**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-KSB**
 
 **ANNUAL
        REPORT UNDER SECTION 13 OR 15(d) OF**
 **THE
        SECURITIES AND EXCHANGE ACT OF 1934**
 **For
        the fiscal year ended December 31, 2007**
 
 ***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
                incorporation
                  or organization)
              
              (I.R.S.
                  Employer
                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** **x** **NO** **o** ****
 
 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. **x**
 
 Registrant’s
        revenues for its fiscal year ended December 31, 2007 were
        $9,129,779.
 
 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 24, 2008 was approximately $7,597,848.
 
 The
        number of shares of registrant’s common stock outstanding as of March 24, 2008
        was 87,448,642.
 Transitional
        Small Business Disclosure Format: **YES** **o** **NO** **x**
 
  
  **TABLE
        OF CONTENTS**
  **Page*****PART
                  I***
              
              ***1*****ITEM
                  1**
              **BUSINESS**
              **1****ITEM
                  2**
              **PROPERTY**
              **23****ITEM
                  3**
              **LEGAL
                  PROCEEDINGS**
              **23****ITEM
                  4**
              **SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS**
              **23*****PART
                  ΙΙ***
              
              ***24*****ITEM
                  5**
              **MARKET
                  FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**
              ***24*****ITEM
                  6**
              **MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATION**
              **25****ITEM
                  7**
              **FINANCIAL
                  STATEMENTS**
              **34****ITEM
                  8**
              **CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE**
              **34****ITEM
                  8A**
              **CONTROLS
                  AND PROCEDURES**
              **34****ITEM
                  8B**
              **OTHER
                  INFORMATION**
              **35*****PART
                  III***
              
              ***36*****ITEM
                  9**
              **DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS, CORPORATE GOVERNANCE, 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.**
              **42****ITEM
                  13**
              **EXHIBITS**
              **42****ITEM
                  14**
              **PRINCIPAL
                  ACCOUNTING FEES AND SERVICES**
              **43****SIGNATURES**
              **45****Index
                  to Consolidated Financial Statements**
              **F-1**
 
 
  **PART
        I**
  **ITEM
        1**  **BUSINESS**
  **The
        Company**
  References
        herein to “we”, “us”, “our Company”, “the Company” or “Kiwa” 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 Kiwa Bio-Tech Products Group Ltd. (“Kiwa BVI”), a company
        originally organized under the laws of the British Virgin Islands on June
        5,
        2002, and Tintic Gold Mining Company (“Tintic”), a corporation originally
        incorporated in the state of Utah on June 14, 1933 to perform mining operations
        in Utah. 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 provide safe
        and
        environment-friendly inputs for agricultural industry to solve important
        food
        safety and environment pollution problems and to enhance the quality of human
        life by increasing the value, quality and productivity of farm outputs and
        decreasing the negative environmental impact of chemicals and other wastes.
 
 ***Bio-fertilizer*** **
 
 We
        have
        developed a number of bio-fertilizer and other products for plants and are
        developing more. In 2002, Kiwa BVI chartered Kiwa Shandong, a wholly-owned
        subsidiary organized under the laws of PRC, as its offshore fertilizer
        manufacturing base to capitalize on low cost, high quality manufacturing
        advantages available in China. In October 2003, Kiwa Shandong completed the
        first phase of construction of its manufacturing facility in Shandong Province,
        China. In November 2003, Kiwa Shandong began shipping its first bio-fertilizer
        product to the agricultural market in China. Since then, we have been devoting
        ourselves to expand our market share and further upgrade our
        facility.
  ***Bio-enhanced
        Feed***
 
 On
        July
        11, 2006, we entered into a joint venture with Tianjin Challenge Feed Co.,
        Ltd.
        (“Challenge Feed”) to engage in the developing, manufacturing and marketing of
        biologically enhanced feed for livestock. The joint venture is through Kiwa
        Tianjin, our 80% subsidiary formed under the laws of PRC. Pursuant to the
        joint
        venture agreement between the Company and Challenge Feed, we invested $480,000
        in cash for our 80% equity share of Kiwa Tianjin and Challenge Feed invested
        machinery and equipment used in one of Kiwa Tianjin’s two bio-enhanced feed
        production lines with an agreed value of $120,000 for the remaining 20% equity.
        We also lease another production line from Challenge Feed. With these two
        production lines, Kiwa Tianjin’s total annual production capacity is
        approximately 40,000 metric tons of concentrated and supportive feeds.
  1
  ***AF-01
        Anti-viral Aerosol***
 
 On
        May 8,
        2006 we entered into a Technology Transfer Agreement with Jinan Kelongboao
        Bio-Tech Co., Ltd. (“JKB”), which will become fully effective when we have
        finished paying the first installment of consideration according to the payment
        schedule in the contract. Pursuant to the agreement, JKB agreed to transfer
        its
        AF-01 anti-viral aerosol technology for veterinary medicine applications
        to the
        Company. The AF-01 anti-viral aerosol technology is a broad-spectrum antiviral
        agent with potent inhibitory and/or viricidal effects on a variety of RNA
        viruses found in animals and fowls such as bird flu. We acquired the exclusive
        production right and other related rights to produce an anti-viral aerosol
        veterinary drug. Our hope is to develop a commercialized product in the form
        of
        a spray for applying in fowl houses and other animal holding facilities to
        prevent and cure virus-caused diseases.
 
 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.
 
 On
        December 18, 2007, the Company signed a Letter of Intent with Shijiazhuang
        Huaxing Animal Medicine Co., Ltd. (“Huaxing”). Both parties agreed that Kiwa
        will invest in Huaxing and transform it to a Sino-foreign joint-venture company
        through expansion of Huaxing's capital. Kiwa will control a majority of the
        new
        joint-venture's equity. Up to now, we have finished the due diligence and
        asset
        appraisal of Huaxing.
 
 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 inputs which may resolve many
        of
        these problems in environmentally friendly ways. To exploit this opportunity,
        our core strategies are as follows:
 
 2
  ·
              Build
                  a platform for world-class biotechnological research and development
                  results to be commercialized into products for applications in
                  agriculture;
  ·
              Invest
                  in mature technologies that will not require large amounts of research
                  expense to develop into commercial
                  products;
  ·
              Utilize
                  proprietary technology to supply ag-biotech inputs to the market
                  at lower
                  cost than our competitors;
  ·
              Constructing
                  or acquiring new production facilities, improving established facilities;
                  to improve our manufacturing capability in
                  China;
  ·
              Building
                  and strengthening our “KIWA” brand so as to become one of the leading
                  companies in China’s “biological, safe and environment-friendly”
                  agricultural inputs industry;
  ·
              Establish
                  strategic alliances for research and development, sales and distribution
                  and customer acquisition with complimentary entities in the
                  biological-agriculture industry;
                  and
  ·
              Enhance
                  overall management systems, operational structure and corporate
                  governance.
  Our
        sales
        strategy involves utilizing both a direct sales force and distribution networks.
        Our distribution efforts are expected to include the following:
  ·
              Choosing
                  green food/organic-food planting bases or other demonstrative agricultural
                  products producers, carrying out regional field tests, fanning
                  out from a
                  point to an area, cultivating market
                  network;
  ·
              Leveraging
                  government, industrial organizations (such as “China Green Food
                  Association”) to strengthen existing sales network in rural areas, thereby
                  reach end-users in a more cost-effective manner; cut off selling
                  expenses
                  occurred during middle tiers of supply chain to boost end-user’s
                  value;
  ·
              Cooperating
                  with special agricultural production materials distributors who
                  also help
                  farmers resell their products; focusing on large-to-medium size
                  wholesalers of agricultural production materials at provincial
                  and
                  municipal levels;
  ·
              Establishing
                  a three-level distribution network consisting of a company-centralized
                  sales office, prefectural representative offices and direct distributors
                  in villages and towns; and
  ·
              Leveraging
                  existing sales channels and network of affiliates’ products to save costs
                  of building the network from scratch.
  Our
        targeted customers include major agricultural companies and growers that
        can
        realize significant financial benefits from using our products
        including:
  ·
              Provide
                  high value-added agricultural products (such as fruits, vegetables,
                  meat,
                  eggs that meet the requirements of green food/organic food) to
                  Chinese
                  agricultural products producers;
  ·
              Agricultural
                  products producers located in China who are exporting to Japan,
                  Korea,
                  Europe, US and other regional markets of the
                  world;
  ·
              Chinese
                  agricultural products producers who have generated internal needs
                  of
                  ag-biotech inputs to solve the problems of soil-caused diseases,
                  anti-biotic drug tolerance, leftover and others;
                  and
  ·
              “Green”
                  or organic growers throughout the world.
  Given
        the
        global trend of customers favoring environmentally safe green food and
        organically grown food, producers’ needs for higher yields and better quality
        and increasing pressure of treating and preventing such diseases as H5N1
        avian
        flu, we also foresee strong market needs in other international markets
        including East Asia and Southeast Asia. We plan to explore these markets
        when
        the time is right.
  **Intellectual
        Property and Product Lines**
 
 Our
        goal
        is to build a platform to commercialize bio-technological research and
        development results for applications in agriculture and environmental
        protection. In this respect, we are working on developing cooperative research
        relationships with several universities and institutions in China. When our
        liquidity position improves, we also intend to continue to acquire technologies
        to reduce research and development costs and shorten commercialization
        cycles.
  3
  ***Bio-fertilizer***
 
 We
        have
        developed six series of bio-fertilizer products with bacillus spp and/or
        photosynthetic bacteria as core ingredients. Bacillus spp is one species
        of
        bacteria that interacts with plants and promotes biological processes. It
        is
        highly effective for promoting plant growth, enhancing yield, improving quality
        and elevating resistances. Photosynthetic bacteria are a group of green and
        purple bacteria. Bacterial photosynthesis differs from green plant
        photosynthesis in that bacterial photosynthesis occurs in an anaerobic
        environment and does not produce oxygen. Photosynthetic bacteria can help
        enhance the photosynthetic capacity of green plants by increasing the
        utilization of sunlight. This helps keep the photosynthetic process at a
        vigorous level, enhance the capacity of plants to transform inorganic materials
        to organic products. It greatly boosts overall plant health and the productivity
        of agricultural products.
 
 Our
        bacillus bacteria based fertilizers are protected by patents. On April 12,
        2004,
        we entered into an agreement with China Agricultural University (“CAU”) to
        acquire from the university Chinese patent no. ZL 93101635.5 entitled “Highly
        Effective Composite Bacteria for Enhancing Yield and the Related Methodology
        for
        Manufacturing”. The aggregate purchase consideration under the agreement was
        $480,411, of which $60,411 was paid in cash in 2004. For the balance of the
        consideration, we issued 1,000,000 shares of our common stock to CAU in
        September 2004, valued at $0.42 per share (aggregate value of $420,000)based
        on
        the market value on July 20, 2004, the date when the transfer of the patent
        was
        approved. Our photosynthetic bacteria based fertilizers are protected by
        trade
        secret.
 
 The
        patent acquired from CAU covers six different species of bacillus which have
        been tested as bio-fertilizers to enhance yield and plant health. The production
        methods of the six species are also patented. The patent will expire on February
        9, 2013. There are no limitations under this agreement on our exclusive use
        of
        the patent. Pursuant to our agreement with CAU, the university agreed to
        provide
        research and technology support services at no additional cost to us in the
        event we decide to use the patent to produce commercial products. These research
        and technology support services include: (1) furnishing faculty or
        graduate-level researchers to help bacteria culturing, sampling, testing,
        trial
        production and production formula adjustment; (2) providing production
        technology and procedures to turn the products into powder form while keeping
        live required bacteria in the products; (3) establishing quality standards
        and
        quality control systems; (4) providing testing and research support for us
        to
        obtain necessary sale permits from the Chinese government; and (5) cooperation
        in developing derivative products.
 
 We
        have
        obtained six fertilizer registration certificates from the Chinese government
        -
        five covering our bacillus bacteria fertilizer and one covering our
        photosynthetic bacteria fertilizer. Some of our products contain ingredients
        of
        both photosynthesis and bacillus bacteria. The five registration certificates
        are: (1) Microorganism Microbial Inoculum Fertilizer Registration Certificate
        issued by the PRC Ministry of Agriculture; (2) Photosynthetic Bacteria
        Fertilizer Registration Certificate issued by the PRC Ministry of Agriculture;
        (3) Amino Acid Foliar Fomular Fertilizer Registration Certificate issued
        by the
        PRC Ministry of Agriculture; (4) Organic Fertilizer Registration Certificate
        issued by Agriculture Department of Shandong Province, (5) Water-run Fertilizer
        Registration Certificate issued by Agriculture Department of Shandong Province,
        and (6) Organic Matter-Decomposing Inoculants Registration Certificate issued
        by
        the PRC Ministry of Agriculture on February 16, 2008. Protected by these
        six
        Fertilizer Registration Certificates and five trademarks under the names
        of
“KANGTAN” (Chinese translation name for Kiwa), “ZHIGUANGYOU”, “PUGUANGFU”,
“JINWA” and “KANGGUAN”, we have developed six series of bio-fertilizer products
        with bacillus spp and/or photosynthetic bacteria as core
        ingredients.
 
 We
        also
        obtained two fertilizer product licenses from the Vietnamese government in
        November 2006, one is used for leaf fertilizer and the other for organic
        fertilizer.
 
 ***Bio-enhanced
        Feed***
 
 We
        have
        developed our own special concentrated and supportive feeds prescriptions,
        mainly for fowl, fish and pigs. We add distilled materials from animal blood,
        bacillus spp or other ingredients to standard livestock feed to improve quality
        and function. Our feed products can enhance digestion and inhibit disease
        in
        animals, in some circumstances functioning as a substitute for antibiotic
        additives. Currently we have different feed prescriptions for fowl, fish
        and
        swine at different growth stages.
  4
  The
        total annual production capacity of Kiwa Tianjin is approximately 40,000
        metric
        tons of concentrated and supportive feeds. During fiscal 2007, the actual
        sales
        volume of our bio-enhanced feed products was approximately 28,000 tons, which
        is
        about 70% of Kiwa Tianjin’s maximum production volume.
  ***AF-01
        Anti-viral Aerosol***
  AF-01
        anti-viral aerosol is a broad-spectrum antiviral agent with potent inhibitory
        and/or viricidal effects on a variety of RNA viruses found in fowl and other
        animals, initially discovered and developed by the Institute of Medicinal
        Biotechnology, Chinese Academy of Medical Sciences (“IMB”). Pursuant to a
        related technical appraisal report certified by the PRC Ministry of Health,
        the
        current owners of technology rights are IMB and its medium test center, Jinan
        Kelongboao Bio-Tech Co., Ltd. (“JKB”). IMB designated JKB as its custodian to
        apply and dispose all rights of the AF-01 technology on IMB’s behalf. Pursuant
        to a technical appraisal report certified by the PRC Ministry of Health,
        no
        adverse effects have been found of this agent, and it is not irritating or
        erosive to the skin, mucous membrane or the eyes of the recipient animal
        after
        swallowing or inhalation.
 
 On
        May 8,
        2006 we entered into a Technology Transfer Agreement with JKB. Pursuant to
        the
        agreement, JKB agreed to transfer to us its AF-01 anti-viral aerosol technology
        for veterinary medicine applications. The AF-01 technology, which can be
        used to
        prevent and cure virus-caused diseases by aerosol spray, is recognized by
        a
        technological achievement appraisal certificate issued by relevant
        administration of the Chinese government. Under the agreement JKB will
        facilitate transferring of the technology by providing consulting services
        to us
        and to cooperate with us in the development of an animal drug product for
        the
        market.
 
 We
        plan
        to develop a commercialized product in the form of spray for applying in
        hen
        houses and other animal holding facilities to prevent and cure virus-caused
        diseases. Before marketing this product, we must acquire statutory licenses
        in
        accordance with rules and regulations of the PRC government. See subsection
        entitled “The Company” under Business in Part I.
 
 ***Kiwa-CAU
        Research and Development Center***
 
 In
        July
        2006 we established a new research center with CAU through our subsidiary,
        Kiwa
        Shandong, which goes under the name, Kiwa-CAU Bio-Tech Research &
Development Center (the “Kiwa-CAU R&D Center”). Pursuant to an agreement
        reached between CAU and Kiwa Shandong on November 14, 2006, Kiwa Shandong
        agreed
        to contribute RMB 1 million (approximately $137,000) each year to fund research
        at Kiwa-CAU R&D Center. Under the above agreement, the Kiwa-CAU R&D
        Center is responsible for fulfilling the overall research-and-development
        functions of Kiwa Shandong, including: (1) development of new technologies
        and
        new products (which will be shared by Kiwa and CAU); (2) subsequent perfection
        of existing product-related technologies; and (3) training quality-control
        personnel and technicians and technical support for marketing
        activities.
 
