UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to

Commission File Number 001-32473

American Dairy, Inc.

(Exact name of registrant as specified in its charter)

Utah	90-0208758
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Star City International Building, 10 Jiuxianqiao Road, C-16th Floor

Chaoyang District, Beijing, China, 100016

(Address of principal executive offices, including zip code)

+86 (10) 8457-4688 / +1 (626) 757-8885

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  ¨

Indicate by check mark whether the registrant  has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    ¨	Accelerated filer  ¨
Non-accelerated filer      ¨  (Do not check if a smaller reporting company)	Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of the registrant’s common stock as of November 10, 2009 was 21,707,376.

AMERICAN DAIRY, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2009

 TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Submission of Matters to a Vote of Security Holders	49
Item 5.	Other Information	50
Item 6.	Exhibits	50
SIGNATURES		51
EXHIBIT INDEX

Unless the context otherwise requires, the terms “we,” “us,” “our,” “American Dairy,” and “the Company” refer to American Dairy, Inc., a Utah corporation, and its consolidated subsidiaries.  References to “dollars” and “$” are to United States dollars.

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PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

AMERICAN DAIRY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	September 30, 2009		December 31, 2008
	US$		US$
ASSETS
Current assets:
Cash and cash equivalents		43,491,803		11,785,408
Notes and loans receivable, net		-		1,493,245
Trade receivables, net of allowance of $1,002,883 and $1,311,331, respectively		32,308,418		12,275,497
Due from related parties		2,250,874		265,479
Employee receivables		199,563		307,249
Advances to suppliers		27,120,715		24,943,046
Receivable from discontinued operations		-		31,002,897
Inventories, net of allowance of $546,503 and $575,916, respectively		65,959,828		52,330,333
Prepayments and other current assets		97,218		63,711
Refundable taxes		4,135,779		488,938
Other receivables		6,138,410		4,598,359
Current assets of discontinued operations		-		12,392,384
Total current assets		181,702,608		151,946,546
Investments:
Investment in mutual funds – available for sale		118,437		77,504
Investment at cost		263,249		262,611
		381,686		340,115
Property and equipment:
Property and equipment, net		96,780,672		88,289,858
Construction in progress		62,272,749		28,847,959
		159,053,421		117,137,817
Biological assets:
Immature biological assets		35,901,697		23,784,479
Mature biological assets, net		11,589,288		1,483,355
		47,490,985		25,267,834
Other assets:
Deferred tax assets		730,491		730,490
Prepaid leases		29,367,017		29,146,748
Goodwill		2,288,380		2,282,838
Deferred charges, net		5,653		107,396
Long term assets of discontinued operations		-		31,587,018
Total assets		421,020,241		358,546,802
LIABILITIES AND EQUITY
Liabilities
Current liabilities:
Current maturities of long term debt		3,919,504		4,018,704
Convertible debt redeemable within one year		4,500,000		17,732,033
Short term debt		11,106,018		73,809,893
Notes and loans payable		39,634,714		8,055,450
Accounts payable		42,127,814		36,643,041
Accrued expenses		9,298,412		10,620,393
Income tax payable		1,367,039		1,185,528
Advances from customers		3,958,534		9,864,080
Due to related parties		594,057		1,017,399
Advances from employees		469,731		1,016,173
Accrued employee benefits		2,760,033		2,873,889
Other payable		20,076,776		19,513,681
Current liabilities of discontinued operations		-		35,063,603
Total current liabilities		139,812,632		221,413,867
Long term debt, net of current portion		19,626,770		9,146,034
Long term tax payable		5,883,747		2,750,887
Deferred income		7,695,346		8,416,492
Contingent share obligation		10,010,000		-
Long term liability of discontinued operations		-		395,176
Total liabilities		183,028,495		242,122,456
Commitments and Contingencies		-		-
Temporary equity
Redeemable ordinary shares (2,100,000 and 0 shares issued and outstanding, respectively)		53,780,010		-
Equity
Shareholders’ equity:
Ordinary shares (US$0.001 par value, 50,000,000 shares authorized; 19,183,492 and 17,253,907 issued and outstanding, respectively)		19,184		17,254
Additional paid-in capital		48,366,564		26,758,425
Ordinary share warrants		2,119,485		3,003,448
Statutory reserves		6,861,224		6,861,224
Accumulated other comprehensive income		25,780,937		25,146,055
Retained earnings		100,650,814		54,091,493
Total shareholders’ equity		183,798,208		115,877,899
Noncontrolling interests		413,528		546,447
Total equity		184,211,736		116,424,346
Total liabilities and equity		421,020,241		358,546,802

The accompanying notes are an integral part of these financial statements.

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AMERICAN DAIRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
	US$			US$			US$			US$
Sales		72,110,934			37,153,003			227,119,247			113,568,304
Cost of goods sold		35,129,532			24,685,354			93,427,854			74,119,818
Gross profit		36,981,402			12,467,649			133,691,393			39,448,486
Operating and administrative expenses:
Sales and marketing		27,455,572			15,674,769			79,771,636			32,448,651
General and administrative		5,656,116			5,248,778			16,957,199			10,165,737
Total operating expenses		33,111,688			20,923,547			96,728,835			42,614,388
Income (loss) from continuing operations		3,869,714			(8,455,898	)		36,962,558			(3,165,902	)
Other income (expenses):
Interest income		62,248			138,320			273,333			369,739
Interest and finance costs		(1,700,702	)		(5,152,481	)		(5,114,679	)		(15,525,803	)
Amortization of deferred charges		(33,914	)		(184,897	)		(101,742	)		(554,691	)
Registration rights penalty		-			(720,324	)		-			(2,160,974	)
Gain (loss) on derivatives		(790,000	)		(8,692,027	)		(790,000	)		7,015,618
Government subsidy-tax refund (reversal)		7,895,626			(1,495,494	)		14,640,034			2,375,240
Other income (expenses), net		158,410			(22,331	)		852,290			421,944
Income (loss) from continuing operations before income tax expense and noncontrolling interests		9,461,382			(24,585,132	)		46,721,794			(11,224,829	)
Income tax expense (benefit)		(1,672,167	)		(2,479,496	)		3,502,574			153,879
Net income (loss) from continuing operations before noncontrolling interests		11,133,549			(22,105,636	)		43,219,220			(11,378,708	)
Noncontrolling interests		7,548			(14,200	)		50,193			(24,402	)
Net income (loss) from continuing operations		11,141,097			(22,119,836	)		43,269,413			(11,403,110	)
Net income from discontinued operations		-			1,963,565			3,289,908			3,315,595
Net income (loss) attributable to ordinary shareholders		11,141,097			(20,156,271	)		46,559,321			(8,087,515	)
Other comprehensive income (loss):
Cumulative currency translation adjustments		254,556			(3,139,688	)		593,949			9,138,266
Change in fair value of available for sale investments		(2,429	)		(20,159	)		40,933			(99,226	)
Total comprehensive income (loss)		11,393,224			(23,316,118	)		47,194,203			951,525
Earnings (loss) per ordinary share – Basic
Net income (loss)  from continuing operations		0.57			(1.32	)		2.39			(0.67	)
Net income from discontinued operations		-			0.13			0.18			0.20
Net income (loss)		0.57			(1.19	)		2.57			(0.47	)
Earnings (loss) per ordinary share – Diluted
Net income (loss) from continuing operations		0.52			(1.32	)		2.21			(0.67	)
Net income from discontinued operations		-			0.13			0.17			0.20
Net income (loss)		0.52			(1.19	)		2.38			(0.47	)
Weighted average ordinary shares outstanding
Basic		19,659,657			16,964,768			18,093,104			16,964,122
Diluted		21,597,188			16,964,768			19,541,775			16,964,122

The accompanying notes are an integral part of these financial statements.

