UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K/A





Amendment
No. 1





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


For the
fiscal year ended December 31, 2008





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


For the
Transition Period from ______ to ______





Commission
file number: 000-33167





KIWA
BIO-TECH PRODUCTS GROUP CORPORATION


(Exact
name of registrant as specified in its charter)





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





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





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


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. xYes  ̈No





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





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





Large
      accelerated filer  ̈
              
              Accelerated
      filer  ̈Non-accelerated
      filer  ̈
              
              Smaller
      reporting company x





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





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





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










EXPLANATORY
NOTE




We are
filing this Amendment No. 1 on Form 10-K/A to our Annual Report on Form 10-K for
the period ended December 31, 2008, which was filed on May 18, 2009 (the ‘‘Form
10-K’’) to amend:


(1).
            Item
      11, “Executive compensation,” replacing it in its entirety with Item 11,
      “Executive Compensation;”


(2).
            Item
      15, “Exhibits and Financial Statement Schedules” to add certain employment
      agreements between the Company and our executives,
  and


(3).
            “Report
      of Independent Registered Public Accounting Firm,” in which our
      independent auditor’s signature was inadversely
  omitted.





The
effect of such amendments is as follows:


(1).
            This
      amendment corrects the mistake in Item 11 of Form 10-K in which Mr.
      Lianjun Luo’s “Non-equity Incentive Plan” was reported as “Bonus” in the
      Summary Compensation Table.  Relevant statement has also been
      updated.  The “Outstanding Equity Awards at Fiscal Year-End”
      table and “Option Exercise and Stock Vested” table had also been
      updated.  After revision, only the result of our Chief Executive
      Officer and Chief Financial Officer had been
  included.


(2).
            This
      amendment also updates Item 15 of Form 10-K “Exhibits and Financial
      Statement Schedules” to include employment agreements between the Company
      and Mr. Wei Li, Mr. Lianjun Luo and Mr. Steven Ning Ma,
      respectively.


(3).
            This
      amendment also includes “Report of Independent Registered Public
      Accounting Firm,” which was signed by Mao & Company CPAs,
      Inc.





We have
filed the following exhibits with this amendment:





Exhibit
31.1 Certification of Principal Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934;


Exhibit
31.2 Certification of Principal Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934; and


Exhibit
32.1 Certification of Principal Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.





Except
for the above-mentioned items, our Form 10-K has not been
amended.








Item 11.
            Executive
      compensation





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





Our Stock
Incentive Plan is administered by the Board of Directors.Any amendment
to our Stock Incentive Plan requires majority approval of the stockholders of
the Company.





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





Currently,
the main forms of compensation provided to each of our executive officers are:
(1) annual salary; (2) non-equity incentive plan 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


Name and
                                    Principal position
                                  
                                  Year
                                  
                                  Salary
                                    ($)
                                  
                                  
                                  Bonus
                                    ($)
                                  
                                  
                                  Stock
                                    Awards
                                    ($)
                                  
                                  
                                  Option
                                    Awards
                                    ($)(1)
                                  
                                  
                                  Non-Equity
                                    Incentive Plan
                                    Compensation
                                    ($)
                                  
                                  
                                  Nonqualified
                                    Deferred
                                    Compensation
                                    Earnings ($)
                                  
                                  
                                  All Other
                                    Compensation
                                    ($)
                                  
                                  
                                  Total
                                    ($)(a)
                                  
                                  (b)
                                  
                                  (c)
                                  
                                  
                                  (d)
                                  
                                  
                                  (e)
                                  
                                  
                                  (f)
                                  
                                  
                                  (g)
                                  
                                  
                                  (h)
                                  
                                  
                                  (i)
                                  
                                  
                                  (j)Wei
      Li, CEO
                                  
                                  2008
                                  
                                  
                                  75,000
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  
                                  75,000Wei
      Li, CEO
                                  
                                  2007
                                  
                                  
                                  75,000
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  
                                  75,000Lianjun
      Luo, CFO
                                  
                                  2008
                                  
                                  
                                  48,000
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  
                                  48,000Lianjun
      Luo, CFO
                                  
                                  2007
                                  
                                  
                                  48,000
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  12,000
                                  
                                  
                                  Nil
                                  
                                  
                                  Nil
                                  
                                  
                                  
                                  60,000





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





Employment Contracts and
Termination of Employment and Change of Control Arrangements





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





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








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





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





Stock Incentive Plan and
Option Grant





2004
Stock Incentive Plan





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





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





Stock
Option Grant





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





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





On
December 12, 2008, 471,800 outstanding stock options were vested, among which
179,200 stock
options in total are held by our current executive officers.





No
options were granted under the Plan during 2008.





