xiao
                nan Wu
            
            
            2005
            
            
            9,000
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            9,000





(1)
            The
                bonus amounts for the fiscal year of 2006 were accrued pursuant to
                the
                terms of Wei Li, Lian jun Luo and Ju hua Wang’s employment agreements with
                the Company. Wei Li’s bonus payment is subject to approval of the Board of
                Directors of the Company, Lianjun Luo and Ju hua Wang’s bonus payment is
                subject to approval of Wei Li, our Chief Executive Officer. For material
                terms of the employment agreements, see additional information below
                under
                subheading entitled “Employment Contracts and Termination of Employment
                Upon a Change of Control.” The bonus paid to Lianjun Luo for the fiscal
                year of 2005 was based on his former employment agreement with the
                Company.





(2)
            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
      July
      31, 2006, we entered into an employment agreement with our Chief Executive
      Officer, Wei Li, for a three-year term, commencing on January 1, 2006. Pursuant
      to this agreement, Mr. Li will receive a salary at the rate of RMB768,000
      (approximately $96,000) per annum, of which RMB600,000 will be paid in equal
      monthly installments of RMB50,000 ($6,250) during the period of employment,
      prorated for any partial employment period, and RMB168,000 ($1,750)will be
      paid
      as an annual performance bonus in three months after each employment year.
      Mr.
      Li will 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, Lian jun Luo, for a three-year term, commencing on January 1, 2006.
      Pursuant to this 2006 agreement, we will pay Mr. Luo an annual salary at the
      rate per annum of RMB480,000 (approximately $60,000), of which RMB384,000 will
      be paid in equal monthly installments of RMB32,000 during the period of
      employment, prorated for any partial employment period, and RMB96,000 will
      be
      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 and
      is
      entitled to an annual grant of stock options under our employee stock option
      plan as determined by the Board of Directors. Mr. Luo is entitled to three
      month’s severance if his employment is terminated without cause.





On
      September 13, 2006, our Board of Directors approved the appointment of Ju hua
      Wang as our Chief Operating Officer. We entered into an employment agreement
      with Ms. Wang for a three-year term, commencing on August 1, 2006. Pursuant
      to
      the employment agreement, we will pay Ms. Wang an annual salary at the rate
      per
      annum of RMB300,000 (approximately $37,500), of which RMB240,000 will be paid
      in
      equal monthly installments of RMB20,000 during the period of employment,
      prorated for any partial employment period, and RMB60,000 will be 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 and is entitled
      to an annual grant of stock options under our employee stock option plan as
      determined by the Board of Directors. Ms. Wang is entitled to three month’s
      severance if her employment is terminated without cause.




39




Except
      as
      set forth above, we do not have employment agreements with any other members
      of
      management or key personnel. In addition, 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.





**Outstanding
      Equity Awards At 2006 Fiscal Year-End**





The
      following table sets forth all options granted to acquire shares of common
      stock
      of the Company to certain executive officers and directors during fiscal year
      2006.


**Option
                Awards****Name**
            **Number
                of Securities Underlying Unexercised Options Exercisable
                (vested)**
            **Number
                of Securities Underlying Unexercised Options Unexercisable
                (unvested)**
            **Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options**
            **Option**
              **Exercise**
              **Price**
            **Option
                Expiration Date**Wei
                Li
            Nil
            182,800
            182,800(1)
            0.175
            December
                11, 2016Lian
                jun Luo
            Nil
            132,200
            132,200(1)
            0.175
            December
                11, 2016Ju
                hua Wang
            Nil
            120,300
            120,300(1)
            0.175
            December
                11, 2016Xiao
                nan Wu
            Nil
            105,800
            105,800(1)
            0.175
            December
                11, 2016Yvonne
                Wang
            Nil
            125,100
            125,100(1)
            0.175
            December
                11, 2016





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





**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”). On June 3,
      2004, our stockholders approved the Plan. Under the Plan, we may issue to
      qualifying participants options and stock purchase rights with respect to up
      to
      1,047,907 shares of our common stock, of which not more than 350,000 shares
      may
      be granted to any participant in any fiscal year. Options issued under the
      Plan
      will expire ten years from the date of grant.





Our
      Board
      of Directors approved an amendment to the Plan to increase the number of shares
      reserved for options and other stock awards under it to 3,047,907, and to
      increase the limit on the number of shares that may be granted to any
      participant in a fiscal year to 500,000. The proposed amendment is described
      in
      detail in the Company’s definitive proxy statement, which was filed with the SEC
      on August 9, 2006. At the annual meeting of the stockholders held on September
      12, 2006, the amendment was approved by the required vote of the Company’s
      stockholders.





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.
      As
      of December 31, 2006, we had granted 2,000,000 options under our 2004 Stock
      Plan.





40


***Stock
      Option Grant***





On
      December 13, 2006, our Board of Directors approved a grant program, pursuant
      to
      which we granted 2,000,000 options under the Plan, as amended, of which
      1,061,900 shares were granted to the executive officers and directors named
      in
      the table immediately above. Under the grant program, 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 anniversary 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.





***Aggregate
      Option Exercises and Fiscal-Year-End Values***





No
      stock
      options were exercised by any officers or directors during 2006 and as of March
      29,2007. We did not adjust or amend the exercise price of any stock options
      previously awarded to any named executive officers during 2006 and as of March
      29, 2007.





The
      fiscal-year-end value of unexercised options hold by executives and directors
      was $47,786 based on the closing price on December 31, 2006.


Name
            
            Number
                of Stock Options Granted
            
            Exercise
                Price/shares
            
            Expiration
                Date
            
            Grant
                Date Present Value (1)
            
            Year-end
                Value (2)Wei
                Li
            
            
            182,800
            
            
            0.175
            
            
            2016-12-11
            
            
            29,262
            
            
            8,226Lian
                jun Luo
            
            
            132,200
            
            
            0.175
            
            
            2016-12-11
            
            
            21,162
            
            
            5,949Ju
                hua Wang
            
            
            120,300
            
            
            0.175
            
            
            2016-12-11
            
            
            19,257
            
            
            5,414Qi
                Wang
            
            
            121,500
            
            
            0.175
            
            
            2016-12-11
            
            
            19,449
            
            
            5,468Xiao
                nan Wu
            
            
            105,800
            
            
            0.175
            
            
            2016-12-11
            
            
            16,936
            
            
            4,761Yvonne
                Wang
            
            
            125,100
            
            
            0.175
            
            
            2016-12-11
            
            
            20,026
            
            
            5,630Wen
                bin Li
            
            
            120,300
            
            
            0.175
            
            
            2016-12-11
            
            
            19,257
            
            
            5,414Yun
                long Zhang
            
            
            153,900
            
            
            0.175
            
            
            2016-12-11
            
            
            24,636
            
            
            6,926





(1)
            The
                fair value of these options at the date of grant was estimated using
                a
                Black-Scholes option pricing model.





(2)
            The
                year-end value of unexercised options equals the difference between
                the
                option exercise price and the closing price of the Company stock
                at fiscal
                year end, multiplied by the number of shares underlying the options.
                The
                closing price of the Company stock on December 29, 2006, as reported
                in
                NASD OTC Bulletin Board was $0.22.





**Director
      Compensation for 2006**


**Name
                (a)**
            **Fees
                Earned or Paid in Cash (b)**
            **Stock
                Awards ($) (c)**
            **Option
                Awards ($) (d)**
            **All
                Other Compensation ($) (g)**
            **Total
                ($)**Wei
                Li
            Nil
            Nil
            Nil
            Nil
            NilLian
                jun Luo
            Nil
            Nil
            Nil
            Nil
            NilDa
                chang Ju
            Nil
            Nil
            Nil
            Nil
            NilYun
                long Zhang
            Nil
            Nil
            24,639
                (1)
            Nil
            24,639





(1)
            We
                currently have no policy in effect for providing compensation to
                our
                directors for their services on our Board of Directors. In 2006,
                we
                granted 153,900 options valued at $24,639.39 to Yun long Zhang, who
                is not
                an employee of the Company. With the exception of the option grant
                above,
                in fiscal year 2006, we did not provide any compensation to our directors
                for their service on our Board of Directors. Two of the directors,
                Mr. Wei
                Li and Mr. Lianjun Luo, are also executive officers of the Company
                and
                their respective compensation was provided for their service as employees
                of the Company.




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





41


The
      following table sets forth as of December 31, 2006 certain information with
      respect to the beneficial ownership of our common stock by (i) each of our
      directors and 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 70,149,556 shares of our common stock outstanding as of
      December 31, 2006. 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 Owner**
            **Amount
                and Nature of Beneficial Owner**
            **Percent
                of Class**Common
                Stock
            Wei
                Li(1)
            12,356,672
            17.61Common
                Stock
            Da
                chang Ju(2)
            10,062,088
            14.34Common
                Stock
            Lian
                jun Luo
            1,305,562
            1.86Common
                Stock
            Yun
                long Zhang
            308,916
            *Common
                Stock
            Ju
                hua Wang
            100,000
            *Common
                Stock
            All
                Star Technology Inc.(1)
            12,356,672
            17.61Common
                Stock
            InvestLink
                (China) Limited(2)
            10,062,088
            14.34Common
                Stock
            All
                officers and directors as a group (5 persons)
            24,133,238
            34.40





*
            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. 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 Gui sheng Chen. InvestLink has the sole
                power
                to vote or direct the vote and dispose or direct the disposition
                of
                10,062,088 sharesbut
                disclaims beneficial ownership of such shares except to the extent
                of its
                pecuniary interest therein. Da chang Ju exercises voting and investment
                control over the shares held by InvestLink. Da chang 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 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 Millenium 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, 2006
      about our equity compensation plans under which our equity securities are
      authorized for issuance.





