12. Financial position and operating results

12.1 Financial Statements

(A) Summary of the Report of the Independent Auditor for 2005-2007.

The Company appointed Ms. Ratana Jala, Certified Public Accountant no.
3734 of Ernst & Young Office Limited, as auditor for the year 2005 -
2007. The auditor expressed opinions on the consolidated financial
statements for the year 2005-2007 as follows:

-   Year 2005 : The Auditor expressed an unqualified opinion but drew
    attention to Note 19 to the financial statements which stated that
    as on the balance sheet date, the Company had a share discount of
    approximately Baht 1,010 million. The Meeting of the Board of
    Directors No. 1/2006, dated 24 February 2006, had approved a share
    capital reduction plan and the transfer of share premium generated
    from the reduction of share capital to offset the share discount.
    The share capital reduction plan had to be approved by a meeting of
    the shareholders of the Company before it could be implemented.
    Before this process was completed if any dividend was paid by the
    Company, the balance of retained earnings remaining after such
    dividend payment must not have been less than the balance of the
    share discount.

-   Year 2006: The auditor’s report for the 2006 does not contain any
    qualified opinion.

-   Year 2007: The Auditor expressed an unqualified opinion but drew
    attention to Note 4 to the financial statements whereby, effective 1
    January 2007, the Company changed its accounting policy for
    recording investments in subsidiaries in the separate financial
    statements from the equity method to the cost method. The Company
    has thus restated the separate financial statements as at 31
    December 2006 and for the year then ended to reflect this accounting
    change.

Change in Accounting Policy for recording investments in subsidiaries in
the separate financial statements

During the first quarter of the current year, the Company changed its
accounting policy for recording investments in subsidiaries in the
separate financial statements from the equity method to the cost method,
in compliance with Accounting Standard No. 44 (Revised 2007) regarding
“Consolidated Financial Statements and Separate Financial Statements”,
under which investments in subsidiaries are to be presented in the
separate financial statements under the cost method.

In this regard, the Company has restated the previous period’s separate
financial statements as though the investments in the subsidiaries had
originally been recorded using the cost method. The change has the
effect of increasing net income in the separate income statements for
the year ended 31 December 2007 and 2006 by Baht 10.8 million (Baht 0.01
per share) and Baht 315.7 million (Baht 0.16 per share), respectively.
The cumulative effect of the change in accounting policy has been
presented under the heading of “Cumulative effect of the change in
accounting policy for investments in subsidiaries” in the separate
statements of changes in shareholders’ equity.

Such change in accounting policy affects only the accounts related to
investments in subsidiaries in the Company’s separate financial
statements, with no effect to the consolidated financial statements.

  (B) Summary of financial statements for the Company and its subsidiary
  companies for the years ended 31 December 2005, 2006 and 2007.

KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED AND ITS SUBSIDIARY
COMPANIES

BALANCE SHEETS

AS AT 31 DECEMBER 2005, 2006 AND 2007

(Unit : Baht)

[]

KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED AND ITS SUBSIDIARY
COMPANIES

BALANCE SHEETS (Continued)

AS AT 31 DECEMBER 2005, 2006 AND 2007

(Unit : Baht)

[]

KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED AND ITS SUBSIDIARY
COMPANIES

EARNINGS STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2005, 2006 AND 2007

(Unit : Baht)

[]

KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED AND ITS SUBSIDIARY
COMPANIES

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED 31 DECEMBER 2005, 2006 AND 2007

(Unit : Baht)

  []

  KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED AND ITS SUBSIDIARY
  COMPANIES

STATEMENTS OF CASH FLOWS (continued)

FOR THE YEARS ENDED 31 DECEMBER 2005, 2006 AND 2007

(Unit : Baht)

[] 

(C) Ratios for years 2005, 2006 AND 2007

  ------------------------------------ ----------- ----------- -----------
  Consolidated Basis                   2007        2006        2005

  Profitability Ratios                                         

  Gross profit margin (%)              90.42%      90.44%      92.16%

  Net profit margin (%)                21.91%      16.59%      13.45%

  Return on equity (%)                 7.56%       4.25%       3.74%

  Return on investment (%)             16.47%      3.50%       7.11%

  Efficiency Ratios                                             

  Return on assets (%)                 4.56%       2.85%       2.48%

  Assets turnover (times)              0.21        0.17        0.18

  Financial Ratios                                              

  Liquid assets to total liabilities   1.16        1.44        0.91
  (times)                                                      

  Earning assets to total liabilities  1.91        2.79        2.64
  (times)                                                      