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AMERICAN DAIRY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(unaudited)

	Ordinary shares (US$0.001 par value)					Ordinary			Accumulated Other
	Number of Shares		Par Value	Additional Paid-in Capital		Share Warrants	Statutory Reserves		Comprehensive Income	Retained Earnings		Noncontrolling Interest		Total Equity
			US$	US$		US$	US$		US$	US$		US$		US$
Balance as of January 1, 2009		17,253,907	17,254		26,758,425	3,003,448		6,861,224	25,146,055		54,091,493		546,447		116,424,346
Stock compensation expense		-	-		2,278,754	-		-	-		-		-		2,278,754
Warrant  exercise		768,701	769		2,497,842	(883,963)		-	-		-		-		1,614,648
Shares issued for notes conversion		1,160,884	1,161		16,831,543	-		-	-		-		-		16,832,704
Net income		-	-		-	-		-	-		46,559,321		(50,193)		46,509,128
Sale of a subsidiary		-	-		-	-		-	-		-		(82,726)		(82,726)
Currency translation adjustments		-	-		-	-		-	593,949		-		-		593,949
Change in fair value of available for sale investments		-	-		-	-		-	40,933		-		-		40,933
Balance as of September 30, 2009		19,183,492	19,184		48,366,564	2,119,485		6,861,224	25,780,937		100,650,814		413,528		184,211,736

The accompanying notes are an integral part of these financial statements.

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AMERICAN DAIRY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine months ended September 30,
	2009			2008
	US$			US$
Cash flows from operating activities:
Net income (loss) before noncontrolling interests		46,509,128			(8,063,113	)
Less:  Net income from discontinued operations		3,289,908			3,315,595
Net income (loss) from continuing operations before noncontrolling interests		43,219,220			(11,378,708	)
Adjustments to reconcile net income (loss) to operating activities:
Depreciation of property and equipment		3,962,032			3,416,207
Depreciation of biological assets		1,115,296			-
Amortization of prepaid leases		418,003			336,903
Amortization of deferred income		(10,328	)		(10,332	)
Loss on sale of biological assets		971,984			-
Provision for losses on receivables		(311,555	)		57,762
Provision for losses on inventories		(30,789	)		-
Compensation expense for option awards		2,278,754			-
Interest expense from accrual of guaranteed redemption value		-			11,602,133
Interest expense from amortization of note discounts		4,475,045			5,716,435
Gain on waived interest expense		(550,000	)		-
Loss (gain) on derivatives		790,000			(7,015,296	)
Amortization of deferred charges		101,742			554,690
Changes in assets and liabilities:
Increase in trade receivables, net		(19,721,366	)		(8,642,846	)
Increase in due from related parties		(1,985,395	)		(277,476	)
Decrease in receivable from discontinued operations		-			1,210,908
Decrease (increase) in employee receivables		107,686			(157,267	)
Increase in inventories, net		(13,600,082	)		(18,219,305	)
Increase in advances to suppliers		(5,196,616	)		(399,377	)
(Increase) decrease in prepayments and other assets		(33,507	)		2,567,262
Increase in refundable taxes		(3,646,841	)		(540,199	)
(Increase) decrease in other  receivables		(1,454,913	)		2,228,772
Increase in deferred tax assets		-			(53,629	)
Increase in accounts payable and accrued expenses		6,249,416			16,816,667
(Decrease) increase in income taxes payable		(357,878	)		333,172
(Decrease) increase in advances from customers		(5,905,546	)		8,463,247
(Decrease) increase in due to related parties		(423,342	)		628,047
(Decrease) increase in advances from employees		(546,442	)		562,235
(Decrease) increase in other payable		(225,291	)		1,704,917
Increase in long term tax payable		3,132,860			1,019,697
Increase in deferred income		3,579,449			4,352,033
Net cash provided by continuing operations		16,401,596			14,876,652
Discontinued operations		(2,108,429	)		1,556,373
Net cash provided by operating activities		14,293,167			16,433,025
Cash flows from investing activities:
Purchase of property and equipment		(46,998,833	)		(23,310,650	)
Purchase and capitalized costs of biological assets		(12,932,023	)		(14,627,625	)
Decrease (increase) in short term notes and loans receivable		1,493,245			(1,578,251	)
Decrease in time deposit		-			8,446,778
Purchase of Longjiang dairy operation		(3,287,167	)		-
Proceeds from sale of a subsidiary		38,957,413			-
Proceeds from disposal of biological assets		81,785			-
Net cash used in continuing operations		(22,685,580	)		(31,069,748	)
Discontinued operations		-			(1,390,763	)
Net cash used in investing activities		(22,685,580	)		(32,460,511	)
Cash flows from financing activities:
Proceeds from short term notes and loans payable		38,879,321			7,647,315
Proceeds from long term debt		10,748,531			944,182
Repayment of long term debt		(408,311	)		(81,118	)
Repayment of short term debt		(76,268,710	)		-
Proceeds from issuance of redeemable ordinary shares		63,000,010			-
Proceeds from warrant exercise		1,614,648			6,750
Net cash provided by financing activities		37,565,489			8,517,129
Effect of exchange rate changes on cash		424,890			4,491,408
Net decrease (increase) in cash from discontinued operations		2,108,429			(165,610	)
Net increase (decrease) in cash and cash equivalents		31,706,395			(3,184,559	)
Cash and cash equivalents, beginning of period		11,785,408			11,057,874
Cash and cash equivalents, end of period		43,491,803			7,873,315
Supplemental disclosure of cash flow information:
Cash paid during the period for income tax		(6,100,224	)		(3,058,062	)
Cash received during the period for tax refund		12,183,248			5,591,256
Interest paid during the period		(1,559,026	)		(1,104,162	)
Non-cash investing and financing activities:
Conversion of bridge loan to redeemable ordinary shares		16,000,000			-
Conversion of convertible debt and accrued interest to ordinary shares		16,832,704			-

The accompanying notes are an integral part of these financial statements.

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AMERICAN DAIRY, INC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.           ORGANIZATION AND NATURE OF OPERATION

The accompanying condensed consolidated financial statements include the financial statements of American Dairy, Inc. (the “Company” or “American Dairy”) and its subsidiaries.  The Company and its subsidiaries are collectively referred to as the “Group.”

The condensed consolidated balance sheet as of December 31, 2008, which has been derived from audited financial statements, and the unaudited condensed consolidated interim financial statements included herein, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  The condensed consolidated interim financial statements do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).  In the opinion of the Company’s management, the accompanying condensed consolidated financial statements contain all material adjustments (consisting only of normal and recurring accruals) necessary to present fairly its financial position and the results of its operations and cash flows.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto filed with the SEC on Form 10-K for the year ended December 31, 2008.  The interim operating results are not necessarily indicative of the results to be expected for an entire year.

For the period ended September 30, 2009, the Company has used the same significant accounting policies and estimates which are discussed in the Annual Report on Form 10-K for the year ended December 31, 2008.  The Company has reclassified certain 2008 balances to conform to the current period presentation.

2.           RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued authoritative guidance on noncontrolling interests in consolidated financial statements.  The guidance established new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, the guidance requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements that is presented separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. The guidance clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, the guidance requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. The guidance also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The adoption of the guidance resulted in the reclassification of minority interest into equity.

In December 2007, FASB issued authoritative guidance on accounting for business combinations, including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. The requirements are effective for fiscal years beginning after December 15, 2008.  The adoption of these requirements did not have a material impact on the Company’s financial statements.