**(a)**
            **(b)**
            **(c)****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))**Equity
                compensation plans approved by security holders
            2,000,000
            $0.175
            1,047,907Equity
                compensation plans not approved by security holders
            —
            —
            —**Total**
            2,000,000
            —
            1,047,907





42
 
  ITEM
        12  CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS ,
        AND
        DIRECTOR INDEPENDENCE.





For
      description of transactions with related parties, see Note 12 to Consolidated
      Financial Statements under Item 7 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.





We
      do not
      have a separately designated audit, nominating or compensation committee or
      committee performing similar functions.





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.
      Da
      chang 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.
      Lian
      jun Luo is Chief Financial Officer of the Company.





Mr,
      Yun
      long Zhang is General Manager of China Star Investment Management Co., Ltd.
      ,
      which is also 28% owned by Mr. Wei Li.




ITEM
      13  EXHIBITS


Description
      of Exhibits


**Exhibit
                No.**
            **Description**
            **Incorporated
                by Reference in Document**
            **Exhibit
                No. in Incorporated Document**3.1
            Certificate
                of Incorporation, effective as of July 21, 2004.
            Form
                8-K filed on July23
                2004
            3.13.2
            Bylaws,
                effective as of July 22, 2004.
            Form
                8-KfiledonJuly23, 2004
            3.23.3
            Certificate
                of Amendment to Certificate of Incorporation, effective as of September
                27, 2006.
            Form
                10-QSB filed on November 15, 2006
            3.310.31
            Advance
                Agreement, dated December 31, 2005, between Kiwa Bio-Tech Products
                (Shandong) Co. Ltd. and China Star Investment Management Co.
                Ltd.
            Form
                10-KSB filed April 17, 2006
            10.3110.32
            Stock
                Purchase Agreement dated March 10, 2006 between Kiwa Bio-Tech Products
                Group Corporation and Guilian Li Ziyang Zong
            Form
                8-K filed on March 15, 2006
            10.110.33
            Termination
                Agreement between Kiwa Bio-Tech Products Group Corporation and Cornell
                Capital dated on March 31, 2006
            Form
                8-K filed on April 4, 2006
            10.110.34
            Supplementary
                Agreement for Stock Purchase Agreement dated April 13,
                2006
            Form
                10-KSB filed on April 17, 2006
            10.3410.35
            Supplementary
                Agreement for Stock Purchase Agreement dated May 12, 2006
            Form
                10-QSB filed on May 15, 2006
            10.3510.36
            Advance
                Agreement, dated March 31, 2006, between Kiwa Bio-Tech Products (Shandong)
                Co. Ltd. and China Star Investment Management Co. Ltd.
            Form
                10-QSB filed on May 15, 2006
            10.36




43




**Exhibit
                No.**
            **Description**
            **Incorporated
                by Reference in Document**
            **Exhibit
                No. in Incorporated
                Document**


10.37
            Technology
                Transfer Agreement dated May 8, 2006, between Kiwa Bio-Tech Products
                Group
                Corporation and Jinan Kelongboao Bio-Tech Co., Ltd.
            Form
                8-K filed on May 8, 2006
            10.110.38
            Acquisition
                Framework Agreement between the Company and Beijing Huasheng Medicine
                Co.,
                dated May 10, 2006
            Form
                8-K filed on May 8, 2006
            10.210.39
            Securities
                Purchase Agreement, dated as of June 29, 2006 between Kiwa Bio-Tech
                Products Group Corporation and 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 (collectively, the
                “Purchasers”)
            Form
                8-K filed on July 5, 2006
            10.0110.40
            Registration
                Rights Agreement, dated as of June 29, 2006 between Kiwa Bio-Tech
                Products
                Group Corporation and the Purchasers
            Form
                8-K filed on July 5, 2006
            10.0210.41
            Security
                Agreement, dated as of June 29, 2006, between Kiwa Bio-Tech Products
                Group
                Corporation and the Purchasers
            Form
                8-K filed on July 5, 2006
            10.0310.42
            Intellectual
                Property Security Agreement, dated as of June 29, 2006, between Kiwa
                Bio-Tech Products Group Corporation and the Purchasers
            Form
                8-K filed on July 5, 2006
            10.0410.43
            Pledge
                Agreement, dated as of June 29, 2006, among Kiwa Bio-Tech Products
                Group
                Corporation, Wei Li, and the Purchasers
            Form
                8-K filed on July 5, 2006
            10.0510.44
            Form
                of Callable Secured Convertible Note, dated as of June 29, 2006,
                issued by
                Kiwa Bio-Tech Products Group Corporation to the Purchasers
            Form
                8-K filed on July 5, 2006
            10.0610.45
            Form
                of Stock Purchase Warrant, dated as of June 29, 2006, issued by Kiwa
                Bio-Tech Products Group Corporation to the Purchasers
            Form
                8-K filed on July 5, 2006
            10.0710.46
            Contract
                for Joint Venture dated July 11, 2006 between Kiwa Bio-Tech Products
                Group
                Corporation and Tianjin Challenge Feed Co., Ltd.
            Form
                8-K filed on July 14, 2006
            10.0110.47
            Contract
                for urea dated July 28, 2006 between Kiwa Bio-Tech Products Group
                Ltd. and
                China Hua Yang Roneo Corporation.
            Form
                8-K filed on August 2, 2006
            10.110.48
            Contract
                for urea dated July 31, 2006 between Kiwa Bio-Tech Products Group
                Ltd. and
                Shengkui Technologies, Inc.
            Form
                8-K filed on August 2, 2006
            10.210.49
            Employment
                Agreement dated July 31, 2006 between Kiwa Bio-Tech Products Group
                Ltd.
                and Wei Li
            Form
                8-K filed on August 7, 2006
            10.110.50
            Employment
                Agreement dated July 31, 2006 between Kiwa Bio-Tech Products Group
                Ltd.
                and Lianjun Luo
            Form
                8-K filed on August 7, 2006
            10.210.51
            Employment
                Agreement dated September 25, 2006 between Kiwa Bio-Tech Products
                Group
                Ltd. and Juhua Wang
            Form
                8-K/A filed on September 25, 2006
            10.110.52
            Amendment
                to Registration Right Agreement dated as of October 31, 2006, by
                and amongKiwa
                Bio-Tech Products Group Corporation and the Purchasers
            Form
                10-QSB filed on November 15, 2006
            10.5210.53
            Contract
                dated August 8, 2006, by and among Kiwa Bio-Tech Products Group Ltd.
                and
                UPB International Sourcing Limited
            Form
                10-QSB filed on November 15, 2006
            10.5310.54
            Supplementary
                Agreement, dated August 20, 2006, by and between Kiwa Bio-Tech Products
                Group Ltd. and UPB International Sourcing Limited
            Form
                10-QSB filed on November 15, 2006
            10.5410.55
            Short
                Term Loan Agreement, dated as of October 23, 2006, by and among Kiwa
                Bio-Tech Products (Shandong) Co., Ltd and China Star Investment Management
                Co., Ltd.
            Form
                10-QSB filed on November 15, 2006
            10.55




44




**Exhibit
                No.**
            **Description**
            **Incorporated
                by Reference in Document**
            **Exhibit
                No. in Incorporated
                Document**


10.56
            Agreement
                on Joint Incorporation of Kiwa-CAU Bio-Tech Research & Development
                Center, dated November 14, 2006, between China Agricultural University
                and
                Kiwa Bio-Tech Products (Shandong) Limited
            Filed
                herewith.10.57
            Annual
                Distribution Contract, dated December 26, 2006, by and among Kiwa
                Bio-Tech
                Products (Shandong) Co., Ltd and Xinjiang Rundi Bio-Tech Co.,
                Ltd.
            Form
                8-K filed on December 27, 2006
            10.0121
            List
                of Subsidiaries
            Filed
                herewith.31.1
            Certification
                of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
                of the
                Securities Exchange Act of 1934
            Filed
                herewith.31.2
            Certification
                of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
                of the
                Securities Exchange Act of 1934
            Filed
                herewith.32.1
            Certification
                of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
            Filed
                herewith.32.2
            Certification
                of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
            Filed
                herewith.




ITEM
      14  PRINCIPAL
      ACCOUNTING FEES AND SERVICES





**Fees
      Paid to Independent Public Accountants for 2006 and 2005**





**Audit
      Fees**





Mao
&
      Company, CPAs, Inc. audited our financial statements for year-end 2006 and
      2005,
      and reviewed our quarterly financial statements for 2006. Grobstein, Horwath
      & Company, LLP reviewed our quarterly financial statements for 2005. 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 board of directors approved
      the engagement of each of Mao & Company, CPAs, Inc. and Grobstein, Horwath
& Company, LLP before their respective engagements. 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 2006 were approximately $73,000. 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
      2006
      fiscal year and reviews of our quarterly reports on the Form 10-QSB for the
      first, second and third quarters of 2006 fiscal year.