 During
        fiscal 2007, Kiwa-CAU R&D Center obtained forty-one strains observed to have
        the capability of boosting crop yield, dispelling chemical pesticide residual
        from soil. These strains could be used for not only developing new biological
        preparation but also environmental protection preparation. In 2007, Kiwa-CAU
        R&D Center has successfully developed two new products: microecological
        preparation against replanting obstacle and organic materiel maturity composts
        preparation, one of which has been granted a fertilizer registration certificate
        by Ministry of Agriculture of PRC and another one is still in the process
        of the
        examination. We finished preparation of three patent applications. We expect
        to
        start application procedures during the first quarter of 2008. We also trained
        560 employees, skilled workers, customers and farmers.
 
 **Market
        Overview**
  Modern
        agricultural practices largely rely on heavy use of chemical fertilizers,
        pesticides and veterinary drugs that can cause tremendous harm to the
        environment, soils and human health. Such practices have been under increasing
        public scrutiny across the world, leading to increased consumer demand for
        agricultural practices that are more environmentally friendly. China has
        only
        9.26% 1 of the
        world’s arable 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.
  5
  China’s
        agricultural production has steadily increased for more than 20 years due
        to
        agricultural policy reform, improved agricultural technology and recent
        government support programs, including price supports, export incentives,
        direct
        payment and tax incentives. The following table shows the increase in output
        of
        major agriculture and aquatic products between 1949 and 2005:
  **Increases
        in Output of Major Agricultural Products**
 
 **Variety**(1,000 tons)
                  
                  **1949**
                  
                  **1978**
                  
                  **%**
                  
                  **1999**
                  
                  **%**
                  
                  **2004**
                  
                  **%**
                  
                  **2005**
                  
                  **%**Grain
                  
                  
                  113,180
                  
                  
                  304,770
                  
                  
                  169
                  %
                  
                  508,390
                  
                  
                  67
                  %
                  
                  469,472
                  
                  
                  -8
                  %
                  
                  481,022
                  
                  
                  3
                  %Cotton
                  
                  
                  444
                  
                  
                  2,167
                  
                  
                  388
                  %
                  
                  3,831
                  
                  
                  77
                  %
                  
                  6,324
                  
                  
                  65
                  %
                  
                  5,714
                  
                  
                  -10
                  %Oil-bearing
                      crops
                  
                  
                  2,564
                  
                  
                  5,218
                  
                  
                  104
                  %
                  
                  26,012
                  
                  
                  399
                  %
                  
                  30,659
                  
                  
                  18
                  %
                  
                  30,771
                  
                  
                  0.4
                  %Sugar
                      crops
                  
                  
                  2,833
                  
                  
                  23,818
                  
                  
                  741
                  %
                  
                  83,340
                  
                  
                  250
                  %
                  
                  95,707
                  
                  
                  15
                  %
                  
                  94,519
                  
                  
                  -1
                  %Flue-cured
                      tobacco
                  
                  
                  43
                  
                  
                  1,052
                  
                  
                  2347
                  %
                  
                  2,185
                  
                  
                  108
                  %
                  
                  2,163
                  
                  
                  -1
                  %
                  
                  2,435
                  
                  
                  13
                  %Tea
                  
                  
                  41
                  
                  
                  268
                  
                  
                  554
                  %
                  
                  676
                  
                  
                  152
                  %
                  
                  835
                  
                  
                  24
                  %
                  
                  935
                  
                  
                  12
                  %Fruit
                  
                  
                  1,200
                  
                  
                  6,570
                  
                  
                  448
                  %
                  
                  62,376
                  
                  
                  849
                  %
                  
                  153,409
                  
                  
                  146
                  %
                  
                  161,201
                  
                  
                  5
                  %Meat
                  
                  
                  2,200
                  
                  
                  8,563
                  
                  
                  289
                  %
                  
                  59,609
                  
                  
                  596
                  %
                  
                  72,448
                  
                  
                  22
                  %
                  
                  77,431
                  
                  
                  7
                  %Aquatic
                      products
                  
                  
                  450
                  
                  
                  4,660
                  
                  
                  936
                  %
                  
                  41,220
                  
                  
                  785
                  %
                  
                  49,018
                  
                  
                  19
                  %
                  
                  51,076
                  
                  
                  4
                  %
  *Source:
        ERS-United States Department of Agriculture.*
 
 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 is 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
        cater 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.
 
 In
        response to the increasingly severe food safety, environment pollution, rural
        area stability and other challenges, the Chinese government attaches high
        importance to the problems of farmers, rural areas and agriculture. From
        January
        1, 2006, the agricultural tax had been abolished. From 2004, the Central
        People’s Government of the PRC continuously issued “Number One Document”
regarding rural areas of China. The latest “Number One Document” issued on
        January 30, 2008, contains wider-range of policies promoting sustainable
        development of agriculture, for example, promoting income level of billions
        of
        farmers, strengthening supervision of farm inputs and actively developing
        green-food and organic food. In April 2007, the State Council of the PRC
        promulgated the “‘Eleven-Five’ National Program on Boosting Food and Drug
        Safety”, calling for strengthening agricultural input quality and safety
        control; setting up demonstrational bases for agricultural products and food
        based on “recycling economy” model; speeding up building bases for
        Uncontaminated Food/Agricultural Products), GAP (Good Agricultural Practices),
        Green Food and Organic Food. In July 2007, the State Council of the PRC
        promulgated “Special Rules of the State Council on Strengthening the Supervision
        and Management of the Safety of Food and Other Products” requiring compliance of
        laws, administrative regulations and national compulsory standards for producers
        when using agricultural input; producers and dealers of export products must
        guarantee the compliance of importing country’s relevant standards or
        contractual standards; anyone getting out of the line will face severe
        punishment. These policies are in favor of our Company in the following three
        ways:
 
 1Total area of world arable land is 1,404,130,000 hectares - as cited
          in
“China Statistical Yearbook 2006” (http://www.stats.gov.cn). Total area
          of arable land of China is 130ô039ô200 hectares - as cited in “China
          Agricultural Yearbook 2005”.
 2Calculated based on data in “China Statistical Yearbook 2006” from the
          website of National Bureau of Statistics of
          China: http://www.stats.gov.cn.
 3Calculated based on data in “China Statistical Yearbook 2006” from the
          website of National Bureau of Statistics of China:
          http://www.stats.gov.cn.
  6
  ·
              Government
                  policy’s guiding direction is propitious to expedite more agricultural
                  products’ producers to accept ag-biotech input in a quicker
                  fashion;
 ·
              Preferential
                  policies in rural areas increase farmers’ income level, therefore they can
                  afford to buy more of our products, thus increase our sales
                  volume.
 ·
              Resulting
                  from certain changes in new policies’ procedures, we expect to receive
                  stronger support from relevant industrial associations and government
                  departments when promoting our
                  products.
 
 ***Bio-fertilizer
        Market***
 
 To
        increase the overall crop yield, farmers in China use vast amounts of chemical
        fertilizers. According to U.S. Department of Agriculture, the use of fertilizer
        in China rocketed from 10,863,000 tons in 1979 to 47,662,000 tons in 2005,
        underpinning a compound annual growth rate of 5.85%. Together with the
        continuous growth of total fertilizer consumption, the way that Chinese farmers
        apply fertilizer is also changing. From 1979 to 2005, the percentage of
        Nitrogenous fertilizer application to total amount of fertilizer consumption
        decreased gradually from 76% to 47%. In the meanwhile, the percentage of
        Phosphate fertilizer and Potash fertilizer increased steadily. Most importantly,
        in 1976, 100% of China’s fertilizer consumption was chemical fertilizer
        (including Nitrogenous fertilizer, Phosphate fertilizer and Potash fertilizer);
        while in 2005, the rate decreased to 73%. Other fertilizer, including
        bio-fertilizer has been gradually accepted by Chinese farmers. *(Source:
        ERS-United States Department of Agriculture)*
 
 The
        excessive use of chemical fertilizer in China is also reflected by the
        China-to-U.S. rate of chemical fertilizer application. According to data
        quoted
        from U.S. Department of Agriculture, Chinese farmers applied 2.05 times the
        nitrogen fertilizer and 1.8 times the phosphate fertilizer than did their
        U.S.
        counterparts in 2005.
 
 In
        August
        2006, during the 10th National Soil Microbial Conference & 3rd National
        Microbial Fertilizer Production and Application Technology Conference experts
        from the Ministry of Agriculture of PRC pointed out that consumption of chemical
        fertilizer in China ranked first in the world, and the rate of utilization
        continued to decrease.
 
 Use
        of
        chemical fertilizer in China is now higher than it has ever been, which has
        led
        to a series of severe problems including degradation of the soil structure,
        natural biodiversity and ecological system stability. Promoting the use of
        bio-fertilizer together with chemical fertilizer is one of the solutions
        to
        solve these problems.
 
 In
        the
        U.S. and European countries, the amount of bio-fertilizer consumption in
        the
        agricultural production accounts for over 20% of the total amount of fertilizer
        consumption. The output increased at the speed of 10% to 20% each year.
        According to the statistics, total amount of bio-fertilizer production was
        1.5
        million tons, total sales volume about RMB4 billion Yuan in 2001, which counts
        for about 1% of total commercial fertilizer consumption. Analysis indicates
        that
        bio-fertilizer will possess about 10% of market share in 2010, which is
        forecasted to be about 14 million tons of market demands. Therefore, the
        market
        potential of bio-fertilizer is immense.
 
 Our
        serial commercialized products, with bacillus and/or Photosynthesis Biological
        Catalyst as core ingredients, capitalize on this market trend and we hope
        to
        become one of the leaders in developing green technologies for productive,
        more
        sustainable agriculture in China.
  7
  Our
        main
        markets have so far been in China, mostly in Shandong (sown area 10,736,100
        hectares, accounted for 6.9% of China; value of crop output RMB203,400 million
        Yuan, 10.4% of China in 2005), Jiangsu (sown area 7,641,200 hectares, accounted
        for 4.9% of China; value of crop output RMB129,110 million Yuan, 6.6% of
        China
        in 2005), Zhejiang (sown area 2,837,900 hectares, accounted for 1.8% of China;
        value of crop output RMB65,480 million Yuan, 3.3% of China in 2005), Hebei
        Provinces (sown area 8,785,500 hectares, accounted for 5.7% of China; value
        of
        crop output RMB125,800 million Yuan, 6.4% of China in 2005), Xinjiang Uygur
        Autonomous Region (sown area 3,731,200 hectares, accounted for 2.4%; value
        of
        crop output RMB59,580 million Yuan, 3.0% of China in 2005), and Northeast
        area
        of China all these are the primary large agricultural provinces in China. *(Source:
        ERS-United States Department of Agriculture)*
 
 ***Bio-enhanced
        Feed Market***  **
 
 China
        is
        one of the largest livestock products producing countries of the world. During
        the past two decades, livestock products production has increased significantly.
        For instance, China produced 16,547,000 tons of pork in 1985 as compared
        with
        50,106,000 tons in 2005. The compound annual growth rate of pork production
        is
        5.70%. Similar trends can be identified in other livestock products, such
        as
        beef, meat and poultry, etc. Since the trend of development has been unchanged
        for decades, it is reasonable to forecast that the growth pattern will continue. *(Source:
        ERS-United States Department of Agriculture)*
 
 Accompanying
        the continuous growth in livestock products, the nation’s demand for livestock
        feed also increased. In 2004, the production of feed products in China increased
        to 93 million tons, an 11% increase over the previous year, compared to
        production of 35.7 million tons in 1991. The total production value of the
        livestock feed industry has increased 13.36% to approximately RMB242.8 billion.
        It is estimated that the market for livestock feed will continue to grow
        in the
        foreseeable future ( *China
        Stockbreeding Industry Year Book 2005* ).
        However, in recent years, some Chinese stock growers have added various
        anti-bacterial medicines, hormone and other growth stimulants into livestock
        feed and drinking water in order to prevent and cure diseases, promote growth,
        enhance animal reproductivity, increase feed conversion rate and improve
        animal
        products quality, which has led to medicine residue in animal foods. Serious
        consequences have attracted much attention from both the Chinese government
        and
        those who have imported Chinese animal foods. The Chinese livestock industry
        is
        suffering from lack of powerful feed producers that are capable of manufacturing
        high-quality, environment-friendly bio-enhanced feed in a cost-effective
        manner
        to satisfy the increasing demand of the market. In light of the huge potential
        of the market, continuing growth in demand and other favorable conditions
        in the
        industry, we have concluded that the livestock feed market is a good opportunity
        for the Company.
 
 ***Anti-viral
        Veterinary Drug Market***
  Virus-caused
        diseases remain the most deadly category of animal disease in clinic. They
        are
        not only spreading quickly but also claiming a high fatality rate. The unique
        nature of virus reproduction makes it difficult to find a cure for it in
        the
        laboratory. Virus-caused diseases account for a large proportion of all animal
        infectious diseases; the death rate is 36.8% 4 ,
        the
        second highest among all causes, second only to bacteria. However, in China
        only
        a very small proportion of veterinary drugs are anti-virus. The income breakdown
        of the Chinese veterinary drug industry is as follows: antimicrobial agent
        37%,
        medication additive 21%, biological products 14%, insecticide-agent 14%,
        health-care products 6%, environmental hygiene products 4%, and others
        4%. 5
  Virus
        can
        be divided into two categories, one group is DNA virus and other group is
        RNA
        virus. Our planned anti-virus aerosol product is based on AF-01 technology.
        It
        will be in the form of spray and be capable of preventing/curing various
        RNA
        virus-caused diseases in various breading farms. Bird-flu is caused by typical
        RNA virus, it is the first virus caused animal disease that AF-01 will
        target.
  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 further 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. During 2004, the outbreak of bird-flu in main land China cost
        RMB 18
        billion to Chinese stock-breading industry. 6
  
 4 Cited
          from “Applications and Problems of Anti-virus Medicine in Veterinary”, published
          on “Si Chun Veterinary Studies” Issue 5, 2003.
 5 Cited
          from “Contemporary Analyses on Our Country’s Animal Health-care Products
          Industry”, published on “Industry Insights”, No. 8, Issue 43,
          2007.
  8
  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 the most severely affected.  According to the World
        Health Organization, the cumulative number of confirmed human cases of avian
        influenza A/(H5N1) is 373, with 236 deaths from 2003 to March 18, 2008March
        24,
        2008, of which there were 110 confirmed human cases with 78 deaths in the
        past
        15 months. The situation is also severe in China. H5N1 of Highly Pathogenic
        Avian Influenza (HPAI) was first identified in China in 2003, with 30 reported
        cases and 20 deaths. There is no sign that the situation will improve in
        China.
        Because of potential serious risks to human health and safety, scientists
        are
        now studying the possibility of bird-to-human transmission occurring due
        to
        genetic changes resulting from 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. If we are
        able
        to complete approval procedures to develop our intended anti-viral aerosol
        agent
        product, we believe that it will have the potential to attract a significant
        share of the Chinese market upon launching and benefit from large government
        orders.
  **Competition**
  We
        have
        three different product lines: (1) bio-fertilizer, (2) biologically enhanced
        livestock feed, and (3) veterinary disinfectants and drugs. The market condition
        and competition confronting us are different and vary with respect to each
        of
        the three product lines.
  ***Bio-fertilizer***
  According
        to statistics, so far there are about 400 microbial fertilizer producers
        in
        China, most of which are small-scale, workshop producing enterprises with
        backward equipment and production processes and poor quality. Some of the
        producers over-exaggerate product effectiveness, employ improper artifice
        and
        even produce fake and shoddy products, all of which has caused losses to
        farmers
        and lowered the reputation of bio-fertilizer.
 
 Due
        to
        the unique products that we offer and the very early stage of the bio-fertilizer
        market in China, we believe there is limited direct competition for our products
        in the Chinese marketplace. We believe that we have product differentiation
        and
        cost advantages (cost to customer) that will enable us to be more profitable
        than our competitors, in terms of profitability, for the following reasons,
        among others:
 
 ·
              Highly
                  effective in boosting crop yield and quality while being environmentally
                  friendly;
 ·
              Lower
                  price point and higher return on investment to end users; and
 ·
              Complimentary
                  to existing use of chemical fertilizer which will help minimize
                  switching
                  costs for end users.
 
 In
        addition, we face competition from large chemical fertilizer manufacturers
        in
        China. These chemical fertilizer manufacturers have provided chemical
        fertilizers to farmers in China for more than ten years and customers are
        more
        accustomed to using their established products as compared to our
        products.
 