In February 2008, the FASB issued a deferral for the fair value requirements for non-financial assets and liabilities not required to be stated at fair value on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008. This deferral primarily impacts assets such as property, plant and equipment, intangible assets and goodwill upon non-recurring events such as business combinations, asset impairments and goodwill impairment, among others. The adoption of the deferral did not have a material impact on the Company’s financial statements.

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In March 2008, the FASB issued new disclosure requirements for an entity’s derivative and hedging activities. These disclosure requirements are  effective for periods beginning after November 15, 2008 and the adoption of the disclosure requirements  did not have a material impact on the Company’s financial statements.

In April 2008, the FASB issued amended guidance regarding the factors an entity should consider when developing renewal or extension assumptions used in determining the useful life over which to amortize the cost of a recognized intangible asset. This guidance requires an entity to consider its own historical experience in renewing or extending similar arrangements in determining the amortizable useful life. Additionally, this guidance requires expanded disclosures related to the determination of intangible asset useful lives.  The guidance is effective for fiscal years beginning after December 15, 2008, and may impact any intangible assets the Company acquires in future transactions. The guidance for determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements must be applied prospectively to all intangible assets recognized as of the effective date.  The adoption of this guidance did not have a material impact on the Company’s financial statements.

In May 2008, the FASB issued guidance that requires an issuer of certain convertible debt instruments that may be settled in cash, or other assets, on conversion to separately account for the debt and equity components in a manner that reflects the issuer’s non-convertible debt borrowing rate. The Company adopted this guidance in the first quarter of 2009 on a retrospective basis. The adoption of this guidance did not have a material impact on the Company’s financial statements.

In June 2008, the FASB issued guidance which requires entities to apply the two-class method of computing basic and diluted earnings per share for participating securities that include awards that accrue cash dividends (whether paid or unpaid) any time common shareholders receive dividends and those dividends will not be returned to the entity if the employee forfeits the award. The guidance is effective for fiscal years beginning after December 15, 2008, and the interim periods within those years. Retroactive disclosure is required. The adoption of this guidance did not have a material impact on the Company’s financial statements.

In June 2008, the FASB ratified certain authoritative guidance regarding determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. This guidance is effective for years beginning after December 15, 2008 and the adoption of the guidance did not have a material impact on the Company’s financial statements.

In July 2008, the FASB issued new guidance regarding fair value measurements. This new guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The new guidance was effective for the Company beginning July 1, 2008, for certain financial assets and liabilities. The new guidance was effective for non-financial assets and liabilities recognized or disclosed at fair value on a non-recurring basis beginning July 1, 2009. The adoption of this guidance did not have a material impact on the Company’s financial statements.

In April 2009, the FASB issued additional guidance on estimating fair value when the volume and level of transaction activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability, or on circumstances that may indicate that a transaction is not orderly. This guidance also addresses when the use of multiple, or different, valuation techniques may be warranted and considerations for determining the weight that should be applied to the various techniques. The guidance is effective for the interim and annual reporting periods ending after June 15, 2009, and must be applied prospectively. The adoption of this guidance did not have a material impact on the Company’s financial statements.

In April 2009, the FASB issued an accounting standard that requires a company to recognize the credit component of an other-than-temporary impairment of a fixed maturity security in earnings and the non-credit component in accumulated other comprehensive income when the company does not intend to sell the security or it is not more likely than not that the company will not be required to sell the security prior to recovery. The standard also changed the threshhold for determining when an other-than-temporary impairment has occurred on a fixed maturity security with respect to intent and ability to hold until recovery and does not change the recognition of other-than-temporary impairment for equity securities. Additional disclosures are required under the standard for fixed maturity and equity securities. The changes are effective for the interim and annual periods ending after June 15, 2009 and are to be applied to existing and new investments held by an entity as of the beginning of the period in which it is adopted. The adoption of this guidance did not have a material impact on the Company’s financial statements.

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In May 2009, the FASB issued authoritative accounting guidance on subsequent events, a topic that was previously only addressed by auditing literature. The guidance clarified that subsequent events are either recognized or non-recognized and modified the definition of subsequent events to refer to events or transactions that occur after the balance sheet date but before the financial statements are issued or available to be issued. Furthermore, the guidance requires entities to disclose the date through which an entity has evaluated subsequent events and the basis for that date. The authoritative guidance is effective for the interim or annual financial periods ending after June 15, 2009, and should be applied prospectively. The Company has evaluated subsequent events through November 16, 2009, the date the interim financial statements were issued. Other than the transactions described in Note 20, the Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.

In June 2009, the FASB amended the accounting and disclosure requirements for transfers of financial assets. This amendment requires greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them, and it changes the requirements for derecognizing financial assets. In addition, this amendment eliminates the concept of a qualifying special-purpose entity (“QSPE”). This amendment is effective for financial statements issued for fiscal years beginning after November 15, 2009. This amendment is not expected to have a material impact on the Company’s financial statements.

In June 2009, the FASB amended the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes a prior exception to consolidation. This amendment requires an enterprise to perform a qualitative analysis when determining whether or not it must consolidate a VIE. The amendment also requires an enterprise to continuously reassess whether it must consolidate a VIE. Additionally, the amendment requires enhanced disclosures about an enterprise’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the enterprise’s financial statements. Finally, an enterprise will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This amendment is effective for financial statements issued for fiscal years beginning after November 15, 2009. This amendment is not expected to have a material impact on the Company’s financial statements.

In July 2009, the FASB adopted the FASB Accounting Standards CodificationTM (the “Codification”) as the single source of authoritative nongovernmental U.S. GAAP. The Codification is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards documents, with a few grandfathered exceptions, are superseded as described in FASB Statement No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles.” All other accounting literature not included in the Codification is nonauthoritative.

3.           TAXATION

The provision for income taxes is comprised of the Company’s current tax liability and change in deferred income tax assets and liabilities. Deferred income taxes are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws.

The Company recorded a provision (benefit) for income tax of approximately $(1.7) million and $(2.5) million for the three month periods ended September 30, 2009 and 2008, respectively, and $3.5 million and approximately $154,000 for the nine month periods ended September 30, 2009 and 2008, respectively.  The income tax expense is comprised primarily of enterprise income taxes related to the business operations of the Company’s subsidiaries in the People’s Republic of China (the “PRC”).  The increase of approximately $0.8 million in the three month periods and increase of approximately $3.3 million in the nine month periods in the Company’s income tax expense results from an increase in the Company’s income subject to PRC tax.

The effective tax rate for the three months ended September 30, 2009 decreased 27.8% from a 10.1% effective rate for the three months ended September 30, 2008 to a (17.7)% effective rate.

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The effective tax rate for the nine months ended September 30, 2009 increased 8.9% from a (1.4)% effective rate for the nine months ended September 30, 2008 to a 7.5% effective rate.

4.           EARNINGS PER ORDINARY SHARE

The following table sets forth the computation of weighted-average shares outstanding for calculating basic and diluted earnings per share for the three and nine months ended:

	Three months ended			Nine months ended
	September 30,			September 30,
	2009		2008	2009		2008
Weighted-average shares – Basic	19,659,657		16,964,768		18,093,104		16,964,122
Effect of dilutive securities
Stock options		955,296	-		354,212		-
Warrants		403,048	-		641,878		-
Convertible notes		388,230	-		388,230		-
Performance adjustment shares		190,957	-		64,351		-
Weighted-average shares – Diluted		21,597,188	16,964,768		19,541,775		16,964,122

0 and 1,424,799 shares for the three months ended September 30, 2009 and 2008, and 0 and 1,424,799 shares for the nine months ended September 30, 2009 and 2008, respectively, of the Company’s ordinary shares attributable to the potential conversion of the 7.75% Convertible Notes due 2009 (the “2009 Notes”) were excluded from the calculation of diluted income per share because their inclusion would have been anti-dilutive.

