12. Financial position and operating results

12.1 Financial Statements

(A) Summary of the Report of the Independent Auditor for 2006-2008.

The Company appointed Ms. Ratana Jala, Certified Public Accountant no.
3734 of Ernst & Young Office Limited, as auditor for the year 2006 -
2007. In 2008, the Company appointed Ms. Nongluk Pumnoi, Certified
Public Accountant no. 4172 of Ernst & Young Office Limited, as auditor.
The auditors expressed opinions on the consolidated financial statements
for the year 2006-2008 as follows:

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

-   Year 2007: The Auditor expressed an unqualified opinion, but drew
    attention to Note 4 of the financial statement 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 of 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 year 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,
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.

-   Year 2008: The auditor’s report for 2008 does not contain any
    qualified opinion.

  (B) Summary of financial statements for the Company and its subsidiary
  companies for the years ended 31 December 2006, 2007 and 2008.

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

BALANCE SHEETS

AS AT 31 DECEMBER 2006, 2007 AND 2008

(Unit : Baht)

[]

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

BALANCE SHEETS (Continued)

AS AT 31 DECEMBER 2006, 2007 AND 2008

(Unit : Baht)

[]

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

EARNINGS STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2006, 2007 AND 2008

(Unit : Baht)

[]

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

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED 31 DECEMBER 2006, 2007 AND 2008

(Unit : Baht)

  []

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

STATEMENTS OF CASH FLOWS (continued)

FOR THE YEARS ENDED 31 DECEMBER 2006, 2007 AND 2008

(Unit : Baht)

[] 

  (C) Ratios for years 2006, 2007 and 2008

  ------------------------------------ ----------- ----------- -----------
  Consolidated Basis                   2008        2007        2006

  Profitability Ratios                                         

  Gross profit margin (%)              87.23%      90.42%      90.44%

  Net profit margin (%)                13.72%      21.91%      16.59%

  Return on equity (%)                 4.19%       7.56%       4.25%

  Return on investment (%)             14.52%      16.47%      3.50%

  Efficiency Ratios                                            

  Return on assets (%)                 2.51%       4.56%       2.85%

  Assets turnover (times)              0.18        0.21        0.17

  Financial Ratios                                             

  Liquid assets to total liabilities   1.78        1.16        1.44
  (times)                                                      

  Earning assets to total liabilities  2.60        1.91        2.79
  (times)                                                      

  Liquid assets to total assets (%)    58.75%      52.90%      45.42%

  Earning assets to total assets (%)   85.84%      87.27%      87.87%

  Debt to equity (times)               0.49        0.84        0.46

  Dividend payment (%)                 71.43%      70.59%      77.78%

  Other ratios                                                 

  Securities investment to total       41.60%      47.49%      53.55%
  assets (%)                                                   

  NCR to net liquid assets (SEC        425.64%     188.58%     39.20%
  requirement) (%)                                             

  Per Share Information                                        

  Par Value per share (Baht)           1.00        1.00        1.00

  Book Value per share (Baht)          2.23        2.25        2.18

  Basic Earning per share (Baht)       0.09        0.17        0.09

  Dividend per share (Baht)            0.075       0.12        0.07

                                                               
  ------------------------------------ ----------- ----------- -----------

  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, 2008)

Analysis of Performance

    The Company reported total income of Baht 1,363 million and net
    profit (net income attributable to equity holders of the parent) of
    Baht 187 million (equivalent to earnings per share of Baht 0.09).
    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 2008, the Company reported total income of Baht 1,363 million,
  which comprises securities income of Baht 1,358 million and other
  income of Baht 6 million. The main elements of the Company’s
  securities income structure were; 41% from brokerage fees from
  securities business and derivatives business, 25% on gain trading on
  trading securities and trading derivatives, 17% from fee and service
  income, 10% from interest and dividends income, and 6% from interest
  on margin loans.