The
      aggregate audit fees for 2005 were approximately $67,500. The amounts include
      fees of approximately $45,000 for professional services rendered by Mao &
Company, CPAs, Inc. in connection with the audit of our consolidated financial
      statements as of and for the 2005 fiscal year and fees of approximately $22,500
      for professional services rendered by Grobstein, Horwath & Company, LLP in
      connection with reviews of our unaudited consolidated interim financial
      statements for the first, second and third quarters of 2005.




**Audit-Related
      Fees**





Audit-related
      fees for 2006 for assurance and related services by Mao & Company, CPAs,
      Inc. and Grobstein, Horwath & Company, LLP were $7,100 and $9,500. The
      amounts include fees for auditing the financial statements in relation to the
      preparation and filing of our registration statement on Form SB-2.




45





There
      were no audit-related fees billed by Mao & Company, CPAs, Inc. or Grobstein,
      Horwath & Company, LLP for other services rendered to the
      Company for the
      2005 fiscal year.





**Tax
      Fees**





Tax
      service fees billed to Mao & Company, CPAs, Inc.for 2006 were $4,500. There
      were no fees for tax services billed by Mao & Company, CPAs, Inc. or
      Grobstein, Horwath & Company, LLP for other services rendered to the
      Company for the
      2005 fiscal year.





**All
      Other Fees**





There
      were no additional aggregate fees billed by Mao & Company, CPAs, Inc. for
      2005 and 2006 or by Grobstein, Horwath & Company, LLP for 2005 for other
      services rendered to the Company.





46





SIGNATURES





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized on April 1, 2007.





**KIWA
                BIO-TECH PRODUCTS GROUP CORPORATION**By:
            
            /s/
                Wei Li
              Wei
                Li
              Chief
                Executive Officer and Chairman of the Board of Directors
              (Principal
                Executive Officer)





Pursuant
      to the requirements of the Securities Act of 1934, this report has been signed
      below by the following persons on behalf of the registrant and in the capacities
      indicated on April 1, 2007.




/s/
                  Wei Li
              
              April
                  1, 2007
              Chief
                  Executive Officer andWei
                  Li
              
              
              Chairman
                of the Board
                of Directors(Principal
                  Executive Officer)/s/
                  Lian jun Luo
              
              April
                  1, 2007
              Chief
                  Financial Officer and DirectorLian
                  jun Luo
              
              
              (Principal
                  Financial Officer andPrincipal
                  Accounting Officer)/s/
                  Da chang Ju
              
              April
                  1, 2007
              DirectorDa
                  chang Ju/s/
                  Yun long Zhang
              
              April
                  1, 2007
              DirectorYun
                  long Zhang
 47




**KIWA
      BIO-TECH PRODUCTS GROUP CORPORATION AND ITS SUBSIDIARIES**







**Index
      to Consolidated Financial Statements**









**Page**Report
                of Mao & Company CPAs, Inc. dated February 16, 2007
            F-2Consolidated
                Balance Sheets as of December 31, 2006 and 2005
            F-3Consolidated
                Statements of Operations and Comprehensive Income for the years ended
                December 31, 2006 and 2005
            F-4Consolidated
                Statements of Stockholders’ Equity (Deficiency) for the period from
                January 1, 2005 through December 31, 2006
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2006 and
                2005
            F-6Notes
                to Consolidated Financial Statements
            F-7




F-1




**Independent
      Auditor’s Report**





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 Subsidiary (the “Company”) as of December 31, 2006 and
      2005, and the related consolidated statements of operations, stockholders’
equity (deficiency) and cash flows for the years ended December 31, 2006 and
      2005. These consolidated financial statements are the responsibility of the
      Company’s management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audit.





We
      conducted our audit in accordance with the auditing 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
      consolidated 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 controls over financial reporting. Our audit included consideration
      of
      internal controls 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
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall consolidated financial statement
      presentation. We believe that our audit 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 Kiwa Bio-Tech Products
      Group
      Corporation as of December 31, 2006 and 2005 and the consolidated results of
      their operations and their cash flows for the year ended December 31, 2006,
      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 a working capital deficit and a net capital deficiency
      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.





/s/
      Mao
& Company CPAs, Inc.





New
      York,
      New York


February
      16, 2007




F-2


**Consolidated
      Balance Sheets**





Year
                Ended December 31,2006
            
            2005**ASSETS**Current
                assetsCash
                and cash equivalents
            
            
            
            
            $
            498,103
            
            $
            14,576Accounts
                receivable, net of bad debt allowance of $258,667
              and
                $82,942, respectively
            
            
            
            
            
            929,446
            
            
            701,486Inventories
            
            
            
            
            
            541,340
            
            
            495,597Prepaid
                expenses
            
            
            
            
            
            302,007
            
            
            1,962Other
                current assets
            
            
            
            
            
            57,011
            
            
            27,186Total
                current assets
            
            
            
            
            
            2,327,907
            
            
            1,240,807Property,
                Plant and Equipment:Buildings
            
            
            
            
            
            1,046,116
            
            
            1,012,219Machinery
                and equipment
            
            
            
            
            
            585,282
            
            
            447,361Automobiles
            
            
            
            
            
            47,772
            
            
            103,914Office
                equipment
            
            
            
            
            
            78,096
            
            
            57,423Computer
                software
            
            
            
            
            
            9,240
            
            
            8,9401,766,506
            
            
            1,629,857Less:
                accumulated depreciation
            
            
            
            
            
            (286,039
            )
            
            (192,991
            )Property
                plant and equipment - net
            
            
            
            
            
            1,480,467
            
            
            1,436,866Construction
                in progress
            
            
            
            
            
            34,548
            
            
            33,429Intangible
                asset-net
            
            
            
            
            
            337,027
            
            
            410,586Deferred
                financing costs
            
            
            
            
            
            211,793
            
            
            -Deposit
                to purchase the proprietary technology
            
            
            
            
            
            126,443
            
            
            -Total
                assets
            
            
            
            
            $
            4,518,185
            
            $
            3,121,688**LIABILITIES
                AND STOCKHOLDERS’ EQUITY (DEFICIENCY)**Current
                liabilitiesAccounts
                payable and accrued expenses
            
            
            
            
            $
            983,980
            
            $
            1,000,477Construction
                costs payable
            
            
            
            
            
            366,879
            
            
            372,338Due
                to related parties
            
            
            
            
            
            496,806
            
            
            454,193Convertible
                notes payable
            
            
            
            
            
            -
            
            
            407,135Current
                portion of bank notes payables
            
            
            
            
            
            5,405
            
            
            13,647Total
                current liabilities
            
            
            
            
            
            1,853,070
            
            
            2,247,790Long-term
                liabilities, less current portion:Unsecured
                loans payable
            
            
            
            
            
            1,472,717
            
            
            1,424,996Bank
                notes payable
            
            
            
            
            
            1,351
            
            
            13,895Long-term
                convertible notes payable
            
            
            
            
            
            2,365,962
            
            
            -Discount
                on warrants relating to long-term convertible notes
            
            
            
            
            
            (1,371,446
            )
            
            -Total
                long-term liabilities
            
            
            
            
            
            2,468,584
            
            
            1,438,891Minority
                interest in a subsidiary
            
            
            
            
            
            103,362
            
            
            -Shareholders’
                equity (deficiency)Common
                stock -$0.001 par value
              Authorized
                200,000,000 shares and 100,000,000 shares at
              December 31,
                2006 and 2005, respectively
              Issued
                and outstanding 70,149,556 and 59,235,930 shares at December 31, 2006
                and 2005, respectively
            
            
            
            
            
            70,150
            
            
            59,236Preferred
                stock -$0.001 par value
              Authorized
                20,000,000 shares, nil shares issued and outstanding at December 31,
                2006 and 2005, respectively
            
            
            
            
            
            -
            
            
            -Additional
                paid-in capital
            
            
            
            
            
            8,311,975
            
            
            4,835,968Stock-based
                compensation reserve
            
            
            
            
            
            (523,468
            )
            
            -Deficit
                Accumulated
            
            
            
            
            
            (7,766,654
            )
            
            (5,482,555
            )Accumulated
                other comprehensive income
            
            
            
            
            
            1,166
            
            
            22,358Total
                shareholders’ equity (deficiency)
            
            
            
            
            
            93,169
            
            
            (564,993
            )**Total
                liabilities and stockholders’ equity**
            
            
            
            
            $
            4,518,185
            
            $
            3,121,688





F-3


**Consolidated
      Statements of Operations** **and Comprehensive Income**




Year
                Ended December 31,********
            
            2006
            
            2005**Net
                sales**
            
            $
            3,306,715
            
            $
            631,794Cost
                of sales
            
            
            2,711,419
            
            
            232,692**Gross
                profit**
            
            
            595,296
            
            
            399,102**Operating
                expenses:**Consulting
                and professional fees
            
            
            852,107
            
            
            614,532Officers’
                compensation
            
            
            176,528
            
            
            38,727General
                and administrative
            
            
            605,071
            
            
            509,674Selling
                expenses
            
            
            521,608
            
            
            72,021Research
                and development
            
            
            119,719
            
            
            11,264Depreciation
                and amortization
            
            
            172,011
            
            
            106,283****Allowance and provision
            
            
            220,148
            
            
            82,942**Total
                costs and expenses**
            
            
            2,667,192
            
            
            1,435,443**Operating
                loss**
            
            
            (2,071,896
            )
            
            (1,036,341
            )**Interest
                expense, net**
            
            
            (231,559
            )
            