Outstanding
Equity Awards at 2008 Fiscal Year-End





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








Outstanding
Equity Awards at Fiscal Year-End


Option Awards
                
                Stock AwardsName
                
                Number of
                  Securities
                  Underlying
                  Unexercised
                  Options (#)
                  Exercisable
                
                
                Number of
                  Securities
                  Underlying
                  Unexercised
                  Options (#)
                  Unexercisable
                
                
                Equity
                  Incentive
                  Plan
                  Awards:
                  Number of
                  Securities
                  Underlying
                  Unexercised
                  Unearned
                  Options (#)
                
                
                Option
                  Exercise
                  Price ($)
                
                Option
                  Expiration
                  Date
                
                Number
                  of
                  Shares
                  or Units
                  of
                  Stock
                  That
                  Have
                  Not
                  Vested
                  (#)
                
                
                Value
                  of
                  Shares
                  or
                  Units
                  of
                  Stock
                  That
                  Have
                  Not
                  Vested
                  ($)
                
                
                Equity
                  Incentive
                  Plan
                  Awards:
                  Number
                  of
                  Unearned
                  Shares,
                  Units or
                  Other
                  Rights
                  That
                  Have Not
                  Vested
                  (#)
                
                
                Equity
                  Incentive
                  Plan
                  Awards:
                  Market
                  or Payout
                  Value of
                  Unearned
                  Shares,
                  Units or
                  Other
                  Rights
                  That
                  Have Not
                  Vested
                  (#)(a)
                
                (b)
                
                
                (c)
                
                
                (d)
                
                
                (e)
                
                (f)
                
                (g)
                
                
                (h)
                
                
                (i)
                
                
                (j)Wei
      Li
                
                
                120,648
                
                
                
                62,152
                
                
                
                182,800
                
                
                
                0.175
                
                12/04/16
                
                
                Nil
                
                
                
                Nil
                
                
                
                Nil
                
                
                
                NilLianjun
      Luo
                
                
                87,252
                
                
                
                44,948
                
                
                
                132,200
                
                
                
                0.175
                
                12/04/16
                
                Nil
                
                
                Nil
                
                
                Nil
                
                
                NilTotal
                
                
                207,900
                
                
                
                107,100
                
                
                
                315,000
                
                
                
                
                
                
                
                Nil
                
                
                Nil
                
                
                Nil
                
                
                Nil





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





Option
exercises and stock vested





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




Option
Exercises and Stock Vested


Option Awards
                
                
                Stock AwardsName
                
                Number of Shares
                  Acquired on Exercise (#)
                
                
                Value Realized
                  on Exercise ($)
                
                
                Number of Shares
                  Acquired on Vesting (#)
                
                
                Value Realized on
                  Vesting ($)(a)
                
                (b)
                
                
                (c)
                
                
                (d)
                
                
                (e)Wei
      Li
                
                
                Nil
                
                
                
                Nil
                
                
                
                Nil
                
                
                
                NilLianjun
      Luo
                
                Nil
                
                
                Nil
                
                
                Nil
                
                
                NilTotal
                
                Nil
                
                
                Nil
                
                
                Nil
                
                
                Nil





Director
Compensation for 2008





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







Item
15. Exhibits and Financial Statement Schedules




Exhibit
                No.
              
              Description
              
              Incorporated by
                Reference in
                Document
              
              Exhibit No. in
                Incorporated
                Document3.1
              
              Certificate
      of Incorporation, effective as of July 21, 2004
              
              Form
      8-K filed on July 23, 2004
              
              3.13.2
              
              Bylaws,
      effective as of July 22, 2004
              
              Form
      8-K filed on July 23, 2004
              
              3.23.3
              
              Certificate
      of Amendment to Certificate of Incorporation, effective as of January 9,
      2009
              
              Filed
      herewith
              
              3.310.1
              
              Advance
      Agreement by and between Wei Li and the Company dated January 10,
      2008
              
              Form
      8-K filed on January 11, 2008
              
              10.0110.2
              
              Stock
      Purchase Agreement between Kiwa Bio-Tech Products Group Corporation and
      Yuxin Zhou dated February 19, 2008
              
              Form
      8-K filed on February 22, 2008
              
              10.0110.3
              
              Consulting
      Agreement between the Company and Robert Schechter dated January 10,
      2008
              
              Form
      10-Q filed on August 11, 2008
              
              10.110.4
              
              Contract
      for Joint Venture between the Company and Hebei Huaxing Pharmaceuticals
      Co., Ltd. dated May 22, 2008
              
              Form
      8-K filed on May 27, 2008
              
              10.110.5
              
              Term
      Sheet for Redemption Convertible Notes dated September 25, 2008 between
      the Company and AJW Offshore Ltd., AJW Qualified Partners LLC, AJW
      Partners LLC, and New Millennium Capital Partners II LLC
              
              Form
      10-Q filed on November 12, 2008
              
              10.310.6
              
              Term
      Sheet for Redemption Convertible Notes dated September 25, 2008 between
      the Company and FirsTrust Group, Inc. dated October 7,
2008
              
              Form
      10-Q filed on November 12, 2008
              
              10.410.7
              
              2004
      Stock Incentive Plan, amended in 2006
              
              Form
      Pre 14A filed on July 28, 2006
              
              Appendix
      A10.8
              
              Employment
      Agreement dated July 31, 2006, between the Company and Lianjun
      Luo
              
              Form
      8-K filed on August 7, 2006
              
              10.0210.9
              
              Employment
      Agreement dated February 2, 2009 by and between the Company and Wei
      Li.
              