 6Cited from “Veterinary Drugs and Animal-Food Safety”, published on “China
        Veterinary Drug Industry” Issue 38, 2004.
  9
  ***Bio-enhanced
        Feed***





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




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





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





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





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





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





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





***Our
      Positioning***





China’s
      bio-fertilizer market has experienced nearly 10 years of cultivation and
      development. It is transitioning from the stage of decentralized and disordering
      competition to that of brand, quality and scale stage. In the next two to three
      years, the conformity process of “superior win and the inferior wash out” will
      take place in China’s bio-fertilizer industry, together with the guiding of
      government policies; it is very likely for a few strong and powerful companies
      to dominate the market place. Complimented by the research and development
      resources at Kiwa-CAU R&D Center, our Company in the past few years has
      accumulated a wealth of experience in technology, product development,
      government authorization applications, perfection of production processes,
      field
      tests and market cultivation. It is reasonable to believe that our Company
      will
      become one of the leading companies in bio-fertilizer industry in a shorter
      period of time.




10


Although
      Chinese livestock feed and veterinary drug markets are both highly competitive
      and mature, those of bio-enhanced feed stuff and bio-veterinary drugs remain
      otherwise. The overall market condition does not necessarily suggest intense
      competition or limited demand for those products that are precisely targeting
      market segments or differentiating from its alternatives. Therefore, we have
      positioned our bio-enhanced feed and bio-veterinary drug businesses with high
      specialization, aiming to becoming the dominant power of the fractionized market
      for microbial feed additives and veterinary drug.




**Raw
      Materials and Suppliers**





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





In
      2007,
      with the price index rising in China, we have experienced a significant increase
      of the prices of some of our main materials such as urea and bean cake, which
      to
      some extent adversely affected the profitability of relating
      products.





***Bio-fertilizer***





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





Three
      suppliers accounted for 17.9%, 17.6% and 13.3% of our net purchases for the
      fiscal year ended December 31, 2007, respectively. No other single supplier
      accounted for more than 7%.





***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. During fiscal 2007, we had more suppliers and lower concentration
      of
      suppliers as compared to fiscal 2006





The
      three
      largest suppliers accounted for 11.3%, 9.5% and 7.9% of our net purchases for
      the fiscal year ended December 31, 2007, respectively. No other single supplier
      accounted for more than 8%.





**Customers**





***Bio-fertilizer***





With
      respect to bio-fertilizer, we have a total of 58 customers as of December 31,
      2007, of which three customers accounted for  36.1%,
      24.7% and 17.1% of our net sales for the fiscal year ended December 31, 2007,
      respectively. No other single customer accounted for more than 5% of our
      revenues in this product line.





***Bio-enhanced
      feed***





With
      respect to bio-enhanced feed, we have a total of 101 customers, of which two
      customers accounted for 12.2% and 5.5% of net sales in this product line. No
      other individual customer accounted for more than 5% of our net sales for the
      fiscal year ended December 31, 2007.




**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.




11




***Bio-enhanced
      feed***





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





***AF-01
      Anti-viral aerosol***





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





**Employees**





We
      currently employ 124 full-time employees in China and one in the United States.
      We also have 69 seasonal employees in China.





**Regulatory
      Concerns** ****





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





**Environmental
      Matters**





Our
      two
      manufacturing facilities, Kiwa Shandong and Kiwa Tianjin, have passed
      environmental impact assessment by local 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 which we or our properties are subject
      to.





**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***




12




**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. From
      the
      inception of our current business in ag-biotechnology on June 5, 2002 to
      December 31, 2007, we have accumulated losses of $11,074,522. 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. As
      of
      December 31, 2007, we had incurred an accumulated deficit of $11 million and
      current liabilities were over $2.8 million, reflecting a current ratio 0.52
      and
      a quick ratio 0.23, respectively. 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 operating, and may have
      to
      curtail or cease operations and consider a formal or informal restructuring
      or
      reorganization.





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




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





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





During
      fiscal 2007, three customers accounted for 78.0% of our net sales in
      bio-fertilizer product line. The customer concentration in this production
      line
      has been increasing. During fiscal 2007, three customers accounted for 22.4%
      of
      our net sales in bio-enhanced feed product line. The loss of any of our
      significant customers would result in a material reduction in our sales and
      results of operations.





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





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





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




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




13




**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:




·  the
      timing and size of orders from major customers;


·  budgeting
      and purchasing cycles of customers;


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


·  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;


·  fluctuations
      in general economic conditions;


·  the
      status of operating cash flow; and


·  natural
      disasters and contagious animal diseases.





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





From
      January 1, 2007 to December 31, 2007, the market close price for our common
      stock as quoted on the OTC Bulletin Board has ranged from a low of $0.06 to
      a
      high of $0.26 per share. High volatility in the market price of our common
      stock
      may result in lower prices for our common stock, making it more difficult for
      us
      to obtain equity financing on terms and conditions which are favorable to us,
      if
      at all. We expect to continue to incur losses in the future as we develop and
      market our initial products. As a result, we will be dependent on additional
      debt or equity financing to fund our operations. If such financing is not
      available on terms which are acceptable to us, we may have to delay development
      of new products and/or reduce sales and marketing efforts for our existing
      products. Such actions may have an adverse effect on our results of operations.
      In addition, uncertainties with respect to our ability to raise additional
      capital would make operational planning more difficult for
      management.




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





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




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





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





14




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





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





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





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





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





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




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




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





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





15




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





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





Although
      our sales revenues in both bio-fertilizer and bio-enhanced feed product lines
      have increased significantly in 2007, we are continuing to experience losses.
      We
      currently do not have sufficient revenues to support our business activities
      and
      we expect operating losses to continue. We will require additional capital
      to
      fund our operations and finance our research and development activities.
      Funding, whether from a public or private offering of debt or equity, a bank
      loan or a collaborative agreement, may not be available when needed or on
      favorable terms. Further, any significant equity or debt financing will require
      us to give priority to holders of the 6% secured convertible notes (“6% Notes”)
      under the terms of a securities purchase agreement dated June 29, 2006, which
      may raise the difficulty level of completing a financing. (For more details
      regarding the 6% Notes see Note 14 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.
      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.




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





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





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





16




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





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





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





For
      example, in June 2002, we entered into an agreement with Zoucheng Municipal
      Government granting us the use of at least 15.7 acres in Shandong Province,
      China at no cost for 10 years to construct a manufacturing facility. Pursuant
      to
      relevant China laws and regulations, we had paid tenure tax on quarterly basis
      at the rate of approximately $1,660 per acre. However, from January 1, 2007,
      China central government adopted a series of policies to strengthen land
      management, including doubled tenure tax to $3,320 per acre. In February 2008,
      the Ministry of Land and Resources of China issued “Controlling Indexes of
      Construction Land Use for Industrial Projects”, which requires the building
      coverage should not be less than 30%. Up to now, the current situation in Kiwa
      Shandong does not meet this requirement. As a company operating ag-biotech
      business, the building coverage may differ from that of typical manufacturers
      in
      other industries. However, there can be no assurance that it will not result
      in
      more costs to the Company or other uncertainties.





**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. During 2007, there
      is an
      increasing trend of inflation in China. The performance of the Chinese economy
      overall affects our profitability as expenditures for agricultural technological
      products may decrease due to slowing of 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, highly pathogenic blue-ear disease or another
      widespread public health problem in China, where most of our revenue is derived,
      could have a negative effect on our operations. Our operations may be impacted
      by a number of health-related factors, including the following: (1) quarantines
      or closures of some of our offices and factories which would severely disrupt
      our operations, (2) the sickness or death of our key officers and employees,
      (3)
      a general slowdown in the Chinese economy, especially rapid decrease of
      stockbreeding





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





17




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





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


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 proprietary information to enter into confidentiality and
      proprietary rights agreements. There can be no assurance, however, that these
      agreements will provide adequate protection for our trade secrets, know-how
      or
      proprietary information in the event of any unauthorized use or disclosure.
      There can be no assurance that we will be able to obtain a license for any
      technology that we may require to conduct our business or that, if obtainable,
      such technology can be licensed at a reasonable cost. The cost of obtaining
      and
      enforcing patent protection and of protecting proprietary technology may involve
      a substantial commitment of our resources. Any such commitment may divert
      resources from other areas of our operations. We may be required to license
      or
      sublicense certain technology or patents in order to commence operations. There
      can be no assurance that we will be able to obtain any necessary licenses or
      to
      do so on satisfactory terms. In addition, we could incur substantial costs
      in
      defending ourselves against suits brought by other parties for infringement
      of
      intellectual property rights and there are no assurances that we will have
      the
      resources to do so.





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





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





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




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





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




**We
      have limited business insurance coverage.**





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





***(2)
      Risk Related to Our Common Stock***




19


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





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





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





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




20


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




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





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





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





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





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





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





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





For
      example, we issued $2,450,000 of convertible notes (6% Notes) in 2006, of which
      $370,338 have been converted into 4,744,813 shares and the balance of $2,058,625
      may be converted into an estimated 28,600,000 shares of our common stock based
      on the average price of three lowest prices within 20 trading days before
      December 31, 2007. We also have outstanding 6% Note Warrants to purchase
      12,250,000 shares of common stock. The conversion ratio of the 6% Notes is
      based
      on the market price of our stock at any given point in time. Consequently,
      the
      number of shares of common stock issuable upon conversion of the outstanding
      6%
      Notes and certain of our other outstanding convertible notes will increase
      if
      the market price of our stock declines. Such debt financings may cause immediate
      and substantial dilution to our existing stockholders.




21


**In
      the event that our stock price declines, the shares of common stock allocated
      for conversion of the 6% Notes may not be adequate and we may be required to
      amend our certificate of incorporation to increase our authorized shares of
      common stock. If so, we may incur substantial costs in connection
      therewith.**




Pursuant
      to the securities purchase agreement in connection with the 6% Notes, we must
      reserve for purposes of issuance a number of shares of common stock that is
      no
      less than 110% of the number of shares of common stock issuable upon full
      conversion of the 6% Notes based on the average conversion price of the 6%
      Notes
      and full exercise of the 6% Note Warrants based on the average exercise price
      of
      the 6% Note Warrants. Based on our current market price and the potential
      decrease in our market price as a result of the issuance of shares upon
      conversion of the 6% Notes, we have made a good faith estimate as to the amount
      of shares of common stock that we are required to allocate for conversion of
      the
      6% Notes. Accordingly, we have allocated an aggregate of 18,310,912 shares
      of
      common stock to cover the conversion of the 6% Notes.(among which a total number
      of 6,610,963 shares have been used for conversion as of March 18, 2007) In
      the
      event that our stock price decreases, the shares of common stock we have
      allocated for conversion of the 6% Notes may not be adequate. 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% Notes 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. The number of authorized shares of the Company was amended from
      100,000,000 to 200,000,000 at the Annual Stockholders’ Meeting of
      2006.





**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, 2007, we had 81,519,676 shares
      of
      common stock outstanding, most of which we estimate have been held more than
      two
      years and are freely tradable under Rule 144. In the Form SB-2 declared
      effective on October 30, 2006, we registered up to 27,685,365 shares of common
      stock for resale, which may be sold without restriction under securities laws.
      In November of 2007, the SEC adopted significant amendments to Rule 144,
      pursuant to which holding period of non-affiliates before resale of restricted
      shares of a reporting company has been shortened to six months. The sale of
      these shares may adversely affect the market price of our common stock.





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





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




22





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 ($65,712) per acre for the
      land
      use right at the expiration of the 10-year period. We may not transfer or pledge
      the temporary land use right. In the same agreement, we have also committed
      to
      invest approximately $18 million to $24 million for developing the manufacturing
      and research facilities in Zoucheng, Shandong Province. As of December 31,
      2007,
      we had invested approximately $1.79 million in plant and equipment 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 construction phase and began
      production in the facility. During September 2007, we finished the first stage
      of an upgrade to our Kiwa Shandong facility. The end-product production capacity
      of the facility is now approimmatly 5,000 tons per year and is expected to
      be
      48,000 tons per year after subsequent upgrades.





With
      the
      formation of Kiwa Tianjin in July 2006, Challenge Feed, the minority
      shareholder, invested machinery and equipment used in one of its two
      bio-enhanced feed production lines at an agreed value of $120,000. The Company
      has also entered into a lease agreement with Challenge Feed to lease another
      concentrated feed product line for three years. (For more details, see Note
      19
      to consolidated financial statements under Item 7 in Part II.) Under the lease
      agreement, we also lease Challenge Feeds’s other facilities for three years
      commencing on August 1, 2006: (1) an office building with floor area of
      approximately 800 square meters; (2) storehouses with floor area approximately
      2,500 square meters; and (3) two workshops with floor area of approximately
      1,200 square meters. The total monthly rental is RMB 50,000 ($6,845). From
      January 1 to December 31, 2007 we have paid $68,450 as rent
      expenses.





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 with
      monthly rent $1,000 and expires in March 2008. We currently expect that we
      will
      renew this lease prior to its expiration.





The
      Company leased an office in Beijing under an operating lease since May 2005
      with
      an aggregate monthly lease payment of approximately RMB 40,767 (US$5,581) and
      the lease was terminated with the consent of both the lessor and the Company
      on
      July 14, 2007. The Company has leased a new office in Beijing from July 15,
      2007. The operating lease agreement will expire at January 14, 2009. The monthly
      rental payment for the new office is RMB 82,322 ($11,270).




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 July 18, 2007, five nominees for director has been
      elected by the required vote of our shareholders. The annual meeting also
      ratified the appointment of Mao & Company, CPAs Inc. as the Company’s
      independent auditor for fiscal 2007.


23


**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 2007, the market price for our
      common stock has ranged from $0.06 to $0.26.





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 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
            
            LowFirst
                Quarter
            
            $
            0.26
            
            $
            0.17Second
                Quarter
            
            $
            0.21
            
            $
            0.085Third
                Quarter
            
            $
            0.095
            
            $
            0.06Fourth
                Quarter
            
            $
            0.19
            
            $
            0.083


Fiscal
                Year 2008
            
            High
            
            LowJanuary
                1, 2008 through March 24, 2008
            
            $
            0.21
            
            $
            0.11





**Shareholders**





As
      of
      March 24, 2008, there were approximately 433 shareholders of record of our
      common shares.





**Dividend
      Policy**





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





**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.




24




ITEM
              6
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATION





*This
      Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007
      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, 2007 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 $9.13 million and $2.51 million in revenue from
      continuing operations in fiscal years 2007 and 2006, respectively, reflecting
      an
      increase of 263.8%. The marked increase is mainly due to the notable expansion
      in our principal operations, including our bio-fertilizer business and
      bio-enhanced feed business; (1) During fiscal 2007, revenue generated from
      our bio-fertilizer business increased from approximately $47,000 to $241,000,
      representing a 414.3% increase; (2) net sales contributed by the bio-enhanced
      feed business increased 261.3%, from $2.46 million in 2006 to $8.89 million
      in
      2007. (The $2.46 million in revenue generated from bio-enhanced livestock feed
      business in 2006 were contributed by our majority-owned subsidiary, Kiwa
      Tianjin, in five months since its inception in August 2006.) In the meantime,
      we
      have terminated urea entrepot trade business in 2007, which generated nil
      revenue in 2007, while $800,000 in 2006. We incurred a net loss of $3.31 million
      (including non-cash expenses of approximately $1.4 million) and $2.28 million
      for fiscal years 2007 and 2006, respectively.





Due
      to
      our limited revenues from sales and continuous losses, we have relied on the
      proceeds from the sale of our equity securities and loans from both unrelated
      and related parties to provide the resources necessary to fund the development
      of our business plan and operations. During fiscal 2007, we entered into a
      couple of advance agreements with related parties. Our financing activities
      generated $308,591 net cash inflow in total during the twelve months ended
      December 31, 2007. 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.





As
      of
      December 31, 2007, we had an accumulated deficit of $11,074,522, of which
      $3,307,868 (including non-cash expenses $1,408,239) and $2,284,099 (including
      non-cash expenses $759,681) was occurred during the fiscal years ended
      December 31, 2007 and 2006, respectively. Though revenues from our
      principal operations increased significantly in 2007 as compared with 2006,
      total revenue remains relatively low. We have also terminated our urea entrepot
      trade business in 2007, which had contributed $800,000 revenue in 2006. Our
      bio-fertilizer business still incurred losses and our bio-enhanced feed business
      showed low profit margin. We currently do not have sufficient revenues to
      support our business activities and we expect operating losses to
      continue.





25




In
      the
      short term, we still need to continue upgrading or expanding our bio-fertilizer
      and bio-enhanced feed manufacturing facility, expand our sales and marketing
      forces in China, expand our distribution channels 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
      regional 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 give priority to holders of the 6% secured
      convertible notes under the terms of a securities purchase agreement dated
      June
      29, 2006, which may raise the difficulty of completing a financing. See Note
      14
      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 prevent us from continuing as a going
      concern.





