12. Financial position and operating results

12.1 Financial Statements

(A) Summary of the Report of the Independent Auditor for 2003 - 2005.

The Company appointed Ms. Ratana Jala, Certified Public Accountant no.
3734 of Ernst & Young Office Limited, as auditor for the year 2003 -
2005. The auditor expressed opinions on the consolidated financial
statements for the year 2003-2005 as follows:

- Year 2003 : The auditor expressed an unqualified opinion on the
consolidated financial statements for the years 2003 but drew attention
to the contingent liabilities.

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

- Year 2005 : The Auditor expressed an unqualified opinion but draw
attention to Note 19 to the financial statements which states that as at
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, has 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
has to be approved by a meeting of the shareholders of the Company
before it can be implemented. Before this process is completed if any
dividend is paid by the Company the balance of retained earnings
remaining after such dividend payment must not be less than the balance
of the share discount.

  (B) Summary of financial statements for the Company and its subsidiary
  companies for the years ended 31 December 2003, 2004 and 2005.

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

BALANCE SHEETS

AS AT 31 DECEMBER 2003, 2004 AND 2005

(Unit : Baht)

[]

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

BALANCE SHEETS (Continued)

AS AT 31 DECEMBER 2003, 2004 AND 2005

(Unit : Baht)

[]

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

EARNINGS STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2003, 2004 AND 2005

(Unit : Baht)

[]

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

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED 31 DECEMBER 2003, 2004 AND 2005

(Unit : Baht)

[]

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

STATEMENTS OF CASH FLOWS (continued)

FOR THE YEARS ENDED 31 DECEMBER 2003, 2004 AND 2005

(Unit : Baht)

[] 

(C) Ratios for years 2003, 2004 AND 2005

  -------------------------------------- --------- ------------ ----------
  Consolidated Basis                     2005      2004         2003

  Profitability Ratios                                          

  Gross profit margin (%)                92.16%    93.92%       96.39%

  Net profit margin (%)                  13.45%    23.13%       44.07%

  Return on equity (%)                   3.74%     7.77%        16.57%

  Return on investment (%)               7.11%     -0.45%       20.86%

  Efficiency Ratios                                             

  Return on assets (%)                   2.48%     4.60%        11.39%

  Assets turnover (times)                0.18      0.20         0.26

  Financial Ratios                                              

  Liquid assets to total liabilities     0.91      0.94         0.65
  (times)                                                       

  Earning assets to total liabilities    2.64      2.46         1.19
  (times)                                                       

  Liquid assets to total assets (%)      31.28%    30.99%       30.77%

  Earning assets to total assets (%)     90.69%    81.11%       56.51%

  Debt to equity (times)                 0.52      0.49         0.90

  Dividend payment (%)                   -         62.50%       19.23%

  Other ratios                                                  

  Securities investment to total assets  34.78%    34.08%       15.46%
  (%)                                                           

  NCR to net liquid assets (SEC          265.14%   223.93%      112.83%
  requirement) (%)                                              

  Per Share Information                                         

  Par Value per share (Baht)             2.00      7.50         7.50

  Book Value per share (Baht)            2.12      2.17         2.12

  Basic Earning per share (Baht)         0.08      0.16         0.52

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

  12.2 Management discussion & analysis

  (Consolidated financial statements as of December 31, 2005)

Analysis of Performance

    The Company reported total income of Baht 1,179 million and net
    profits of Baht 159 million (equivalent to earnings per share of
    Baht 0.08). Details of the Company’s performance are as follows:

    1. Revenue structure

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

  In 2005, the Company reported total income of Baht 1,179 million and
  the Company’s revenue structure comprised 57% of brokerage fee, 21% of
  fee and service income, 8% of gain on sales of investment in
  subsidiary and 14% of other incomes (Gain or loss on trading in
  securities, interest and dividends and interest on margin loans and
  other income).