              Form
      8-K filed on February 2, 2009
              
              10.110.10
              
              Employment
      Agreement dated February 18, 2009 by and between the Company and Steven
      Ning Ma.
              
              Form
      8-K filed on February 19, 2009
              
              10.114.1
              
              Code
      of Ethics
              
              Filed
      herewith.21
              
              List
      of Subsidiaries
              
              Form
      10-KSB filed on April 2, 2007
              
              2131.1
              
              Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934
              
              Filed
      herewith.31.2
              
              Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934
              
              Filed
      herewith.32.1
              
              Certification
      of Chief Executive Officer and Chief Financial Officer, pursuant to 18
      U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002
              
              Filed
      herewith.







Signatures




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





Date:
September 25, 2009




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





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





ChiefExecutive Officer
      andChairman
      of the Board of Directors (Principal/s/
      Wei Li
                              
                              Executive
      Officer)
                              
                              September
      25, 2009Wei
      Li/s/
      Steven Ning Ma
                              
                              Chief
      Financial Officer
                                (Principal
      Financial and Accounting Officer)
                              
                              September
      25, 2009Steven
      Ning Ma/s/
      Xucheng Hu
                              
                              Director
                              
                              September
      25, 2009Xucheng
      Hu/s/
      Yunlong Zhang
                              
                              Director
                              
                              September
      25, 2009Yunlong
      Zhang/s/
      Lianjun Luo
                              
                              Director
                              
                              September
      25, 2009Lianjun
      Luo/s/
      Qi Wang
                              
                              Director
                              
                              September
      25, 2009Qi
      Wang







Report
of Independent Registered Public Accounting Firm




To the
Board of Directors and Stockholders of


Kiwa
Bio-Tech Products Group Corporation:





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





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





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





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





/s/ Mao
& Company CPAs, Inc.


New York,
New York


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





KIWA
BIO-TECH PRODUCTS GROUP CORPORATION


CONSOLIDATED
BALANCE SHEETS




Item
                
                December 31,2008
                
                
                2007ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                18,986
                
                
                $
                61,073Accounts
      receivable, net of allowance for doubtfulaccounts
      of $352,896 and $277,140, respectively
                
                
                490,060
                
                
                
                470,298Inventories
                
                
                351,786
                
                
                
                818,329Prepaid
      expenses
                
                
                20,440
                
                
                
                70,460Prepayment
      for fertilizer trade
                
                
                2,955,550
                
                
                
                -Other
      current assets
                
                
                73,432
                
                
                
                67,372Total
      current assets
                
                
                3,910,254
                
                
                
                1,487,532Property,
      Plant and EquipmentBuildings
                
                
                1,241,972
                
                
                
                1,162,060Machinery
      and equipment
                
                
                705,680
                
                
                
                660,273Automobiles
                
                
                81,390
                
                
                
                76,154Office
      equipment
                
                
                108,759
                
                
                
                93,231Computer
      software
                
                
                21,166
                
                
                
                9,877Property,
      plant and equipment - total
                
                
                2,158,967
                
                
                
                2,001,595Less:
      accumulated depreciation
                
                
                (600,596
                )
                
                
                (433,690
                )Less:
      impairment on long-lived assets
                
                
                (542,285
                )
                
                
                -Property,
      plant and equipment - net
                
                
                1,016,086
                
                
                
                1,567,905Construction
      in progress
                
                
                71,887
                
                
                
                67,262Intangible
      asset - net
                
                
                151,231
                
                
                
                296,245Deferred
      financing costs
                
                
                47,793
                
                
                
                129,793Deposit
      to purchase proprietary technology
                
                
                126,443
                
                
                
                126,443Total
      assets
                
                $
                5,323,694
                
                
                $
                3,675,180LIABILITIES
      AND SHAREHOLDERS’ EQUITY(DEFICIENCY)Current
      liabilitiesAccounts
      payable
                
                $
                1,935,698
                
                
                $
                1,635,490Advances
      from customers
                
                
                159,200
                
                
                
                169,553Construction
      costs payable
                
                
                297,472
                
                
                
                316,902Due
      to related parties - trade
                
                
                3,190,872
                
                
                