  ------------------------------- --------------- ------- --------------- -------
  Income                          2008 (Baht)     %                       %

                                                          2007 (Baht)     

  Brokerage fee                                                           

  - Brokerage fee from securities 478,581,158     35%     577,531,446     38%
  business                                                                

  - Brokerage fee from            82,377,524      6%      56,274,967      4%
  derivatives business                                                    

  Fee and service income          233,150,796     17%     216,575,087     14%

  Gain (loss) on trading in       195,858,757     14%     528,312,358     35%
  securities                                                              

  Gain (loss) on trading          155,614,638     11%     (80,497,977)    (5%)
  derivatives                                                             

  Interest and dividends          135,010,520     10%     155,615,461     10%

  Interest on margin loans        77,237,906      6%      62,021,128      4%

  Securities Income               1,357,831,299   100%    1,515,832,470   100%

  Other Income                    5,640,695               6,779,681       

  Total Income                    1,363,471,994           1,522,612,151   
  ------------------------------- --------------- ------- --------------- -------

2. Changes in income and expenses

2.1 Change in securities business income

  The Company’s securities business income decreased from Baht 1,516
  million in 2007 to Baht 1,358 million in 2008, details as follows:

  2.1.1 Brokerage fee

  Brokerage fee from securities business

  Brokerage fee decreased from Baht 578 million in 2007 to Baht 479
  million in 2008. The reasons were the political unrest in Thailand and
  the sub-prime loans crisis in the US, resulting in the sluggish
  investment of investors. Accordingly, the daily average turnover (in
  SET) decreased from Bt17.4bn in 2007 to Bt15.9bn in 2008. Moreover,
  the Company’s market share decreased from 4.18% in 2007 to 3.75% in
  2008 due to highly competitive conditions in SET market and a decrease
  in retail investors due to the uncertain market conditions.

  Brokerage fee from derivatives business

  The brokerage fee from derivatives business increased from Baht 56
  million in 2007 to Baht 82 million in 2008 due to growth in the
  average daily total turnover of TFEX, which increased from Baht 2,883
  million in 2007 to Baht 3,810 million in 2008, a rise of 32%. The
  Company ranked No.4 in 2008 in terms of market share in Thailand
  Futures Exchange (TFEX) market with a market share of 8.95%.

  2.1.2 Fee and service income

  The Company’s fee and service income increased from Baht 217 million
  in 2007 to Baht 233 million in 2008 (equivalent to a 8% increase). The
  main fee and service income were from mutual fund management fees and
  private fund management fees, which were Baht 165 million and 28
  million, respectively. These income fees were from One Asset
  Management Limited (a 97%-held subsidiary). The changes in fee and
  service income are as follows:

  ----------------------------- ------------- --------- ------------- ---------
                                2008                    2007           

  Fee and Service Income        Baht          %         Baht          %

  Mutual fund management fee    165,029,021   70.78%    158,305,287   73.09%

  Private fund management fee   28,143,330    12.07%    24,627,913    11.37%

  Management fee, registrar and 9,886,152     4.24%     9,391,229     4.34%
  custodian fees                                                      

  Underwriting fee              2,453,460     1.05%     1,026,275     0.47%

  Financial advisory fee        5,484,200     2.35%     4,900,000     2.26%

  Securities borrowing and      7,577,337     3.25%     7,715,679     3.56%
  lending fee                                                         

  Selling agent fee             10,800,484    4.63%     9,070,352     4.19%

  Others                        3,776,812     1.62%     1,538,352     0.71%

  Total Fee and Service Income  233,150,796   100.00%   216,575,087   100.00%
  ----------------------------- ------------- --------- ------------- ---------

  2.1.3 Gain on trading in securities and derivatives

  The Company recognized a gain on trading in securities and derivatives
  business of Baht 351 million in 2008, compared with a gain of Baht 448
  million in 2007. The decrease was mainly due to the SET Index decline
  of 47.6% in 2008 compared to the SET Index increase of 26.2% in 2007.

  Gain on trading in securities and derivatives business of Baht 351
  million in 2008 comprised gain on trading in debt securities of Baht
  141 million, gain on trading in equity securities of Baht 54 million
  and gain on trading in derivatives of Baht 156 million.