  ----------------------------- --------------- ------- --------------- -------
                                2005                    2004             

                                                                        

  Income                        Baht            %       Baht            %

  Brokerage Fee                 674,675,843     57%     1,068,469,793   77%

  Fee and service income        252,786,197     21%     239,934,951     18%

  Gain (Loss) on trading in     (12,625,131)    -1%     -66,163,453     -5%
  securities                                                            

  Interest and Dividend         79,272,957      7%      58,605,690      4%

  Interest on Margin Loans      74,110,860      6%      35,797,607      3%

  Securities Income             1,068,220,726   91%     1,336,644,588   97%

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

  Other Income                  20,533,812      2%      40,104,924      3%

  Total Income                  1,178,754,538   100%    1,376,749,512   100%
  ----------------------------- --------------- ------- --------------- -------

2. Changes in income and expenses

2.1 Change in securities business income

  The Company’s securities business income decreased from Baht 1,337
  million in 2004 to Baht 1,068 million in 2005, a decrease of 20%, as
  follows:

2.1.1 Brokerage Fee

  The Company ranked at No.8 in terms of market share at 3.72% in 2005.
  The Company opened 2 new branches, Ayutthaya branch and RamaII branch
  and as at 31 December 2005 had a total of 19 branches
  (7 branches in Bangkok and 12 branches in provincial area). However,
  the high level of competition in the securities business resulted in
  decreased market share for many brokers. The Company also saw a
  decrease in market share from 4.52% in 2004 to 3.72% in 2005, which
  resulted in a decrease in brokerage fees from Baht 1,068 million in
  2004 to Baht 675 million in 2005 (equivalent to a 37% decrease).

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

  Trading Volume             2005        %          2004        %

  SET (Baht million)*        16,600.71              20,647.39   
                             16,600.71                          

  The Company (Baht          1,236.51               1,868.32    
  million)*                                                     

  The Company’s market share 3.72%                  4.52%       
  (%)                                                           

  Breakdown by types of                                         
  clients                                                       

  - The Company’s portfolio  122.11      9.88%      106.74      5.71%

  - Fund                     66.27       5.36%      79.82       4.27%

  - Retail client            915.2       74.01%     1,383.04    74.03%

  - Foreign client           132.93      10.75%     298.72      15.99%

  Total                      1,236.51    100.00%    1,868.32    100.00%

  Breakdown by types of                                         
  account                                                       

  - Cash account             1136.94     91.95%     1,750.19    93.68%

  - Credit balance account   99.57       8.05%      118.13      6.32%

  Total                      1236.51     100.00%    1,868.32    100.00%
  -------------------------- ----------- ---------- ----------- ----------

  Note : * Trading volume referred to volume in both SET and MAI

  2.1.2 Fee and service income

  The Company’s fee and service income increased from Baht 239.93
  million in 2004 to Baht 252.78 million in 2005 (equivalent to a 5.36%
  increase). The change of fee and service income came from:

  a) Management fee, registrar and custodian fees slightly decreased
  from Baht 217.78 million in 2004 to Baht 217.26 million in 2005.

  b) Underwriting fee increased from Baht 11.33 million in 2004 to Baht
  17.44 million in 2005.

  c) Financial advisory fees decreased from Baht 8.05 million in 2004 to
  Baht 6.66 million in 2005.

  d) Securities borrowing and lending fee increased from Baht 0.37
  million in 2004 to Baht 6.31 million in 2005.

  e) Selling agent fee increased from Baht 1.47 million in 2004 to Baht
  4.44 million in 2005.

  f) Other fee decreased from Baht 0.94 million in 2004 to Baht 0.67
  million in 2005.

