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 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.

  Year 2007 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 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.

  Year 2007 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 2005 financial statement as of October 31, 2005 included nine
subsidiaries, the 2006 financial statements as of October 31, 2006
included eleven subsidiaries while the 2007 financial statements as of
October 31, 2007 included twelve subsidiaries as shown in the following
tables:

Table 12.1: Percentage of Shareholding in Subsidiaries

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

                                           2005           2006       2007

  Thai Sugar Terminal Public Company       23.82          23.82      23.82
  Limited                                                            

  Tamaka Sugar Industry Co.,Ltd.           88.82          90.21      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      78.63

  KS LAXMI Co.,Ltd.                        51.00          100.00     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     100.00

  Savannakhet Sugar Co.,Ltd.               -              80.00      97.00

  Koh Kong Plantation Co.,Ltd.             -              -          50.00
  ---------------------------------------- -------------- ---------- ----------

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.

12.3) Income Statements

In 2007, the Company and its subsidiary generated revenue from their
operations amounted to THB 9,133 million, increasing from that in the
previous year by 41 percent. The operating costs amounted to THB 6,824
million, increasing from that in the previous year by 40 percent.
Selling and administrative expenses amounted to THB 838 million, 51
percent increase from the previous year. The corporate income tax
amounted to THB 329 million, 54 percent increase from the previous year.
The net profit increased by 24 percent from THB 673 million in 2006 to
THB 836 million in 2007.

Table 12.2 : Consolidated Profit and Loss in year 2007, 2006, 2005

[]

In terms of the Company’s revenue structure, in 2007 revenue from sales
of sugar and molasses amounted to THB 7,400 million, representing 81
percent of the total revenue. Revenue from sales of ethanol and Benzene
amounted to THB 342 million, representing 4 percent of the total
revenue. Revenue from bio-fertilizer sales (in-house production)
amounted to THB 19 million. Electricity sales, which start production in
late December 2006, according to the firm contract done between the
Company and Electricity Generating Authority of Thailand amounted to THB
289 million, accounting for 3 percent of the total revenue. Revenue from
sale of wheat flour totaled THB 224 million, accounting for 2 percent of
the total revenue. The rest of the revenue was generated from service
provision, property leasing, sale of electricity with a non-firm
contract, gasoline sold to sugarcane farmers (trading), sugarcane
harvesting service, fertilizer sold to sugarcane farmers (trading), and
other sources such as interest received and miscellaneous revenues.

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

[]

According to the Company’s revenue structure, an increase in total
revenue in 2007 compared to that in 2006 was from sales of sugar and
molasses. There was an increase in the total of sugarcane crushed
resulting in increases in sugar and molasses production, 47 and 75
percent respectively. Although sugar and molasses prices decreased by 7
percent and 20 percent. The revenue from sale of sugar and molasses, as
a result, increased by 37 percent and 39 percent. There was also
increase in revenues generated from 2 recent projects including sale of
electricity under a firm contract with the Electricity Generating
Authority of Thailand beginning in late December 2006, and sale of wheat
flour produced by Thai Sugar Terminal Public Company Limited commencing
in July – August 2007 (For details, refer to the corporate profile of
Thai Sugar Terminal Public Company Limited, listed under TSTE.).
Revenues generated by sale of ethanol, however, decreased due to the
total amount of ethanol produced in the domestic market was much larger
than domestic demands. Consequently, ethanol prices and sale volume
dropped. The average ethanol price of THB 22.99 per liter in the
previous year was reduced to THB 17.92 per liter in this production
year. There was a decrease in sale volume of ethanol, from the total of
25.57 million liters in the previous year to 18.94 million liters in
this production year. In 2007, the Company earned extra income from the
70:30 profit-sharing system amounted to THB 246 million. At the
beginning of sugarcane crushing season in 2007, the government announced
the provisional sugarcane price of THB 800 per ton and provisional sugar
processing return of THB 342.86 per ton of sugarcane. (Calculation is
based on estimation.) Then, after the end of season, the final sugarcane
price and final sugar processing return are calculated based on actual
data and annouced by the government. The Cane and Sugar Act states that
if the provisional sugarcane price and provisional sugar processing
return are lower than the final sugarcane price and final sugar
processing return, sugar mills are required to pay the difference
between provisional sugar cane price and final sugar cane price to
sugarcane farmers. If, however, the provisional sugarcane price and
provisional sugar processing return are higher than the final sugarcane
price and final processing return, the Cane and Sugar Fund is required
to payback the difference between provisional sugar cane price and final
sugar cane price to sugar mills and compensates for the difference
between provisional sugar processing return and final sugar processing
return to sugar mill which expects to get the return at the provisional
price. In 2007, due to strong currency in THB and significantly drop in
world sugar prices, the final sugarcane price and final sugar processing
return were lower than the provisional sugarcane price and provisional
sugar processing return. According to the law, the Cane and Sugar Fund
was required to pay the differences back to the Company. The different
amount required to pay back for the sugarcane was reflected in the
financial statement as part of sugar production cost and the difference
of the sugar processing return was reflected as extra income. The total
was THB 246 million.