  2.1.4 Interest and Dividend Income

  The Company’s interest and dividend income decreased from Baht 156
  million in 2007 to Baht 135 million in 2008. The main reasons were a
  decrease of interest of debentures and bonds and a decrease of
  dividend from investments.

  2.1.5 Interest on Margin Loans

  The Company’s interest on margin loans increased from Baht 62 million
  in 2007 to Baht 77 million in 2008. The increase was mainly from
  credit balance accounts.

  2.2 Change in Expenses

  The Company’s total expenses increased from Baht 1,027 million in 2007
  to Baht 1,110 million in 2008, details are as follows:

  2.2.1 Securities Business Expenses

The Company’s securities business expenses increased from Baht 147
million in 2007 to Baht 324 million in 2008, comprised of expenses on
borrowings of Baht 78 million, fee and service expense of Baht 96
million, and bad debt and doubtful accounts of Baht 150 million. Details
are as follows:

A) Expenses on borrowings

Expenses on borrowings increased from Baht 66 million in 2007 to Baht 78
million in 2008. The increase was from increase of interest paid on
securities sold under repurchased agreement, interest paid to cash
accounts and interest paid to derivatives business receivables.

Expenses on borrowings of Baht 78 million in 2008, comprising interest
paid on securities sold under repurchased agreement of Baht 55 million,
interest paid to credit balance account of Baht 3 million, interest paid
to financial institution of Baht 2 million, interest paid to cash
accounts of Baht 7 million, and interest paid to derivatives business
receivables of Baht 11 million.

B) Fee and Service Expenses

Fee and service expenses increased from Baht 80 million in 2007 to Baht
96 million in 2008 or equivalent to a 20% increase, which was from fees
from brokerage expensed of derivatives business, fees from securities
borrowing and lending business, and others fees and service expenses.
Those fees increased which varied with the Company’s transactions.

Out of the fee and service expenses in year 2008 totaling Baht 96
million, Baht 55 million was from brokerage expenses of the securities
and derivatives business which varied with the company’s brokerage
volume, Baht 17 million was expenses for stock lending and borrowing
transactions and Baht 24 million came from other fees and service
expenses.

C) Bad debt and doubtful accounts

The Company has provided an allowance for doubtful debts based on a
review of debtor's ability to make repayment, taking into consideration
recovery risk and the value of the collateral. Such debt classifications
and provisions are made in accordance with the guidelines laid down in
the Notification No. Kor. Thor. 5/2544 dated 15 February 2001 of the
Office of the Securities and Exchange Commission, and consideration of
other relevant factors.

  In 2008, the Company recorded doubtful accounts of Baht 150 million,
  which increased from Baht 2 million in 2007. The main reasons were
  from the unsettlement transactions from clients, the forced sale of
  stocks of credit balance account collateral and devaluation of land of
  credit balance account collateral.

2.2.2 Operating Expenses

The Company’s operating expenses decreased from Baht 880 million in 2007
to Baht 786 million in 2008. The operating expenses comprised personnel
expenses of Baht 489 million, premises and equipment expenses of Baht
136 million, taxes and duties of Baht 5 million, directors’ remuneration
of Baht 18 million, and other expenses of Baht 138 million.

3. Performance

In year 2008, the Company reported net profit (net income attributable
to equity holders of the parent) of Baht 187 million and earnings per
share of Baht 0.09, a gross profit margin of 87.23%, net profit margin
of 13.72%, and return on equity of 4.19%.