As
      of
      December 31, 2007, our current liabilities were $2,854,458, which exceeded
      current assets by $1,366,926, representing a current ratio of 0.52 and a quick
      ratio 0.23; although our current assets exceeded our current liabilities by
      $474,837 at December 31, 2006, denoting a current ratio of 1.26. The turning
      down of short-term liquidity is mainly due to (1) losses from continued
      operations, increased 14.7% from $2,522,146 in 2006 to $2,893,359 in 2007;
      (2) a
      net loss of $414,509 recognized from discontinued urea entrepot trade; and
      (3)
      net cash inflow from financing activities decrease to $308,591 in 2007 as
      compared to $2,665,333 in 2006. If we can achieve the necessary financing to
      increase our working capital, we believe the Company will be well-positioned
      to
      further increase sales of our products and to generate more revenues in 2008.
      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 five 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 30, 2008 contains
      wider-range of policies promoting sustainable development of agriculture, for
      example, promoting income level of billions of farmers, strengthening
      supervision of farm inputs and actively developing green-food and organic food.
      The agricultural tax was abolished effective January 1, 2006. The abolition
      of
      the agricultural tax should increase incomes of farmers and ease their financial
      burdens. Other programs and regulations have been adopted that are favorable
      to
      agriculture including: (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). In July 2007, the State Council of the PRC promulgated “Special
      Rules of the State Council on Strengthening the Supervision and Management
      of
      the Safety of Food and Other Products” setting forth legal requirements,
      administrative regulations and national compulsory standards for producers
      when
      using agricultural input. Producers and dealers of export products must
      guarantee compliance with the importing country’s relevant legal requirements or
      contractual standards; anyone company not complying may be penalized. 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.





26




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





The
      volatility in the inflation rate in China in the past decade, especially the
      serious inflation trend since the second half of 2007 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 has taken 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 previous 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 used 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 previously in effect, our PRC
      subsidiaries, Kiwa Shandong and Kiwa Tianjin were exempt from corporate income
      taxes for their first two profitable years and were entitled to a 50% tax
      reduction for the succeeding three years. However after the new income tax
      law
      took effect, fiscal year 2008 is regarded as the first profitable year even
      if
      Kiwa Shandong or Kiwa Tianjin will not be 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.





27




On
      July
      21, 2005, the People’s Bank of China announced it would appreciate the RMB,
      increasing the RMB-U.S. Dollar exchange rate from approximately US$1.00 =
      RMB8.28 to approximately US$1.00 = RMB8.11. So far the trend of such
      appreciation continues; the exchange rate of U.S. Dollar against RMB on December
      31, 2007 was US$1.00 = RMB7.3046.





**Critical
      Accounting Policies and Estimates**





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





The
      following critical accounting policies affect the more significant judgments
      and
      estimates used in the preparation of our consolidated financial statements.
      In
      addition, you should refer to our accompanying audited balance sheets as of
      December 31, 2007 and 2006, and the audited statements of operations, equity
      movement and cash flows for the fiscal years ended December 31, 2007 and 2006,
      and the related notes thereto, for further discussion of our accounting
      policies.





***Accounts
      Receivables***





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





As
      of
      December 31, 2007, there was $277,140 in accounts receivable over 365 days
      old,
      therefore we provided $277,140 in bad debt provision based on total accounts
      receivable over one year.





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





***Inventories***





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





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





Our
      long-lived assets consist of property, equipment and intangible assets. As
      of
      December 31, 2007, the net value of property and equipment and intangible
      assets was $1,567,905 and $296,245, respectively, which represented
      approximately 42.7% and 8.1% of our total assets, respectively.





28




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 actual production
      capacity of Kiwa Shandong in fiscal 2006 and 2007 was significantly lower than
      its normal capacity because the upgrade in our fermentation facility has not
      yet
      fully completed. Our production capacity is increasing gradually and steadily.
      It is expected that the second stage upgrade will be completed in the first
      half
      of 2008 and Kiwa Shandong’s production capacity will continue to increase in
      2008.





Based
      on
      our analysis, we have determined that there was no impairment to our current
      production facilities and intangible assets as of December 31, 2007 and
      2006.





***Fair
      value of warrants and options***





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





We
      also
      adopt SFAS No. 123(R) “Share Based Payment” to recognize options granted to
      employees as derivative instruments in our consolidated financial statements.





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





***Revenue
      Recognition***





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





Pursuant
      to EITF 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent”,
      if the company carry out a transaction which has the following indicators:
      (1)
      the supplier (not the company) is the primary obligor in the arrangement; (2)
      the amount the company earns is fixed; (3) the supplier (and not the company)
      has credit risk, then the company shall recognize revenue based on the net
      amount retained (that is, the amount billed to the customer less the amount
      paid
      to a supplier). We evaluate the relevant facts and circumstances of our urea
      entrepot trade, and recognize revenue in accordance with this principle. During
      fiscal year ended December 31, 2006, we recognized $800,000 revenue from the
      trade and nil was recognized during fiscal year ended December 31, 2007. We
      classified urea entrepot trade as discontinued operations in 2007.





***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 58 customers as of December 31, 2007, of which three customers
      accounted for 36.1%, 24.7% and 17.1% of our net sales for the fiscal year ended
      December 31, 2007, respectively. No other single customer accounted for more
      than 5% of our revenues. For the fiscal year ended December 31, 2006, we had
      two
      significant customers accounting for 28.5% and 15.9% of our net sales,
      respectively, and no other single customer accounted for more than 10% of our
      revenues.





29




Three
      suppliers accounted for 17.9%, 17.6% and 13.3% of net purchases for fiscal
      2007.
      Comparably, 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.
      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.





***Bio-enhanced
      feed***





Our
      bio-enhanced feed business began in August 2006. So far, we have also developed
      a total of 101 customers, of which two significant customers account for 12.2%
      and 5.5% of our net sales for the fiscal 2007. No other individual customers
      accounted for more than 5% of net sales during the period. We had 61 customers
      in total for 2006, of which no individual customer accounted for more than
      8% of
      our net sales for fiscal year ended December 31, 2006.





The
      three
      largest suppliers accounted for 11.3%, 9.5% and 7.9% of our net purchases for
      fiscal 2007, no other individual supplier account for more than 7.5% of our
      net
      purchases. Three suppliers accounted for 25.4%, 18.0%, and 12.5% of our net
      purchases for the fiscal year ended December 31, 2006,
      respectively.





**Results
      of Operations**





***Net
      Sales***





Net
      sales
      from continuing operations were $9,129,779 and $2,506,715 for the twelve months
      ended December 31, 2007 and 2006, respectively, representing an increase of
      $6,623,064 or 264.2%. The marked increase is mainly due to the notable expansion
      in our principal operations, including our bio-fertilizer business and
      bio-enhanced feed business; (1) During the fiscal year ended December 31, 2007,
      revenue generated from our bio-fertilizer business increased from 46,926 to
      $241,357, representing a 414.3% increase; (2) net sales contributed by our
      bio-enhanced feed business increased 261.3%, from $2,459,789 in 2006 to
      $8,888,422 in 2007. (The $2,459,789 revenues generated from our bio-enhanced
      livestock feed business in 2006 were contributed by Kiwa Tianjin during the
      five
      months from its inception in August 2006 to the end of 2006.)


Twelve months ended December 31,2007
              
              2006
              
              Increase
              
              %**Bio-fertilizer:**Net
                  sales
              
              $
              241,357
              
              
              46,926
              
              
              194,431
              
              
              414.3
              %Quantity
                  (Tons)
              
              
              247
              
              
              109
              
              
              138
              
              
              126.6
              %*Average
                  price*
              
              *$*
              *977*
              
              
              *431***Bio-enhanced
                  feed:**Net
                  sales
              
              $
              8,888,422
              
              
              2,459,789
              
              
              6,428,633
              
              
              261.3
              %Quantity
                  (Tons)
              
              
              28,235
              
              
              9,244
              
              
              18,991
              
              
              205.4
              %*Average
                  price*
              
              *$*
              *315*
              
              
              *266*Total
                  net sales
              
              $
              9,129,779
              
              
              2,506,715
              
              
              6,623,064
              
              
              264.2
              %





***Cost
      of Sales***





Cost
      of
      sales was $8,603,795 and $2,326,419 for the twelve months ended
      December 31, 2007 and 2006, respectively. The increase of $6,277,376 or
      269.8% in cost of sales was primarily due to the rapid increase of
      sales.





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





Gross
      profit from our continuing operations was $525,984 and $180,296, representing
      a
      profit margin of 5.8% and 7.2% for the twelve months ended December 31,
      2007 and 2006, respectively.





30




This
      increase of $345,688 in gross profit is mainly due to quick expansion in sales
      revenues of both bio-fertilizer and bio-enhanced feed business. The decrease
      in
      gross profit margin was mainly caused by the following factors: (1) During
      2007,
      97.4% of our net sales were from our bio-enhanced feed sector; comparably,
      98.1%
      of sales revenues of continuing operations were from that sector during 2006.
      (2) Gross profit margin of our bio-enhanced feed business was 4.8% for 2007,
      while it was 6.9% during 2006. (3) Although the gross profit margin of
      bio-fertilizer business increased 21.3% from 20.9% in 2006 to 42.2% in 2007,
      it
      does not make material impact on the overall gross profit margin of the
      Company’s continued operations.





Continued OperationsBio-fertilizer
            
            Bio-enhanced feedChanges
            
            
            
            
            
            Changes2007
            
            2006
            
            $
            
            %
            
            2007
            
            2006
            
            $
            
            %Net
                Sales
            
            
            241,357
            
            
            46,926
            
            
            194,431
            
            
            414.3
            %
            
            8,888,422
            
            
            2,459,789
            
            
            6,428,633
            
            
            261.3
            %Cost
                of Sales
            
            
            139,573
            
            
            37,140
            
            
            102,433
            
            
            275.8
            %
            
            8,464,222
            
            
            2,289,279
            
            
            6,174,943
            
            
            269.7
            %Gross
                Profit
            
            
            101,784
            
            
            9,786
            
            
            91,998
            
            
            940.1
            %
            
            424,200
            
            
            170,510
            
            
            253,690
            
            
            148.8
            %Gross
                Profit Margin
            
            
            42.2
            %
            
            20.9
            %
            
            
            
            
            21.3
            %
            
            4.8
            %
            
            6.9
            %
            
            
            
            
            (2.2
            )%





The
      gross
      margin of both bio-fertilizer and bio-enhanced feed fluctuated from quarter
      to
      quarter in 2007. For example, the gross margin of bio-enhanced feed decreased
      sharply during the fourth quarter of 2007. This was due to the fact that (1)
      in
      general, fish feed generally has a high profit margin as compared with fowl
      feed
      and pig feed, due to seasonal factors, and consistent with that pattern, sales
      of fish feed decreased significantly in winter; and (2) the purchasing price
      of
      raw materials increased gradually from the second half of 2007, but it is
      difficult to similarly adjust selling prices continuously among large number
      of
      price-sensitive customers.





***Consulting
      and Professional Fees***





Consulting
      and professional fees occurred in principal operations were $794,324 (including
      $475,764 non-cash expenses incurred from amortization of fair value of stocks
      and warrants) and $822,529 for the twelve months ended December 31, 2007 and
      2006, respectively, representing a decrease of $28,205 or 3.4%. Most of these
      fees are related to fundraising, investor relations, public company operations,
      etc. The decrease in consulting and professional fees is primarily attributable
      to high consulting and professional fees relating to investor relation service,
      financing commissions and legal fees in connection with the financing of 6%
      Notes in 2006.





***Officers’
      Compensation***





Officers’
      compensation was $285,941 and $89,528 for the twelve months ended December
      31,
      2007 and 2006. The $196,413 or 219.4% increase is mainly due to amortization
      of
      fair value of stock options granted on December 12, 2006 to officers under
      our
      2004 Stock Incentive Plan (See Item 10 in Part III for details). The amount
      of
      amortization during fiscal 2007 was $139,233; comparably the amount was $50,437
      during twelve months ended December 31, 2006.





***General
      and Administrative***





General
      and administrative expenses were $901,545 and $544,696 for the twelve months
      ended December 31, 2007 and 2006, an increase of $356,849 or 65.5%. General
      and
      administrative expenses include salaries, travel and entertainment, rent, office
      expense, telephone expense and insurance costs. The increase is mainly resulted
      from the expansion of our operating activities, which led to the increased
      amount of rental, salaries, travel expenses and office expenses. Kiwa Tianjin
      has been operating for only 17 months (five months during 2006 and twelve months
      in 2007), which also contributed to increased general and administrative
      expenses.





***Selling
      expenses***





During
      2007, selling expenses were $363,131, a $158,477 or 30.4% decrease from
      $521,608, our selling expenses in 2006. This decrease is mainly attributable
      to
      our adjustment of marketing and sales policies in our bio-enhanced feed
      business. Meanwhile, we invested approximately $280,000 to launch a marketing
      campaign in Shandong and Xinjiang in 2006.





31




***Research
      and Development***





Research
      and development expenses increased by $58,054 or 48.5% to $177,773, for the
      twelve months ended December 31, 2007, as compared to $119,719 for the twelve
      months ended December 31, 2006. The increased research and development
      expense is mainly attributable to the expenses of maintaining Kiwa-CAU R&D
      Centre, which began operation in July 2006. (See “Business-Intellectual Property
      and Product Lines- Kiwa-CAU R&D Center” under Item 1 in Part I).





***Depreciation
      and Amortization***





Depreciation
      and amortization, excluding depreciation included in cost of production and
      deprecation of research equipment, decreased $42,713 or 24.8% to $129,298,
      for
      the twelve months ended December 31, 2007, as compared to $172,011 for the
      same period of 2006. The decrease in depreciation and amortization is mainly
      due
      to the abnormally low production volume in Kiwa Shandong in both 2006 and 2007.
      During 2006, more of the depreciation of manufacturing facilities was booked
      as
      operating expense, which would normally be booked as production costs when
      production capacity reaches an adequate level.





***Allowance
      and Provision***





During
      2007 we accrued allowance and provision of $588 in total as compared to $220,148
      to 2006. The decreased amount of allowance and provision is mainly due to a
      bad
      debt provision of $172,109 and an inventory impairment allowance of $48,039
      in
      2006.





***Net
      Interest Expenses***





Net
      interest expense was $766,411(including non-cash expenses of $568,274) in 2007
      and $231,559 in 2006, representing a $534,852 or 231.0% increase. The increase
      is mainly attributable to (1) the increased amount of amortization of fair
      value
      of warrants in connection with 6% Notes, which increased $465,786 (non-cash
      expense) (see Note 14 of Notes to Consolidated Financial Statements), and (2)
      interest charges on our loans increased $44,521.





***Net
      Loss***





Our
      net
      loss from continuing operations for 2007 was $2,893,359 (including non-cash
      expenses 1,408,239), an increase of $371,213 or 14.7% compared to net loss
      in
      2006, which was $2,522,146 (including non-cash expenses $759,681) for 2006.
      This
      increase resulted from the following factors: (1) increase in gross profit
      of
      $345,688 or 191.7%; (2) increase in operating expenses of $162,361 or 6.5%;
      (3)
      increase in interest expenses of $534,852 or 231.0%; and (4) negative $332
      and
      positive $19,356 in minority interest in subsidiary in 2007 and 2006
      respectively.





***Discontinued
      Operations-Urea Entrepot Trade***





In
      July
      2007, the Company entered three termination agreements with each party of the
      urea entrepot trade for the termination of contracts between Kiwa BVI and
      Shengkui Technologies (“Shengkui”), Hua Yang Roneo Corporation (“Hua Yang”) and
      UPB International Sourcing Limited (“UPB”). Pursuant to these termination
      agreements, the Company will have neither rights nor obligations under previous
      contracts in connection with the urea entrepot trade except for a commission
      due
      to UPB. Based on these facts, we recognized relevant expenses in the second
      quarter of 2007. Net loss of discontinued operation, the urea entrepot trade
      was
      $414,509 for the fiscal year ended December 31, 2007. Comparably, during
      the twelve months ended December 31, 2006, urea entrepot trade has contributed
      sales revenues of $800,000 and cost of sales was $385,000, after deducting
      operating costs $176,953, the net profit of urea enterport trade was
      $238,047.





***Comprehensive
      Loss***





Comprehensive
      loss increased by $1,012,766 to $3,368,979 for the twelve months ended
      December 31, 2007, as compared to $2,379,875 for the comparable period of
      2006. The increase in comprehensive loss in the current year as compared to
      fiscal 2006 is due to an increase of $1,023,769 in net loss and a decrease
      of
      $34,665 in other comprehensive loss.





32




**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 2007, we raised $720,172 in total
      from our related parties through several advance and repaid $388,196 to related
      parties. To some extent, these fundraisings improved our short-term liquidity,
      however as of December 31, 2007, our current liabilities exceeded current assets
      by $1,366,926, reflecting a current ratio of 0.52:1, compared to net working
      capital of $474,837, reflecting a current ratio 1.26:1, as of December 31,
      2006.