Table 12.4 : Sales and Sale Volumes from sugar, molasses, ethanol and
electricity (firm contract)

[]

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

[]

The total amount of sugarcane crushed in 2007 increased from that in
2006 by 31 percent, from 4,012,292 tons to 5,265,362, as a result of
sufficient rain in late 2006. The total amount of sugarcane crushed in
2006 and 2005 were relatively low due to droughts.

To facilitate analysis and calculation of the corporate financial ratio
compared to revenues from sales and services, the Company has revised
its profit and loss statements as shown in Table 12.6. Annual profit and
loss statements and gross margin are presented. The Company’s gross
profit margin generated from sales and services decreased, from 23.1
percent in 2006 to 21.7 percent in 2007, due to a decrease in the gross
profit margin from its ethanol business because of oversupply of ethanol
in Thailand. Also, the corporate sugar businesses experienced a decrease
in its total gross profit margin caused by higher cost of inventory of
sugar at the beginning of the year. The sugar was then sold at lower
prices resulting in lower gross profit margin. The lower profit margin
was also caused by decrease in production efficiency in the Group.
Although in 2007, there was an increase in the total amount of sugar
produced resulting in a decrease in unit production cost (excluding
production material cost), and the Group realized gross profit margin
from the sale of electricity, its overall profit margin decreased.
However, according to the increase revenues from sales and services by
39 percent, the gross profit from sales and services increased by 31
percent, from THB 1,405 million to THB 1,840 million. Once including the
gross profit from other revenues and other expenses, the total gross
profit margin increased by 42 percent from THB 1,628 million to THB
2,310 million.

Table 12.6 Consolidate income statement in new format for calculating
financial ratio (2207, 2006, 2005)

[]

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

(1) Selling expenses included transport and exporting expenses. In 2007,
selling expenses increased by 117 percent from those in 2006 due to
increases in total amounts of sugar and molasses sold and selling
expenses from ethanol export, sale of fertilizer, and sale of wheat
flour.

(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 decreased from that in the previous year due to that
domestic sugar quota had decreased ( from Quota A at 2.2 million tons in
2006 to 2.0 million tons of sugar in 2007)

(3) Administrative expenses increased by 49 percent because new ventures
in 2007 required more personnel. Total expense of salaries increased by
25 percent, from THB 141 million in 2006 to THB 176 million in 2007.
Other extra expenses included THB 33 million allowance for doubtful
account, depreciation and loss on asset totaling THB 26 million, THB 9
million adjustment of ethanol production cost to market, damage to
sugarcane plantation amounting to THB 12 million, etc. Overall, the
total administrative expense increased by 49 percent, from THB 307
million in 2006 to THB 459 million in 2007.

In 2007, the Company had an increase in the total amount of sugarcane
crushed. The provisional sugarcane price announced by the government was
higher than actual. More cash flow was needed for purchasing sugarcane.
In addition, several investment projects start to need cash for
investment. Although, the Company issued bills of exchange (B/E) in
which an interest rate was fairly low, the corporate total interest
payment increased by 69 percent, from THB 109 million in 2006 to THB 184
million in 2007. Increases in tax expenses depend on the Company’s
operating results and types of corporate businesses. The Company’s tax
burden from its sugar businesses was 25-30 % percent. Its electricity
generating business, which the operating results were good, was
qualified for tax exemption. The ethanol production business, which tax
exemption was granted, experienced a decline in its operating results.
As a result, the corporate average tax expense rate increased from 23
percent in 2006 to 26 percent in 2007.