0 and 251,040 shares for the three months ended September 30, 2009 and 2008, and 0 and 251,040 shares for the nine months ended September 30, 2009 and 2008, respectively, of the Company’s ordinary shares attributable to the exercise of outstanding warrants, respectively, were excluded from the calculation of diluted income per share because their inclusion would have been anti-dilutive.

5,555,556 shares for the three months ended September 30, 2008, and 5,555,556 shares for the nine months ended September 30, 2008, respectively, of the Company’s ordinary shares attributable to the potential conversion of the 1% Guaranteed Senior Secured Convertible Notes due 2012 (the “2012 Notes”) were excluded from the calculation of diluted income per share because their inclusion would have been anti-dilutive. The 2012 Notes were fully repaid as of October 15, 2009.

5.           LONGJIANG FEIHE ACQUISITION

On May 20, 2009, the Company’s subsidiary Gannan Flying Crane Dairy Products Co., Limited (“Gannan Feihe”) acquired a 100% interest of the dairy processing plant from Heilongjiang Xin Tian Dairy Co., Ltd, for a total cash consideration of $4,382,890, which was accounted for as a business acquisition in accordance with authoritative FASB guidance regarding accounting for business combinations.  Approximately $2.2 million was paid on January 12, 2009 and a second payment in the amount of approximately $1.1 million was paid on June 30, 2009. The remaining amount of approximately $1.1 million is due on or before December 31, 2009. The purpose of the acquisition was to expand milk production capacities in the Heilongjiang Province, China.

	US$
Total purchase price		4,382,890
Fair value of identifiable assets acquired:
Property and equipment, net		3,723,297
Prepaid leases		659,593
		4,382,890

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As of September 30, 2009, the initial accounting for the acquisition was incomplete due to pending appraisal of identifiable assets acquired.  Therefore, the amounts recognized in the financial statements have been determined only provisionally.  No measurement period adjustments have been recognized for the nine months ended September 30, 2009.

Financial results of the acquired processing plant for the period from acquisition date to September 30, 2009, are as follows:

	US$
Sales		-
Net profit		2,724,291

Disclosure of unaudited pro-forma financial information is considered impractical because there are no operational results available for the processing plant prior to acquisition.

6.           INVENTORIES, NET

The inventory amounts included in the condensed consolidated balance sheets as of September 30, 2009 and December 31, 2008 comprised of:

	September 30, 2009		December 31, 2008
	US$		US$
Raw materials		15,417,318		16,193,783
Work-in-progress		36,711,021		25,322,111
Finished goods		13,831,489		10,814,439
Total inventories, net		65,959,828		52,330,333

7.           ADVANCES TO SUPPLIERS

Advances to suppliers consist primarily of advances for the purchase of dairy cows, as well as advances for advertisements, inventories and equipment, not delivered at the balance sheet date.  The Company utilizes advances to suppliers in an effort to keep future purchasing prices stable and consistent. Advances to suppliers of Heilongjiang Moveup Co., Limited (“Moveup”) in 2008 are mainly advances paid to one trade agency, the key supplier from whom all goods sold by Moveup are imported, to guarantee imports.

Advanced amounts are refundable if the transaction is not completed by the other party in accordance with the terms of the contract or agreement.  No advances to suppliers were refunded in cash, and the Company has a minimal refund history.

8.           DISCONTINUED OPERATIONS

Moveup was initially formed in October 2007 to serve as an acquisition vehicle in connection with the Company’s proposed acquisition of 100% of the outstanding equity interest in Ausnutria Dairy (Hunan) Company Ltd. (“Ausnutria”), a distributor of dairy products focused on the high-end segment of the dairy products market in the PRC. In August 2007, an advance payment was made to Ausnutria in connection with the proposed acquisition.  The transaction did not close and the parties entered into renegotiations.

In October 2007, the Company entered into an equity purchase agreement (the “2007 EPA”) pursuant to which the Company agreed to purchase, through its subsidiary Moveup, 75% of the outstanding equity interests of Ausnutria, for consideration that included the amount of the advance payment previously made by the Company (the “2007 Transaction”).  The 2007 Transaction did not close because the sellers failed to comply with certain closing conditions under the equity purchase agreement, and the parties entered into renegotiations, including discussions regarding the Company’s proposed acquisition (directly or indirectly) of the other 25% of the outstanding equity interests of Ausnutria.

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In November 2007, when the Company’s efforts to close the Ausnutria transaction were not successful, the Company decided to commence limited business activities using Moveup as an importer of higher-end milk powder that Ausnutria was willing to purchase and sell to its customers.  These business activities consisted of Moveup’s purchasing milk powder for its own account from a small number of third party suppliers in Australia that it selected, taking the products into its inventory, and then selling those products in arms-length transactions at market-based prices to Ausnutria, which then distributed the products in the PRC through Ausnutria’s distribution channels.

In February 2008, we made a deposit payment of approximately $1.4 million to Ausnutria Holding Co., Ltd., which indirectly owns Ausnutria, in connection with our efforts to resolve the incomplete transactions in 2007. Although Moveup had obtained certain preliminary government approvals in connection with the proposed Ausnutria acquisition, other government approvals had not been obtained, and the sellers failed to comply with certain closing conditions under the equity purchase agreement. The transaction did not close and we entered into renegotiations. In connection with this transaction, a total deposit for investment of $31,586,473 was recorded in the financial records of Moveup as of December 31, 2008.

On December 16, 2008, the Group and Ausnutria’s owners entered into a letter of intent to unwind the transactions.  In considering an orderly way to do so under PRC law, the parties concluded that it would be more efficient to sell all of the business activities and operations of Moveup, rather than attempt to have the applicable government authorities cancel the approvals granted to Moveup.  Selling Moveup also provided an orderly mechanism for returning to the Group the approximately $31 million in consideration it had paid to Ausnutria in 2007 and 2008, plus an amount reflecting a settlement from Ausnutria’s owners for their failure to complete the transactions. Accordingly, the prior transactions to acquire Ausnutria were effectively cancelled and Moveup is reflected in the Company’s consolidated financial statements as discontinued operations. On February 18, 2009, the Company, through its subsidiary Heilongjiang Feihe Dairy Co., Limited (“Feihe Dairy”) entered into a new equity purchase agreement pursuant to which Feihe Dairy and the minority shareholder of Moveup, Liu Sheng-Hui, one of the Company’s directors and Vice President of Feihe Dairy, each agreed to sell to Hunan Xindaxin Co., Ltd. 100% of their equity interests in Moveup for an aggregate consideration of approximately $43.3 million (the “2009 Transaction”).  The Company received approximately $11.0 million from the purchasers, including approximately $4.4 million in 2008 and approximately $6.6 million in January 2009, and the second tranche of approximately $32.3 million was deposited into an escrow account to be released to Feihe Dairy and Mr. Liu upon satisfaction of the closing conditions under the agreement, including completion of the application for amendment of shareholders with the local counterpart of the State Administration of Industry and Commence in Kedong County, Heilongjiang Province, China. In May 2009, the final tranche of approximately $32.3 million was released to Feihe Dairy and Mr. Liu and a resulting gain on sale of a subsidiary of $0 and $2,552,733 was recognized in the consolidated statements of operations and comprehensive income for the three months and nine months ended September 30, 2009.

Moveup received advances from the Group of $31,002,897 as of December 31, 2008. The consideration received from the sale of Moveup was used, among other uses, to repay these intra-Group advances.