As
      of
      December 31, 2007 and 2006, we had cash of $61,073 and $498,103, respectively.
      The change is outlined as follows.





During
      2007, our operations utilized cash of $523,649, as compared with $2,066,248
      used
      by operations in 2006. Such cash was mainly used for working capital for our
      bio-fertilizer and bio-enhanced feed businesses, purchase of inventory, a market
      development fee for bio-fertilizer, and repayment of accounts payable to venders
      and service providers.





During
      2007, we utilized $206,446 in acquiring property and equipment to finish the
      first stage to upgrade our facility in Kiwa Shandong. Comparatively, in 2006
      we
      spent $36,600 for the purchase of equipment and $126,443 to pay part of the
      first payment to acquire the AF-01 anti-viral aerosol technology.





During
      the fiscal year ended December 31, 2007, we generated $308,591 from financing
      activities, consisting of proceeds from related parties of $720,172, which
      was
      offset in part by repayment of $388,196 to related parties and long-term
      borrowings of $23,385. During the twelve months ended December 31, 2006, we
      generated 2,665,333 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 $651,069 due to related parties, convertible notes of $307,135
      and
      long-term borrowings of $20,785.





As
      of
      December 31, 2007, we had an accumulated deficit of $11,074,522, which was
      made
      up in part of a net loss of $3,307,868 (including non-cash expenses of
      $1,408,239) and $2,284,099 during 2007 and 2006, respectively. Although our
      bio-fertilizer business has achieved a 414.3% increase in revenue, we still
      incurred a net loss of $305,939 in 2007. Revenue in our bio-enhanced feed
      business increased 261.3% in 2007 over 2006 revenue; however, the sector has
      not
      yet reached break-even with net loss of $18,876. Although we expect our
      operating cash flow to improve in 2008, we do not anticipate generating
      sufficient positive operating cash inflow to fund our planned operations.





In
      2008,we plan to finish the upgrade of Kiwa Shandong’s fermentation facilities,
      which will allow us to fully utilize the patent we acquired from CAU and further
      reduce production costs. In the meantime, we will focus on expanding our
      bio-fertilizer sales. We hope that key accounts in several significant regional
      markets will generate revenue for the Company after years of field tests. To
      achieve profitability in our bio-enhanced feed business, we will concentrate
      on
      (1) adjusting our product mix to increase the proportion of high-margin
      products, (2) improving our current equipment, and (3) setting up new production
      lines. With respect to the AV-01 technology, our hope is to (1) close the
      acquisition of a GMP-qualified veterinary factory, (2) close a first round
      of
      investment, and (3) procure approval of a number of veterinary drug products
      for
      the AF-01 technology.





Currently
      we have insufficient cash resources to accomplish our objectives. In the next
      year we estimate that we will need at least $4 million in total broken down
      as
      follows: (1) $0.5 million to service debt obligations and satisfy accounts
      payable to venders and service providers, (2) $0.6 million to continue the
      upgrade of our bio-fertilizer facility and bio-enhanced feed facility, (3)
      $1.25
      million for our AF-01 anti-viral aerosol agent project for research and
      development, for acquiring a Good Manufacturing Practice (GMP) factory and
      to
      market anti-viral aerosol agents, (4) $1.7 million as working capital, including
      marketing fees, R&D expenses and operating cost as a public
      company.





33




We
      will
      need to seek additional sources of funding to sustain our operations. In the
      next year, we intend to raise additional capital through the issuance of debt
      or
      equity securities to fund the development of our planned business operations,
      although there can be no assurance that we will be successful in obtaining
      this
      financing. On February 19, 2008, the Company successfully closed an equity
      financing with an individual investor and raised $650,000 cash.





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
      Note19 to the Consolidated Financial Statements under Item 7 in Part
      II.





**Off-Balance
      Sheet Arrangements**





At
      December 31, 2007, we did not have any relationships with unconsolidated
      entities or financial partnerships, such as entities often referred to as
      structured finance or special purpose entities, established for the purpose
      of
      facilitating off-balance sheet arrangements or other contractually narrow or
      limited purposes. As such, we are not exposed to any financing, liquidity,
      market or credit risk that could arise if we had engaged in such
      relationships.





**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





At
      the
      annual meeting of shareholders on July 18, 2007, the proposal of the appointment
      of Mao & Company, CPAs, Inc. as the Company’s independent auditors for the
      fiscal year ended December 31, 2007 was approved by the required votes of our
      shareholders. Mao & Company had also audited our Annual Report on Form
      10-KSB for the fiscal year ended December 31, 2006.





Through
      March 18, 2007, there was not any disagreement with our current certifying
      accountants on any matter of accounting principles or practices, financial
      statement disclosure, or auditing scope and procedures.





ITEM
      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 2007 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.





34




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, 2007 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 2008 as we implement our Sarbanes
      Oxley testing methodologies.





ITEM
      8B  OTHER
      INFORMATION





Not
      applicable.




35


**PART
      III**




ITEM
              9
            DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS, CORPORATE GOVERNANCE, 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 24, 2008. The directors listed below will
      serve until the Company’s next annual meeting of the stockholders:





**Name**
            
            **Age**
            
            **Position**Wei
                Li
            
            46
            
            Chief
                Executive Officer and Chairman of the Board of
                DirectorsLianjun
                Luo
            
            38
            
            Chief
                Financial Officer and DirectorDachang
                Ju
            
            67
            
            DirectorYunlong
                Zhang
            
            44
            
            Director
                and General Manager of Kiwa ShandongQi
                Wang
            
            41
            
            Director
                and Vice President - TechnicalYvonne
                Wang
            
            29
            
            Corporate
                SecretaryDianyuan
                Song
            
            48
            
            Vice
                President-MarketingXin
                Ma
            
            31
            
            Associate
                Chief Financial OfficerJun
                Guo
            
            40
            
            CEO
                Assistant





***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 financial services and/or venture investments to growth
      businesses in China. Mr. Li served as President of China Star from June 1993
      to
      January 2004. In 1989, Mr. Li founded Xinhua International Market Development
      Co. Ltd., a company which engaged in investing in China’s high tech,
      pharmaceutical, medical device, media, entertainment and real estate industries.
      Mr. Li holds a B.S. in Finance from Hunan Finance and Economics
      University.





***Lianjun
      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.





***Dachang
      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.





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





36




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





***Yvonne
      Wang*** became
      our Secretary in 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.





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





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





***Jun
      Guo*** became
      our CEO Assistant in June 2007. Prior to that Mr. Guo served as General Manager
      of Shijiazhuang Yongfeng Feed Co., Ltd. and Shenyang Yiming Feed Co, Ltd. for
      two years respectively. Mr. Guo holds a Bachelor’s degree from Sichuan Institute
      of Animal Husbandry and Veterinary Medicine.





**Family
      Relationships**





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





**Section
      16(a) Beneficial Ownership Compliance**





Section
      16(a) of the Securities Exchange Act of 1934 requires our officers, directors
      and certain persons holding more than 10 percent of a registered class of
      our common stock to file with the Securities and Exchange Commission initial
      reports of ownership and reports of changes in ownership of our common stock.
      Officers, directors and certain other shareholders are required by the
      Securities and Exchange Commission to furnish the Company with copies of all
      Section 16(a) forms they file. To
      the
      best of the Company’s knowledge, based solely upon a review of the copies of
      such reports, during 2007, all of the required filings were made on a timely
      basis.





**Code
      of Ethics**





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





37




**Board
      Composition; Audit Committee and Financial Expert**





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





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





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
      either 2007 or 2006 exceeded $100,000.





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





**Summary
      Compensation Table**




**SUMMARY
      COMPENSATION TABLE**





NonqualifiedName and
            
            
            
            
            
            
            
            
            
            
            
            Non-Equity
            
            Deferred
            
            All
                Otherprincipal
            
            
            
            
            
            
            
            Stock
            
            Option
            
            Incentive Plan
            
            Compensation
            
            Compensationposition
            
            Year
            
            Salary ($)
            
            Bonus ($)
            
            Awards ($)
            
            Awards ($)
            
            Compensation ($)
            
            Earnings ($)
            
            ($)
            
            Total ($)(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (g)
            
            (h)
            
            (i)
            
            (j)Wei
                Li, CEO
            
            
            2007
            
            
            75,000
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            75,000Wei
                Li, CEO
            
            
            2006
            
            
            75,000
            
            
            21,000
            
            
            Nil
            
            
            29,262
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            125,262Lianjun
                Luo, CFO
            
            
            2007
            
            
            48,000
            
            
            12,000
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            60,000Lianjun
                Luo, CFO
            
            
            2006
            
            
            48,000
            
            
            12,000
            
            
            Nil
            
            
            21,162
            
            
            Nil
            
            
            Nil
            
            
            Nil
            
            
            81,162





(1)
            The
                bonus amounts for fiscal 2006 were accrued pursuant to the terms
                of Wei
                Li’s employment agreements with the Company. Wei Li’s bonus payment is
                subject to approval of the Board of Directors of the Company. 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.”


(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.





38




**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 $105,000) per annum, of which RMB600,000 will be paid in equal
      monthly installments of RMB50,000 ($6,845) during the period of employment,
      prorated for any partial employment period, and RMB168,000 ($23,000) 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, Lianjun 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 $65,700), 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. Mr.
      Luo
      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.





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.





**Stock
      Incentive Plan and Option Grant**





***2004
      Stock Incentive Plan***





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





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





***Stock
      Option Grant***





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





During
      the second quarter of 2007, a total number of 362,100 unexercised stock options
      was returned to the Plan pool following the separation of certain company
      employees. These stock options are available for future grant.





On
      December 12, 2007, 540,507 outstanding stock options were vested, among which
      271,821 stock options in total are held by our current executive
      officers.





No
      options were granted under the Plan during 2007.





***Outstanding
      Stock Option At 2007 Fiscal Year-End***





The
      following table sets forth the status of all outstanding options of the Company
      as of December 31, 2007.




39




**Option
                Grant Table**




**Name**
            
            **Number of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Options**
              **Exercisable**
            
            **Number of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Options**
              **Unexercisable**
            
            **Number of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Unearned**
              **Options**
            
            **Option**
              **Exercise**
              **Price**
            
            **Option**
              **Grant**
              **Date**
            
            **Option**
              **Expiration**
              **Date**Wei
                Li
            
            
            60,324
            
            
            122,476
            
            
            182,800
            (1)
            
            0.175
            
            
            2006-12-12
            
            
            2016-12-4Lianjun
                Luo
            
            
            43,626
            
            
            88,574
            
            
            132,200
            (1)
            
            0.175
            
            
            2006-12-12
            
            
            2016-12-4Yunlong
                Zhang
            
            
            50,787
            
            
            103,113
            
            
            153,900
            (1)
            
            0.175
            
            
            2006-12-12
            
            
            2016-12-4Qi
                Wang
            
            
            40,095
            
            
            81,405
            
            
            121,500
            (1)
            
            0.175
            
            
            2006-12-12
            
            
            2016-12-4Yvonne
                Wang
            
            
            41,283
            
            
            83,817
            
            
            125,100
            (1)
            
            0.175
            
            
            2006-12-12
            
            
            2016-12-4Xin
                Ma
            
            
            35,706
            
            
            72,494
            
            
            108,200
            (1)
            
            0.175
            
            
            2006-12-12
            
            
            2016-12-4Total
            
            
            271,821
            
            
            551,879
            
            
            823,700




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




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





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





The
      fiscal-year-end value of unexercised options hold by executives was nil based
      on
      the closing price on December 31, 2007.





**Aggregate Option Exercises in 2007 and FY-End Option Values**(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (g)Shares Acquired
              on Exercise
            
            Securities Underlying
              Unexercised Options
              at December 31, 2007
              (Exercisable)
            
            Securities Underlying
              Unexercised Options
              at December 31, 2007
              (Unexercisable)Name
            
            Number
              (#)
            
            Value
              Realized
              ($)
            
            Number
              (#)
            
            Value(1)
              ($)
            
            Number
              (#)
            
            Value(1)
              ($)Wei
                Li
            
            
            Nil
            
            
            Nil
            
            
            60,324
            
            
            Nil
            
            
            122,476
            
            
            NilLianjun
                Luo
            
            
            Nil
            
            
            Nil
            
            
            43,626
            
            
            Nil
            
            
            88,574
            
            
            NilYunlong
                Zhang
            
            
            Nil
            
            
            Nil
            
            
            50,787
            
            
            Nil
            
            
            103,113
            
            
            NilQi
                Wang
            
            
            Nil
            
            
            Nil
            
            
            40,095
            
            
            Nil
            
            
            81,405
            
            
            NilYvonne
                Wang
            
            
            Nil
            
            
            Nil
            
            
            41,283
            
            
            Nil
            
            
            83,817
            
            
            NilXin
                Ma
            
            
            Nil
            
            
            Nil
            
            
            35,706
            
            
            Nil
            
            
            72,494
            
            
            NilTotal
            
            
            Nil
            
            
            Nil
            
            
            271,821
            
            
            Nil
            
            
            551,879
            
            
            Nil





(1)
            The
                2007 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 31, 2007,
                as
                reported on the NASD OTC Bulletin Board was $0.12 (the stock options
                are
                out-of-money).





**Director
      Compensation for 2007**





We
      currently have no policy in effect for providing compensation to our directors
      for their services on our Board of Directors, and did not compensate our
      directors in 2007 for services performed as directors.




40




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





The
      following table sets forth as of December 31, 2007 certain information with
      respect to the beneficial ownership of our common stock by (i) each of our
      executive officers, (ii) each person who is known by us to beneficially own
      more
      than 5% of our outstanding common stock, and (iii) all of our directors and
      executive officers as a group. Percentage ownership is calculated based on
      81,519,676 shares of our common stock outstanding as of December 31, 2007.
      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
            
            Percentage of ClassCommon
                Stock
            
            
            Weil
                Li(1)
            
            
            13,064,794
            
            
            16.03
            %Common
                Stock
            
            
            Dachang
                Ju(2)
            
            
            10,062,088
            
            
            12.34
            %Common
                Stock
            
            
            Lianjun
                Luo
            
            
            1,305,562
            
            
            1.60
            %Common
                Stock
            
            
            Qi
                Wang
            
            
            -
            
            
            -Common
                Stock
            
            
            Yunlong
                Zhang
            
            
            308,916
            
            
            *Common
                Stock
            
            
            All
                Star Technology Inc.
            
            
            12,356,672
            
            
            15.16
            %Common
                Stock
            
            
            InvestLink
                (China) Limited
            
            
            10,062,088
            
            
            12.34
            %Common
                Stock
            
            
            All
                officers and directors as a group (5)
                persons
            
            
            24,741,360
            
            
            30.35
            %





*
            Less
                than 1%.(1)
            Consists
                of shares held by All Star Technology Inc., a British Virgin Islands
                international business company. Wei Li exercises voting and investment
                control over the shares held by All Star Technology Inc. Wei Li is a
                principal stockholder of All Star Technology Inc. and may be deemed
                to
                beneficially own such shares, but disclaims beneficial ownership
                in such
                shares held by All Star Technology Inc. except to the extent of his
                pecuniary interest therein.(2)
            Consists
                of 7,812,088 shares of common stock held directly by InvestLink (China)
                Limited (“Investlink”) and 2,250,000 shares of common stock held by
                InvestLink as custodian for Guisheng Chen. InvestLink has the sole
                power
                to vote or direct the vote and dispose or direct the disposition
                of
                10,062,088 shares but disclaims beneficial ownership of such shares
                except
                to the extent of its pecuniary interest therein. Dachang Ju exercises
                voting and investment control over the shares held by InvestLink.
                Dachang
                Ju is a principal stockholder of InvestLink and may be deemed to
                beneficially own such shares, but disclaims beneficial ownership
                in such
                shares held by InvestLink except to the extent of his pecuniary interest
                therein.




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





**Equity
      Compensation Plan Information**





The
      following table sets forth certain information as of December 31, 2007
      about our equity compensation plans under which our equity securities are
      authorized for issuance.




41




**(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
            
            
            1,637,900
            
            $
            0.175
            
            
            1,410,007Equity
                compensation plans not approved by security holders
            
            
            —
            
            
            —
            
            
            —**Total**
            
            
            1,637,900
            
            
            —
            
            
            1,410,007





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





Mr.
      Lianjun Luo is Chief Financial Officer of the Company.





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





Mr.
      Yunlong Zhang is General Manager of Kiwa Shandong.





ITEM
      13  EXHIBITS




**Description
      of Exhibits**


**Exhibit**
                **No.**
              
              **Description**
              
              **Incorporated by**
                **Reference in**
                **Document**
              
              **Exhibit No. inIncorporated**
                **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-K filed on July23, 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
              
              3.310.58
              
              Consulting
                  Agreement dated April 9, 2007, between Kiwa Bio-Tech Products Group
                  Corporation and First Trust Group, Inc.
              
