12. Financial position and operating results

12.1 Financial Statements

(A) Summary of the Report of the Independent Auditor for 2004-2006.

The Company appointed Ms. Ratana Jala, Certified Public Accountant no.
3734 of Ernst & Young Office Limited, as auditor for the year 2004 -
2006. The auditor expressed opinions on the consolidated financial
statements for the year 2004-2006 as follows:

- Year 2004 : The auditor’s report for the year 2004 did not contain any
qualified opinions.

- 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.

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

  (B) Summary of financial statements for the Company and its subsidiary
  companies for the years ended 31 December 2004, 2005 and 2006.

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

BALANCE SHEETS

AS AT 31 DECEMBER 2004, 2005 AND 2006

(Unit : Baht)

[]

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

BALANCE SHEETS (Continued)

AS AT 31 DECEMBER 2004, 2005 AND 2006

(Unit : Baht)

[]

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

EARNINGS STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2004, 2005 AND 2005

(Unit : Baht)

[]

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

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED 31 DECEMBER 2004, 2005 AND 2006

(Unit : Baht)

[]

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

STATEMENTS OF CASH FLOWS (continued)

FOR THE YEARS ENDED 31 DECEMBER 2004, 2005 AND 2006

(Unit : Baht)

[] 

(C) Ratios for years 2004, 2005 AND 2006

  -------------------------------------- ---------- ---------- ------------
  Consolidated Basis                     2006       2005       2004

  Profitability Ratios                                         

  Gross profit margin (%)                90.44%     92.16%     93.92%

  Net profit margin (%)                  16.59%     13.45%     23.13%

  Return on equity (%)                   4.25%      3.74%      7.77%

  Return on investment (%)               3.50%      7.11%      -0.45%

  Efficiency Ratios                                            

  Return on assets (%)                   2.85%      2.48%      4.60%

  Assets turnover (times)                0.17       0.18       0.20

  Financial Ratios                                             

  Liquid assets to total liabilities     1.44       0.91       0.94
  (times)                                                      

  Earning assets to total liabilities    2.79       2.64       2.46
  (times)                                                      

  Liquid assets to total assets (%)      45.42%     31.28%     30.99%

  Earning assets to total assets (%)     87.87%     90.69%     81.11%

  Debt to equity (times)                 0.46       0.52       0.49

  Dividend payment (%)                   77.78%     0.00%      62.50%

  Other ratios                                                 

  Securities investment to total assets  53.55%     34.78%     34.08%
  (%)                                                          

  NCR to net liquid assets (SEC          39.2%      265.14%    223.93%
  requirement) (%)                                             

  Per Share Information                                        

  Par Value per share (Baht)             1.00       2.00       7.50

  Book Value per share (Baht)            2.18       2.12       2.17

  Basic Earning per share (Baht)         0.09       0.08       0.16

  Dividend per share (Baht)              0.07       0.00       0.10
  -------------------------------------- ---------- ---------- ------------

  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, 2006)

Analysis of Performance

    The Company reported total income of Baht 1,097 million and net
    profit of Baht 182 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 2006, the Company reported total income of Baht 1,097 million. The
  main elements of the Company’s revenue structure were; 61% from
  brokerage fees, 20% from fee and service income, 13% from interest and
  dividend income, and 7% from interest on margin loans.

  ------------------------------- --------------- ------- --------------- -------
  Income                          2006 (Baht)     %       2005 (Baht)     %

                                                                          

  Brokerage fee                                                           

  - Brokerage fee from securities 654,902,541     60%     674,675,843     57%
  business                                                                

  - Brokerage fee from            10,950,300      1%      -               -
  derivatives business                                                    

  Fee and service income          222,466,654     20%     252,786,197     21%

  Gain (loss) on trading in       (77,652,551)    (7%)    (11,912,781)    (1%)
  securities                                                              