The following table presents the components of discontinued operations reported in the consolidated statements of operations and comprehensive income:

	For the three months ended September 30,			For the nine months ended September 30,
	2009		2008	2009		2008
	US$		US$	US$		US$
Sales		-	12,479,362		10,451,277		25,135,534
Income from operations		-	2,932,276		1,301,909		4,585,082
Gain on sale of subsidiary		-	-		2,552,733		-
Income tax expense		-	(968,711)		(564,734)		(1,269,487	)
Net income from discontinued operations		-	1,963,565		3,289,908		3,315,595

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9.           NOTES AND LOANS PAYABLE

Notes and loans payable included in the condensed consolidated balance sheets as of September 30, 2009 and December 31, 2008 comprised of:

	September 30, 2009		December 31, 2008
	US$		US$
Note payable to a bank in the PRC, bearing interest at 7.47% per annum, unsecured, payable with interest on maturity, due on May 11, 2009		-		4,522,774
Note payable to a bank in the PRC, bearing interest at 7.47% per annum, secured by plant and machinery, payable with interest on maturity, due on May 11, 2009		-		2,772,023
Unsecured, non-interest bearing loan payable to an unrelated party, due on demand.		442,600		442,600
Note payable to a bank in the PRC, bearing interest at 5.31% per annum, secured by machinery, payable with interest on maturity, due on January 4, 2010		2,193,752		-
Note payable to a bank in the PRC, bearing interest at 5.31% per annum, secured by machinery, payable with interest on maturity, due on January 5, 2010		3,656,254		-
Note payable to a bank in the PRC, bearing interest at 5.31% per annum, secured by machinery, payable with interest on maturity, due on May 21, 2010		4,972,505		-
Note payable to a bank in the PRC, bearing interest at 5.31% per annum, secured by machinery, payable with interest on maturity, due on May 21, 2010		2,340,002		-
Note payable to a bank in the PRC, bearing interest at 5.31% per annum, secured by machinery, payable with interest on maturity, due on March 31, 2010		3,773,254		-
Note payable to a bank in the PRC, bearing interest at 5.31% per annum, secured by buildings of Qiqihaer Feihe Soybean Co., Limited, guaranteed by Feihe Dairy(i), payable with interest on maturity, due on July 19, 2010		1,775,477		-
Note payable to a bank in the PRC, bearing interest at 5.31% per annum, guaranteed by Feihe Dairy (i), payable with interest on maturity, due on July 19, 2010		1,149,526		-
Note payable to a bank in the PRC, bearing interest at 5.31% per annum, guaranteed by Feihe Dairy (ii), payable with interest on maturity, due on August 30, 2010		2,925,003		-
Note payable to a bank in the PRC, bearing interest at 5.31% per annum, guaranteed by Feihe Dairy (ii), payable with interest on maturity, due on September 28, 2010		1,462,501		-
Note payable to a bank in the PRC, bearing interest at 5.31% per annum, secured by building, payable with interest on maturity, due on September 14, 2010		11,846,262		-
Note payable to a bank in the PRC, bearing interest at 5.31% per annum, secured by building, payable with interest on maturity, due on September 15, 2010		2,778,753		-
Unsecured, non-interest bearing loan payable to County Finance Department, due on demand (iii)		318,825		318,053
Total		39,634,714		8,055,450

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(i)	In connection with the purchase of raw materials by Qiqihaer Feihe Soybean Co., Limited, Feihe Dairy guaranteed the loans payable to a bank in the PRC for a period of one year, beginning on July 20, 2009 and ending on July 19, 2010. The maximum potential future amount under the terms of the guarantee is RMB 63,200,000.
(ii)	Feihe Dairy guaranteed the loans payable to a bank in the PRC for a period of one year, beginning on August 30, 2009 and ending on August 29, 2010. The maximum potential future amount under the terms of the guarantee is RMB 100,000,000.
(iii)	Shanxi Feihesantai Biotechnology Scientific and Commercial Co., Limited received funding from the local County Finance Department for its construction of production facilities in the region.  Although, no repayment terms were attached to the funds, the Company considers them to be unsecured, non-interest bearing loans from the County Finance Department that are repayable on demand.

None of the notes and loans payables have restrictions or covenants attached.

10.           RELATED PARTY TRANSACTIONS

Due from/to related parties included in the condensed consolidated balance sheets as of September 30, 2009 and December 31, 2008 comprised of:

	September 30, 2009		December 31, 2008
	US$		US$
Due from related parties:
Due from Directors of the Group		55,410		33,011
Due from related companies		2,195,464		232,468
Total		2,250,874		265,479

	September 30, 2009		December 31, 2008
	US$		US$
Due to related parties:
Due to Directors of the Group		78,346		33,156
Due to related companies		442,586		730,833
Loan payable to a related party		73,125		253,410
Total		594,057		1,017,399

Due from/to Directors of the Group

As part of normal business operations, directors of the Group will from time to time incur routine expenses on behalf of the Group, or receive general advances from the Group for settlement of Group expenses, such as travel, meals, and other business expenses.  The amounts advanced are settled periodically throughout the period and amounts outstanding at period end are short term in nature and due on demand.  During the three month period ended September 30, 2009, advances to directors aggregated to $23,826 and repayments from directors aggregated to $183,867. During the nine month period ended September 30, 2009, advances to directors aggregated to $266,603 and repayments from directors aggregated to $215,021.

As of September 30, 2009 and December 31, 2008, the Group had the following balances due from its Directors:

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	September 30, 2009		December 31, 2008
	US$		US$
Leng You-Bin		33,820		-
Liu Hua		21,590		28,483
Directors of subsidiaries in the PRC		-		4,528
Total		55,410		33,011

As of September 30, 2009 and December 31, 2008, the Group had the following balances due to its Directors:

	September 30, 2009		December 31 2008
	US$		US$
Leng You-Bin		78,346		32,608
Directors of subsidiaries in the PRC		-		548
Total		78,346		33,156

Due from/to related companies

Leng You-Bin is the Chairman, Chief Executive Officer, President, and General Manager of the Group.  During the nine months ended September 30, 2009 and 2008, the Group sold goods to companies owned by close family members of Mr. Leng, including one company partially owned by Mr. Leng and Liu Sheng-Hui, on an arm’s length basis.

For the three and nine months ended September 30, 2009 and 2008, the Group made sales of goods to the following related companies:

	For the three months ended September 30,			For the nine months ended September 30,
	2009		2008	2009		2008
	US$		US$	US$		US$
Tangshan Feihe Trading Company		1,162,572	284,087		4,455,690		754,937
Qinhuangdao Feihe Trading Company		-	121,748		411,214		218,884
Dalian Hewang Trading Company		31,756	20,109		190,258		47,103

As of September 30, 2009 and December 31, 2008, the Group had the following balances due from its related companies:

	September 30, 2009		December 31, 2008
	US$		US$
Tangshan Feihe Trading Company		1,863,647		177,524
Qinhuangdao Feihe Trading Company		331,817		54,944
Total		2,195,464		232,468

As of September 30, 2009 and December 31, 2008, the Group had the following balances due to its related companies for payments for goods received in advance:

	September 30, 2009		December 31, 2008
	US$		US$
Heilongjiang Feihe Yuanshengtai Co., Ltd		438,750		729,480
Dalian Hewang Trading Company		3,836		1,353
Total		442,586		730,833

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Loan payable to related parties

The Group has an outstanding loan payable to a charitable organization set up by Leng You-Bin for underprivileged children in the Heilongjiang province of the PRC, of $73,125 and $253,410 as of September 30, 2009 and December 31, 2008, respectively.  The loan is unsecured and bears interest at 5.85% per annum and is payable on demand.