  ---------------------------- ------------- --------- ------------- ---------
                               2005                    2004           

  Fee and Service Income       Baht          %         Baht          %

  Management fee, registrar    217,260,711   85.95%    217,780,255   90.78%
  and custodian fees                                                 

  Underwriting fee             17,443,164    6.90%     11,332,622    4.72%

  Financial advisory fee       6,656,500     2.63%     8,047,000     3.35%

  Securities borrowing and     6,311,661     2.50%     366,018       0.15%
  lending fee                                                        

  Selling agent fee            4,441,593     1.76%     1,471,308     0.61%

  Others                       672,568       0.27%     937,748       0.39%

  Total Fee and Service Income 252,786,197   100.00%   239,934,951   100.00%
  ---------------------------- ------------- --------- ------------- ---------

  2.1.3 Gain (Loss) on trading in securities

  The Company had a loss from trading securities totaling Baht 13
  million in 2005, which compared to a loss from trading securities
  totaling Baht 66 million in 2004 mainly due to the volatile in the SET
  and a large increase of bond yield in bond market.

  The loss on trading securities of Baht 13 million comprised unrealised
  loss on revaluation of investment in trading securities of Baht 0.2
  million, unrealised loss on revaluation of securities borrowed under
  the securities borrowing and lending business of Baht 54 million,
  realised gain on trading of securities of Baht 42 million and
  allowance for impairment of investment of Baht 0.7million.

+----------------------------------------------------------+-----------+
|   Gain (Loss) on trading in securities                   |   2005    |
+----------------------------------------------------------+-----------+
|   Unrealised gain (loss) on revaluation of investment in |           |
|   trading securities                                     | (242,876) |
+----------------------------------------------------------+-----------+
|   Unrealised gain (loss) on revaluation of securities    |   (53     |
|   borrowed under SBL business                            | ,596,480) |
+----------------------------------------------------------+-----------+
|   Realised gain (loss) on trading of securities          |   4       |
|                                                          | 1,960,474 |
+----------------------------------------------------------+-----------+
|   Loss on impairment of investments                      |           |
|                                                          | (746,249) |
+----------------------------------------------------------+-----------+
|   Total                                                  |   (12     |
|                                                          | ,625,131) |
+----------------------------------------------------------+-----------+

  2.1.4 Gain on Sales of Investment in Subsidiary

  During March 2005, the Company sold its investment in Ace Capital
  Company Limited (a subsidiary company excluded from consolidated
  financial statements). Since the Company has introduced a policy to
  cease management control of this subsidiary, investment in that
  subsidiary is recorded at zero. The Company has recorded a gain of
  Baht 90 million on the sale of the investment in the profit and loss
  statements for the year 2005.

  2.1.5 Interest and Dividend Income

  The Company’s interest and dividend income increased from Baht 59
  million in 2004 to Baht 79 million in 2005.

  2.1.6 Interest on Margin Loans

  The Company’s interest on margin loans increased from Baht 36 million
  in 2004 to Baht 74 million in 2005 because the market interest rate
  increased.

2.2 Change in Expenses

  The Company’s total expenses decreased from Baht 1,027 million in 2004
  to Baht 991 million in 2005. However, the ratio of total expenses to
  total income increased from 75% in 2004 to 84% in 2005 due to an
  decrease of revenue.