  Gain (loss) on trading          35,887,174      3%      (712,350)       
  derivatives                                                             

  Interest and dividends          140,324,971     13%     79,272,957      7%

  Interest on margin loans        72,839,952      7%      74,110,860      6%

  Securities Income               1,059,719,041   97%     1,068,220,726   (90%)

  Gain on sales of investment in  -                       90,000,000*     8%
  subsidiary                                                              

  Other Income                    37,181,240      3%      20,533,812      2%

  Total Income                    1,096,900,281   100%    1,178,754,538   100%
  ------------------------------- --------------- ------- --------------- -------

  Note: *The Company recognized a gain on sale of shares in a
  subsidiary, Ace Capital Company Limited,

  of Baht 90 million in 2005.

2. Changes in income and expenses

2.1 Change in securities business income

  The Company’s securities business income decreased slightly from Baht
  1,068 million in 2005 to Baht 1,060 million in 2006, details as
  follows:

  2.1.1 Brokerage fee

  Brokerage fee from securities business

  The Company ranked No.7 in terms of market share at 3.94% in 2006,
  slightly higher than the previous year. However, the brokerage fee
  decreased from Baht 675 million in 2005 to Baht 655 million in 2006
  due to a decrease in the SET’s average daily trading volume.

  Brokerage fee from derivatives business

  TFEX opened in April 2006, KGI ranked no.1 in terms of TFEX market
  share, with 16.53%. The brokerage fee from derivatives business was
  Baht 11 million.

  2.1.2 Fee and service income

  The Company’s fee and service income decreased from Baht 253 million
  in 2005 to Baht 222 million in 2006 (equivalent to a 12% decrease).
  The changes in fee and service income are as follows:

  ----------------------------- ------------- --------- ------------- --- --------- --
                                2006                    2005                        

  Fee and Service Income        Baht          %         Baht          %             

  Mutual fund management fee    178,215,309   80.11%    191,584,325       75.79%    

  Private fund management fee   16,242,645    7.30%     16,556,058        6.55%     

  Management fee, registrar and 10,113,079    4.55%     9,120,328         3.61%     
  custodian fees                                                                    

  Underwriting fee              5,529,780     2.49%     17,443,164        6.90%     

  Financial advisory fee        2,762,963     1.24%     6,656,500         2.63%     

  Securities borrowing and      5,947,339     2.67%     6,311,661         2.50%     
  lending fee                                                                       

  Selling agent fee             3,280,214     1.47%     4,441,593         1.76%     

  Others                        375,325       0.17%     672,568           0.27%     

  Total Fee and Service Income  222,466,654   100.00%   252,786,197       100.00%   
  ----------------------------- ------------- --------- ------------- --- --------- --

  2.1.3 Loss on trading in securities

  The Company had a loss from trading in securities totaling Baht 78
  million in 2006. The loss on trading in the equity market was mainly
  due to the volatility of the SET. In particular, the Thai stock market
  recorded its biggest ever fall in a single day on 19 December 2006, a
  drop of almost 15% in the SET index.

  The loss on trading securities of Baht 78 million comprised an
  unrealized loss on revaluation of investments of Baht 50 million,
  unrealized gain on revaluation of securities borrowed under the
  securities borrowing and lending business of Baht 21 million, and
  realized loss on trading of securities of Baht 49 million.

  2.1.4 Gain on trading in derivatives

  The Company had gain from trading in derivatives totaling Baht 36
  million in 2006, comprised an unrealized gain on revaluation of
  derivatives of 23 million and realized gain on derivatives of 13
  million.

  2.1.5 Interest and Dividend Income

  The Company had interest and dividend income totaling Baht 140 million
  in 2006, comprised interest income of Baht 110 million and dividend
  income of Baht 30 million.

  2.1.6 Interest on Margin Loans

  The Company had interest on margin loans of Baht 73 million in 2006,
  comprised interest received from credit balance of Baht 62 million and
  interest received from credit set aside loans of Baht 11 million.