            (293,834
            )**Other
                income**
            
            
            -
            
            
            2,416**Minority
                interest in a subsidiary’s loss**
            
            
            19,356
            
            
            -**Net
                loss**
            
            $
            (2,284,099
            )
            $
            (1,327,759
            )**Other
                comprehensive income (loss):******Translation adjustment
            
            
            (95,776
            )
            
            22,358**Comprehensive
                loss**
            
            $
            (2,379,875
            )
            $
            (1,305,401
            )**Net
                loss per common share**
              **-basic
                and diluted**
            
            $
            (0.036
            )
            $
            (0.026
            )**Weighted
                average number of common shares outstanding**
              **-basic
                and diluted**
            
            
            63,646,482
            
            
            50,957,995




F-4




**Consolidated
      Statement of Stockholder** **s’
      Equity (Deficiency)**









Common
                Stock
            
            Additional
                Paid-in
                Capital
            
            Stock-based
              Compensation
              Reserve
            
            Accumulated
              Deficits
            
            Other
                  Comprehensive
                income
            
            Total
                  Stockholders’
                DeficiencyShares
            
            Amount**Balance,
              January 1,
              2005**
            
            
            40,873,711
            
            $
            40,874
            
            $
            4,393,415
            
            
            -
            
            
            ($4,154,796
            )
            
            -
            
            $
            279,493Issuance
                of common stock to Cornell Capital in the first nine months of 2005,
                as
                repayments in conjunction with Promissory Note dated on January 4,
                2005
            
            
            18,362,219
            
            
            18,362
            
            
            294,503
            
            
            -
            
            
            -
            
            
            -
            
            
            312,865Issuance
                of detachable warrants in conjunction with the issuance of convertible
                promissory notes in June 2005
            
            
            -
            
            
            -
            
            
            21,700
            
            
            -
            
            
            -
            
            
            -
            
            
            21,700Beneficial
                conversion feature of convertible note payable funded in June,
                2005
            
            
            -
            
            
            -
            
            
            106,666
            
            
            -
            
            
            -
            
            
            -
            
            
            106,666Issuance
                of detachable warrants in conjunction with the various advances from
                a
                director in May 2005
            
            
            -
            
            
            -
            
            
            8,633
            
            
            -
            
            
            -
            
            
            -
            
            
            8,633Issuance
                of detachable warrants in conjunction with the advances from a related
                party dated June 29, 2005
            
            
            -
            
            
            -
            
            
            5,417
            
            
            -
            
            
            -
            
            
            -
            
            
            5,417Issuance
                of detachable warrants in conjunction with the advances from a related
                party dated September 30, 2005
            
            
            -
            
            
            -
            
            
            5,021
            
            
            -
            
            
            -
            
            
            -
            
            
            5,021Issuance
                of detachable warrants in conjunction with the advances from a related
                party dated December 31, 2005
            
            
            -
            
            
            -
            
            
            613
            
            
            -
            
            
            -
            
            
            -
            
            
            613Net
                loss for the year ended December 31, 2005
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,327,759
            )
            
            -
            
            
            (1,327,759
            )Other
                comprehensive income-Translation
              adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            22,358
            
            
            22,358**Balance,
                January 1, 2006**
            
            
            59,235,930
            
            $
            59,236
            
            $
            4,835,968
            
            
            -
            
            
            ($5,482,555
            )
            $
            22,358
            
            
            ($564,993
            )Issuance
                of detachable warrants in conjunction with the advances from a related
                party dated March 31, 2006
            
            
            -
            
            
            -
            
            
            5,145
            
            
            -
            
            
            -
            
            
            -
            
            
            5,145Issuance
                of 5 million shares of common stock pursuant to the Stock Purchase
                Agreement dated as of March 10, 2006
            
            
            5,000,000
            
            
            5,000
            
            
            740,416
            
            
            -
            
            
            -
            
            
            -
            
            
            745,416Issuance
                of detachable warrants in conjunction with the issuance of convertible
                promissory notes on June 29, 2006, August 15, 2006 and October 31,
                2006
            
            
            -
            
            
            -
            
            
            1,467,956
            
            
            -
            
            
            -
            
            
            -
            
            
            1,467,956Issuance
                of warrants to a financing consultant in June and August, October
                2006
            
            
            -
            
            
            -
            
            
            231,544
            
            
            (231,544
            )
            
            -
            
            
            -
            
            
            -Amortization
                of fair value of stock-based compensation reserve
            
            
            -
            
            
            -
            
            
            -
            
            
            30,801
            
            
            -
            
            
            -
            
            
            30,801Issuance
                of common stock for exercise of warrants at July 6, 2006
            
            
            50,000
            
            
            50
            
            
            (50
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Issuance
                of common stock for exercise of warrants at August 9, 2006
            
            
            500,000
            
            
            500
            
            
            8,500
            
            
            -
            
            
            -
            
            
            -
            
            
            9,000Issuance
                of common stock as compensation to a investor relation consultant
                on
                October 10, 2006
            
            
            1,800,000
            
            
            1,800
            
            
            430,200
            
            
            -
            
            
            -
            
            
            -
            
            
            432,000Issuance
                of common stock as compensation to an officer on October 10,
                2006
            
            
            996,646
            
            
            997
            
            
            45,355
            
            
            -
            
            
            -
            
            
            -
            
            
            46,352Issuance
                of common stock for exercise of warrants at October 10,
                2006
            
            
            350,000
            
            
            350
            
            
            7,350
            
            
            -
            
            
            -
            
            
            -
            
            
            7,700Issuance
                of common stock for exercise of warrants at October 10,
                2006
            
            
            750,000
            
            
            750
            
            
            16,500
            
            
            -
            
            
            -
            
            
            -
            
            
            17,250Issuance
                of common stock for conversion of a convertible note on November
                10,
                2006
            
            
            773,537
            
            
            774
            
            
            112,936
            
            
            -
            
            
            -
            
            
            -
            
            
            113,710Employee
                stock option granted on December 12, 2006
            
            
            -
            
            
            -
            
            
            326,810
            
            
            (326,810
            )
            
            -
            
            
            -
            
            
            -Amortization
                of fair value of employee stock option in 2006
            
            
            -
            
            
            -
            
            
            -
            
            
            4,085
            
            
            -
            
            
            -
            
            
            4,085Issuance
                of common stock for conversion 6% Notes in the quarter of
                2006
            
            
            693,443
            
            
            693
            
            
            83,345
            
            
            -
            
            
            -
            
            
            -
            
            
            84,038Net
                loss for the year ended December 31, 2006
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,284,099
            )
            
            -
            
            
            (2,284,099
            )Other
                comprehensive income-Translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (21,192
            )
            
            (21,192
            )**Balance,
                December31, 2006**
            
            
            70,149,556
            
            $
            70,150
            
            $
            8,311,975
            
            
            ($523,468
            )
            
            ($7,766,654
            )
            $
            1,166
            
            $
            93,169





F-5




**Consolidated
      Statements of Cash Flows**





Year
                Ended December 31,2006
            
            2005**Cash
                flows from operating activities:**Net
                loss
            
            $
            (2,284,099
            )
            $
            (1,327,759
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            200,815
            
            
            146,932Amortization
                of detachable warrants and option
            
            
            137,374
            
            
            78,447Amortization
                of beneficial conversion feature of convertible notes
            
            
            -
            
            
            106,666Provision
                for doubtful debt and inventory impairment
            
            
            224,614
            
            
            82,942Fair
                value of shares as compensation to an employee
            
            
            46,352
            
            
            -(Gain)
                loss on disposal of fixed assets
            
            
            2,077
            
            
            -Minority
                interest in subsidiary
            
            
            (19,356
            )
            
            -Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (403,685
            )
            
            178,975Inventories
            
            
            (94,632
            )
            
            (411,920
            )Other
                receivable
            
            
            -
            
            
            157,495Prepaid
                expenses
            
            
            131,955
            
            
            129,638Other
                current assets
            
            
            (29,825
            )
            
            (846
            )Accounts
                payable and accrued expenses
            
            
            22,162
            
            
            439,603**Net
                cash used in operating activities**
            
            
            (2,066,248
            )
            
            (419,827
            )**Cash
                flows from investing activities:**Purchase
                of property and equipment
            
            
            (36,600
            )
            
            (229,989
            )Acquisition
                of intangible asset
            
            
            (126,443
            )
            
            -**Net
                cash used in investing activities**
            
            
            (163,043
            )
            
            (229,989
            )**Cash
                flows from financing activities:**Proceeds
                from issuance of common stock
            
            
            754,416
            
            
            -Repayment
                of short-term loans
            
            
            -
            
            
            (50,000
            )Proceeds
                from related parties
            
            
            685,906
            
            
            488,501Repayment
                to related parties
            
            
            (651,069
            )
            
            (163,741
            )Proceeds
                from convertible notes payable
            
            
            -
            
            
            720,000Repayment
                of convertible notes payable
            
            
            (307,135
            )
            
            (350,000
            )Proceeds
                from long-term convertible notes payable
            
            
            2,204,000
            
            
            -Repayment
                of long-term borrowings
            
            
            (20,785
            )
            
            (12,190
            )**Net
                cash provided by financing activities**
            
            
            2,665,333
            
            
            632,570**Effect
                of exchange rate changes on cash and cash
                equivalents**
            
            
            47,486
            
            
            14,773**Cash
                and cash equivalents:**Net
                increase (decrease)
            
            
            483,528
            
            
            (2,473
            )Balance
                at beginning of year
            
            
            14,575
            
            
            17,049**Balance
                at end of year**
            
            $
            498,103
            
            $
            14,576**Supplemental
                Disclosures of Cash flow Information:**Cash
                paid for interest
            
            $
            103,313
            
            $
            6,354Cash
                paid for taxes
            
            $
            -
            
            $
            -Non-cash
                investing and financing activities:Fixed
                assets invested by minority shareholder of subsidiary
            
            $
            120,000
            
            $
            -Beneficial
                conversion feature of convertible notes payable
            
            
            -
            
            
            106,666Issuance
                of common stock for convertible notes payable and interest
            
            
            197,748
            
            
            312,865Issuance
                of common stock as compensation to a consultant
            
            
            432,000
            
            
            -Issuance
                of detachable warrants in conjunction with issuance
              of
                convertible notes payable
            
            
            1,473,101
            
            
            41,384Issuance
                of warrants as compensation and grant of stock option
            
            
            558,534
            
            
            -Non-cash
                exercise of warrants
            
            
            50
            
            
            -Issuance
                of stock for warrant exercise with accrued interest setoff
            
            
            24,950
            
            
            -





F-6





**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 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 22, 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 entered into an
      agreement to acquire 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. See “Business” section in Part
      I.