+----------------------------+----------+-------+------------+-------+
|                            | 2005     | %     | 2547       | %     |
|                            |          |       |            |       |
|                            |          | Of    |            | Of    |
|                            |          | I     |            | I     |
|                            |          | ncome |            | ncome |
+----------------------------+----------+-------+------------+-------+
| TOTAL INCOME               | 1,178    | 100%  | 1,3        | 100%  |
|                            | ,754,538 |       | 76,749,512 |       |
+----------------------------+----------+-------+------------+-------+
| EXPENSES                   |          |       |            |       |
+----------------------------+----------+-------+------------+-------+
| Expenses on borrowings     | 19       | 2%    | 4,613,858  | -     |
|                            | ,074,512 |       |            |       |
+----------------------------+----------+-------+------------+-------+
| Fee and service expenses   | 71       | 6%    | 76,698,868 | 6%    |
|                            | ,678,669 |       |            |       |
+----------------------------+----------+-------+------------+-------+
| Bad debt and doubtful      | 103      | 9%    | (          | -     |
| accounts (reversal)        | ,268,326 |       | 2,638,391) |       |
+----------------------------+----------+-------+------------+-------+
|                            |          |       |            |       |
+----------------------------+----------+-------+------------+-------+
| Operating expenses         |          |       |            |       |
+----------------------------+----------+-------+------------+-------+
| Personnel expenses         | 482      | 41%   | 6          | 47%   |
|                            | ,590,763 |       | 43,327,860 |       |
+----------------------------+----------+-------+------------+-------+
| Premises and equipment     | 129      | 11%   | 1          | 10%   |
| expenses                   | ,503,835 |       | 43,624,370 |       |
+----------------------------+----------+-------+------------+-------+
| Taxes and duties           | 5        | 1%    | 4,403,994  | -     |
|                            | ,945,575 |       |            |       |
+----------------------------+----------+-------+------------+-------+
| Directors' remuneration    | 12       | 1%    | 22,442,840 | 2%    |
|                            | ,795,387 |       |            |       |
+----------------------------+----------+-------+------------+-------+
| Other expenses             | 165      | 14%   | 1          | 10%   |
|                            | ,804,027 |       | 34,854,018 |       |
+----------------------------+----------+-------+------------+-------+
| Total operating expenses   | 796      | 68%   | 9          | 69%   |
|                            | ,639,587 |       | 48,653,082 |       |
+----------------------------+----------+-------+------------+-------+
| TOTAL EXPENSES             | 990      | 84%   | 1,0        | 75%   |
|                            | ,661,094 |       | 27,327,417 |       |
+----------------------------+----------+-------+------------+-------+

  2.2.1 Securities Business Expenses

The Company had securities business expenses of Baht 194 million,
comprising expenses on borrowing of Baht 19 million, fee and service
expense of Baht 72 million, and reversal of bad debt and doubtful
accounts of Baht 103 million. Details are as follows:

A) Expenses on borrowing

Expenses on borrowings of Bah 19 million refer to interest payment for
using credit line for daily liquidity management.

B) Fee and Service Expenses

Out of fee and service expenses totaling Baht 72 million, Baht 32
million was from brokerage expenses which varied with the company’s
brokerage volume, Baht 10 million resulted from amortization of
underwriting licence fees, Baht 17 million was expenses for stock
lending and borrowing transactions and Baht 13 million came from other
fees and expenses.

C) Bad debt and doubtful accounts

In 2005, the Company recorded doubtful accounts of Baht 121 million but
the Company was repaid Baht 18 million, thus the Company reported bad
debt and doubtful accounts of Baht 103 million.

+------------------------------------------------+---------------------+
|                                                |   2005              |
+------------------------------------------------+---------------------+
| Balance - beginning of the year                |   210,767,938       |
+------------------------------------------------+---------------------+
| Add : Doubtful accounts                        |   121,293,354       |
+------------------------------------------------+---------------------+
|   Bad debt recovery                            |   20,704,488        |
+------------------------------------------------+---------------------+
| Less : Reversal of doubtful accounts           |   (18,025,028)      |
+------------------------------------------------+---------------------+
|  Bad debt written-off                          |   (33,194,145)      |
+------------------------------------------------+---------------------+
|   Balance - end of the year                    |   301,546,607       |
+------------------------------------------------+---------------------+

D) Operating Expenses

The Company’s operating expenses decreased from Baht 949 million in 2004
to Baht 797million in 2005, a decline of 16%. The decrease came mainly
from reduced personnel expenses and Directors’ remuneration. Personnel
expenses fell from Baht 643 million in 2004 to Baht 483 million in 2005,
largely due to a decrease in marketing commission payments which varied
with the company’s brokerage volume. Directors’ remuneration, included
Directors’ bonus which paid upon the Company’s performance, fell from
Baht 22 million in 2004 to Baht 13 million in 2005.