                177,970Due
      to related parties - non-trade
                
                
                897,070
                
                
                
                551,654Convertible
      notes payable, net of $348,932 discount
                
                
                1,273,391
                
                
                
                -Penalty
      payable
                
                
                152,750
                
                
                
                -Current
      portion of long-term liabilities
                
                
                3,857
                
                
                
                2,889Total
      current liabilities
                
                
                7,910,310
                
                
                
                2,854,458Long-term
      liabilities, less current portionUnsecured
      loans payable
                
                
                1,682,615
                
                
                
                1,574,350Bank
      notes payable
                
                
                11,881
                
                
                
                17,988Long-term
      convertible notes payable
                
                
                112,917
                
                
                
                2,058,625Less:
      discount relating to long-termconvertible
      notes payable
                
                
                -
                
                
                
                (856,308
                )Long-term
      convertible notes payable - net
                
                
                112,917
                
                
                
                1,202,317Total
      long-term liabilities
                
                
                1,807,413
                
                
                
                2,794,655Minority
      interest in a subsidiary
                
                
                66,057
                
                
                
                110,838Shareholders’
      equity (deficiency)Common
      stock - $0.001 par value Authorized 200,000,000 shares. Issued and
      outstanding 139,399,206 and 81,519,676 shares at December 31, 2008 and
      December 31, 2007
                
                
                139,399
                
                
                
                81,520Preferred
      stock - $0.001 par value Authorized 20,000,000 shares, none
      issued
                
                
                -
                
                
                
                -Additional
      paid-in capital
                
                
                10,269,855
                
                
                
                9,217,876Stock-based
      compensation reserve
                
                
                (135,843
                )
                
                
                (307,053
                )Deficit
      accumulated
                
                
                (14,706,710
                )
                
                
                (11,074,522
                )Accumulated
      other comprehensive income
                
                
                (26,787
                )
                
                
                (2,592
                )Total
      shareholders’ equity (deficiency)
                
                
                (4,460,086
                )
                
                
                (2,084,771
                )Total
      liabilities and stockholders’ equity
                
                $
                5,323,694
                
                
                $
                3,675,180





SEE
ACCOMPANYING NOTES







KIWA
BIO-TECH PRODUCTS GROUP CORPORATION


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME





Item
                
                Fiscal Year Ended December 31,2008
                
                
                2007Net
      sales
                
                $
                9,175,737
                
                
                $
                9,129,779Cost
      of sales
                
                
                8,958,219
                
                
                
                8,603,795Gross
      profit
                
                
                217,518
                
                
                
                525,984Operating
      expensesConsulting
      and professional fees
                
                
                359,831
                
                
                
                794,324Officers’
      compensation
                
                
                240,993
                
                
                
                285,941General
      and administrative
                
                
                1,126,167
                
                
                
                901,545Selling
      expenses
                
                
                189,163
                
                
                
                363,131Research
      and development
                
                
                192,977
                
                
                
                177,773Depreciation
      and amortization
                
                
                123,147
                
                
                
                129,298Allowance
      for doubtful accounts
                
                
                82,815
                
                
                
                588Total
      operating expenses
                
                
                2,315,093
                
                
                
                2,652,600Operating
      loss
                
                
                (2,097,575
                )
                
                
                (2,126,616
                )Loss
      from disposal of obsolete inventory
                
                
                (192,798
                )
                
                
                -Loss
      from impairment of long-lived assets
                
                
                (639,492
                )
                
                
                -Interest
      expense
                
                
                (753,956
                )
                
                
                (766,411
                )Loss
      before minority interest in a subsidiary’s deficit
                
                
                (3,683,821
                )
                
                
                (2,893,027
                )Minority
      interest in a subsidiary’s deficit (profit)
                
                
                51,633
                
                
                
                (332
                )Loss
      from continuing operations
                
                
                (3,632,188
                )
                
                
                (2,893,359
                )Loss
      on discontinued operations:Discountinued
      urea entrepot trade -Commission
      paid to a related party
                
                
                -
                
                
                
                (414,509
                )Net
      loss
                
                $
                (3,632,188
                )
                
                $
                (3,307,868
                )Other
      comprehensive lossTranslation
      adjustment
                
                
                (24,195
                )
                
                
                (61,111
                )Comprehensive
      loss
                
                $
                (3,656,383
                )
                
                $
                (3,368,979
                )Net
      (loss) from continuing operations per common share - basic and
      diluted
                
                $
                (0.039
                )
                
                $
                (0.038
                )Net
      loss on discontinued operations per common share - basic and
      diluted
                
                $
                -
                
                
                $
                (0.005
                )Weighted
      average number of common shares outstanding-basic and
    diluted
                
                
                93,624,204
                
                
                
                75,543,446





SEE
ACCOMPANYING NOTES








KIWA
BIO-TECH PRODUCTS GROUP CORPORATION


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)