See Note 16 regarding the issuance of shares to Sequoia Capital China Growth Fund I, LP and certain of its affiliates and designees.

11.   DEBT

1)   Short term debt

On November 12, 2008, the Company entered into a supplemental indenture with respect to the 2012 Notes.  The supplemental indenture grants each holder of the 2012 Notes the option to elect that the Company repurchase all or any portion of such holder’s 2012 Notes at a repurchase price of 115% of the principal amount of 2012 Notes for which such holder elected early repurchase.  On November 13, 2008, the holders of 100% of the outstanding 2012 Notes elected to exercise the early repurchase option with respect to all of the outstanding 2012 Notes, which obligates the Company to repurchase the 2012 Notes for an aggregate amount of $92,000,000 in accordance with the terms and conditions of the supplemental indenture.   Accordingly, the Company has repurchased all of the 2012 Notes, of which $11,000,000 was paid in November 2008, $4,333,333 was paid in January 2009, $15,333,333 was paid in April 2009, $15,333,333 was paid in July 2009, $33,950,000 was paid in August 2009 (in lieu of $34.5 million that would have been payable in October 2009, and the gain on waived interest of $550,000 was recorded as other income), and $11,500,001 was paid in October 2009.  As part of the first repurchase payment, the Company also paid $407,000 in accrued and unpaid interest and accrued registration rights penalty to holders of the 2012 Notes.  Costs of $123,354 associated with the 2012 Notes restructuring were capitalized as a deferred charge and are shown as an other asset in the condensed consolidated balance sheets.  These costs are amortized over the term of the restructured Notes.  Amortization of $33,914 and $0 was charged to expense during the three months ended September 30, 2009 and 2008, respectively.  Amortization of $101,742 and $0 was charged to expense during the nine months ended September 30, 2009 and 2008, respectively.

	September 30, 2009			December 31, 2008
	US$			US$
Short term debt due 2009
Principal		11,500,001			80,000,000
Less:  Note discount		(393,983	)		(6,190,107	)
		11,106,018			73,809,893

2)  Long term debt

Long term debt comprised of the following as of September 30, 2009 and December 31, 2008:

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	September 30, 2009			December 31, 2008
	US$			US$
Loan payable to a bank in the PRC, bearing interest at 5.76%, secured by buildings and payable in monthly installments of $9,078, including interest. The Loan commenced in 2004 and was repaid in April 2009		-			407,597
Loan payable to a bank in the PRC, bearing interest at 7.47%, unsecured, guaranteed by Feihe Dairy (i), and payable in installments of $2,925,003 on October 28, 2009 and $936,001 on October 28, 2010. The Loan commenced in October 29, 2008		3,861,004			3,851,653
Loan payable to a bank in the PRC, bearing interest at 7.47%, secured by biological assets, guaranteed by Feihe Dairy (i), and payable on October 20, 2011. The Loan commenced on October 29, 2008		3,928,279			3,918,765
Loan payable to a bank in the PRC, bearing interest at 7.47%, secured by biological assets, guaranteed by Feihe Dairy (i), and payable in installments of $3,451,503 on October 28, 2010 and $552, 826 on October 28, 2011. The Loan commenced in October 29, 2008		4,004,329			3,994,631
Loan payable to a bank in the PRC, bearing interest at 5.94%, secured by biological assets, guaranteed by Feihe Dairy (i) and payable on maturity. The Loan commenced in June 29, 2009 and matures on October 28, 2014		6,907,395			-
Loan payable to a bank in the PRC, bearing interest at 5.94%, secured by biological assets, guaranteed by Feihe Dairy (i) and payable on maturity. The Loan commenced in March 27, 2009 and matures on October 28, 2014		3,850,766			-
Loan payable to local government, bearing no interest, unsecured and payable on maturity.  The Loan commenced on January 29, 2008 and matures on December 31, 2009		994,501			992,092
		23,546,274			13,164,738
Less: current portion of long term debt		(3,919,504	)		(4,018,704	)
		19,626,770			9,146,034

(i) In connection with the purchase of long-lived fixed assets of Kedong Farms, Feihe Dairy guaranteed the loans payable to a bank in the PRC for a period of one year, beginning on October 29, 2008 and ending on October 18, 2009. The maximum potential future amount under the terms of the guarantee is RMB 251,510,000.

None of the long term debt has restrictions or covenants attached.

12.           CONVERTIBLE DEBT, NET

Convertible debt consisted of the following as of September 30, 2009 and December 31, 2008:

	September 30, 2009		December 31, 2008
	US$		US$
7.75% Convertible Notes due 2009:
Principal		4,500,000		18,200,000
Less:  Note discount		-		(467,967	)
		4,500,000		17,732,033

On October 3, 2006, pursuant to a subscription agreement, the Company issued an aggregate principal amount of $18,200,000 in 2009 Notes and warrants to purchase up to an aggregate of 251,000 shares of Common Stock (the “Warrants”).    As of September 30, 2009, the exercise price for the Warrants was $14.50 per share and approximately $16.8 million in principal and accrued interest under the 2009 Notes had been converted into 1,160,884 shares of Common Stock.

- 16 -

The effective interest rates on the 2009 Notes were 5.7% and 6.3% as of September 30, 2009 and 2008, respectively.  Interest expense amounting to $226,788 and $380,181 were recognized during the three month period ended September 30, 2009 and 2008, respectively. Interest expense amounting to $1,046,078 and $1,140,544 were recognized during the nine month period ended September 30, 2009 and 2008, respectively. Amortization of the notes discount of $155,991 and $155,988 were recognized during the three month period ended September 30, 2009 and 2008, respectively. Amortization of the notes discount of $467,967 and $467,967 were recognized during the nine month period ended September 30, 2009 and 2008.

13.           ASSETS AND LIABILITIES MEASURED AT FAIR VALUE

At September 30, 2009, the Group had the following assets measured at fair value:

Description	September 30, 2009		Quoted prices in active markets of identical assets (Level 1)
	US$		US$
Assets:
Investment in mutual funds		118,437		118,437

At December 31, 2008, the Group had the following assets measured at fair value:

Description	December 31, 2008		Quoted prices in active markets of identical assets (Level 1)
	US$		US$
Assets:
Investment in mutual funds		77,504		77,504

14.           ACCRUED EXPENSES

Accrued expenses as of September 30, 2009 and December 31, 2008 consist of the following:

	September 30, 2009		December 31, 2008
	US$		US$
Accrued selling expenses		7,750,241		6,802,837
Other accrued expenses		1,548,171		3,817,556
		9,298,412		10,620,393

15.           OTHER PAYABLE

Other payable as of September 30, 2009 and December 31, 2008 consists of the following:

	September 30, 2009		December 31, 2008
	US$		US$
Payable for property and equipment		5,848,079		6,358,939
Payable for leases		2,065,097		2,054,553
Other tax payable		4,688,359		4,454,081
Deposit from distributors		1,710,834		1,536
Payable for Longjiang acquisition		1,096,876		-
Other payables		4,667,531		6,644,572
		20,076,776		19,513,681

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16.           ORDINARY SHARES AND EQUITY TRANSACTIONS

During the three months ended September 30, 2009, the Company had the following ordinary share transactions:

The Company recorded $140,690 of share-based compensation expense in general and administrative expenses, in connection with an option to purchase 80,000 shares valued at $562,758 granted to an employee on October 15, 2008.

The Company recorded $1,114,012 of share-based compensation expense in general and administrative expenses, in connection with performance stock options to purchase 2,073,190 shares valued at $22,106,218 granted to certain employees on May 7, 2009.