3. Performance

The Company reported net profit of Baht 159 million and earnings per
share of Baht 0.08, a gross profit margin of 92.16%, net profit margin
of 13.45%, and return on equity of 3.74%.

  --------------------------------------------------- -------------------
  Profitability Ratios                                2005

  Gross profit margin (%)                             92.16%

  Net profit margin (%)                               13.45%

  Return on equity (%)                                3.74%
  --------------------------------------------------- -------------------

Analysis of Financial Status

  As of 31 December 2005, the Company had total assets of Baht 6,438
  million and total shareholders’ equity of Baht 4,231 million. The
  Company’s financial status was strong with a high level of liquidity.
  Net capital adequacy ratio (NCR) was 265.14% at the year end, which is
  higher than that required by the SEC (at least 7%). Analysis of
  financial status is as follows:

  1 . Assets

  The company’s total assets were Baht 6,438 million at the end of 2005.

  -------------------------------------------- ------------- -------------
  Financial Ratios                             2005          2004

  Earning assets to total liabilities (times)  2.64          2.46

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

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

  a) Investment in securities

  Net investment increased from Baht 2,166 million in 2004 to Baht 2,240
  million in 2005, Net investments comprised:

-   Total short term investments increased from Baht 1,328 million in
    2004 to Baht 1,358 million in 2005. Total short term investments
    comprised 85% equity securities and 15% debt securities, as follows:

  ----------------------------------------------- ------------- ---------
  Investment in trading securities                Million Baht  %

  Equity securities                               1,155         85%

  Debt securities                                 163           12%

  Total Investment in trading securities-net      1,318         97%

  Held-to-maturity debt securities-due within 1                  
  year                                                          

  Government Bond (net unearned discount)         40            3%

  Total short term investment - net               1,358         100%
  ----------------------------------------------- ------------- ---------

-   Long term investments increased from Baht 840 million in 2004 to
    Baht 882 million in 2005. Long term investments comprised
    non-marketable securities of Baht 874 million, and held-to-maturity
    debt securities of baht 8 million. Details of an increase of long
    term investments are as follows;

+-----------------------------------------------+----------+----------+
|                                               | (Unit :  |          |
|                                               | million  |          |
|                                               | Baht)    |          |
+-----------------------------------------------+----------+----------+
|                                               | 2005     | 2004     |
+-----------------------------------------------+----------+----------+
| Long-term investments                         |          |          |
+-----------------------------------------------+----------+----------+
| Non-marketable securities                     |          |          |
+-----------------------------------------------+----------+----------+
|   Foreign unit trusts                         | 833      | 808      |
+-----------------------------------------------+----------+----------+
|   Other securities - ordinary shares          | 46       | 24       |
+-----------------------------------------------+----------+----------+
|   Less: allowance for impairment              | (5)      | -        |
+-----------------------------------------------+----------+----------+
|   Net non-marketable securities               | 874      | 832      |
+-----------------------------------------------+----------+----------+
| Held-to-maturity debt securities              |          |          |
+-----------------------------------------------+----------+----------+
| Government bond                               | 8        | 8        |
+-----------------------------------------------+----------+----------+
| Net held-to-maturity debt securities          | 8        | 8        |
+-----------------------------------------------+----------+----------+
| Total long-term investments - net             | 882      | 840      |
+-----------------------------------------------+----------+----------+

  b) Net securities business receivable and accrued interest receivables

  Net securities business receivables and accrued interest receivables
  increased from Baht 2,869 million in 2004 to Baht 3,160 million in
  2005. The main securities business receivables were credit balance
  accounts of Baht 1,094 million, customer’s accounts of Baht 937
  million, receivable under securities borrowing and lending business of
  Baht 1,058 million, and other receivables of Baht 357 million against
  which the Company had set allowances for doubtful accounts of Baht 302
  million. Accrued interest receivables amounted to Baht 16 million.