The Company’s net profit margin decreased, from 11.1 percent in 2006 to
9.9 percent in 2007. As its total income increased by 41 percent, the
net profit increased by 24 percent, from THB 673 million in 2006 to THB
836 million in 2007.

12.4) Balance Sheet

Table 12.8 : Balance Sheet of the Company in 2007, 2006, 2005

[]

In 2007, the Company and its subsidiaries had the total asset of THB
14,057 million. Current assets totaled THB 4,013 million. Non-current
assets totaled THB 10,044 million. In 2006, the Company and its
subsidiaries had the total asset of THB 10,673 million. Current assets
totaled THB 2,918 million. Non-current assets totaled THB 7,755 million.
Part of an increase in the current assets was the compensation from the
Cane and Sugar Fund. This is due to the fact that the provisional
sugarcane price and provisional sugar processing return announced by the
government were higher than the final sugarcane price and final sugar
processing return. Payments the corporate sugar mills made for sugarcane
purchases were higher than actual prices. The Cane and Sugar Fund is,
then, required to pay the sugar mills compensation. The payment,
however, has not yet been made by the fund at the end of the fiscal
year. The balance sheet, as a result, reflects in Other Accounts
Receivable – Cane Value and Compensation for production and distribution
of sugar at THB 818 million. In addition, the trade accounts and notes
receivable increased from THB 246 million to THB 431 million. This is
because credit has been granted to customers purchasing ethanol,
electricity and wheat flour. The increase in the corporate non-current
assets came from 31 percent increase in property, plant and equipment
from THB 7,223 million in 2006 to THB 9,479 million in 2007. Part of the
increase was results of new investment amounting to THB 1,052 million,
and recent asset valuation bringing a THB 1,794-million increase.
Liabilities increased approximately THB 1,062 million due to corporate
new project investment and payments on sugarcane purchased in a larger
amount at prices higher than the final. However, D/E ratio equaled 0.45,
which was close to that in the previous year. The Company’s book value
increased from THB 4.03 per share in 2006 to THB 5.32 per share in 2007.

12.5) Cash Flow

Table 12.9 : Cash Flow of the Company in 2007, 2006, 2005

[]

In 2007, the Company had cash flow from its operations before change in
working capital (operating assets and liabilities) totaled THB 1,079
million. Since the compensation of THB 818 million has not yet been paid
by the Cane and Sugar Fund, net operating cash flow remaining amounted
to THB 126 million.

Cash paid in investing activities totaled THB 1,140 million. An amount
of THB 986 million was invested in lands, buildings, and machinery
(net). Examples of important investments included land purchasing
amounting to about THB 200 millions, machinery and buildings amounting
to about THB 600 million, and automobiles amounting to about THB 140
millions.

Regarding the Company’s financing activities, in 2007 the Company
received the net cash of Baht 1,140 million from short and long term
loans, and issuing bills of exchange and debentures. Some of the cash
was used for dividend payments from mother company and dividend payments
made to minority shareholders.

12.5) Financial Ratio

Chart 12.10 : Financial Ration on year 2007, 2006 and 2005

[]

The 2007 financial ratios indicate a slight increase in liquidity
compared to 2006. This is because of the corporate better operating
results. Current liabilities increased because project investment
required more cash flow. Also, sugarcane was purchased in a larger
amount at prices higher than the final prices. Compared to the previous
year, in 2007 the Company experienced a slight increase in its current
ratio and a decrease in days of inventory due to its better inventory
management. Its D/E ratio in 2007 was close to that in the previous
year. Corporate liabilities and assets increased as results of project
investment and asset re-valuation. The Company’s time interest earned
slightly decreased from those in the previous year. In terms of return
on investment, the Company’s ROA and ROE are close to those in the
previous year.

Regarding operating results, the Company has gross profit ratio and
operating profit ratio close to that in the previous year. Its net
profit margin is slightly lower due to increase in interest and tax
expenses.

12.6) Audit Fees

Khon Kaen Sugar Industry Public Co., Ltd. was responsible for audit fees
in 2006 totaled THB 890,000 (excluding its subsidiaries) and audit fees
in 2007 totaled THB 925,000 (excluding its subsidiaries).