On July 1, July 6 and August 17, 2009, the holders of the 2009 Notes elected to convert the 2009 Notes into ordinary shares.  In connection with these conversions, $13,700,000 in principal and $3,132,704 in accrued interest on the 2009 Notes was converted into 1,160,884 ordinary shares at a conversion price of $14.50 per share.  As of September 30, 2009, $4.5 million in principal remained on the 2009 Notes.

During the nine months ended September 30, 2009, the Company had the following ordinary share transactions:

The Company recorded $422,069 of share-based compensation expense in general and administrative expenses, in connection with an option to purchase 80,000 shares valued at $562,758 granted to an employee on October 15, 2008.

The Company recorded $1,856,685 of share-based compensation expense in general and administrative expenses, in connection with performance stock options to purchase 2,073,190 shares valued at $22,106,218 granted to certain employees on May 7, 2009.

On July 1, July 6 and August 17, 2009, the holders of the 2009 Notes elected to convert the 2009 Notes into ordinary shares.  In connection with these conversions, $13,700,000 in principal and $3,132,704 in accrued interest on the 2009 Notes was converted into 1,160,884 ordinary shares at a conversion price of $14.50 per share.  As of September 30, 2009, $4.5 million in principal remained on the 2009 Notes.

During the three and nine months ended September 30, 2009, the Company had the following transactions related to redeemable ordinary shares:

On July 24, 2009, the Company entered into a Summary of Terms with Sequoia Capital China Growth Fund I, LP and certain of its affiliates and designees (collectively, “Sequoia”) in which Sequoia agreed to provide a 90-day bridge loan in the amount of $16 million.  The bridge loan was funded on July 29, 2009.  On August 11, 2009, the Company entered into a subscription agreement (the “Subscription Agreement”) with Sequoia pursuant to which the Company agreed to issue 2.1 million shares of its common stock for an aggregate purchase price of $63 million, including $47 million in cash and the conversion of the $16 million bridge loan.  On August 26, 2009, the Company closed the sale and issuance pursuant to the Subscription Agreement and entered into a registration rights agreement with Sequoia with respect to the shares.

Under the terms of the Subscription Agreement, the ordinary shares are redeemable at the option of the holders of the ordinary shares if at any time after the third anniversary of the issuance date the average the closing prices for the Company’s ordinary shares for the period of fifteen (15) consecutive trading days is less than $39 per share for an amount equal to the issuance price plus a 5% annual compounded return, subject to certain adjustments if there is a performance adjustment event.  Due to the redeemable nature of the ordinary shares, the Company has classified the ordinary shares as temporary equity.  When and if the redemption right expires or when redemption becomes improbable, the ordinary shares will be classified as shareholders’ equity.  The amount that would have been paid if the redemption had occurred on September 30, 2009 is $63 million plus interest based on LIBOR plus 5% accrued from inception.

The Company determined that the redemption feature does not meet the authoritative criteria for bifurcation and separate accounting as an embedded derivative as of September 30, 2009.

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In the Subscription Agreement, if the Company fails to meet certain earnings per share targets for 2009 and 2010, the Company has agreed to issue additional shares of Common Stock to Sequoia, for no additional consideration, in proportion to the amount by which the Company fails to meet the target, up to a maximum amount of 525,000 shares (as adjusted for stock splits, dividends, and similar events). This right has been accounted for as an embedded derivative which should be bifurcated from the host contract and, therefore, the Company has recorded a liability equal to the fair value in accordance with applicable authoritative guidance, which was $9,220,000 at the date of inception.  Management has estimated the fair value to be $10,010,000 as of September 30, 2009 for this liability and, accordingly, a loss of $790,000 related to the change in fair value was charged to earnings as other income(expense) for the three and nine months periods ended September 30, 2009.

The registration rights agreement required the Company to file a registration statement covering the resale of the securities issued or issuable pursuant to the subscription agreement within 15 days after the closing date. If the Company failed to meet the registration Obligation, or if the SEC did not declare the registration statement effective within the earlier of 90 days of the filing or 120 days after closing, the Company would be required to make a monthly payment in an amount of $945,000 as damages. The registration rights agreement also granted demand and piggy-back registration rights to Sequoia. On October 23, 2009 the SEC declared effective the Company's registration statement on which registered for resale up to 2,647,542 shares of common stock of the Company that may be offered and sold in accordance with the Registration Statement by the selling shareholders named therein.

The fair value of the embedded derivative was estimated at inception and as of September 30, 2009 by using the Monte Carlo Simulation approach using assumptions based on significant other observable inputs other than quoted prices in active markets (Level 2 under authoritative guidance).

17.           OPTION PLAN AND WARRANTS

2009 Stock Incentive Plan

On May 7, 2009, the Company’s Board of Directors approved the Company’s 2009 Stock Incentive Plan (the “2009 Plan”). All awards under the 2009 Plan will be subject to shareholder approval at the Company’s 2009 Annual Meeting of Shareholders. The Board of Directors approved the 2009 Plan in order to permit grants of certain equity incentives, including incentive stock options, nonqualified stock options, restricted stock awards, performance stock awards and other equity-based compensation, to certain employees, directors, officers, consultants, agents, advisors and independent contractors of the Company and its subsidiaries. The total number of shares of the Company’s common stock initially authorized for issuance under the 2009 Plan is 2,000,000 plus any authorized shares that, as of May 7, 2009, were available for issuance under the Company’s 2003 Stock Incentive Plan. Shares issued under the 2009 Plan may be drawn from authorized but unissued shares or shares now held or subsequently acquired by the Company as treasury shares.

On May 7, 2009, the Compensation Committee of the Board of Directors granted new, non-statutory performance stock options to certain officers and employees of the Company under the 2009 Plan. In the aggregate, 2,073,190 performance stock options were granted, each with an exercise price of $16.86. The performance stock options will vest in two equal tranches on the fourth and fifth anniversaries of the date such options were granted, provided that the recipient has met the performance criteria established in accordance with the 2009 Plan and the option holder continues to be an employee of, or service provider to, the Company or its subsidiaries at the time of the relevant vesting dates. If the recipient fails to satisfy the performance goals related to the vesting date, the shares that would otherwise vest on that date will be forfeited and cancelled.

The fair value of the option awards are estimated on the date of grant using the Black-Scholes option valuation model to be $22,106,218, of which $1,114,012 and $1,856,685  was recorded as compensation expense in general and administrative expenses in the three and nine months ended September 30, 2009, in accordance with the graded vesting attribution method.  The valuation was based on the assumptions noted in the following table.

Expected volatility	74.94	%
Expected dividends	0	%
Expected term (in years)	5.2
Risk-free rate	2.27	%

2003 Stock Incentive Plan

Effective May 7, 2003, the Company adopted and approved its 2003 Stock Incentive Plan (the “2003 Plan”), which reserved 3,000,000 ordinary shares for issuance under the 2003 Plan. The 2003 Plan allows the Company to issue awards of incentive non-qualified stock options, stock appreciation rights, and stock bonuses to directors, officers, employees and consultants of the Company which may be subject to restrictions. The Company applies authoritative guidance issued by FASB regarding share-based payments in accounting for the 2003 Plan, which requires that compensation for services that a corporation receives through share-based compensation plans should be measured by the quoted market price of the stock at the measurement date less the amount, if any, that the individual is required to pay.

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No stock appreciation rights have been issued under the 2003 Plan.

On October 15, 2008, an option to purchase 80,000 shares was granted under the 2003 Plan to an employee that vests on the 12-month anniversary of the date of grant, conditioned upon continued employment on such date, and have a contractual life of 4 years.  The fair value of the option award is estimated on the date of grant using the Black-Scholes option valuation model to be $562,758, of which $140,690 and $422,069 was recorded as compensation expense in general and administrative expenses in the three and nine months ended September 30, 2009, respectively, in accordance with the straight line attribution method.  The valuation was based on the assumptions noted in the following table.