  --------------------------------------- --------------- ---------------
                                          2005            2004

  Customer’s accounts                     937,151,536     715,970,062

  Credit balance                          1,093,923,824   1,430,845,260

  Receivables under securities borrowing                  
  and lending business :-                                 

  - Guarantee deposit receivables         964,582,646     711,448,375

  - Securities borrowing and lending      93,559,317      22,920,000
  receivables                                             

  Other receivables :-                                    

  - Installment receivables               357,104,688     195,380,834

  - Overdue customers’ accounts           102,395         422,762

  Total securities business receivables   3,446,424,406   3,076,987,293

  Add : Accrued interest receivables      15,512,417      3,161,690

  Less : Allowance for doubtful accounts  (301,546,607)   (210,767,938)

  Securities business receivables and                     

  Accrued interest receivables - net      3,160,390,216   2,869,381,045
  --------------------------------------- --------------- ---------------

  The Company has 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 2005, Baht 66 million were classified as substandard debt and
  Baht 302 million were classified as doubtful debt. The company has set
  aside full provisions for the doubtful debts.

  -------------------------- ----------------- ---------------------------
  As of 31 December 2005     Debt balance      Allowance for doubtful

                                               accounts set up

                                               by the Company

  Doubtful debt              302               302

  Substandard debt           66                -

  Total                      368               302
  -------------------------- ----------------- ---------------------------

2. Liquidity

The Company had high level of liquidity. As of 31 December 2005, the
value of the Company’s liquid assets was Baht 2,014 million (equivalent
to 31.28% of total assets). These liquid assets consisted of Baht 741
million in cash and cash equivalents, Baht 157 million of government
securities and Baht 1,116 million of listed securities. In addition, the
Company’s NCR was as high at 265.14% (the SEC requires that the NCR must
not be lower than 7%).

  -------------------------------------------- ------------- -------------
                                               2005          2004

  Liquid assets to total liabilities (times)   0.91          0.94

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

  NCR (%)                                      265.14        223.93
  -------------------------------------------- ------------- -------------

For 2005, the Company reported cash flows of Baht 741 million, a
decrease of Baht 34 million from the year before, details of cash flows
as follows:

  ------------------------------------------------------ ----------------
  Cash flows for the 2005                                (Million baht)

  Net cash from (used in) operating activities           414.18

  Net cash from (used in) investing activities           51.24

  Net cash from (used in) financing activities           (499.49)

  Net decrease in cash and cash equivalents              (34.07)

  Cash and cash equivalent as at 1 January 2005          774.68

  Cash and cash equivalent as at 31 December 2005        740.61
  ------------------------------------------------------ ----------------

3. Appropriateness of capital structure

As of 31 December 2005, the Company had a good debt to equity ratio,
which slightly increased from 0.49 times in 2004 to 0.52 times in 2005.

  The Annual General Meeting of the shareholders of the Company held on
  21 April 2005 approved a share capital reduction and the transfer of
  share premium, generated from the reduction of share capital to offset
  the discount on common stock. The above transaction affected only the
  presentation on the Balance Sheet and did not result in any change to
  total shareholders’ equity. (See details in Section 17 : Share Capital
  of the Note to Financial Statements for the year ended 31 December
  2005)

3.  Audit Fee

1) Audit fees

The Company and subsidiaries paid audit fees and disbursements as
follows:

  - To the Company’s auditor for the accounting period of 2005, a total
  of Baht 1,510,213.

  - To the auditor’s firm, any persons or companies related to the
  auditor and to the auditor’s firm for the accounting period of 2005, a
  total of HK Dollar 79,000.

2) Non-audit fees

The Company and its subsidiaries paid for other services, which were tax
services. The payments included:

  - To the auditor’s firm, any persons, or any companies related to the
  auditor or the auditor’s firm for the accounting period of year 2005,
  a total of Baht 152,650 and HK Dollar 7,200 and no further expense for
  services not yet completed which will become payable in the near
  future.