  Liquid assets to total assets (%)    52.90%      45.42%      31.28%

  Earning assets to total assets (%)   87.27%      87.87%      90.69%

  Debt to equity (times)               0.84        0.46        0.52

  Dividend payment (%)                 70.59%      77.78%      0.00%

  Other ratios                                                  

  Securities investment to total       47.49%      53.55%      34.78%
  assets (%)                                                   

  NCR to net liquid assets (SEC        188.58%     39.2%       265.14%
  requirement) (%)                                             

  Per Share Information                                        

  Par Value per share (Baht)           1.00        1.00        2.00

  Book Value per share (Baht)          2.25        2.18        2.12

  Basic Earning per share (Baht)       0.17        0.09        0.08

  Dividend per share (Baht)            0.12        0.07        0.00
  ------------------------------------ ----------- ----------- -----------

  12.2 Management discussion & analysis (For the purpose of section
  12.2, “Company” refers

  to “Company together with its subsidiaries”)

  (Consolidated financial statements as of December 31, 2007)

Analysis of Performance

    The Company reported total income of Baht 1,523 million and net
    profit of Baht 334 million (equivalent to earnings per share of Baht
    0.17). Details of the Company’s performance are as follows:

    1. Revenue structure

  To diversify its income base the Company tried to expand its revenue
  from various businesses such as financial advisory business,
  underwriting business, selling agent, securities borrowing and lending
  business derivatives business and futures business.

  In 2007, the Company reported total income of Baht 1,523 million. The
  main elements of the Company’s revenue structure were; 42% from
  brokerage fees from securities business and derivatives business, 29%
  on gain trading on trading securities and trading derivatives, 14%
  from fee and service income, 10% from interest and dividend income,
  and 4% from interest on margin loans.

  ------------------------------- --------------- ------- --------------- -------
  Income                          2007 (Baht)     %                       %

                                                          2006 (Baht)     

  Brokerage fee                                                           

  - Brokerage fee from securities 577,531,446     38%     654,902,541     60%
  business                                                                

  - Brokerage fee from            56,274,967      4%      10,950,300      1%
  derivatives business                                                    

  Fee and service income          216,575,087     14%     222,466,654     20%

  Gain (loss) on trading in       528,312,358     35%     (77,652,551)    (7%)
  securities                                                              

  Gain (loss) on trading          (80,497,977)    -5%     35,887,174      3%
  derivatives                                                             

  Interest and dividends          155,615,461     10%     140,324,971     13%

  Interest on margin loans        62,021,128      4%      72,839,952      7%

  Securities Income               1,515,832,470   100%    1,059,719,041   97%

  Other Income                    6,779,681       0%      37,181,240      3%

  Total Income                    1,522,612,151   100%    1,096,900,281   100%
  ------------------------------- --------------- ------- --------------- -------

2. Changes in income and expenses

2.1 Change in securities business income

  The Company’s securities business income increased from Baht 1,060
  million in 2006 to Baht 1,516 million in 2007, details as follows:

  2.1.1 Brokerage fee

  Brokerage fee from securities business

  The Company ranked No.7 in terms of market share at 4.18% in 2007,
  same ranking but slightly increased market shares from the previous
  year. However, the brokerage fee decreased from Baht 655 million in
  2006 to Baht 578 million in 2007.

  Brokerage fee from derivatives business

  TFEX opened in April 2006 and in 2007 KGI ranked no.1 in terms of TFEX
  market share at 13.55%, a same ranking as last year. The brokerage fee
  from derivatives business increased from Baht 11 million in 2006 to
  Baht 56 million in 2007. The increase was mainly due to the growth in
  the average daily trading volume of TFEX.

  2.1.2 Fee and service income

  The Company’s fee and service income decreased from Baht 222 million
  in 2006 to Baht 217 million in 2007 (equivalent to a 2% decrease). The
  changes in fee and service income are as follows:

  ----------------------------- ------------- --------- ------------- ---------
                                2007                    2006           

  Fee and Service Income        Baht          %         Baht          %

  Mutual fund management fee    158,305,287   73.09%    178,215,309   80.11%

  Private fund management fee   24,627,913    11.37%    16,242,645    7.30%

  Management fee, registrar and 9,391,229     4.34%     10,113,079    4.55%
  custodian fees                                                      

  Underwriting fee              1,026,275     0.47%     5,529,780     2.49%

  Financial advisory fee        4,900,000     2.26%     2,762,963     1.24%

  Securities borrowing and      7,715,679     3.56%     5,947,339     2.67%
  lending fee                                                         

  Selling agent fee             9,070,352     4.19%     3,280,214     1.47%

  Others                        1,538,352     0.71%     375,325       0.17%

  Total Fee and Service Income  216,575,087   100.00%   222,466,654   100.00%
  ----------------------------- ------------- --------- ------------- ---------

  2.1.3 Gain on trading in securities

  The Company had a gain from trading in securities totaling Baht 528
  million due to favorable market sentiment through out the year. Gain
  on trading securities comprises a realized gain of Baht 510 million,
  an unrealized gain on revaluation of investment held from trading of
  Baht 69 million, and an unrealized loss on revaluation of securities
  borrowed under the securities and lending business of Baht 51 million.

