12. Financial Condition and Operating Results

  The corporate accounting period begins on November 1 and ends on
  October 31 in the next year.

12.1) Review Report of Independent Auditor

1)  Auditor

  Year 2004 Miss Susan Eiamvanicha Certified Public Accountant
  Registration No. 4306

  Sam Nak-Ngan A.M.C. Co., Ltd.

  Year 2005 Miss Praphasri Leelasupha Certified Public Accountant
  Registration No. 4664

  Sam Nak-Ngan A.M.C. Co., Ltd.

  Year 2006 Miss Praphasri Leelasupha Certified Public Accountant
  Registration No. 4664

  Sam Nak-Ngan A.M.C. Co., Ltd.

2)  Summary of the audit report over the past three years

  Year 2004 The Auditor reviewed corporate financial statements.
  Unqualified opinions and comments are as follows:

  The financial statements as of October 31, 2003 shown for comparison
  were audited by another auditor from the same firm. Qualified opinions
  on the income statements that relating to non-observation of the
  inventory counting in the end of the year 2002 amounting to Baht
  383.84 million was given, as at that time the current auditor had not
  yet been appointed as the corporate auditor.

  Year 2005 The Auditor reviewed corporate financial statements.
  Unqualified opinions and comments are as follows:

  The financial statements as of October 31, 2004 shown for comparison
  were audited by another auditor from the same firm. Qualified opinions
  relating to non-observation of the inventory counting as at the end of
  the year 2002.

  Year 2006 The Auditor reviewed corporate financial statements as
  unqualified opinions.

12.2) Percentage of Shareholding in the Subsidiaries and Consolidated
Financial Statements Preparation Criteria

(Refer to the attached financial statements for detail.)

The 2004 financial statements as of October 31, 2004 and the 2005
financial statements as of October 31, 2005 included nine subsidiaries
while the 2006 financial statements as of October 31, 2006 included
eleven subsidiaries as shown in the following tables:

Table 12.1: Percentage of Shareholding in Subsidiaries

  ---------------------------------------- -------------- ---------- ----------
                                           Percentage of             
                                           Shareholding              

                                           2004           2005       2006

  Thai Sugar Terminal Public Company       23.82          23.82      23.82
  Limited                                                            

  Tamaka Sugar Industry Co.,Ltd.           88.82          88.82      90.21

  New Krung Thai Sugar Factory Co.,Ltd.    91.06          91.06      91.06

  New Kwang Soon Lee Sugar Factory         96.85          96.85      96.85
  Co.,Ltd.                                                           

  KSL Real Estate Co.,Ltd.                 80.31          80.31      80.31

  KSL Export Trading Co.,Ltd.              78.32          78.32      78.32

  KS LAXMI Co.,Ltd.                        51.00          51.00      100.00

  Khon Kaen Sugar Power Plant Co.,Ltd.     100.00         100.00     100.00

  Khon Kaen Alcohol Co.,Ltd.               100.00         100.00     100.00

  KSL Agro Co.,Ltd.                        -              -          100.00

  Savannakhet Sugar Co.,Ltd.               -              -          80.00
  ---------------------------------------- -------------- ---------- ----------

NOTE:

(1) Although the Company only has 23.82 percent shareholding in Thai
Sugar Terminal Public Company Limited, the Company has controlling power
in that particular company. Thai Sugar Terminal Public Company Limited
is, therefore, considered a corporate subsidiary.

(2) On January 29, 2004 the Company had a change of its shareholding
structure to clarify its investment structure by acquiring shareholding
in three sugar manufacturers as follows:

1.  Tamaka Sugar Industry Co., Ltd. 88.82 percent shareholding

2.  New Krung Thai Sugar Factory Co., Ltd. 91.06 percent shareholding

3.  New Kwang Soon Lee Sugar Factory Co., Ltd. 96.85 percent
    shareholding

After the structural change, those companies became the Company’s
subsidiaries. Also, the change of the KSL Group’s structure made other
companies in the group become the Company’s subsidiaries. Consequently,
the 2003 consolidated financial statements could not be compared to the
2004 and 2005 operating results and financial position.