Common Stock
                  
                  
                  Additional
                    Paid-in
                  
                  
                  Stock-based
                    Compensation
                  
                  
                  Accumulated
                  
                  
                  Other
                    Comprehensive
                  
                  
                  Total
                    Stockholders’Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Reserve
                  
                  
                  Deficits
                  
                  
                  Income
                  
                  
                  DeficiencyBalance,
      January 1, 2007
                  
                  
                  70,149,556
                  
                  
                  
                  70,150
                  
                  
                  
                  8,311,975
                  
                  
                  
                  (523,468
                  )
                  
                  
                  (7,766,654
                  )
                  
                  
                  1,166
                  
                  
                  
                  93,169Issuance
      of common stock for exercise of warrants at January 5,
2007
                  
                  
                  1,000,000
                  
                  
                  
                  1,000
                  
                  
                  
                  (1,000
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Issuance
      of common stock for cashless exercise of warrants on April 11,
      2007
                  
                  
                  610,278
                  
                  
                  
                  610
                  
                  
                  
                  (610
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Issuance
      of common stock for cashless exercise of warrants on April 20,
      2007
                  
                  
                  97,844
                  
                  
                  
                  98
                  
                  
                  
                  (98
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Issuance
      of common stock for conversion of principal 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 an investor relations consultant on
      October 24, 2007
                  
                  
                  140,000
                  
                  
                  
                  140
                  
                  
                  
                  20,860
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  21,000Issuance
      of 3,000,000 shares to two Chinese citizens designated by a related party
      on October 30, 2007
                  
                  
                  3,000,000
                  
                  
                  
                  3,000
                  
                  
                  
                  222,300
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  225,300Issuance
      of 250,000 shares of warrants to a consultant
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  44,414
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  44,414Amortizaton
      of fair value of warrants issued to a financing consultant during fiscal
      year ended December 31, 2007
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  77,181
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  77,181Amortization
      of fair value of employee stock option cancelled
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  55,792
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  55,792Amortization
      of fair value of employee stock options granted in 2006
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  83,442
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  83,442Fair
      value of warrants issued to a related party in June
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  15,172
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  15,172Fair
      value of warrants issued to a related party in September
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  60,742
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  60,742Fair
      value of warrants issued to a related party in December
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  65,416
                  
                  
                  
                  -
                  
                  
                  _
                  
                  
                  
                  -
                  
                  
                  
                  65,416Net
      loss for fiscal ended December 31, 2007
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,307,868
                  )
                  
                  
                  -
                  
                  
                  
                  (3,307,868
                  )Other
      comprehensive income fiscal year ended December 31, 2007
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,758
                  )
                  
                  
                  (3,758
                  )Balance,
      December 31, 2007
                  
                  
                  81,519,676
                  
                  
                  
                  81,520
                  
                  
                  
                  9,217,876
                  
                  
                  
                  (307,053
                  )
                  
                  
                  (11,074,522
                  )
                  
                  
                  (2,592
                  )
                  
                  
                  (2,084,771
                  )Issuance
      of 140,000 shares of common stock to an Investor Relations consultant on
      February 27, 2008
                  
                  
                  140,000
                  
                  
                  
                  140
                  
                  
                  
                  19,460
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  19,600Issuance
      of 5,000,000 shares of common stock to an investor for the consideration
      of $650,000 on March 14, 2008
                  
                  
                  5,000,000
                  
                  
                  
                  5,000
                  
                  
                  
                  645,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  650,000Issuance
      of common stock for conversion of principal and interest of 6% Notes
      during fiscal year ended December 31, 2008
                  
                  
                  52,739,530
                  
                  
                  
                  52,739
                  
                  
                  
                  387,519
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  440,258Amortizaton
      of fair value of warrants issued to a financing consultant during fiscal
      year ended December 31, 2008
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  77,181
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  77,181Amortization
      of fari value of employee stock options granted in 2006
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  94,029
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  94,029Net
      loss for the fiscal year ended December 31, 2008
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,632,188
                  )
                  
                  
                  -
                  
                  
                  
                  (3,632,188
                  )Other
      comprehensive income for the fiscal year ended December 31,
      2008
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (24,195
                  )
                  
                  
                  (24,195
                  )Balance,
      December 31, 2008
                  
                  
                  139,399,206
                  
                  
                  
                  139,399
                  
                  
                  
                  10,269,855
                  
                  
                  
                  (135,843
                  )
                  
                  
                  (14,706,710
                  )
                  
                  
                  (26,787
                  )
                  
                  
                  (4,460,086
                  )





SEE
ACCOMPANYING NOTES








KIWA
BIO-TECH PRODUCTS GROUP CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Item
                
                Fiscal Year Ended December 31,2008
                
                
                2007Cash
      flows from operating activities:Net
      loss
                
                $
                (3,632,188
                )
                