              Form
                  10-QSB filed on May 14, 2007
              
              10.5810.59
              
              Termination
                  of Agreement dated July 15, 2007 between Kiwa Bio-Tech Products
                  Group Ltd.
                  and China Hua Yang Roneo Corporation
              
              Form
                  10-QSB filed on August 14, 2007
              
              10.59




42


**Exhibit**
                **No.**
              
              **Description**
              
              **Incorporated by**
                **Reference in**
                **Document**
              
              **Exhibit No. in**
                **Incorporated**
                **Document**10.60
              
              Termination of Agreement
                  dated July 18, 2007 between Kiwa Bio-Tech Products Group Ltd. and
                  Shengkui
                  Technologies Inc.
              
              Form
                  10-QSB filed on August 14, 2007
              
              10.6010.61
              
              Termination
                  of Agreement dated July 22, 2007 between Kiwa Bio-Tech Products
                  Group Ltd.
                  and UPB International Sourcing Limited
              
              Form
                  10-QSB filed on August 14, 2007
              
              10.6110.62
              
              Advance
                  agreement with Wei Li dated June 30, 2007
              
              Form
                  10-QSB filed on November 7, 2007
              
              10.6210.63
              
              Advance
                  agreement with Wei Li dated September 10, 2007
              
              Form
                  10-QSB filed on November 7, 2007
              
              10.6310.64
              
              Stock
                  Purchase Agreement between the Company, Wei Li and the Investors
                  named
                  therein dated October 24, 2007
              
              Form
                  8-K filed on October 29, 2007
              
              10.110.65
              
              Stock
                  Purchase Agreement between the Company, Wei. Li and the Investors
                  named
                  therein dated October 24, 2007.
              
              Form
                  8-K filed on October 29, 2007
              
              10.210.66
              
              Advance
                  agreement with Wei Li dated January 10, 2008
              
              Form
                  8-K filed on January 11, 2008
              
              10.0110.67
              
              Stock
                  Purchase Agreement between the Company and Yuxin Zhou dated February
                  19,
                  2008.
              
              Form
                  8-K filed on February 22, 2008
              
              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 2007 and 2006**





**Audit
      Fees**





Mao
&
      Company, CPAs, Inc. audited our financial statements for year-end 2007 and
      2006,
      and reviewed our quarterly financial statements for 2007. 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 Mao & Company, CPAs, Inc. before engagement. All of the services
      described below were approved by our board of directors prior to performance.
      The board of directors has determined that the payments made to its independent
      accountant for these services are compatible with maintaining such auditor's
      independence.





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





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.





43




**Audit-Related
      Fees**





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





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.





**Tax
      Fees**





Tax
      service fees billed to a tax consultant for 2007 were $4,500. Tax service fees
      billed to Mao & Company, CPAs, Inc. for 2006 were $4,500.





**All
      Other Fees**





There
      were no additional aggregate fees billed by Mao & Company, CPAs, Inc. for
      2007 and 2006 for other services rendered to the Company.


44





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 March 25, 2008.





**KIWA
                BIO-TECH PRODUCTS GROUP CORPORATION**By:
            
            /s/
                Wei LiWei
              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 March 25, 2008.





/s/
                Wei Li
            March
                25, 2008
            Chief
                Executive Officer andWei
                Li
            
            Chairman
                of the Board of Directors(Principal
                Executive Officer)/s/
                Lianjun Luo
            March
                25, 2008
            Chief
                Financial Officer and DirectorLianjun
                Luo
            
            (Principal
                Financial Officer andPrincipal
                Accounting Officer)/s/
                Dachang Ju
            March
                25, 2008
            DirectorDachang
                Ju/s/
                Yunlong Zhang
            March
                25, 2008
            DirectorYunlong
                Zhang/s/
                Qi Wang
            March
                25, 2008
            DirectorQi
                Wang





45






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




**Index
      to Consolidated Financial Statements**





**Page**Report
                of Mao & Company CPAs, Inc. dated March 18, 2008
            F-2Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            F-3Consolidated
                Statements of Operations and Comprehensive Income for the years ended
                December 31, 2007 and 2006
            F-4Consolidated
                Statements of Stockholders’ Equity (Deficiency) for the period from
                January 1, 2006 through December 31, 2007
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2007 and
                2006
            F-6Notes
                to Consolidated Financial Statements
            F-7




F-1


**Report
      of Independent Registered Public Accounting Firm**





To
      the
      Board of Directors and Stockholders of


Kiwa
      Bio-Tech Products Group Corporation





We
      have
      audited the accompanying consolidated balance sheets of Kiwa Bio-Tech Products
      Group Corporation and subsidiaries (the “Company”) as of December 31, 2007 and
      2006, and the related consolidated statements of operations, stockholders’
equity (deficiency) and cash flows for each of the two years in the period
      ended
      December 31, 2007. 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 and subsidiaries as of December 31, 2007 and 2006 and the results
      of
      their operations and their cash flows for each of the two years in the period
      ended December 31, 2007 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


March
      18,
      2008


F-2


**KIWA
      BIO-TECH PRODUCTS GROUP CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


**(AUDITED)**





Item
            
            December
                31, 2007
            
            December
                31, 2006**ASSETS**Current
                assetsCash
                and cash equivalents
            
            $
            61,073
            
            $
            498,103Accounts
                receivable, net of bad debt allowance of $277,140 and $258,667,
                respectively
            
            
            470,298
            
            
            929,446Inventories
            
            
            818,329
            
            
            541,340Prepaid
                expenses
            
            
            70,460
            
            
            302,007Other
                current assets
            
            
            67,372
            
            
            57,011Total
                current assets
            
            
            1,487,532
            
            
            2,327,907Property,
                Plant and EquipmentBuildings
            
            
            1,125,128
            
            
            1,046,116Machinery
                and equipment
            
            
            697,205
            
            
            585,282Automobiles
            
            
            76,154
            
            
            47,772Office
                equipment
            
            
            93,231
            
            
            78,096Computer
                software
            
            
            9,877
            
            
            9,240Property
                plant and equipment - total
            
            
            2,001,595
            
            
            1,766,506Less:
                accumulated depreciation
            
            
            (433,690
            )
            
            (286,039
            )Property
                plant and equipment - net
            
            
            1,567,905
            
            
            1,480,467Construction
                in progress
            
            
            67,262
            
            
            34,548Intangible
                asset - net
            
            
            296,245
            
            
            337,027Deferred
                financing costs
            
            
            129,793
            
            
            211,793Deposit
                to purchase the proprietary technology
            
            
            126,443
            
            
            126,443**Total
                assets**
            
            $
            3,675,180
            
            $
            4,518,185**LIABILITIES
                AND SHAREHOLDERS’ EQUITY (DEFICIENCY)**Current
                liabilitiesAccounts
                payable and accrued expenses
            
            $
            1,862,043
            
            $
            958,368Construction
                costs payable
            
            
            316,902
            
            
            366,879Due
                to related parties-trade
            
            
            164,280
            
            
            25,612Due
                to related parties-non-trade
            
            
            508,344
            
            
            496,806Current
                portion of bank notes payables
            
            
            2,889
            
            
            5,405Total
                current liabilities
            
            
            2,854,458
            
            
            1,853,070Long-term
                liabilities, less current portion:Unsecured
                loans payable
            
            
            1,574,350
            
            
            1,472,717Bank
                notes payable
            
            
            17,988
            
            
            1,351Long-term
                convertible notes payable
            
            
            2,058,625
            
            
            2,365,962Less:
                discount relating to warrants
            
            
            (856,308
            )
            
            (1,371,446
            )Long-term
                convertible notes payable - net
            
            
            1,202,317
            
            
            994,516Total
                long-term liabilities
            
            
            2,794,655
            
            
            2,468,584Minority
                interest in a subsidiary
            
            
            110,838
            
            
            103,362Shareholders’
                equity (deficiency)Common
                stock - $0.001 par value Authorized 200,000,000 shares. Issued and
                outstanding 81,519,676 and 70,149,556 shares at December 31, 2007
                and
                2006, respectively
            
            
            81,520
            
            
            70,150Preferred
                stock - $0.001 par value Authorized 20,000,000 shares, none
                issued
            
            
            -
            
            
            -Additional
                paid-in capital
            
            
            9,217,876
            
            
            8,311,975Stock-based
                compensation reserve
            
            
            (307,053
            )
            
            (523,468
            )Deficit
                accumulated
            
            
            (11,074,522
            )
            
            (7,766,654
            )Accumulated
                other comprehensive income
            
            
            (2,592
            )
            
            1,166Total
                shareholders’ equity (deficiency)
            
            
            (2,084,771
            )
            
            93,169**Total
                liabilities and stockholders’ equity**
            
            $
            3,675,180
            
            $
            4,518,185





**SEE
      ACCOMPANYING NOTES**


F-3


**KIWA
      BIO-TECH PRODUCTS GROUP CORPORATION**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**


**(AUDITED)**





Item
            
            Fiscal
                Years Ended December 31,2007
            
            2006**Net
                sales**
            
            $
            9,129,779
            
            $
            2,506,715Cost
                of sales
            
            
            8,603,795
            
            
            2,326,419**Gross
                profit**
            
            
            525,984
            
            
            180,296**Operating
                expenses**Consulting
                and professional fees
            
            
            794,324
            
            
            822,529Officers’
                compensation
            
            
            285,941
            
            
            89,528General
                and administrative
            
            
            901,545
            
            
            544,696Selling
                expenses
            
            
            363,131
            
            
            521,608Research
                and development
            
            
            177,773
            
            
            119,719Depreciation
                and amortization
            
            
            129,298
            
            
            172,011Allowance
                and provision
            
            
            588
            
            
            220,148**Total
                operating expenses**
            
            
            2,652,600
            
            
            2,490,239**Operating
                loss**
            
            
            (2,126,616
            )
            
            (2,309,943
            )**Interest
                expenses**
            
            
            (766,411
            )
            
            (231,559
            )**Loss
                before minority interest in a subsidiary’s
                deficit**
            
            
            (2,893,027
            )
            
            (2,541,502
            )**Minority
                interest in a subsidiary’s deficit**
            
            
            (332
            )
            
            19,356**Net
                loss from continuing operation**
            
            
            (2,893,359
            )
            
            (2,522,146
            )**Loss
                from discontinued operations****Net
                income ( loss) - Urea Entrepot Trade**
            
            
            (414,509
            )
            
            238,047**Net
                loss**
            
            
            (3,307,868
            )
            
            (2,284,099
            )**Other
                comprehensive loss:**Translation
                adjustment
            
            
            (61,111
            )
            
            (95,776
            )**Comprehensive
                loss**
            
            $
            (3,368,979
            )
            $
            (2,379,875
            )**Net
                profit (loss) from continuing operations per****common
                share -basic and diluted**
            
            $
            (0.038
            )
            $
            (0.040
            )**Net
                profit (loss) on discontinued operations per****common
                share -basic and diluted**
            
            $
            (0.005
            )
            $
            0.004**Weighted
                average number of common****shares
                outstanding-basic and diluted**
            
            
            75,543,446
            
            
            63,646,482





**SEE
      ACCOMPANYING NOTES**


F-4





**KIWA
      BIO-TECH PRODUCTS GROUP CORPORATION**


**CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)**


**(AUDITED)**





Common
                Stock
            
            Additional
              Paid-in
              Capital
            
            Stock-based
              Compensation
              Reserve
            
            Accumulated
              Deficits
            
            Other
              Comprehensive
              Income
            
            Total
              Stockholders’
              DeficiencyShares
            
            Amount**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, Ocotber
                2006
            
            
            -
            
            
            -
            
            
            231,544
            
            
            (231,544
            )
            
            -
            
            
            -
            
            
            -Amortizaton
                of fair value of warrants to a financing consultant in
                2006
            
            
            -
            
            
            -
            
            
            -
            
            
            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
            
            
            -
            
            
            -
            
            
            -
            
            
            9,000Issuace
                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 Nobember
                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 granted in 2006
            
            
            -
            
            
            -
            
            
            -
            
            
            4,085
            
            
            -
            
            
            -
            
            
            4,085Issuance
                of common stock for conversion of principal of 6% Notes in the fourth
                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 for the year ended December 31, 2006
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (21,192
            )
            
            (21,192
            )**Balance,
                January 1, 2007**
            
            
            70,149,556
            
            
            70,150
            
            
            8,311,975
            
            
            (523,468
            )
            
            (7,766,654
            )
            
            1,166
            
            
            93,169Issuance
                of common stock for exercise of warrants at January 5,
                2007
            
            
            1,000,000
            
            
            1,000
            
            
            (1,000
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Issuance
                of common stock for cashless exercise of warrants on April 11,
                2007
            
            
            610,278
            
            
            610
            
            
            (610
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Issuance
                of common stock for cashless exercise of warrants on April 20,
                2007
            
            
            97,844
            
            
            98
            
            
            (98
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Issuance
                of common stock for conversion of principal and interest of 6% Notes
                during 12 months ended December 31, 2007
            
            
            5,821,998
            
            
            5,822
            
            
            353,405
            
            
            -
            
            
            -
            
            
            -
            
            
            359,227Issuance
                of 700,000 shares of common stock to a consultant on April 18,
                2007
            
            
            700,000
            
            
            700
            
            
            125,300
            
            
            -
            
            
            -
            
            
            -
            
            
            126,000Issuance
                of 140,000 shares of common stock to a investor relations consultant
                on
                October 24, 2007
            
            
            140,000
            
            
            140
            
            
            20,860
            
            
            -
            
            
            -
            
            
            -
            
            
            21,000Issuance
                of 3,000,000 shares to two Chinese citizens designated by a related
                party
                on October 30, 2007
            
            
            3,000,000
            
            
            3,000
            
            
            222,300
            
            
            -
            
            
            -
            
            
            -
            
            
            225,300Issuance
                of 250,000 shares of warrants to a consultant
            
            
            -
            
            
            -
            
            
            44,414
            
            
            -
            
            
            -
            
            
            -
            
            
            44,414Amortizaton
                of fair value of warrants issued to a financing consultant during
                fiscal
                year ended December 31, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            77,181
            
            
            -
            
            
            -
            
            
            77,181Amortization
                of fair value of employee stock option cancelled
            
            
            -
            
            
            -
            
            
            -
            
            
            55,792
            
            
            -
            
            
            -
            
            
            55,792Amortization
                of fair value of employee stock options granted in 2006
            
            
            -
            
            
            -
            
            
            -
            
            
            83,442
            
            
            -
            
            
            -
            
            
            83,442Fair
                value of warrants issued to a related party in June
            
            
            -
            
            
            -
            
            
            15,172
            
            
            -
            
            
            -
            
            
            -
            
            
            15,172Fair
                value of warrants issued to a related party in September
            
            
            -
            
            
            -
            
            
            60,742
            
            
            -
            
            
            -
            
            
            -
            
            
            60,742Fair
                value of warrants issued to a related party in December
            
            
            -
            
            
            -
            
            
            65,416
            
            
            -
            
            
            -
            
            
            -
            
            
            65,416Net
                loss for fiscal ended December 31, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,307,868
            )
            
            -
            
            
            (3,307,868
            )Other
                comprehensive income fiscal year ended December 31, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,758
            )
            
            (3,758
            )**Balance,
                December 31, 2007**
            
            
            81,519,676
            
            
            81,520
            
            
            9,217,876
            
            
            (307,053
            )
            
            (11,074,522
            )
            
            (2,592
            )
            
            (2,084,771
            )





**SEE
      ACCOMPANYING NOTES**


F-5


**KIWA
      BIO-TECH PRODUCTS GROUP CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(AUDITED)**





Item
            
            Fiscal
                Years Ended December 31,2007
            
            2006**Cash
                flows from operating activities:**
            
            ****
            
            ****Net
                loss
            
            $
            (3,307,868
            )
            $
            (2,284,099
            )Adjustments
                to reconcile net loss to net cash used inoperating
                activities:Depreciation
                and amortization
            
            
            291,309
            
            
            200,815Amortization
                of detachable warrants, options and stocks ascompensation
            
            
            1,132,902
            
            
            137,374Provision
                for doubtful debt and inventory impairment
            
            
            588
            
            
            224,614Fair
                value of shares as compensation to an employee
            
            
            -
            
            
            46,352(Gain)/Loss
                on disposal of fixed assets
            
            
            2,033
            
            
            2,077Minority
                interest in subsidiary
            
            
            332
            
            
            (19,356
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            458,560
            
            
            (429,297
            )Inventories
            
            
            (276,989
            )
            
            (94,632
            )Prepaid
                expenses
            
            
            21,612
            
            
            131,955Other
                current assets
            
            
            (10,361
            )
            
            (29,825
            )Accounts
                payable and accrued expenses
            
            
            955,565
            
            
            22,162Due
                to related parties-trade
            
            
            208,668
            
            
            25,612**Net
                cash used in operating activities**
            
            
            (523,649
            )
            