  2.2 Change in Expenses

  The Company’s total expenses decreased from Baht 991 million in 2005
  to Baht 887 million in 2006. As a result, the ratio of total expenses
  to total income decreased from 84% in 2005 to 81% in 2006.

+----------------------------+----------+-------+------------+-------+
|                            | 2006     | %     | 2005       | %     |
|                            |          |       |            |       |
|                            |          | Of    |            | Of    |
|                            |          | I     |            | I     |
|                            |          | ncome |            | ncome |
+----------------------------+----------+-------+------------+-------+
| TOTAL INCOME               | 1,096    | 100%  | 1,1        | 100%  |
|                            | ,900,281 |       | 78,754,538 |       |
+----------------------------+----------+-------+------------+-------+
| Securities Business        |          |       |            |       |
| Expenses                   |          |       |            |       |
+----------------------------+----------+-------+------------+-------+
| Expenses on borrowings     | 34       | 3%    | 19,074,512 | 2%    |
|                            | ,006,601 |       |            |       |
+----------------------------+----------+-------+------------+-------+
| Fee and service expenses   | 67       | 6%    | 71,678,669 | 6%    |
|                            | ,266,636 |       |            |       |
+----------------------------+----------+-------+------------+-------+
| Bad debt and doubtful      | (10,     | (1%)  | 1          | 9%    |
| accounts (reversal)        | 192,727) |       | 03,268,326 |       |
+----------------------------+----------+-------+------------+-------+
| Total Securities Business  | 91       | 8%    | 1          | 17%   |
| expenses                   | ,080,510 |       | 94,021,507 |       |
+----------------------------+----------+-------+------------+-------+
| Operating expenses         |          |       |            |       |
+----------------------------+----------+-------+------------+-------+
| Personnel expenses         | 501      | 46%   | 4          | 41%   |
|                            | ,259,084 |       | 82,590,763 |       |
+----------------------------+----------+-------+------------+-------+
| Premises and equipment     | 140      | 13%   | 1          | 11%   |
| expenses                   | ,943,697 |       | 29,503,835 |       |
+----------------------------+----------+-------+------------+-------+
| Taxes and duties           | 7        | 1%    | 5,945,575  | 1%    |
|                            | ,839,363 |       |            |       |
+----------------------------+----------+-------+------------+-------+
| Directors' remuneration    | 8        | 1%    | 12,795,387 | 1%    |
|                            | ,328,440 |       |            |       |
+----------------------------+----------+-------+------------+-------+
| Other expenses             | 138      | 13%   | 1          | 14%   |
|                            | ,022,558 |       | 65,804,027 |       |
+----------------------------+----------+-------+------------+-------+
| Total operating expenses   | 796      | 73%   | 7          | 68%   |
|                            | ,393,142 |       | 96,639,587 |       |
+----------------------------+----------+-------+------------+-------+
|                            |          |       |            |       |
+----------------------------+----------+-------+------------+-------+
| TOTAL EXPENSES             | 887      | 81%   | 9          | 84%   |
|                            | ,473,652 |       | 90,661,094 |       |
+----------------------------+----------+-------+------------+-------+

  2.2.1 Securities Business Expenses

The Company had securities business expenses of Baht 91 million,
comprising expenses on borrowings of Baht 34 million, fee and service
expense of Baht 67 million, and reversal of bad debt and doubtful
accounts of Baht 10 million. Details are as follows:

A) Expenses on borrowings

Expenses on borrowings of Baht 34 million, comprising interest paid on
securities sold under repurchased agreement of Baht 26 million, interest
paid from credit balance accounts of Baht 4 million, and other expenses
of Baht 4 million.