**Basis
      of Presentation** - The
      consolidated financial statements include the operations of the Company and
      its
      wholly-owned subsidiaries, Kiwa BVI and Kiwa Shandong, and also its
      majority-owned subsidiary, 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 considered. Both the conversion of RMB into
      foreign currencies and the remittance of foreign currencies abroad require
      the
      approval of the Chinese government.





**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, 2006, there was $258,667 in accounts receivable over 365 days
      old,
      of which $251,630 is attributable to two certain fertilizer customers. We had
      established repayment schedules with these two customers in April 2006 to extend
      their credit periods of their accounts receivable over one year then to October
      2006. Before September 30, 2006, these two customers made repayments on
      schedule. So far RMB 4,291,900 (approximately $542,680) has been collected
      against those receivables. However the installment committed in the fourth
      quarter of 2006 was not paid on schedule. In addition, these two customers
      didn’t carry out any transaction with us in 2006. Although the Company is still
      pursuing the collection of these receivables, we provided $258,667 bad debt
      provision based on all accounts receivable over one year as of December 31,
      2006.




F-7





**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.





As
      of
      December 31, 2006, we had an accumulated deficit of $7,766,654, and we incurred
      net losses of $2,284,099 and $1,327,759 during the years ended December 31,
      2006
      and 2005, respectively. This trend is expected to continue. Our remaining
      capital resources are insufficient to allow the Company to execute its business
      plan in the next year. 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. These factors
      create substantial doubt about our ability to continue as a going
      concern.





The
      Company’s registered independent public accounting firm, in their report on the
      consolidated financial statements as of and for the year ended December 31,
      2006
      and 2005 contained in the Company’s Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 2006, have included an explanatory paragraph in their
      opinion indicating that there is substantial doubt about our ability to continue
      as a going concern. The financial statements do not include any adjustments
      that
      might result from the outcome of this uncertainty.





For
      more
      detailed discussion about going concern, see “Going Concern” under Item 6 in
      Part II.





**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$”).





Translations
      of amounts from RMB into U.S. dollars were at approximately US$ 1.00 = RMB
      8.28
      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 = RMB 8.00. 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, 2006, the
      prevailing exchange rate of the U.S. dollar against the RMB was US$ 1.00 =
      RMB
      7.8087), 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 statement of operations and
      comprehensive income.





**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 a
      general 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 August 31, 2006 and January
      27, 2006, the local tax authority approved the exemption from VAT for Kiwa
      Tianjin’s revenues for fiscal year 2006 and 2007, respectively.




F-8





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.





**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,
      2006, potentially dilutive securities aggregated 39,264,435 shares of common
      stock.





**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.





**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.





As
      of
      December 31, 2006, there were $48,039 in finished goods exceeding their quality
      guarantee period, and we accrued impairment allowance for these inventories.





**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
                year





F-9


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, 2006 and 2005 as the
      construction in progress was minimal.





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. If
      these estimates or the related assumptions change in the future, we may be
      required to record impairment charges for these assets. The Company has
      determined that there was no impairment of long-lived assets as of December
      31,
      2006.





**Financial
      Instruments and Fair Value** - 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.





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 of those instruments.





**Stock
      Issued for Compensation and Financing** -
      Effective January 1, 2006, the company adopted SFAS No. 123 (revised
      2004), “Share Based Payment,” (“SFAS No. 123(R)”) 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).





Prior
      to
      December 31, 2005, the Company accounted for stock options under the recognition
      and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued
      to Employees”, and related Interpretations, as permitted by FASB Statement No.
      123, “Accounting for Stock-Based Compensation”.





**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.





**2.**
            **Recent
                Accounting
                Pronouncements**





In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments-an amendment of FASB Statements No. 133 and 140.” SFAS No.
      155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging
      Activities” to permit fair value remeasurement for any hybrid financial
      instrument with an embedded derivative that otherwise would require bifurcation,
      provided that the whole instrument is accounted for on a fair value basis.
      SFAS
      No. 155 amends SFAS No. 140, “Accounting for the Impairment or Disposal of
      Long-Lived Assets”, to allow a qualifying special-purpose entity (“SPE”) to hold
      a derivative financial instrument that pertains to a beneficial interest other
      than another derivative financial instrument. SFAS No. 155 applies to all
      financial instruments acquired or issued after the beginning of an entity’s
      first fiscal year that begins after September 15, 2006, with earlier application
      allowed. The Company does not expect the adoption of SFAS No. 155 to have a
      material impact on its consolidated results of operations and financial
      condition.




F-10




In
      March
      2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
      Assets-an amendment of FASB Statement No. 140." SFAS No. 156 requires that
      all
      separately recognized servicing rights be initially measured at fair value,
      if
      practicable. In addition, this Statement permits an entity to choose between
      two
      measurement methods (amortization method or fair value measurement method)
      for
      each class of separately recognized servicing assets and liabilities. This
      new
      accounting standard is effective January 1, 2007. The adoption of SFAS 156
      is
      expected to have no material impact on our financial statements.





In
      April
      2006, the FASB issued FASB Staff Position (“FSP”) FIN 46(R)-6, “Determining the
      Variability to Be Considered in Applying FASB Interpretation No. 46(R)”, that
      became effective beginning July 2006. FSP FIN No. 46(R)-6 clarifies that the
      variability to be considered in applying Interpretation 46(R) shall be based
      on
      an analysis of the design of the variable interest entity. The adoption of
      this
      FSP is not expected to have a material effect on our consolidated financial
      statements.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertain
      Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in
      income taxes recognized in an entity’s financial statements. FIN 48 prescribes a
      comprehensive model for how a company should recognize, measure, present, and
      disclose in its financial statements uncertain tax positions that the company
      has taken or expects to take on a tax return. FIN 48 is effective for fiscal
      years beginning after December 16, 2006. The Company is currently evaluating
      FIN
      48 and we do not anticipate that it will have a material impact on our financial
      statements upon adoption due to the Company’s current income tax
      situation.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This
      statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principle and expands disclosures of fair
      value
      measurement. In application, this statement does not require any new fair value
      measurements. It shall be effective for fiscal years beginning after November
      15, 2007, and all interim periods within those fiscal years. Earlier application
      is permitted if the entity has not yet issued interim or annual financial
      statements for that fiscal year. The Company is currently evaluating the impact
      that the adoption of this statement will have on the Company’s consolidated
      financial position, results of operations or cash flows.





In
      September 2006, the FASB issued SFAS No. 158, “Employers' Accounting for Defined
      Benefit Pension and Other Postretirement Plans”, This statement improves
      financial reporting by requiring an employer to recognize the overfunded or
      underfunded status of a defined benefit postretirement plan (other than a
      multiemployer plan) as an asset or liability in its statement of financial
      position and to recognize changes in that funded status in the year in which
      the
      changes occur through comprehensive income or business entity. For an employer
      with publicly traded equity securities, the requirement to recognize the funded
      status of a benefit plan and the disclosure requirements are effective as of
      the
      end of the fiscal year ending after December 15, 2006. The Company is currently
      evaluating the impact that the adoption of this statement will have on the
      Company’s consolidated financial position, results of operations or cash
      flows.





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, 2006, the balance of accounts receivable was $929,446, net of
      bad
      debt provision of $258,667. Among this balance, $800,000, $5,242, and
      $124,024relate respectively to our urea entrepot trade, bio-fertilizer and
      bio-enhanced feed business. As stated above in “Business-Risk Factors” under
      Item 1 in Part I, we acted as an agent in urea entrepot trade. The
      first
      two shipments were dispatched in mid-October and reached the destination by
      the
      end of 2006. We recognized revenue of this transaction and corresponding
      accounts receivable based
      on
      the net amount retained (that is, the amount billed to the customer less the
      amount paid to a supplier), of which we have received $680,000 in the first
      quarter of 2007, of 85% of the total. All bad debt provision relates to our
      bio-fertilizer business.





As
      of
      December 31, 2005, the balance of accounts receivable was $701,486, net of
      bad
      debt provision $82,942.