            (2,066,248
            )**Cash
                flows from investing activities:**Purchase
                of property and equipment
            
            
            (206,446
            )
            
            (36,600
            )Acquisition
                of intangible assets
            
            
            -
            
            
            (126,443
            )**Net
                cash used in investing activities**
            
            
            (206,446
            )
            
            (163,043
            )**Cash
                flows from financing activities:**Proceeds
                from issuance of common stock
            
            
            -
            
            
            754,416Proceeds
                from subscription of common stockProceeds
                from related parties
            
            
            720,172
            
            
            685,906Proceeds
                from long-term convetible notes
            
            
            -
            
            
            2,204,000Repayment
                to related parties
            
            
            (388,196
            )
            
            (651,069
            )Repayment
                of convertible notes payable
            
            
            -
            
            
            (307,135
            )Repayment
                of long-term borrowings
            
            
            (23,385
            )
            
            (20,785
            )**Net
                cash provided by financing activities**
            
            
            308,591
            
            
            2,665,333**Effect
                of exchange rate changes on cash and cash
                equivalents**
            
            
            (15,526
            )
            
            47,485**Cash
                and cash equivalents:**Net
                increase (decrease)
            
            
            (437,030
            )
            
            483,527Balance
                at beginning of period
            
            
            498,103
            
            
            14,576**Balance
                at end of period**
            
            $
            61,073
            
            $
            498,103**Supplemental
                Disclosures of Cash flow Information:**Cash
                paid for interest
            
            $
            247
            
            $
            103,313Cash
                paid for taxes
            
            $
            -
            
            $
            -Non-cash
                investing and financing activities:Issuance
                of detachable warrants in conjunction with loans
            
            $
            141,330
            
            $
            1,473,101Fixed
                assets invested by minority shareholer of subsidiary
            
            
            -
            
            
            120,000Issuance
                of warrants as compensation and grant of stock option
            
            
            44,414
            
            
            558,534Issuance
                of common stock for long-term convertible notespayable
                and interest
            
            
            359,227
            
            
            197,748Issuance
                of stock as compensation to consultants
            
            
            147,000
            
            
            432,000Issuance
                of stock to repay related-party
            
            
            225,300
            
            
            -Issuance
                of stock for cashless exercise of warrants
            
            
            1,708
            
            
            50Issuance
                of stock for warrant exercise with accrued interest setoff
            
            
            -
            
            
            24,950




**SEE
                ACCOMPANYING NOTES**




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





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





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





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





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





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





**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, 2007, there was $277,140 in accounts receivable aged over 365
      days
      old, we have provided $277,140 bad debt provision based on all accounts
      receivable over one year as of December 31, 2007.


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, 2007, the Company’s current ratio was 0.52 and quick ratio was 0.23
      and we had an accumulated deficit of $11,074,522, and we incurred net losses
      of
      $3,307,868 and $2,284,099 during the years ended December 31, 2007 and 2006,
      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.





In
      2008,
      we plan to develop new products of both bio-fertilizer and bio-enhanced feed
      to
      adjust our product mix and achieve higher average gross margin, especially
      in
      the bio-enhanced feed sector. We plan to further strengthen our market
      developing power. It is expected that key accounts in several significant
      regional bio-fertilizer markets will generate material revenue to the Company
      after nearly two-years of marketing effort. We will keep on expanding our sales
      volume of high-margin products in 2008 in the bio-enhanced feed sector.





Currently
      we have insufficient cash resources to accomplish the following investment
      objectives.. If we obtained the necessary financing, we plan to (1) finish
      the
      upgrade of Kiwa Shandong’s fermentation facilities, which will allow us to fully
      utilize the patent we acquired from CAU and further reduce production costs;
      (2)
      setting up a new bio-enhanced feed production line, producing high-margin spawn
      feed; (3) close the acquisition of a GMP-qualified veterinary factory, and
      (4)
      procure approval of a number of veterinary drug products for the AF-01
      technology.





In
      the
      next year we estimate that we will need at least $4 million in total broken
      down
      as follows: (1) $0.5 million to service debt obligations and satisfy accounts
      payable to venders and service providers, (2) $0.6 million to continue the
      upgrade of our bio-fertilizer facility and bio-enhanced feed facility, (3)
      $1.25
      million for our AF-01 anti-viral aerosol agent project for research and
      development, for acquiring a Good Manufacturing Practice (GMP) factory and
      to
      market anti-viral aerosol agents, (4) $1.7 million as working capital, including
      marketing fees, R&D expenses and operating cost as a public company. On
      February 19, 2008, the Company successfully closed an equity financing with
      an
      individual investor and raised $650,000 cash.





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.





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,
      2007
      and 2006 contained in the Company’s Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 2007, 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.





**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$1.00 = RMB8.28
      for all periods prior to July 21, 2005. Due to the stability of the RMB during
      the periods covered by the consolidated financial statements prior to July
      21,
      2005, no material exchange differences exist during the aforesaid period. On
      July 21, 2005, the People’s Bank of China announced it would appreciate the RMB,
      increasing the RMB-US$ exchange rate from approximately US$ 1.00 = RMB 8.28
      to
      approximately US$1.00 = RMB8.00. The Company translates it’s China subsidiaries’
assets and liabilities into U.S. dollars using the rate of exchange prevailing
      at the balance sheet date (on December 31, 2007, the prevailing exchange rate
      of
      the U.S. dollar against the RMB was US$1.00 = RMB7.3046), and the statement
      of
      operations is translated at the average rates over each quarterly reporting
      period. Equity items are translated at historical exchange rates. Adjustments
      resulting from the translation from RMB into U.S. dollars are recorded in
      shareholders’ equity as part of accumulated comprehensive income (loss). Gains
      or losses resulting from transactions in currencies other than RMB are reflected
      in the results of operations as incurred.


F-8





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





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





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





Pursuant
      to EITF 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent”,
      the company must recognize revenue based on the net amount retained (that is,
      the amount billed to the customer less the amount paid to a supplier) if the
      company carries out a transaction which has the following indicators: (1) the
      supplier (not the company) is the primary obligor in the arrangement; (2) the
      amount the company earns is fixed; and (3) the supplier (and not the company)
      has credit risk. We evaluate the relevant facts and circumstances of our urea
      entrepot trade, and recognize net amount as revenue for Urea entrepot business.
      During the fiscal year December 31, 2006, we recognized $800,000 revenue from
      urea entrepot trade; nil revenues were recognized during fiscal 2007. urea
      entrepot trade operation was discontinued and has been classified as a
      discontinued operation.





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





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





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





**Net
      Loss Per Common Share** - Basic
      loss per common share is calculated by dividing net loss by the weighted average
      number of shares of common stock outstanding during the period. Diluted loss
      per
      common share reflects the potential dilution that would occur if dilutive
      securities (stock options, warrants, convertible debt, stock subscription and
      other stock commitments issuable) were exercised. These potentially dilutive
      securities were not included in the calculation of loss per share for the
      periods presented because the Company incurred a loss during such periods and
      thus their effect would have been anti-dilutive. Accordingly, basic and diluted
      loss per common share is the same for all periods presented. As of December
      31,
      2007, potentially dilutive securities aggregated 53,438,892 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.


F-9





During
      the first quarter of 2007, we adopted FASB Interpretation No. 48, “Accounting
      for Uncertainty in Income Taxes” (FIN 48), which supplements SFAS No. 109, by
      defining the confidence level that a tax position must meet in order to be
      recognized in the financial statements. FIN 48 requires that the tax effect(s)
      of a position be recognized only if it is “morelikely-than-not” to be sustained
      based solely on its technical merits as of the reporting date. The
      morelikely-than-not threshold represents a positive assertion by management
      that
      a company is entitled to the economic benefits of a tax position. If a tax
      position is not considered more-likely-than-not to be sustained based solely
      on
      its technical merits, no benefits of the tax position are to be recognized.
      The
      more-likelythan-not threshold must continue to be met in each reporting period
      to support continued recognition of a benefit. With the adoption of FIN 48,
      companies are required to adjust their financial statements to reflect only
      those tax positions that are more-likely-than-not to be sustained. Any necessary
      adjustment would be recorded directly to retained earnings and reported as
      a
      change in accounting principle. We evaluated our tax positions and believe
      there
      is no material uncertainty on our income tax issues for fiscal
      2007.





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





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





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




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





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, 2007 and
      2006.





Depreciation
      costs were charged into costs of production or periodic expenses in accordance
      with the utilization of relating property, plant and equipment. However, due
      to
      the abnormally low production capacity in Kiwa Shandong in 2007 and 2006, we
      pro
      rata charged part of the depreciation of production facilities into production
      cost in accordance with the proportion of actual capacity to normal capacity,
      and the rest into operating expenses.





We
      periodically evaluate our investment in long-lived assets, including property
      and equipment, for recoverability whenever events or changes in circumstances
      indicate the net carrying amount may not be recoverable. Our judgments regarding
      potential impairment are based on legal factors, market conditions and
      operational performance indicators, among others. In assessing the impairment
      of
      property and equipment, we make assumptions regarding the estimated future
      cash
      flows and other factors to determine the fair value of the respective assets.
      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,
      2007.





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


F-10





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





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





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





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





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





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





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, 2008.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities - Including an amendment of FASB
      Statement No. 115”. This Statement permits entities to choose to measure many
      financial instruments and certain other items at fair value. The objective
      is to
      improve financial reporting by providing entities with the opportunity to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions. This Statement is expected to expand the use of fair value
      measurement, which is consistent with the Board’s long-term measurement
      objectives for accounting for financial instruments. We are required to adopt
      SFAS No. 159 in the first quarter of 2008 and are currently evaluating the
      impact that SFAS No. 159 will have on our consolidated financial
      statements.





In
      December 2007, the FASB revised SFAS No. 141 “Business Combinations”. This
      Statement provides detailed guidance for entities in recognizing and measuring
      in financial statements the identifiable assets acquired, the liabilities
      assumed, and any noncontrolling interest in the acquirers business. It also
      lays
      out principals in recognizing and measuring the goodwill acquired in the
      business combination or a gain from bargain purchase. In the perspective of
      information disclosure, this statement determines what information needs to
      be
      disclosed, so as to enable users of the financial statements to evaluate the
      nature and financial effects of the business combination. This Statement applies
      prospectively to business combinations for which the acquisition date is on
      or
      after the beginning of the first annual reporting period beginning on or after
      December 15, 2008. An entity may not apply it before that date. The effective
      date of this Statement is the same as that of the related FASB Statement No.
      160, Noncontrolling Interests in Consolidated Financial
      Statement.


F-11





In
      December 2007, the FASB also issued SFAS No. 160 “Noncontrolling Interests in
      Consolidated Financial Statements - An Amendment of ARB No. 51”. The essential
      objective of this statement is to improve the relevance, comparability, and
      transparency of the financial information that a reporting entity provides
      in
      its consolidated financial statements through establishing accounting and
      reporting standards. SFAS No. 160 requires that (1) the ownership interests
      in
      subsidiaries held by parties other than the parent be clearly identified,
      labeled, and presented in the consolidated statement of financial position
      within equity, but separate from the parent’s equity; (2) the amount of
      consolidated net income attributable to the parent and to the noncontrolling
      interest be clearly identified and presented on the face of the consolidated
      statement of income; (3) changes in a parent’s ownership interest while the
      parent retains its controlling financial interest in its subsidiary be accounted
      for consistently; (4) when a subsidiary is deconsolidated, any retained
      noncontrolling equity investment in the former subsidiary be initially measured
      at fair value (the gain or loss on the deconsolidation of the subsidiary is
      measured using the fair value of any noncontrolling equity investment rather
      than the carrying amount of that retained investment); and (5) entities provide
      sufficient disclosures that clearly identify and distinguish between the
      interests of the parent and the interests of the noncontrolling owners. This
      Statement is effective for fiscal years, and interim periods within those fiscal
      years, beginning on or after December 15, 2008 (that is, January 1, 2009, for
      entities with calendar year-ends). Earlier adoption is prohibited. The effective
      date of this Statement is the same as that of the related Statement 141(R).
      This
      Statement shall be applied prospectively as of the beginning of the fiscal
      year
      in which this Statement is initially applied, except for the presentation and
      disclosure requirements. The presentation and disclosure requirements shall
      be
      applied retrospectively for all periods presented.





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, 2007 the balance of $470,298 is net of bad debt provision of
      $277,140. All bad debt provision relates to our bio-fertilizer business.





The
      balance of $929,446, net of bad debt provision of $258,667, on December 31,
      2006
      consists of primarily $800,000 from the urea entrepot trade business, which
      was
      fully collected during the first quarter of 2007.





**4.**
            **Inventories**





Inventories
      consisted of the following as of December 31, 2007 and December 31, 2006:


Item
            
            December
                31, 2007
            
            December
                31, 2006Raw
                materials
            
            $
            686,289
            
            $
            439,828Finished
                goods
            
            
            132,040
            
            
            101,512Total
            
            $
            818,329
            
            $
            541,340





There
      was
      no inventory exceeding their quality guarantee period as of December 31, 2007.
      We provided allowance of $48,039 for inventories exceeding their quality
      guarantee period for the fiscal year ended December 31, 2006. Those inventories
      were sold in 2007 and the related provision was written off.





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





Prepaid
      expenses consisted of the following as of December 31, 2007 and December 31,
      2006:


Item
            
            December 31, 2007
            
            December
                31, 2006Prepaid
                stock-based compensation to consultants
            
            $
            46,865
            
            $
            256,800Prepaid
                charges relating to urea entrepot trade
            
            
            -
            
            
            30,097Others
            
            
            23,595
            
            
            15,110Total
            
            $
            70,460
            
            $
            302,007




F-12




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





Pursuant
      to a consulting agreement with an investor relation consultant, on April 18,
      2007 we issued to the consultant 700,000 shares of common stock and warrants
      to
      purchase 250,000 shares of the Company’s common stock with an exercise price
      equal to $0.25. The fair value of the stock and warrants will be amortized
      over
      the period that services will be delivered under the agreement (one year
      commencing on April 1, 2007).





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 amortized it over the period that
      services will be delivered under the agreement (one year commencing on August
      1,
      2006).





(ii)
      Prepaid charges relating to urea entrepot trade.





We
      engaged in urea entrepot trade during 2006. As of December 31, 2006, the $30,097
      balance is the prepaid charges in connection with the urea entrepot trade.
      During 2007, we classified urea entrepot trade as a discontinued operation
      and
      relevant prepaid expenses were fully amortized during 2007.





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





The
      total
      gross amount of property, plant and equipment was $2,001,595 and $1,766,506
      as
      of December 31, 2007 and 2006, respectively. The increase of $235,089 or 11.7%
      is mainly due to purchase of property and equipment for upgrading the Kiwa
      Shandong facility.





Depreciation
      expense was $147,651 and $93,048 for the twelve months ended December 31, 2007
      and 2006, respectively.





All
      of
      our property, plant and equipment has been used as collateral to secure the
      6%
      Notes (See Note 14 below).





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





The
      Company’s intangible asset as of December 31, 2007 consisted of a patent as
      follows:





Amortization
                Year
            
            Gross
                carrying value
            
            Accumulated
              amount of
              amortization
            
            Net
                Value at
              December
                31, 20078.5
            
            $
            480,411
            
            $
            184,166
            
            $
            296,245




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





Future
                expected amortization
            
            Amount2008
            
            
            56,5192009
            
            
            56,5192010
            
            
            56,5192011
            
            
            56,5192012
            
            
            56,519Thereafter
            
            $
            13,650





This
      patent has been used as collateral to secure the 6% Notes (See Note 14 below).


F-13





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





The
      financing costs relating to 6% Notes (See Note 14 below) were $246,000 as of
      December 31, 2006 and 2007, respectively. These costs consist of financing
      commission paid to an investment bank, legal service fees, insurance premium
      and
      other related costs. The costs are being amortized over the three-year term
      of
      the 6% Notes, starting at various dates of each tranche of 6% Notes in
      2006.





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





The
      balance of $126,443 as of December 31, 2007 and 2006 is partial payment of
      the
      first installment of the transfer fee for the Anti-viral Aerosol technology
      pursuant to a Technology Transfer Agreement dated May 8, 2006 (See Note 19
      below).