B) Fee and Service Expenses

Out of fee and service expenses in year 2006 totaling Baht 67 million,
Baht 35 million was from brokerage expenses of the securities and
derivatives business which varied with the company’s brokerage volume,
Baht 6 million resulted from amortization of underwriting licence fees,
Baht 14 million was expenses for stock lending and borrowing
transactions and Baht 12 million came from other fees and expenses.

C) Bad debt and doubtful accounts (reversal)

In 2006, the Company recorded doubtful accounts of Baht 17 million but
the Company was repaid Baht 27 million, thus the Company reported the
reversal of bad debt and doubtful accounts of Baht 10 million.

2.2.2 Operating Expenses

The Company had operating expenses of Baht 796 million in 2006, mainly
comprised personnel expenses of Baht 501 million and premises and
equipment expenses of Baht 141 million.

3. Performance

In year 2006, the Company reported net profit of Baht 182 million and
earnings per share of Baht 0.09, a gross profit margin of 90.44%, net
profit margin of 16.59%, and return on equity of 4.25%.

Analysis of Financial Status

  As of 31 December 2006, the Company had total assets of Baht 6,343
  million, total liabilities of Baht 1,994 million and total
  shareholders’ equity of Baht 4,349 million. Analysis of financial
  status is as follows:

  1 . Assets

  a) Investments in debt and equity securities

  As of 31 December 2006, the Company had net investments in debt and
  equity securities of Baht 3,397 million, comprised of net investments
  comprised short term investments of Baht 2,582 million and long term
  investment of Baht 815 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 2006, the Company had net securities and derivatives
  business receivables totaling Baht 1,931 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 2006, Baht 67 million were classified as substandard debt and
  Baht 276 million were classified as doubtful debt.

  The Company had set aside full provision for the doubtful debts of
  Baht 276 million and further provision of Baht 11 million, which was
  more than that required by the SEC.

2. Liquidity

As of 31 December 2006, the value of the Company’s liquid assets was
Baht 2,881 million (equivalent to 45.42% of total assets). These liquid
assets consisted of Baht 427 million in cash and cash equivalents, Baht
1,599 million in government securities and Baht 855 million of listed
securities. The Company’s NCR was 39.20% (the SEC requires that the NCR
must not be lower than 7%).

3. Appropriateness of capital structure

As of 31 December 2006, the Company had a low debt to equity ratio,
which decreased from 0.52 times in 2005 to 0.46 times in 2006.

  12.3 Audit Fee

  For 2006, 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 | 1,23  | 2     | -     | -    |
| (Thailand) Plc.     | Office        | 5,000 | 3,760 |       |      |
|                     | Limited       |       |       |       |      |
+---------------------+---------------+-------+-------+-------+------+
| One Asset           | Ernst & Young | 32    | 600   | -     | -    |
| Management Limited  | Office        | 0,000 |       |       |      |
|                     | Limited       |       |       |       |      |
+---------------------+---------------+-------+-------+-------+------+
| KGI Securities      | Ernst &Young  | -     | -     | 3     | -    |
| (Thailand)          | Hong Kong     |       |       | 0,000 |      |
|                     |               |       |       |       |      |
| International       |               |       |       |       |      |
| Holdings Limited    |               |       |       |       |      |
+---------------------+---------------+-------+-------+-------+------+
| KGI (Thailand)      | Ernst &Young  | -     | -     | 5     | -    |
| Holdings Limited    | Hong Kong     |       |       | 4,000 |      |
+---------------------+---------------+-------+-------+-------+------+
| Total Audit Fee     |               | 1,55  | 2     | 8     | -    |
|                     |               | 5,000 | 4,360 | 4,000 |      |
+---------------------+---------------+-------+-------+-------+------+
|                     |               | 1,57  |       | 8     |      |
|                     |               | 9,360 |       | 4,000 |      |
+---------------------+---------------+-------+-------+-------+------+

  B) Non-audit fees

  The Company and its subsidiaries paid non-audit fee 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 2006 |
|                     |            |             | 2006   |           |
|                     |            |             |        | (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.