F-11


**4.**
            **Inventories**





Inventories
      consisted of the following as of December 31, 2006 and December 31,
      2005:





Item
            
            December
                31, 2006
            
            December
                31, 2005Raw
                materials
            
            $
            439,828
            
            $
            417,237Semi-finished
                goods
            
            
            241
            
            
            -Finished
                goods
            
            
            101,271
            
            
            78,360Total
            
            $
            541,340
            
            $
            495,597





As
      of
      December 31, 2006, there were $48,039 in finished goods exceeding their quality
      guarantee period, and we accrued impairment allowance for these inventories.
      The
      balance of finished goods in this table is a net balance after offsetting the
      allowance.





**5.**
            **Prepaid
                expenses**





Prepaid
      expenses consisted of the following as of December 31, 2006 and December 31,
      2005:





Item
            
            Note
            
            December
                31, 2006
            
            December
                31, 2005Prepaid
                stock-based compensation
              to
                investor relation consultant
            
            
            (i)
            
            $
            256,800
            
            $
            -Prepaid
                charges relating to
              urea
                entrepot trade
            
            
            (ii)
            
            
            30,097
            
            
            -Prepaid
                insurance premium
            
            
            
            
            
            -
            
            
            892Others
            
            
            
            
            
            15,110
            
            
            1,070Total
            
            
            
            
            $
            302,007
            
            $
            1,962





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





Pursuant
      to an investor relations and international sales and distribution agreement
      with
      an investor relation consultant dated August 7, 2006, we issued 1.8 million
      shares of our common stock to the consultant as partial compensation on October
      10, 2006. We evaluated the fair value of the stock based on the closing price
      of
      our common stock on the issuance date, and amortize it during the valid period
      (one year commencing on August 1, 2006) of the agreement.





(ii)
      Prepaid charges relating to urea entrepot trade





On
      August
      8, 2006, as amended on August 20, 2006, the Company entered into a letter of
      credit contract with UPB International Sourcing Limited (“UPB”), wholly-owned by
      Wei Li, our CEO, pursuant to which the Company engaged UPB to issue a
      $38,500,000 letter of credit in favor of the Company to a urea supplier under
      a
      urea purchase contract associated with a urea entrepot trade. The letter of
      credit is for a term of 90 days and can be reissued each time its term expires
      until the expiration of the stated term of the urea purchase agreement. The
      Company must pay UPB a commission equal to 2% of the total credit line, of
      which
      50% must be paid in one month from the date of execution, and the balance must
      be paid upon the close of the first shipment of urea under the urea purchase
      contract. As of December 31, 2006, we had paid UPB the first installment and
      other minor costs in the amount of $415,097.





The
      first
      two shipments were dispatched in mid-October and reached the destination by
      the
      end of 2006. Since half of the valid period of the urea purchase and selling
      contracts had passed and only two shipments were closed, for accounting purpose,
      we amortized $385,000 as cost in 2006, or 50% of total agreed commission ,
      assuming that another two shipments would be closed in the rest of the valid
      period. As of December 31, 2006, the remaining balance of prepaid charges was
      $30,097.





**6.**
            **Property,
                Plant and Equipment**





The
      total
      gross amount of property, plant and equipment was $1,766,506 and $1,629,857
      as
      of December 31, 2006 and December 31, 2005, respectively. The increase of
      $136,649 is mainly due to a production assembly line valued at $120,000
      contributed into Kiwa Tianjin by the Company’s minority partner and the
      appreciation of RMB. All of our property, plant and equipment is located in
      China and recorded in RMB.





Depreciation
      expense was $93,048 and $83,144 for the twelve months ended December 31, 2006
      and 2005, respectively.





F-12


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





**7.**
            **Intangible
                Assets**





The
      Company’s intangible asset as of December 31, 2006 consisted of the
      following:


Expected
                Amortization
              Period
            Gross
                carrying
              value
            Accumulated
              amortization
            Net
                value
              at
                December 31, 2006Patent
            8.5
                years
            $480,411
            $143,384
            $337,027





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





Future
                expected amortization
            
            Amount2007
            
            $
            $54,6532008
            
            
            54,6532009
            
            
            54,6532010
            
            
            54,6532011
            
            
            54,653Thereafter
            
            $
            $63,762





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





**8.**
            **Deferred
                Financing Costs**





The
      financing costs relating to 6% Notes (See Note 15 below) were $246,000 in total,
      including financing commission paid to an investment bank, legal service fees,
      insurance premium and other relating costs. As of December 31 2006, all three
      tranches of 6% Notes have been closed and all financing costs have been paid
      in
      cash. The costs are being amortized over the term of the 6% Notes. The balance
      as of December 31, 2006 was $211,793 .





**9.**
            **Deposit
                to Purchase the Proprietary
                Technology**





The
      balance $126,443 as of December 31, 2006 is partial payment of the first
      installment of the transfer fee of Anti-viral Aerosol technology pursuant to
      a
      Technology Transfer Agreement dated May 8, 2006 (See Note 21
      below).





**10.**
            **Accounts
                Payable and Accrued
                Expenses**





Accounts
      payable and accrued expenses consisted of the following at December 31, 2006
      and
      December 31, 2005:


Item
            
            December
                31, 2006
            
            December
                31, 2005Consulting
                and professional payables
            
            $
            419,835
            
            $
            411,360Payables
                to material suppliers
            
            
            99,263
            
            
            211,903Insurance
                payable
            
            
            89,290
            
            
            81,553Interest
                payable
            
            
            80,775
            
            
            106,880Salary
                payable
            
            
            71,793
            
            
            92,557Credit
                card balance
            
            
            69,554
            
            
            22,485Office
                rental payable
            
            
            54,926
            
            
            39,007Rebates
                payable to customers
            
            
            40,651
            
            
            -Payables
                to Kiwa-CAU R&D center
            
            
            25,612
            
            
            -Payables
                to equipment suppliers
            
            
            14,222
            
            
            13,761Others
            
            
            18,058
            
            
            20,971Total
            
            $
            983,980
            
            $
            1,000,477





F-13





**11.**
            **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.





**12.**
            **Related
                Party Transactions**





Amounts
      due to related parties consisted of the following as of December 31, 2006 and
      December 31, 2005:


Item
            
            Notes
            
            December
                31,
              2006
            
            December
                31,
              2005Mr.
                Wei Li (“Mr. Li”)
            
            
            (i)
            
            $
            32,398
            
            $
            191,861China
                Star Investment Management Co., Ltd.
              (“China
                Star”)
            
            
            (ii)
            
            
            457,464
            
            
            263,165Unamortized
                fair value of warrants
              issued
                to China Star
            
            
            
            
            
            -
            
            
            (833
            )Translation
                difference
            
            
            
            
            
            6,944
            
            
            -Total
            
            
            
            
            $
            496,806
            
            $
            454,193





***(i)
      Mr. Li***





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





***Advances
      and Loans***





As
      of
      December 31, 2005, the balance of $191,816 due to Mr. Li primarily consists
      of a
      loan and operating expenses that Mr. Li paid on behalf of the Company. During
      the twelve months ended December 31, 2006, Mr. Li advanced an additional $83,395
      to the Company, and was repaid $242,857. As of December 31, 2006, the remaining
      balance due to Mr. Li was $32,398. The due date has been extended to April
      30,
      2007.





The
      Company has also granted detachable warrants to Mr. Li to purchase an aggregate
      of 783,423 shares of common stock relating to a loan to the Company in April
      2005.The warrants expire two years from the date of issue. None of the
      detachable warrants were exercised as of December 31, 2006.





***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
      $1,876.





***Guarantees
      for the Company***





Mr.
      Li
      also executed without any compensation from the Company a guarantee of repayment
      of the 12% Notes. As of December 31, 2006, the 12% Notes had been
      settled.





In
      addition, 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.





***Issuance
      of Letter of Credit in Favor of Kiwa BVI***





UPB
      International Sourcing Limited (“UPB”) is a company wholly-owned by Mr.
      Li.





On
      August
      8, 2006, Kiwa BVI entered into a Letter of Credit Contract with UPB, as amended
      and supplemented by a Supplementary Agreement dated August 20, 2006. The Letter
      of Credit Contract, as amended, sets forth the following terms:





(1)
      The
      Company engages UPB to issue a letter of credit in favor of the Company with
      a
      $38,500,000 credit line in total to the urea supplier under a urea purchase
      agreement dated July 31, 2006. UPB promises to keep the letter of credit
      effective within the entire stated period of the urea purchase
      agreement.




F-14




(2)
      The
      Company agrees to pay UPB a commission equals to 2% of the total credit line
      of
      the letter of credit issued by UPB, of which 50% will be paid in one month
      from
      the date of execution, and the balance will be paid upon the close of the first
      shipment of urea under the urea purchase contract.





(3)
      UPB
      shall be responsible for the settlement of relating credit letters and after
      the
      settlement, the spread should be paid to Kiwa BVI, which will be recognized
      as
      our commission revenue. As for the settlement of the first two shipments, UPB
      designated Hua Yang Roneo Corporation to settle the credit letters from the
      terminal purchaser, and after the settlement Hua Yang Roneo Corporation wired
      to
      UPB the spread that belong to Kiwa BVI.