                $
                (3,307,868
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                317,379
                
                
                
                291,309Impairment
      loss on long-lived assets
                
                
                639,492
                
                
                
                -Amortization
      of detachable warrants, options and stocks as compensation
                
                
                844,069
                
                
                
                1,132,902Provision
      for doubtful debt and inventory impairment
                
                
                275,613
                
                
                
                588Provision
      for panalty payable
                
                
                152,750
                
                
                
                -(Gain)/Loss
      on disposal of fixed assets
                
                
                -
                
                
                
                2,033Minority
      interest in a subsidiary
                
                
                (51,633
                )
                
                
                332Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                (102,577
                )
                
                
                458,560Inventories
                
                
                273,745
                
                
                
                (276,989
                )Prepaid
      expenses
                
                
                (7,669
                )
                
                
                21,612Prepayment
      to supplier - fertilizer trade
                
                
                (2,955,550
                )
                
                
                -Other
      current assets
                
                
                (6,060
                )
                
                
                (10,361
                )Accounts
      payable
                
                
                420,938
                
                
                
                955,565Advances
      from customers
                
                
                (10,353
                )
                
                
                -Due
      to related parties-trade
                
                
                57,352
                
                
                
                208,668Advances
      from related party - fertilizer trade
                
                
                2,955,550
                
                
                
                -Net
      cash provided by (used in) operating activities
                
                
                (829,142
                )
                
                
                (523,649
                )Cash
      flows from investing activities:Purchase
      of property and equipment
                
                
                (48,111
                )
                
                
                (206,446
                )Net
      cash used in investing activities
                
                
                (48,111
                )
                
                
                (206,446
                )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                
                
                650,000
                
                
                
                -Proceeds
      from related parties
                
                
                802,574
                
                
                
                720,172Repayment
      to related parties
                
                
                (545,353
                )
                
                
                (388,196
                )Repayment
      of long-term borrowings
                
                
                (5,606
                )
                
                
                (23,385
                )Net
      cash provided by financing activities
                
                
                901,615
                
                
                
                308,591Effect
      of exchange rate changes on cash and cash equivalents
                
                
                (66,449
                )
                
                
                (15,526
                )Cash
      and cash equivalents:Net
      increase (decrease)
                
                
                (42,087
                )
                
                
                (437,030
                )Balance
      at beginning of period
                
                
                61,073
                
                
                
                498,103Balance
      at end of period
                
                $
                18,986
                
                
                $
                61,073Supplemental
      Disclosures of Cash flow Information:Cash
      paid for interest
                
                $
                1,715
                
                
                $
                247Cash
      paid for income taxes
                
                $
                -
                
                
                $
                -Non-cash
      investing and financing activities:Issuance
      of detachable warrants in conjunction with loans
                
                
                -
                
                
                
                141,330Issuance
      of detachable warrants as compensation to consultants
                
                
                -
                
                
                
                44,414Issuance
      of common stock for conversion of long-termconvertible
      notes payable and interest
                
                
                440,258
                
                
                
                359,227Issuance
      of stock as compensation to consultants
                
                
                19,600
                
                
                
                147,000Issuance
      of stock to repay related-party
                
                
                -
                
                
                
                225,300Issuance
      of stock for cashless exercise of Warrants
                
                
                -
                
                
                
                1,708Conversion
      of accrued interests into principal
                
                
                112,917
                
                
                
                -





SEE
ACCOMPANYING NOTES








Notes
to Consolidated Financial Statements




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




1.
            Background and Basis of
      Presentation




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





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





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





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





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





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





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








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





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





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


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





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





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





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





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


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





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


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







The Company’s Ability of
Raising New Finance


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





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





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


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





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





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





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





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





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





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


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








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





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





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





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





In
Conclusion


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





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





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





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








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





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





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





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





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





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





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





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





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








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





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





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





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





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





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





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





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








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





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





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





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





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





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





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





2.
            Recent Accounting
      Pronouncements




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








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





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





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





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





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





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








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




3.
            Accounts
      Receivable




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





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





Item
                  
                  December 31, 2008
                  
                  
                  December 31, 2007Accounts
      receivables - gross
                  
                  $
                  842,956
                  
                  
                  $
                  747,438Allowance
      for doubtful accounts
                  
                  
                  (352,896
                  )
                  
                  
                  (277,140
                  )Accounts
      receivables - net
                  
                  $
                  490,060
                  
                  
                  $
                  470,298





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




4.
            Inventories




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





Item
                  
                  December 31, 2008
                  
                  
                  December 31, 2007Raw
      materials
                  
                  $
                  283,770
                  
                  
                  $
                  686,290Finished
      goods
                  
                  
                  68,016
                  
                  
                  