12.3) Income Statements

In 2006, the Company and its subsidiary generated revenue from their
operations amounted to THB 6,499 million, increasing from that in the
previous year by 17 percent. The operating costs amounted to THB 4,870
million, decreasing from that in the previous year by 17 percent.
Selling and administrative expenses amounted to THB 550 million, 2
percent increase from the previous year. The corporate income tax
amounted to THB 213 million, 10 percent increase from the previous year.
The net profit increased by 37 percent from THB 495 million in 2005 to
THB 679 million in 2006.

Table 12.2 : Consolidated Profit and Loss in year 2004, 2005, 2006

[]

In terms of the Company’s revenue structure, in 2006 revenue from sales
of sugar and molasses amounted to THB 5,398 million, representing 83
percent of the total revenue. Revenue from sales of ethanol and gasoline
amounted to THB 591 million, representing 9 percent of the total
revenue. Other revenues were generated from services, renting, non-firm
electricity sales, gasoline sold to sugarcane farmers (trading),
sugarcane harvesting, fertilizer sold to sugarcane farmers (trading),
and other sources such as interest income and miscellaneous incomes.

Table 12.3 : Consolidated Revenue Structure in 2006, 2005 and 2004

[]

The Company’s main revenues in 2006 were from sales of sugar, molasses,
and ethanol. Compared to revenue structure in 2005, revenues generated
by sales of sugar increased by 8 percent. The sales totalling 436,455
tons in 2005 were higher than the sales totalling 365,356 tons in 2006.
The decrease was due to the buyers’ slowdown in taking the shipment of
sugar. The selling price per ton of sugar ton increased from THB 10,807
per ton to THB 13,906 per ton. Consequently, revenues generated by sales
of sugar increased by 8 percent. Revenues generated by sales of molasses
decreased by 7 percent due to a decrease in sales of molasses. Some of
the molasses manufactured were used in ethanol production. In 2006,
sales of ethanol totaled 25.6 million liters amounting to THB 588
million.

Table 12.4 : Sales and Sale Volumes from sugar and molasses

[]

Table 12.5 : Amount of Cane Crushed, Sugar and Molasses Produced

[]

The total amounts of sugarcane crushed in 2006 and 2005 were close. They
were lower than that in 2005 due to droughts. In 2006, the quality of
crushed sugarcane was not relatively good. In addition, some of the cane
juice was used in ethanol production. The Company, thus, produced 6
percent less sugar, a decrease from 425,612 tons to 399,046 tons. The
amount of molasses produced in 2006 was close to that in 2005.

To facilitate analysis and calculation of the corporate income ratio
(revenues from sale of sugar and molasses, and services), the income
statement was presented in a new format, shown in Table 12.6.,
indicating quarterly income statements, yearly income statements, and
gross margin. In the first and second quarters, the Company had
relatively high net profit as the cost of inventory of molasses was
realized at the average selling price. In the third and fourth quarters
of 2006, the Company had relatively high net profit compared to that in
2005, due to that the corporate ethanol business performed almost stable
quarterly operating results. As a result, in the third and fourth
quarters of 2006 when operating results of the ethanol business were
included, the Company had higher net profit than that in 2005 when
operating results of the ethanol business were not included.

The gross profit margin in 2004 was 23.08 percent, increasing compared
to a 22.40 percent gross margin in 2005. The sugar business had 20.95
percent gross profit margin close to 21.09 percent in 2005. The ethanol
business had 39.09 percent gross profit margin. There was a significant
decrease in gross profit margin in the service segment, from 68.27
percent in 2005 to 47.95 in 2006. Revenue in the service segment was
generated from exporting and port services which had high fixed costs.
Decreased amount of sugar produced and exported resulted in decreased
gross margin in the service segment.

Table 12.6 Consolidate income statement in new format for calculating
financial ratio

[]

Table 12.7 : Selling, General and Administrative Expenses

[]

The corporate selling and administrative expenses consists of three main
parts:

(1) Selling expenses included transport and exporting expenses. In 2006,
selling expenses decreased by 26 percent from those in 2005 due to
decrease in amounts of sugar and molasses produced.