As
      of
      December 31, 2006, we had paid UPB the first installment and other minor costs.
      The first two shipments were dispatched in mid-October and arrived
      in the destination by the end of 2006. In the
      first quarter of 2007, we have received from Hua Yang Roneo Corporation
      $680,000, 85% of the spread relating to first two shipments to us, and there
      is
      a remaining balance $120,000 due.





***(ii)
      China Star***





China
      Star is a company which is 28% owned by Mr. Li. Mr. Yun long Zhang, one of
      our
      directors is also the General Manager of China Star and is responsible for
      its
      daily operations.





The
      balance due to China Star was $457,464 and $263,165 as of December 31, 2006
      and
      2005, respectively. In the twelve months ended December 31, 2006, China Star
      advanced an additional $596,189 to the Company and the Company had repaid
      $401,889 to China Star; the due date for the remaining balance has been extended
      to March 31, 2007.





The
      Company has also granted detachable warrants to China Star to purchase an
      aggregate of 1,190,847 shares of common stock relating to advances before March
      31, 2006. The warrants expire two years from the date of issue. China Star
      exercised 1,139,195 shares on a cashless basis in December 2006, for which
      we
      issued 1,000,000 shares to a beneficiary of China Star at its designation on
      January 5, 2007.





***(iii)
      Challenge Feed***





Challenge
      Feed owns 20% of Kiwa Tianjin’s equity, and Mr. Wenbin Li, one of Challenge
      Feed’s shareholders, is also Vice President of the Company and General Manager
      of Kiwa Tianjin and Kiwa Shandong concurrently. As of December 31, 2006, there
      was no outstanding balance among Challenge Feed and the Company. However, there
      used to be the following transactions in 2006.





***Merchandise
      purchased from Challenge Feed***





From
      the
      inception of Kiwa Tianjin to September 31, 2006, the Company purchased from
      Challenge Feed a total of $201,084 in raw materials and $464,218 in finished
      goods. All such transactions were settled in seven days after each delivery
      pursuant to the terms of a related purchase agreement. For raw materials the
      price was determined by their historical purchase cost, and for finished
      products the price was determined by their actual production cost. There was
      no
      such transaction thereafter.





***Lease
      Agreement***





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 product
      line
      for fowl and livestock; and (4) two workshops with floor area approximately
      1,200 square meters. The total monthly rental is RMB 50,000 ($6,322). Pursuant
      to the lease agreement, rent expenses from August 1 to December 31, 2006 had
      been paid.





**13.**
            **Convertible
                Notes Payable**





The
      balance of convertible notes payable as of December 31, 2006 and December 31,
      2005 was nil and $407,135, respectively.





***12%
      Notes***




F-15




On
      May
      30, 2005 and June 16, 2005, the Company entered into three convertible
      promissory note agreements for an aggregate of $320,000 with interest at 12%
      per
      annum (the “12% Notes”), and issued 1,600,000 detachable warrants. The lenders
      are unrelated parties located in the United States.




In
      August
      2006, the principal of two convertible promissory notes under the 12% Notes
      was
      paid. For the remaining principal balance of $100,000, the holder signed a
      Debt
      Conversion Agreement with the Company on August 7, 2006 and agreed to convert
      the principal and accrued interest ($13,710) to 773,537 shares of our common
      stock. As of November 10, 2006, the associated stock certificate had been
      issued.




Each
      warrant attached to the 12% Notes entitled the holders to subscribe for one
      share of common stock of the Company at an exercise price equal to the closing
      quote of the Company’s shares on the date of draw down, which ranged from $0.018
      to $0.023 per share. The warrants expire two years from the date of issue.
      Warrants were exercised in August 2006 for 500,000 shares of common stock,
      and
      the remaining warrants were exercised in October 2006 for 1,100,000 shares
      of
      common stock.. The fair value of the detachable warrants at the time of their
      issuance was determined to be $21,700, calculated pursuant to the Black-Scholes
      option pricing model.





In
      connection with the 12% Notes, the Company recorded deferred debt issuance
      costs
      of $16,000, consisting of the direct costs incurred for the issuance of the
      convertible loan. Debt issuance costs were amortized on the straight-line method
      over the term of the 12% Notes, with the amounts amortized being recognized
      as
      interest expense.





***Promissory
      Note with Cornell Capital Partners, LP***





On
      January 4, 2005, as amended by letter agreements dated March 21, 2005 and April
      5, 2005, the Company issued a promissory note (the “Cornell Note”) in the
      original principal amount of $400,000 to Cornell Capital Partners, LP (“Cornell
      Capital”), and received an advance of $400,000 (before deduction of expenses and
      fees). The Cornell Note bore interest at a rate of 10% per annum and had a
      term
      of 290 days.




In
      2005,
      the Company issued an aggregate of 18,362,219 shares of common stock with
      repayment of $312,865 to Cornell Capital, pursuant to the Standby Equity
      Distribution Agreement dated as of July 6, 2004. The balance of principal due
      on
      the Cornell Note as of December 31, 2005 was $87,135.





On
      March
      31, 2006, the Company settled the Cornell Note with a payment of $110,176,
      constituting all outstanding principal of $87,135 and accrued interest on the
      Cornell Note, and signed a Termination Agreement with Cornell Capital pursuant
      to which the Company terminated all the agreements with Cornell Capital,
      including the Standby Equity Distribution Agreement dated July 6,
      2004.





**14.**
            **Unsecured
                Loans Payable**





The
      balance of unsecured loans payable as of December 31, 2006 and 2005 was
      $1,472,717 and $1,424,996, respectively. The difference of $47,721 was due
      to
      the different exchange rates prevailing at the two dates. Unsecured loans
      payable consisted of the following at September 30, 2006 and December 31,
      2005:


Item
            
            December
                31,
              2006
            
            December
                31,
              2005Unsecured
                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
            
            $
            $1,152,561
            
            $
            1,115,214Unsecured
                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
            
            
            320,156
            
            
            309,782Total
            
            $
            $1,472,717
            
            $
            1,424,996





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.




F-16





According
      to the 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 RMB 480,000 ($61,470) 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, 2006, the Company invested
      approximately $1.64 million for the project. Management believes that neither
      the Company nor management will be liable for compensation or penalty if such
      commitment is not fulfilled.





**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, with the Purchasers
      pursuant to which the Company is required to file within 45 days a registration
      statement under the Securities Act covering the resale of the shares issued
      upon
      conversion of the 6% Notes. The Registration Rights Agreement imposes financial
      penalties if the Company does not timely complete the filing, or the
      registration statement is not declared effective within 120 days after being
      filed. The penalties are capped at 10% of the outstanding principal amount
      of
      the 6% Notes. The registration statement on Form SB-2 was first filed on August
      11, 2006. Amendment No. 1 to the registration statement on Form SB-2/A was
      filed
      on October 30, 2006 and was declared effective on October 31, 2006.





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





The
      conversion price of the 6% Notes is based on an average of the trading price
      of
      the Company’s common stock on the OTC Bulletin Board. The conversion price is
      discounted 50% before the registration statement is filed, 45% after it is
      filed
      if filed before the 45-day deadline, and 40% if the registration statement
      becomes effective before the 120-day deadline. The company met all of the
      foregoing deadlines so the effective conversion price is discounted 40%. 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.





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.




F-17





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 Company
      was required on the Purchase Agreement to amend its Certificate of Incorporation
      to increase the number of authorized shares of common stock. The Purchase
      Agreement required the Company to file with the SEC a proxy statement to solicit
      shareholder approval to increase the number of authorized shares of common
      stock
      no later than August 1, 2006, and to use its best efforts to obtain shareholder
      approval by November 1, 2006. At our annual meeting held on September 12, 2006,
      a proposal to amend our Certificate of Incorporation to increase the number
      of
      authorized shares of common stock, from 100,000,000 shares to 200,000,000 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
      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.





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 (amounted
      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.





The
      Purchasers of the 6% Notes and Warrants were procured with the assistance of
      an
      investment bank pursuant to an engagement letter agreement with the Company.
      Pursuant to the engagement, the investment bank is entitled to 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 the each of 6% Notes
      (amounting to 343,000 shares, 294,000 shares and 343,000 shares) are exercisable
      for three years and will 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.





Pursuant
      to terms and conditions of 6% Notes, two of six institutional investors
      converted $84,038 of the principal into 693,443 shares of our common stock
      during the fourth quarter of 2006. The average conversion price was $0.122.
      The
      related stock certificates have been issued. As of December 31, 2006, the
      balance of 6% Notes was $2,365,962.





**16.**
            **Equity-Based
                Transactions**





(a)  Authorized
      share capital





The
      Company’s authorized capital consists of 200,000,000 shares of common stock and
      20,000,000 shares of preferred stock. At our annual meeting held on September
      12, 2006, a proposal to amend our Certificate of Incorporation to increase
      the
      number of authorized shares of common stock from 100,000,000 shares to
      200,000,000 shares was approved by the required vote of our
      stockholders.