                  132,039Total
                  
                  $
                  351,786
                  
                  
                  $
                  818,329





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




5.
            Prepayment for fertilizer
      trade




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




6.
            Prepaid
      expenses




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








Item
                  
                  December 31, 2008
                  
                  
                  December 31, 2007Prepaid
      stock-based compensation to consultants
                  
                  $
                  -
                  
                  
                  $
                  46,865Others
                  
                  
                  20,440
                  
                  
                  
                  23,595Total
                  
                  $
                  20,440
                  
                  
                  $
                  70,460





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





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





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




7.
            Property, Plant and
      Equipment




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





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





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





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




8.
            Intangible
      Assets




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





Amortization Year
                    
                    Gross carrying
                      value
                    
                    
                    Accumulated
                      amount of
                      amortization
                    
                    
                    Impairment on
                      Intangible
                      Assets
                    
                    
                    Net Value at
                      December 31,
                      20088.5
                    
                    $
                    480,411
                    
                    
                    $
                    232,238
                    
                    
                    $
                    96,942
                    
                    
                    $
                    151,231





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





Future expected amortization
                    
                    Amount2009
                    
                    
                    37,0362010
                    
                    
                    37,0362011
                    
                    
                    37,0362012
                    
                    
                    37,0362013
                    
                    $
                    3,086





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








9.
            Deferred Financing
      Costs




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




10.
            Deposit to Purchase the
      Proprietary Technology




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




11.
            Accounts
      Payable




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





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





12.
              Construction
      Costs Payable




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




13.
            Related Party
      Transactions




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





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




(i)
Mr. Li




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







Advances
and Loans




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




Motor
Vehicle Lease




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





Guarantees
for the Company




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




(2)
Kangtai




Non-trade


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





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





Fertilizer
trade


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





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




(3)
Ms. Wang




Ms. Wang
is the Secretary of the Company.










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




(4)
Kiwa-CAU R&D Center




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





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





·
                    Three
      new technological achievements get patented;·
                    Two
      technological achievements pass the provincial level or ministerial level
      scientific and technological achievements
  qualification;


·
                Develop
      two new products which can be
commercialized..





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


1.
            Isolation
      and culture of microorganisms;2.
            Screening
      of growth-promoting bacteria;


3.
            Screening
      of bio-control bacteria;4.
            Screening
      of environmental microbiology;


5.
            Studies
      on fermentation technology and related production
  process;6.
            Analysis
      of soil and fertilizer nutrients and fertilization program
      development;


7.
            Field
      demonstration test of Kiwa fertilizer products;8.
            Application
      of approval and certification of Kiwa fertilizer
  products;


9.
            Application
      of patents; and10.
            Technical
      training and services.





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





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





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




(5)
Challenge Feed




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










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





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





14.
            Unsecured
      Loans Payable




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





Item
                      
                      December 31, 2008
                      
                      
                      December 31, 2007Unsecured
      loan payable to Zoucheng Municipal Government, non-interest bearing,
      becoming due within three years from Kiwa Shandong’s first profitable year
      on a formula basis, interest has not been imputed due to the
      undeterminable repayment date
                      
                      $
                      1,316,829
                      
                      
                      $
                      1,232,100Unsecured
      loan payable to Zoucheng Science & Technology Bureau, non-interest
      bearing, it is due in Kiwa Shandong’s first profitable year, interest has
      not been imputed due to the undeterminable repayment date
                      
                      
                      365,786
                      
                      
                      
                      342,250Total
                      
                      $
                      1,682,615
                      
                      
                      $
                      1,574,350





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





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




15.
            Long-Term
      Convertible Notes Payable




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










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





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





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





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





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





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





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










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





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





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





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





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





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





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





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










16.
            Equity-Based
      Transactions




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





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





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





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




17.
            Stock-based
      Compensation




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




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




(b)
Option Grant




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





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










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





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




18.
            Segment
      Reporting




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





Item
                      
                      Bio-fertilizer
                      
                      
                      Livestock Feed
                      
                      
                      Urea Entrepot Trade(1)
                      
                      
                      Chemical Fertilizer
                        Trade (2)
                      
                      
                      Corporate (3)
                      
                      
                      TotalFiscal
      Year Ended December 31, 2008Net
      sales
                      
                      $
                      226,869
                      
                      
                      $
                      8,948,868
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      9,175,737Gross
      profit
                      
                      
                      60,035
                      
                      
                      
                      157,483
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      217,518Operating
      expenses
                      
                      
                      360,320
                      
                      
                      
                      415,608
                      
                      
                      
                      -
                      
                      
                      
                      2,323
                      
                      
                      
                      1,536,842
                      
                      
                      
                      2,315,093Operating
      profit (loss)
                      
                      
                      (300,285
                      )
                      
                      
                      (258,125
                      )
                      
                      
                      -
                      
                      
                      
                      (2,323
                      )
                      