(2) Proceed to Stabilization Funds was collected from the change in
regulation of sugar price, originally, controlled prices of sugar
included VAT to the controlled prices of sugar not included VAT. The
difference in this sugar price are required by cabinet to contribute to
Stabilization Fund. Therefore, part of the expenses depends on domestic
sugar sale which increased from that in the previous year due to that
domestic sugar quota had increased ( from Quota A at 2 million tons in
2005 to 2.2 million tons of sugar in 2006)

(3) Administrative expenses increased by 14 percent because the
investment projects on 2006 required more personnel.

Regarding interests and taxes, interest rates increased compared to the
previous year. In 2006, the Company had a large inventory of sugar
resulting in decrease in cash inflow from sale of sugar and increase in
short term loan used as working capital in the sugar business segment.
The interest bearing debt in 2005 was Baht 42 million. It reached Baht
109 million in 2006. Tax expenses increased due to the Company’s better
operating results compared to those in the previous year. The Company
paid 23- percent tax in 2006, a decrease from 26 percent in 2005, as
there is an 8-year exemption of corporate income tax for ethanol
production.

12.4) Balance Sheet

Table 12.8 : Balance Sheet of the Company in 2003*-2005

[]

In 2006, the Company and its subsidiaries had the total asset of THB
10,846 million. Current assets totaled THB 2,918 million. Non-current
assets totaled THB 7,928 million. Inventory, part of the current assets,
increased from THB 912 million to THB 1,834 million, due to the buyers’
slowdown in taking the shipment of sugar. Thus, there is an increase in
the inventory of sugar. Most of the inventory of sugar was sold with
agreements, and deliveries were awaited. According to the company policy
concerning the revenue recognized, the company records the revenue after
sugar are delivered. Consequently, the sales of sugar appeared lower
while inventory appeared higher. The non-current assets are mostly
lands, buildings, and machine equipments (PP&E). The net PP&E in 2006
was THB 7,151 million, an increase from THB 5,837 million in 2005. This
was because there was increasing investment in 2006 amounting to THB
1,708 million. In 2006, liabilities totaled THB 3,327 million.
Shareholders’ equity amounted to THB 7,518 million. D/E ratio equaled
0.44.

At the end of 2006, the Company and its subsidiaries had the total
inventory of THB 1,834 million: 113,453 tons of sugar, 34,766 tons of
molasses, and 360,150 liters of ethanol. In 2005, the Company and its
subsidiaries had the total inventory of THB 912 million: 79,774 tons of
sugar and 28,304 tons of molasses.

12.5) Cash Flow

Table 12.9 : Cash Flow of the Company in 2006, 2005, 2004

[]

In 2006, the Company had cash flow from operating activities before
change in working capital (operating assets and liabilities) totaled THB
944 million. Since there was a large amount of inventory of sugar, an
amount of working cost needed to be set aside. Net operating cash flow
remaining amounted to THB 111 million.

Cash paid in investment activities totaled THB 1,484 million. An amount
of THB 1,708 million was invested in lands, buildings, and machinery.
Important activities were investing in the machinery of the power plant
and ethanol plant, purchasing lands for sugarcane farming, and investing
in wheat flourmill operations of the subsidiary of Thai Sugar Terminal
Public Company Limited.

Regarding the Company’s financing activities, in 2006 the Company
received the net cash of THB 1,283 million from short and long term
loans. Some of the cash was used for dividend payments in the Company
and dividend payments made to minority shareholders.

12.5) Financial Ratio

Chart 12.10 : Financial Ration on year 2006, 2005 and 2004

[]

The financial ratios in 2006 indicate decreased liquidity and increase
liabilities due to increase in inventories and investment. Compared to
the previous year, the Company has decreased current ratio, increased
days of inventory, increased D/E ratio, and decreased times interest
earned. In terms of return on investment, the ROA is close to that in
the previous year. The ROE increases from that in the previous year, as
the Company has provided financial supports for its investment in forms
of internal loans and loans from financial institutions rather than
capital increase.

Regarding operating results, the Company has gross profit margin that is
close to that in the previous year. The operating profit margin
increases. The Company has increased income resulting in decrease in
fixed expenses in terms of SG&A against the total income. Consequently,
the Company’s operating profit margin and net profit margin increase.

12.6) Audit Fees

Khon Kaen Sugar Industry Public Co., Ltd. was responsible for audit fees
in 2006 totaled Baht 890,000 million (excluding its subsidiaries).