F-18


(b)  Issued
      and outstanding share capital





As
      of
      December 31, 2006 and December 31, 2005, the Company had 70,149,556 and
      59,235,930 shares of common stock issued and outstanding, respectively. From
      January 1, 2006 to December 31, 2006, the Company has engaged in the following
      equity-based transactions:




On
      March
      10, 2006, the Company entered into a stock purchase agreement (“Stock Purchase
      Agreement”) with two Chinese citizens, pursuant to which the Company agreed to
      issue 5,000,000 shares of our common stock in exchange for RMB 6,000,000 at
      RMB1.20 per share. In issuing the stock, the Company relied on Section 4(2)
      of
      the Securities Act and Rule 506 of Regulation D promulgated under the Securities
      Act for its exemption from the registration requirements of the Securities
      Act.
      No underwriters or brokers were used in the transaction and no underwriting
      or
      broker fees were paid. The purchaser was granted “piggy-back” registration
      rights in the event that the Company undertakes to register any of its shares
      after 16 months from the date of the Stock Purchase Agreement. The registration
      rights expire four years from the effective date of the Stock Purchase
      Agreement. As of May 19, 2006, the Company has received the proceeds in full
      and
      issued 5,000,000 shares of common stock.





On
      July
      6, 2006, the Company issued 50,000 shares in accordance with a cashless exercise
      request of warrants for 150,000 shares issued on September 23,
      2004.





On
      August
      9, 2006, the Company issued 500,000 shares in accordance with an exercise
      request of warrants relating to 12% Notes.





On
      October 10, 2006, the Company issued 1,800,000 shares of common stock as
      compensation to a investor relation consultant.





On
      October 10, 2006 the Company issued 996,646 shares of common stock as
      compensation to an officer for his services during the fiscal years of 2005
      and
      2004





On
      October 10, 2006 we issued 350,000 shares of common stock in accordance with
      an
      exercise request of warrants relating to 12% Notes.





On
      October 10, 2006 we issued 750,000 share of common stock in accordance with
      an
      exercise request of warrants relating to 12% Notes.





On
      November 10, 2006 the Company issued 773,535 shares of common stock for the
      conversion of a convertible note.





From
      October 1, 2006 to December 31, 2006, the Company issued 693,443 shares of
      common stock for conversions under our 6% Notes.





(c)  Options





See
“2004
      Stock Incentive Plan” section under Item 11 in Part III.





**17.**
            **Stock-based
                Compensation**





On
      December 13, 2006, we granted 2,000,000 shares of stock option under our 2004
      Stock Incentive Plan as amended among which 1,061,900 shares were granted to
      executive officers and directors, and 938,100 shares were granted to other
      employees. (See “2004 Stock Incentive Plan” under Item 11 in Part III).





The
      Company adopts SFAS 123R from the fiscal year of 2006. The fair value of the
      options granted at the grant date was determined to be $320,154, 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, with $5,336 charged as compensation expense
      during fiscal year 2006.




F-19





**18.**
            **Concentration
                of Customers and
                Suppliers**





The
      Company did not make significant sales of bio-fertilizer during 2006. During
      2005, the Company had two significant customers accounting for 51.3% and 45.3%
      of our net sales of bio-fertilizer, respectively. The customers and suppliers
      for livestock feed business are not highly concentrated. No customer or supplier
      of the livestock feed business accounts for more than 10%, respectively, of
      our
      livestock feed business. All revenue from the urea entrepot trade during 2006
      derived from the margin the Company earned from one sale contract of urea and
      one supplier contract of urea it entered into during 2006.





**19.**
            **Segment
                Reporting**





Since
      the
      establishment of Kiwa Tianjin in August 2006 and the entrance of Urea entrepot
      trade in July 2006, the Company has been operating in three principal business
      segments, bio-fertilizer, livestock feed and Urea entrepot trade. 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
            
            Corporate(1)
            
            Total**Fiscal
                year ended**
              **December
                31, 2006**Net
                sales
            
            
            46,926
            
            
            2,459,789
            
            
            800,000
            
            
            -
            
            
            3,306,715Gross
                profit
            
            
            9,786
            
            
            170,510
            
            
            415,000
            
            
            -
            
            
            595,296Operating
                expenses
            
            
            824,840
            
            
            267,968
            
            
            176,953
            
            
            1,397,431
            
            
            2,667,192Operating
                profit (loss)
            
            
            (815,054
            )
            
            (97,458
            )
            
            238,047
            
            
            (1,397,431
            )
            
            (2,071,896
            )Interest
                income (expense)
            
            
            (8,260
            )
            
            (1
            )
            
            (817
            )
            
            (222,482
            )
            
            (231,559
            )Minority
                interest in subsidiary
            
            
            -
            
            
            (19,356
            )
            
            -
            
            
            -
            
            
            (19,356
            )Net
                income (loss)
            
            
            (823,314
            )
            
            (78,103
            )
            
            237,230
            
            
            (1,619,912
            )
            
            (2,284,099
            )Total
                assets, as of
              December
                31, 2006
            
            
            2,408,634
            
            
            559,805
            
            
            851,249
            
            
            698,497
            
            
            4,518,185**Fiscal
                year ended**
              **December
                31, 2005**Net
                sales
            
            
            631,794
            
            
            -
            
            
            -
            
            
            -
            
            
            631,794Gross
                profit
            
            
            399,102
            
            
            -
            
            
            -
            
            
            -
            
            
            399,102Operating
                expenses
            
            
            394,558
            
            
            -
            
            
            -
            
            
            1,040,885
            
            
            1,435,443Operating
                profit (loss)
            
            
            4,544
            
            
            -
            
            
            -
            
            
            (1,040,885
            )
            
            (1,036,341
            )Interest
                income (expense)
            
            
            (12,177
            )
            
            -
            
            
            -
            
            
            (281,657
            )
            
            (293,834
            )Other
                income
            
            
            2,416
            
            
            -
            
            
            -
            
            
            -
            
            
            2,416Net
                income (loss)
            
            
            (5,216
            )
            
            -
            
            
            -
            
            
            (1,322,543
            )
            
            (1,327,759
            )Total
                assets, as of
              December
                31, 2005
            
            
            3,110,583
            
            
            -
            
            
            -
            
            
            11,105
            
            
            3,121,688





(1)
            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.




F-20




**20.**
            **Income
                Tax**





There
      is
      no provision (benefit) for income taxes for the years ended December 31, 2006
      and 2005 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 2006 and 2005, respectively, was as follows:





Years
                Ended December 31,2006
            
            2005Income
                (Loss) in U.S. before income taxes
            
            $
            (1,161,914
            )
            $
            (1,088,694
            )Income
                (Loss) in British Virgin Islands before income taxes
            
            
            237,230
            
            
            -Income
                (Loss) in Kiwa Shandong before income taxes
            
            
            (1,281,312
            )
            
            (216,707
            )Income
                (Loss) in Kiwa Tianjin before income taxes
            
            
            (78,103
            )Total
            
            $
            (2,284,099
            )
            $
            (1,305,401
            )




The
      tax
      effect of temporary differences and operating loss carryforwards is as follows
      as of December 31, 2006 and 2005:






Years
                Ended December 31,2006
            
            2005**Deferred
                tax assets**Net
                operating loss carryforwards
            
            $
            712,309
            
            $
            408,055Allowance
                for doubtful accounts receivable
            
            
            38,800
            
            
            12,441Value
                difference of intangible assets
            
            
            25,993
            
            
            27,896Deferred
                financing cost
            
            
            31,769
            
            
            -Impairment
                of inventories
            
            
            7,206
            
            
            -Accrued
                expenses
            
            
            93,708
            
            
            116,222909,785
            
            
            564,615**Deferred
                tax liabilities**Prepaid
                expenses
            
            
            (47,568
            )
            
            (294
            )(47,568
            )
            
            (294
            )Valuation
                allowance
            
            
            (862,217
            )
            
            (564,320
            )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 its 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 takes 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,
            
            Year
                ended December 31,2006
            
            2005Statutory
                rate
            
            
            33.0%
            
            
            33.0%Income
                tax holiday
            
            
            (33.0%)
            
            
            (33.0%)Effective
                income tax rate
            
            
            -
            
            
            -




F-21





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





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.





**21.**
            **Commitments
                and Contingencies**





The
      Company has the following material contractual obligations:





***Operating
      lease commitments***





The
      Company previously leased an office in Beijing under an operating lease that
      expired in April 2005 with an aggregate monthly lease payment of approximately
      $2,882. This operating lease was replaced by another operating lease expiring
      in
      March 2008 with an aggregate monthly lease payment of approximately $5,170.
      Rent
      expense under the operating leases for the fiscal year ended December 30, 2006
      and 2005 was $62,040 and $52,416, respectively.





The
      Company previously leased an office in the United States under a commercial
      lease agreement with China Star with an aggregate monthly lease payment of
      approximately $2,560. The lease expired in June 2005 and was replaced by another
      operating lease with a third party expiring in June 2008 with an aggregate
      monthly lease payment of approximately $1,000. Pursuant to the lease agreements,
      rent expense for the fiscal year ended December 30, 2006 and 2005 was $11,796
      and $18,360, 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 ($6,400). Pursuant
      to
      the lease agreement, rent expense from August 1 to December 31, 2006 was $12,644
      (See Note 12 above).





Lease
      commitments under the foregoing lease agreements are as
      follows:


Fiscal
                year
            
            Amount2007
            
            $
            150,6362008
            
            
            98,2082009
            
            
            51,200Total
            
            $
            300,044





***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 $1.247 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.




F-22





***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 $128,000) each year to fund research at
      the
      R&D Center. The term of this Agreement ten years starting from July 1,
      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
      November 13, 2006, the Company had invested approximately $2.6 million for
      the
      project. Management believes that neither the Company nor management will be
      liable for compensation or penalty if the commitment is not
      fulfilled.





**22.**
            **Subsequent
                Event**





None.





F-23