  2.1.4 Loss on trading in derivatives

  The Company had loss from trading in derivatives totaling Baht 80
  million in 2007, comprised an unrealized loss on revaluation of
  derivatives of Baht 39 million and realized loss on derivatives of
  Baht 41 million.

  2.1.5 Interest and Dividend Income

  The Company had interest and dividend income totaling Baht 156 million
  in 2007, comprised interest income of Baht 124 million and dividend
  income of Baht 32 million.

  2.1.6 Interest on Margin Loans

  The Company had interest on margin loans of Baht 62 million in 2007
  which received from credit balance.

  2.2 Change in Expenses

  The Company’s total expenses increased from Baht 887 million in 2006
  to Baht 1,027 million in 2007, details are as follows:

  []

  2.2.1 Securities Business Expenses

The Company had securities business expenses of Baht 147.08 million,
comprising expenses on borrowings of Baht 65.51 million, fee and service
expense of Baht 79.70 million, and bad debt and doubtful accounts of
Baht 1.86 million. Details are as follows:

A) Expenses on borrowings

Expenses on borrowings increased from Baht 34.01 million in 2006 to Baht
65.51 million in 2007. The increase was from increase of interest paid
on securities sold under repurchased agreement, interest paid from bills
of exchange and interest paid to derivatives business receivables.

Expenses on borrowings of Baht 65.51 million in 2007, comprising
interest paid on securities sold under repurchased agreement of Bath
48.22 million, interest paid from credit balance account of Baht 3.87
million, interest paid from bills of exchange of Baht 4.33 million,
interest paid to derivatives business receivables of Baht 4.41 million
and others interest paid and expenses of Baht 4.68 million.

B) Fee and Service Expenses

Fee and service expenses increased from Baht 67.27 million in 2006 to
Baht 79.70 million or equivalent to an 18% increase, which was mainly
from fees from brokerage expensed of derivatives business that
considerable increased in volume compared to year 2006.

Out of fee and service expenses in year 2007 totaling Baht 79.70
million, Baht 51.76 million was from brokerage expenses of the
securities and derivatives business which varied with the company’s
brokerage volume, Baht 12.84 million was expenses for stock lending and
borrowing transactions and Baht 15.10 million came from other fees and
service expenses.

C) Bad debt and doubtful accounts

In 2007, the Company recorded doubtful accounts of Baht 6.34 million but
the Company was repaid Baht 4.48 million, thus the Company reported bad
debt and doubtful accounts of Baht 1.86 million.

2.2.2 Operating Expenses

The Company had operating expenses of Baht 880 million in 2007, mainly
comprised personnel expenses of Baht 586 million and premises and
equipment expenses of Baht 134 million.

3. Performance

In year 2007, the Company reported net profit of Baht 334 million and
earnings per share of Baht 0.17, a gross profit margin of 90.42%, net
profit margin of 21.91%, and return on equity of 7.56%.

Analysis of Financial Status

  As of 31 December 2007, the Company had total assets of Baht 8,278
  million, total liabilities of Baht 3,785 million and total
  shareholders’ equity of Baht 4,492 million. Analysis of financial
  status is as follows:

  1 . Assets

  a) Investments in debt and equity securities

  As of 31 December 2007, the Company had net investments in debt and
  equity securities of Baht 3,931 million, comprised of net investments
  comprised short term investments of Baht 3,165 million and long term
  investment of Baht 766 million. (see details in note of financial
  statements No 8: Investments in debt and equity securities)

b) Net securities and derivatives business receivables and accrued
interest receivables

  As of 31 December 2007, the Company had net securities and derivatives
  business receivables totaling Baht 2,298 million, details as follows:

  []

  The Company had classified its securities business receivables in
  accordance with the relevant guildlines issued by the SEC governing
  accounting for the doubtful debts of securities companies. As of 31
  December 2007, Baht 62 million were classified as substandard debt and
  Baht 277 million were classified as doubtful debt.

  The Company had set aside full provision for the doubtful debts of
  Baht 277 million and further provision of Baht 12 million, which was
  more than that required by the SEC.