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





Accounts
      payable and accrued expenses consisted of the following at December 31, 2007
      and
      December 31, 2006:





Item
            
            December 31, 2007
            
            December 31, 2006Consulting
                and professional payables
            
            $
            436,381
            
            $
            419,835Payables
                to material suppliers
            
            
            425,306
            
            
            99,263Salary
                payable
            
            
            212,219
            
            
            71,793Interest
                payable
            
            
            192,275
            
            
            80,775Advances
                from customers
            
            
            169,553
            
            
            7,359Insurance
                payable
            
            
            95,247
            
            
            89,290Credit
                card balance
            
            
            84,042
            
            
            69,554Office
                rental payable
            
            
            80,960
            
            
            54,926Advances
                from employees
            
            
            57,000
            
            
            -Others
            
            
            109,060
            
            
            65,573Total
            
            $
            1,862,043
            
            $
            958,368





**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, 2007 and
      December 31, 2006:





Item
            
            Notes
            
            December 31,
              2007
            
            December 31,
              2006Mr.
                Wei Li (“Mr. Li”)-non-trade
            
            
            (i)
            
            $
            390,908
            
            $
            32,398Discount
                of fair value of warrant issued to Mr. Li
            
            
            
            
            
            (88,195
            )
            
            -China
                Star Investment Management Co., Ltd.(“China
                Star”) -non trade
            
            
            (ii)
            
            
            205,631
            
            
            464,408Kiwa-CAU
                R&D Center-trade
            
            
            (iii)
            
            
            164,280
            
            
            25,612Total
            
            
            
            
            $
            672,624
            
            $
            522,418





***(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, 2006, the remaining balance due to Mr. Li was $32,398. During
      the
      twelve months ended December 31, 2007, Mr. Li advanced $692,778 to the Company
      and was repaid $334,268 (including $225,300 repaid by issuance of three million
      shares of common stock in October). As of December 31, 2007, the balance due to Mr. Li was $390,908. Mr. Li has agreed
      that the
      Company may repay the balance when its cash flow circumstance
      allows.


F-14





The
      Company has also granted detachable warrants to Mr. Li to purchase an aggregate
      of 2,166,991 shares of common stock relating to several advances to the Company
      during the twelve months ended December 31, 2007. The following table summarizes
      the number of shares underlying the warrants, exercise price and fair value
      of
      warrants that have been granted.


Time
                of issuance
            
            Number of shares
              underlying warrants
            
            Exercise price
            
            Fair valueJune
                2007
            
            
            220,886
            
            $
            0.1055
            
            $
            15,172September
                2007
            
            
            1,069,615
            
            $
            0.08
            
            $
            60,742December
                2007
            
            
            876,490
            
            $
            0.12
            
            $
            65,416Total
            
            
            2,166,991
            
            
            
            
            $
            141,330





The
      fair
      value of the warrants will be amortized over the payment periods of their
      associated loans. As of December 31, 2007, the balance of discount of fair
      value
      of the warrants issued to Mr. Li was $88,194.





***Motor
      Vehicle Lease***





In
      December 2004, we entered into an agreement with Mr. Li, pursuant to which
      Mr.
      Li leases to the Company a motor vehicle. The monthly rental payment is $2,054.
      We have extended this lease agreement with Mr. Li to the end of fiscal
      2008.





***Guarantees
      for the Company***





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





***(ii)
      China Star***





China
      Star is a company which is 28% owned by Mr. Li.





The
      balance due to China Star was $205,631 and $457,464 as of December 31, 2007
      and
      2006, respectively. In the twelve months ended December 31, 2007, China Star
      advanced an additional $27,394 to the Company and the Company had repaid
      $279,228 to China Star. China Star agreed that the Company could repay the
      balance when its cash flow circumstance allows.





***(iii)
      Kiwa-CAU R&D Center***





Pursuant
      to the agreement with China Agricultual Universtiy (“CAU”, see Note 19), we
      agree to invest RMB1 million (approximately $137,000) each year to fund research
      at Kiwa-CAU R&D Center. Qi Wang, one of our directors commencing in July
      2007 acts as Director of Kiwa-CAU R&D Center since July 2006.





During
      fiscal 2007 and 2006, we paid Kiwa-CAU R&D Center nil and $51,225. The
      balance due to Kiwa-CAU R&D Center at end of fiscal 2007 and 2006 was
      $164,280 and $22,418, respectively.





***(iv)
      Challenge Feed***





Challenge
      Feed owns 20% of Kiwa Tianjin’s equity, and Mr. Wenbin Li, one of Challenge
      Feed’s shareholders, is also in charge of daily operation of Kiwa Tianjin. As of
      December 31, 2007, the outstanding balance due to Challenge Feed was $13,690,
      which was unpaid rental from operating lease. There was no trade transactions
      between the Company and Challenge Feed in 2007. Merchandise purchase
      transactions between the Company and Challenge Feed in 2006 are as
      follows.





***Merchandise
      Purchase from Challenge Feed***





From
      the
      inception of Kiwa Tianjin in August of 2006 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 have been no such transactions after September 31, 2006.


F-15





***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 production
      line for fowl and livestock; and (4) two workshops with floor area of
      approximately 1,200 square meters. The total monthly rental is RMB 50,000
      (approximately $6,845). During fiscal year ended December 31, 2007, ten months
      rental has been paid, the outstanding balance due to Challenge Feed was
      $13,690.





**13.**
            **Unsecured
                Loans Payable**





The
      balance of unsecured loans payable was $1,574,350 and $1,472,717 as of December
      31, 2007 and 2006 respectively. The difference of $101,633 was due to the
      different exchange rates prevailing at the two dates. Unsecured loans payable
      consisted of the following at December 31, 2007 and 2006:


Item
            
            December 31, 2007
            
            December 31, 2006Unsecured
                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
            
            $
            1,232,100
            
            $
            1,152,561Unsecured
                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
            
            $
            342,250
            
            
            320,156Total
            
            $
            1,574,350
            
            $
            1,472,717





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





According
      to 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 ($65,712) 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, 2007, the Company invested
      approximately $2.86 million for the property, plant and equipment of the
      project. Management believes that neither the Company nor management will be
      liable for compensation or penalty if such commitment is not
      fulfilled.





**14.**
            **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 20, 2006 and was declared effective on October 31, 2006. On June
      29,
      2007, we filed post-effective amendments for registration statement on this
      Form
      SB-2, which was declared effective by the SEC on July 31, 2007.


F-16





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.





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, repurchase stock, incur debt, guaranty
      obligations, merge or restructuring the Company, or sell significant
      assets.





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


F-17





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 each tranche 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, during the twelve months ended December
      31,
      2007, six investors converted $307,338 principal and $51,890 interest into
      4,744,813 and 1,077,185 shares respectively. As of December 31, 2007, 6,515,440
      shares of our common stock were issued in total under terms and condition of
      6%
      Notes. The average conversion price was $0.068 per share. As of December 31,
      2007, the balance of 6% Notes was $2,058,625.





On
      January 31, 2008, we entered into three Callable Secured Convertible Notes
      Agreements (“2% Notes”) with four of our 6% Notes Purchasers converting their
      unpaid interest of $112,917.25 in total, into principal with an interest rate
      of
      2% per annum, which will be due on January 31, 2011. Other terms of the 2%
      Notes
      are similar to 6% Notes.





**15.**
            **Equity-Based
                Transactions**





As
      of
      December 31, 2007 and December 31, 2006, the Company had 81,519,676 and
      70,149,556 shares of common stock issued and outstanding, respectively. From
      January 1, 2007 to December 31, 2007, the Company has engaged in the following
      equity-based transactions:




On
      January 5, 2007, the Company issued 1,000,000 shares of common stock pursuant
      to
      cashless exercise of warrants.





On
      April
      11, 2007, the Company issued 610,278 shares of common stock pursuant to cashless
      exercise of warrants.





On
      April
      18, 2007, we issued 700,000 shares of common stock as compensation to an
      investor relations consultant as compensation.





On
      April
      20, 2007, the Company issued 97,844 shares of common stock pursuant to cashless
      exercise of warrants.





On
      October 24, 2007, the Company issued 140,000 shares of common stock to an
      investor relations consultant as part of the compensation.





On
      October 30, 2007, we issued 3,000,000 shares to two Chinese citizens designated
      by a related party to repay a $70,000 balance due to the related
      party.





During
      the twelve months ended December 31, 2007, the Company issued 5,821,998 shares
      of common stock for conversions of principal and interest under our 6%
      Notes.


F-18





**16.**
            **Stock-based
                Compensation**





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





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




(b)
      Option Grant





On
      December 12, 2006, we granted 2,000,000 shares of stock option under our 2004
      Stock Incentive Plan as amended During fiscal 2007, 362,100 stock options
      were returned to the Company when the holders separated from the Company without
      exercising the options. Consequently, as of December 31, 2007, 1,637,900 options
      were issued and outstanding.





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





The
      Company has adopted SFAS 123R effective as of January 1 2006. The fair value
      of
      the options granted at the grant date was determined to be $320,154
      (approximately $0.16 per share), calculated pursuant to the Black-Scholes option
      pricing model. The calculated fair value is recognized as expense over the
      applicable vesting periods, using the straight-line attribution method.
      Unamortized fair value of stock options granted to those who separated from
      the
      Company has been charged to expense, while the options returned to the Company.
      We charged $139,233 and $5,336 as compensation expense in 2007 and 2006
      respectively.





As
      of
      December 31, 2007, 540,507 shares of our issued and outstanding options vested
      and none were exercised. The closing price of our common stock on December
      31,
      2007 was $0.12 (lower than the exercise price), thus the year-end intrinsic
      value of options granted was nil.





**17.**
            **Segment
                Reporting**





We
      had
      three principal business segments, bio-fertilizer, livestock feed and urea
      entrepot trade for fiscal 2006. Commecing from July 2007 when we terminated
      all
      agreements related to urea entrepot trade, we treated urea entrepot trade as
      discontinued and have been operating in the rest two segments 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.


F-19





Item
            
            Bio-fertilizer
            
            Livestock
              Feed
            
            Urea Entrepot
              Trade(1)
            
            Corporate(2)
            
            Total**Fiscal
                Year ended December 31, 2007**Net
                sales
            
            
            241,357
            
            
            8,888,422
            
            
            -
            
            
            -
            
            
            9,129,779Gross
                profit
            
            
            101,784
            
            
            424,200
            
            
            -
            
            
            -
            
            
            525,984Operating
                expenses
            
            
            403,984
            
            
            442,833
            
            
            -
            
            
            1,805,783
            
            
            2,652,600Operating
                profit (loss)
            
            
            (302,200
            )
            
            (18,633
            )
            
            -
            
            
            (1,805,783
            )
            
            (2,126,616
            )Interest
                income (expense)
            
            
            (3,739
            )
            
            89
            
            
            -
            
            
            (762,761
            )
            
            (766,411
            )Minority
                interest in subsidiary
            
            
            -
            
            
            (332
            )
            
            -
            
            
            -
            
            
            (332
            )Net
                loss from discontinued operation(Commission
                paid to a related-party)
            
            
            -
            
            
            -
            
            
            414,509
            
            
            -
            
            
            414,509Net
                income (loss)
            
            
            (305,939
            )
            
            (18,876
            )
            
            (414,509
            )
            
            (2,568,544
            )
            
            (3,307,868
            )Total
                assets as of December 31, 2007
            
            
            2,178,912
            
            
            1,080,602
            
            
            -
            
            
            415,666
            
            
            3,675,180**Fiscal
                Year ended December 31, 2006**Net
                sales
            
            
            46,926
            
            
            2,459,789
            
            
            -
            
            
            -
            
            
            2,506,715Gross
                profit
            
            
            9,786
            
            
            170,510
            
            
            -
            
            
            -
            
            
            180,296Operating
                expenses
            
            
            824,840
            
            
            267,968
            
            
            -
            
            
            1,397,431
            
            
            2,490,239Operating
                profit (loss)
            
            
            (815,054
            )
            
            (97,458
            )
            
            -
            
            
            (1,397,431
            )
            
            (2,309,943
            )Interest
                income (expense)
            
            
            (8,260
            )
            
            (1
            )
            
            (817
            )
            
            (222,481
            )
            
            (231,559
            )Minority
                interest in subsidiary
            
            
            -
            
            
            (19,356
            )
            
            -
            
            
            -
            
            
            (19,356
            )Net
                income from discontinued operation
            
            
            -
            
            
            -
            
            
            238,047
            
            
            -
            
            
            -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





(1)
      In
      July 2007, the Company has entered three termination agreements with each party
      of the Urea entrepot trade for the termination of contracts between Kiwa BVI
      and
      Shengkui Technologies, Hua Yang Roneo Corporation and UPB International Sourcing
      Limited. Pursuant to these termination agreements, the Company will have neither
      rights nor obligations under previous contracts in connection with the urea
      entrepot trade except for a commission due to UPB. Based on these facts, we
      recognized relevant expenses in the second quarter of 2007.





(2)  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.





**18.**
            **Income
                Tax**





There
      is
      no provision (benefit) for income taxes for the years ended December 31, 2007
      and 2006 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 2007 and 2006, respectively, was as follows:





Years Ended December 31,2007
            
            2006Income
                (Loss) in U.S. before income taxes
            
            $
            (1,693,745
            )
            $
            (1,161,914
            )Income
                (Loss) in British Virgin Islands before income taxes
            
            
            (612,592
            )
            
            237,230Income
                (Loss) in Kiwa Shandong before income taxes
            
            
            (982,656
            )
            
            (1,281,312
            )Income
                (Loss) in Kiwa Tianjin before income taxes
            
            
            (18,875
            )
            
            (78,103
            )Total
            
            $
            (3,307,868
            )
            $
            (2,284,099
            )




The
      tax
      effect of temporary differences and operating loss carryforwards is as follows
      as of December 31, 2007 and 2006:


F-20




Year ended December 31,2007
            
            2006**Deferred
                tax assets**Net
                operating loss carryforwards
            
            $
            904,035
            
            $
            712,309Allowance
                for doubtful accounts receivable
            
            
            41,571
            
            
            38,800Value
                difference of intangible assets
            
            
            19,173
            
            
            25,993Impairment
                of inventories
            
            
            -
            
            
            7,206Accrued
                expenses
            
            
            141,867
            
            
            93,7081,106,646
            
            
            878,016**Deferred
                tax liabilities**Prepaid
                expenses
            
            
            (3,539
            )
            
            (47,568
            )Deferred
                financing cost
            
            
            (19,469
            )
            
            (31,769
            )(23,008
            )
            
            (79,337
            )Valuation
                allowance
            
            
            (1,083,638
            )
            
            (798,679
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -





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





Year ended
              December 31,
            
            Year ended
              December 31,2007
            
            2006Statutory
                rate
            
            
            33.0
            %
            
            33.0
            %Income
                tax holiday
            
            
            (33.0
            )%
            
            (33.0
            )%Effective
                income tax rate
            
            
            -
            
            
            -





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





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.





**19.**
            **Commitments
                and Contingencies**





The
      Company has the following material contractual obligations:





***Operating
      lease commitments***





The
      Company leased an office in the United States under a commercial lease agreement
      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 31, 2007 and 2006 was $12,000, for each
      year.





The
      Company leased an office in Beijing under an operating lease since May 2005
      with
      an aggregate monthly lease payment of approximately RMB40, 767 (US$5,581) and
      the lease was terminated with the consent of both the lessor and the Company
      on
      July 14, 2007. The Company has leased a new office in Beijing from July 15,
      2007. The operating lease agreement will expire at January 14, 2009. The monthly
      rental payment for the new office is RMB 82,322 ($11,270). Rent expense under
      the operating leases for the fiscal year ended December 31, 2007 and 2006 was
      $92,570 and $62,040, respectively.


F-21





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 ($6,840). Pursuant
      to
      the lease agreement, rent expense for the fiscal year ended December 31, 2007
      and 2006 was $82,080 and $31,610 (See Note 12 above).





Lease
      commitments under the foregoing lease agreements are as follows:





Fiscal
                year
            
            Amount2008
            
            $
            223,3202009
            
            
            53,140Total
            
            $
            276,460





***Technology
      acquisition***





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





***Operation
      of Kiwa-CAU R&D Center***





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





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





According
      to the Project Agreement with Zoucheng Municipal Government in 2002, the Company
      committed to invest approximately $18 million to $24 million for developing
      the
      manufacturing and research facilities in Zoucheng, Shandong Province. As of
      November 13, 2006, the Company had invested approximately $1.79 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.





**20.**
            **Subsequent
                Event**





On
      February 19, 2008, the Company entered into a Stock Purchase Agreement with
      Yuxin Zhou, pursuant to which the Company agreed to issue 5,000,000 shares
      of
      our common stock for $650,000 cash. Of the total purchase price for the stock,
      30% is due 10 days from the effective date of the Stock Purchase Agreement
      and
      the balance is due 10 days thereafter. The Company must deliver to the purchaser
      certificates evidencing the purchased shares within 30 days after receiving
      full
      payment. As of March 7, 2008, we had received full amount of the proceeds and
      we
      are processing the stock issuance.


In
      issuing the stock, the Company relied on Section 4(2) of the Securities Act
      of
      1993 and Rule 506 of Regulation D promulgated under the act for its exemption
      from the registration requirements of the act. No underwriters or brokers were
      used in the transaction and no underwriting or broker fees were paid.




F-22