Analysis of Financial Status

  As of 31 December 2008, the Company had total assets of Baht 6,655
  million, total liabilities of Baht 2,198 million and total
  shareholders’ equity (equity attributable to Company’s shareholders)
  of Baht 4,450 million. Analysis of financial status is as follows:

  1 . Assets

  a) Investments in debt and equity securities

  As of 31 December 2008, the Company had net investments in debt and
  equity securities of Baht 2,768 million, comprised of net investments
  of short-term investments of Baht 1,985 million and long term
  investment of Baht 783 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 2008, the Company had net securities and derivatives
  business receivables totaling Baht 1,434 million, details as follows:

  ------------------------------------------------------ ----------------
                                                         2008

  Securities business receivables                        

  Cash accounts                                          291,469,530

  Credit balance loans                                   534,977,231

  Receivables under securities borrowing and lending     
  business :-                                            

  - Guarantee deposit receivables                        481,456,193

  - Securities borrowing receivables                     81,201,100

  Other receivables :-                                   

  - Installment receivables                              455,802,506

  - Overdue customers’ accounts                          539,354

  Total securities business receivables                  1,845,445,914

  Add : Accrued interest receivables                     27,282,712

  Less : Allowance for doubtful accounts                 (439,142,044)

  Securities business receivables - net                  1,433,586,582

  Total securities and derivatives business receivable - 1,433,586,582
  net                                                    
  ------------------------------------------------------ ----------------

  The Company had classified its securities business receivables in
  accordance with the relevant guidelines issued by the SEC governing
  accounting for the doubtful debts of securities companies. As of 31
  December 2008, Baht 30 million were classified as substandard debt and
  Baht 439 million were classified as doubtful debt. The Company had set
  aside full provision for doubtful debt.

2. Liquidity

As of 31 December 2008, the value of the Company’s liquid assets was
Baht 3,910 million (equivalent to 58.75% of total assets). These liquid
assets consisted of Baht 1,917 million in cash and cash equivalents,
Baht 1,653 million in government securities and Baht 340 million of
listed securities. The Company’s NCR was 425.64% (the SEC requires that
the NCR must not be lower than 7%).

3. Appropriateness of capital structure

  As of 31 December 2008, the Company has an appropriate capital
  structure; debt to equity ratio was only 0.49 times.

  12.3 Audit Fee

  For 2008, the Company and its subsidiaries paid audit fees and
  non-audit fees 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 | Di    | Audit | Disbur |
| subsidiary         |               | Fee   | sburs | Fee   | sement |
|                    |               |       | ement |       | (HK    |
|                    |               | (     | (     | (HK   | D      |
|                    |               | Baht) | Baht) | Do    | ollar) |
|                    |               |       |       | llar) |        |
+--------------------+---------------+-------+-------+-------+--------+
| KGI Securities     | Ernst & Young | 1,60  | 4     | -     | -      |
| (Thailand) Plc.    | Office        | 0,000 | 3,844 |       |        |
|                    | Limited       |       |       |       |        |
+--------------------+---------------+-------+-------+-------+--------+
| One Asset          | Ernst & Young | 38    | 6,552 | -     | -      |
| 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    |               | 1,98  | 5     | 9     | -      |
|                    |               | 0,000 | 0,396 | 2,000 |        |
+--------------------+---------------+-------+-------+-------+--------+
|                    |               | 2,03  |       | 9     |        |
|                    |               | 0,396 |       | 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 2008 |
|                     |            |             | 2008   |           |
|                     |            |             |        | (HK       |
|                     |            |             | (Baht) | Dollar)   |
+---------------------+------------+-------------+--------+-----------+
| KGI Securities      | Tax        | Ernst &     | 1      | -         |
| (Thailand) Plc.     | Service    | Young       | 20,000 |           |
|                     |            | Corporate   |        |           |
|                     |            | Services    |        |           |
|                     |            | Limited     |        |           |
+---------------------+------------+-------------+--------+-----------+
| KGI Securities      | Tax        | Ernst &     | -      | 8,500     |
| (Thailand)          | Service    | Young Tax   |        |           |
|                     |            | Services    |        |           |
| International       |            | Limited     |        |           |
| Holdings Limited    |            |             |        |           |
+---------------------+------------+-------------+--------+-----------+
| Total Non-Audit Fee |            |             | 1      | 8,500     |
|                     |            |             | 20,000 |           |
+---------------------+------------+-------------+--------+-----------+

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