2. Liquidity

As of 31 December 2007, the value of the Company’s liquid assets was
Baht 4,380 million (equivalent to 52.90% of total assets). These liquid
assets consisted of Baht 1,266 million in cash and cash equivalents,
Baht 2,377 million in government securities and Baht 737 million of
listed securities. The Company’s NCR was 188.58% (the SEC requires that
the NCR must not be lower than 7%).

3. Appropriateness of capital structure

  As of 31 December 2007, the Company has a good capital structure, a
  debt to equity ratio was only 0.84 times.

  12.3 Audit Fee

  For 2007, the Company and its subsidiaries paid audit fees and
  non-audit fee to auditor (Ernst & Young Office Limited) and any
  persons or companies related to auditor as follows:

  A) Audit fees

  The Company and its subsidiaries paid audit fees to auditor (Ernst &
  Young Office Limited) and any persons or companies related to auditor
  as follows:

+---------------------+---------------+-------+-------+-------+------+
| Company and its     | Auditor       | Audit | Other | Audit | O    |
| subsidiary          |               | Fee   | exp   | Fee   | ther |
|                     |               |       | enses |       | expe |
|                     |               | (     | (     | (HK   | nses |
|                     |               | Baht) | Baht) | Do    | (HK  |
|                     |               |       |       | llar) | Dol  |
|                     |               |       |       |       | lar) |
+---------------------+---------------+-------+-------+-------+------+
| KGI Securities      | Ernst & Young | 1,42  | 4     | -     | -    |
| (Thailand) Plc.     | Office        | 5,000 | 5,457 |       |      |
|                     | Limited       |       |       |       |      |
+---------------------+---------------+-------+-------+-------+------+
| One Asset           | Ernst & Young | 35    | 6,080 | -     | -    |
| Management Limited  | Office        | 0,000 |       |       |      |
|                     | Limited       |       |       |       |      |
+---------------------+---------------+-------+-------+-------+------+
| KGI Securities      | Ernst &Young  | -     | -     | 3     | -    |
| (Thailand)          | Hong Kong     |       |       | 2,000 |      |
|                     |               |       |       |       |      |
| International       |               |       |       |       |      |
| Holdings Limited    |               |       |       |       |      |
+---------------------+---------------+-------+-------+-------+------+
| KGI (Thailand)      | Ernst &Young  | -     | -     | 6     | -    |
| Holdings Limited    | Hong Kong     |       |       | 0,000 |      |
+---------------------+---------------+-------+-------+-------+------+
| Total Audit Fee     |               | 1,77  | 5     | 9     | -    |
|                     |               | 5,000 | 1,537 | 2,000 |      |
+---------------------+---------------+-------+-------+-------+------+
|                     |               | 1,82  |       | 9     |      |
|                     |               | 6,537 |       | 2,000 |      |
+---------------------+---------------+-------+-------+-------+------+

  B) Non-audit fees

  The Company and its subsidiaries paid non-audit fees to auditor (Ernst
  & Young Office Limited) and any persons or companies related to
  auditor as follows:

+---------------------+------------+-------------+--------+-----------+
| Company and its     | Non-audit  | The         | Non    |           |
| subsidiary          | service    | auditor’s   | -audit |           |
|                     |            | firm,       | fees   |           |
|                     |            | persons and |        |           |
|                     |            | companies   |        |           |
|                     |            | related to  |        |           |
|                     |            | the auditor |        |           |
+---------------------+------------+-------------+--------+-----------+
|                     |            |             | Year   | Year 2007 |
|                     |            |             | 2007   |           |
|                     |            |             |        | (HK       |
|                     |            |             | (Baht) | Dollar)   |
+---------------------+------------+-------------+--------+-----------+
| KGI Securities      | Tax        | Ernst &     | 1      | -         |
| (Thailand) Plc.     | Service    | Young       | 20,000 |           |
|                     |            | Corporate   |        |           |
|                     |            | Services    |        |           |
|                     |            | Limited     |        |           |
+---------------------+------------+-------------+--------+-----------+
| KGI Securities      | Tax        | Ernst &     | -      | 8,000     |
| (Thailand)          | Service    | Young Tax   |        |           |
|                     |            | Services    |        |           |
| International       |            | Limited     |        |           |
| Holdings Limited    |            |             |        |           |
+---------------------+------------+-------------+--------+-----------+
| Total Non-Audit Fee |            |             | 1      | 8,000     |
|                     |            |             | 20,000 |           |
+---------------------+------------+-------------+--------+-----------+

  There is no further expense for services not yet completed which will
  become payable in the near future.