                      
                      (1,536,842
                      )
                      
                      
                      (2,097,575
                      )Loss
      from disposal of obsolete inventory
                      
                      
                      (192,798
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (192,798
                      )Loss
      from impairment of long-lived assets
                      
                      
                      (639,492
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (639,492
                      )Interest
      income (expense)
                      
                      
                      (438
                      )
                      
                      
                      (39
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (753,479
                      )
                      
                      
                      (753,956
                      )Minority
      interest in subsidiary
                      
                      
                      -
                      
                      
                      
                      51,633
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      51,633Net
      income (loss)
                      
                      $
                      (1,133,013
                      )
                      
                      $
                      (206,531
                      )
                      
                      $
                      -
                      
                      
                      $
                      (2,323
                      )
                      
                      $
                      (2,290,321
                      )
                      
                      $
                      (3,632,188
                      )Total
      assets as of December 31, 2008
                      
                      
                      1,223,645
                      
                      
                      
                      846,175
                      
                      
                      
                      -
                      
                      
                      
                      2,955,550
                      
                      
                      
                      298,324
                      
                      
                      
                      5,323,694Fiscal
      Year Ended December 31, 2007Net
      sales
                      
                      $
                      241,357
                      
                      
                      $
                      8,888,422
                      
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      9,129,779Gross
      profit
                      
                      
                      101,784
                      
                      
                      
                      424,200
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      525,984Operating
      expenses
                      
                      
                      403,984
                      
                      
                      
                      442,833
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,805,783
                      
                      
                      
                      2,652,600Operating
      profit (loss)
                      
                      
                      (302,200
                      )
                      
                      
                      (18,633
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,805,783
                      )
                      
                      
                      (2,126,616
                      )Interest
      income (expense)
                      
                      
                      (3,739
                      )
                      
                      
                      89
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (762,761
                      )
                      
                      
                      (766,411
                      )Minority
      interest in subsidiary
                      
                      
                      -
                      
                      
                      
                      (332
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (332
                      )(Loss)
      from discontinued operations
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      414,509
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      414,509Net
      income (loss)
                      
                      $
                      (305,939
                      )
                      
                      $
                      (18,876
                      )
                      
                      $
                      (414,509
                      )
                      
                      
                      -
                      
                      
                      $
                      (2,568,544
                      )
                      
                      $
                      (3,307,868
                      )Total
      assets as of December 31, 2007
                      
                      $
                      2,178,912
                      
                      
                      $
                      1,080,602
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      415,666
                      
                      
                      $
                      3,675,180




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





(2)    On
June 23rd, 2008, Kiwa Bio-Tech Products (Shangdong) Co., Ltd. (Kiwa Shandong)
received approval documents from the Ministry of Commerce of the People’s
Republic of China, ratifying Kiwa Shandong to wholesale other companies’
fertilizer products, including chemical fertilizers, complex fertilizers and
compound fertilizers.










(3)    Beijing
Representative Office of Kiwa Shandong fulfills part of corporate managerial
function. Most of its expenses relating to this function were categorized into
corporate segment.




19.
            Income
      Tax




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





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





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





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





Year Ended December 31,2008
                  
                  
                  2007Deferred
      tax assetsNet
      operating loss carryforwards
                  
                  $
                  1,183,364
                  
                  
                  $
                  904,035Allowance
      for doubtful accounts receivable
                  
                  
                  59,037
                  
                  
                  
                  41,571Value
      difference of intangible assets
                  
                  
                  27,987
                  
                  
                  
                  19,173Impairment
      of inventories
                  
                  
                  28,920
                  
                  
                  
                  -Impairment
      of long-lived asset
                  
                  
                  73,239
                  
                  
                  
                  -Accrued
      expenses
                  
                  
                  40,286
                  
                  
                  
                  141,8671,412,833
                  
                  
                  
                  1,106,646Deferred
      tax liabilities
                  
                  
                  
                  
                  
                  
                  0Prepaid
      expenses
                  
                  
                  (375
                  )
                  
                  
                  (3,539
                  )Deferred
      financing cost
                  
                  
                  (7,169
                  )
                  
                  
                  (19,469
                  )(7,544
                  )
                  
                  
                  (23,008
                  )Valuation
      allowance
                  
                  
                  (1,405,289
                  )
                  
                  
                  (1,083,638
                  )Net
      deferred tax assets
                  
                  $
                  -
                  
                  
                  $
                  -





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





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










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





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




20.
            Commitments
      and Contingencies




The
Company has the following material contractual obligations:




Operating
lease commitments




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





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





Lease
commitments under the foregoing lease agreements are as follows:





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




Technology
acquisition




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





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










Operation
of Kiwa-CAU R&D Center




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




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




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




Investment
commitment under the joint venture agreement entered into in May




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




21.
            Subsequent
      Event




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