Expected volatility	90.7	%
Expected dividends	0	%
Expected term (in years)	4
Risk-free rate	2.7	%

A summary of option activity under the 2003 Plan and the 2009 Plan as of September 30, 2009 and movement during the nine months then ended are as follows:

	Options		Weighted average grant date fair value	Weighted average exercise price		Aggregate intrinsic value		Weighted average remaining contractual term
			US$	US$		US$
Outstanding at January 1, 2009		80,000	7.03		12.00		-	-
Granted		2,073,190	10.66		16.86
Exercised		-	-		-		-	-
Forfeited or expired		-	-		-		-	-
Outstanding at September 30, 2009		2,153,190	10.53		16.68		25,085,889	5.5

A summary of the status of the Company’s non-vested options as of September 30, 2009 and movements during the nine months then ended are as follows:

	Options		Weighted average grant date fair value
			US$
Non-vested at January 1, 2009		80,000	7.03
Granted		2,073,190	10.66
Vested		-	-
Forfeited or expired		-	-
Non-vested at September 30, 2009		2,153,190	10.53

As of September 30, 2009, there was $20,249,533 of unrecognized compensation cost related to non-vested share-based compensation granted under the 2009 Plan and the 2003 Plan.  The cost is expected to be recognized over a period of 55 months.

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Warrants

As of September 30, 2009, the Company had 282,282 warrants outstanding at an average exercise price of $13.06 per warrant for one share each of the Company’s ordinary shares. The warrants will expire at various dates, with 31,242 expiring in October, 2009 and 251,040 expiring in October, 2012.

During the three months ended September 30, 2009 and 2008, 315,000 and 0 warrants, respectively, were exercised at $2.25, 153,301 and 0 warrants, respectively, were exercised at $1.50, resulting in proceeds of $938,748 and $0, respectively, to the Company.

During the nine months ended September 30, 2009 and 2008, 615,400 and 3,000 warrants, respectively, were exercised at $2.25, 153,301 and 0 warrants, respectively, were exercised at $1.50, resulting in proceeds of $1,614,649 and $6,750, respectively, to the Company.

	Warrants		Average exercise price
			US$
Outstanding warrants at January 1, 2009		1,050,983		5.06
Warrants granted		-		-
Exercised		768,701		2.10
Expired		-		-
Outstanding warrants at September 30, 2009		282,282		13.06

Information regarding the ordinary share warrants outstanding at September 30, 2009 is summarized as below:

		Warrants outstanding at
		September 30, 2009
				Weighted
				Average		Weighted
				Remaining		Average
		Warrants		Contractual		Exercise
Exercise Prices		Outstanding		Life (years)		Price
US$						US$
	1.50		31,242		0.0		1.50
	14.50		251,040		3.0		14.50
			282,282

18.           COMMITMENTS AND CONTINGENCIES

Capital commitments for purchase of property and equipment and biological assets as of September 30, 2009 were $29,632,156.

19.           SEGMENTS

The segment information for the reportable segments for the three months ended September 30, 2009 is as follows:

	Dairy products			Dairy farms			Corporate			Total
	US$			US$			US$			US$
Revenues from external customers		72,110,934			-			-			72,110,934
Goodwill		2,288,380			-			-			2,288,380
Segment income tax		(1,666,826	)		59,088			(64,429)			(1,672,167	)
Segment profit		14,372,005			(197,401	)		(4,713,222	)		9,461,382
Segment assets		439,944,303			136,994,352			202,331,061			779,269,716

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The segment information for the reportable segments for the three months ended September 30, 2008 is as follows:

	Dairy products			Dairy farms			Corporate			Total
	US$			US$			US$			US$
Revenues from external customers		37,153,003			-			-		37,153,003
Goodwill		2,243,314			-			-		2,243,314
Segment income tax		(2,479,496	)		-			-		(2,479,496	)
Segment profit		(7,093,234	)		(155,523	)		(16,336,395	)	(23,585,152	)

The segment information for the reportable segments for the nine months ended September 30, 2009 is as follows:

	Dairy products		Dairy farms		Corporate		Total
	US$		US$		US$		US$
Revenues from external customers		227,119,247		-		-		227,119,247
Goodwill		2,288,380		-		-		2,288,380
Segment income tax		1,818,178		59,088		1,625,308		3,502,574
Segment profit		58,481,670		(1,178,297)		12,918,341		70,221,714
Segment assets		439,944,303		136,994,352		202,331,061		779,269,716

The segment information for the reportable segments for the nine months ended September 30, 2008 is as follows:

	Dairy products		Dairy farms			Corporate			Total
	US$		US$			US$			US$
Revenues from external customers		113,568,304		-			-			113,568,304
Goodwill		2,243,314		-			-			2,243,314
Segment income tax		153,879		-			-			153,879
Segment profit		2,918,864		(332,999	)		(12,810,714	)		(10,224,849	)

A reconciliation of reportable segment profit and assets to the Group’s totals is as follows:

	Three months ended September 30,
	2009		2008
Profit	US$		US$
Total profit for reportable segments		9,461,382		(23,585,152	)
Elimination of dividends		-		(999,980	)
Income from operations before income taxes and noncontrolling interest		9,461,382		(24,585,132	)

	Nine months ended September 30,
	2009			2008
Profit	US$			US$
Total profit for reportable segments		70,221,714			(10,224,849	)
Elimination of dividends		(23,499,920	)		(999,980	)
Income from operations before income taxes and noncontrolling interest		46,721,794			(11,224,829	)

	September 30, 2009
Assets	US$
Total assets for reportable segments		779,269,716
Total assets of discontinued operations		-
Elimination of investment		(120,255,392	)
Elimination of intercompany receivables		(237,994,083	)
Total consolidated assets		421,020,241

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20.           SUBSEQUENT EVENTS

a) Share-based transactions

On October 15, 2009, an option to purchase 50,000 shares was granted under the 2003 Plan to an employee that vests on 12-month anniversary of the date of grant, conditioned upon continued employment on such date, and have a contractual life of 4 years. On October 23, 2009, an option to purchase 30,000 shares was granted under the 2009 Plan, the options will vest in two equal tranches on the fourth and fifth anniversaries of the date of grant, provided that the recipient has met the performance criteria and the option holder continues to be an employee of, or service provider to, the Company or its subsidiaries at the time of the relevant vesting dates. The fair value of the options awards are still in the process of valuation.

b) Conversion of certain 2009 Notes

From October 1, 2009 to October 2, 2009, approximately $4.5 million in principal amount of the 2009 Notes with approximately $1.1 million accrued interest was converted into 388,238 shares of the Company’s ordinary shares.  No 2009 Notes remain outstanding.

c) Repayment of short term debt

As noted in Note 11, from October 13, 2009 to October 15, 2009, approximately $11.5 million of 2012 Notes was repaid. No 2012 Notes remain outstanding.

d) Investment in a new subsidiary

OnOctober 30, 2009, a new subsidiary of the Company, Heilongjiang Aiyingquan International Trading Company Limited was registered in Heilongjiang Province, China. The Company has paid RMB 2 million (or approximately $293,000 as of September 30, 2009) of the total registered capital requirement of RMB 10 million (or approximately $1.5 million as of September 30, 2009), and will hold a 99% equity interest. The main business of the new subsidiary will be sales of water and cheese, specifically marketed for consumption by children.

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FORWARD-LOOKING STATEMENTS

The statements included in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Section 27A of the Securities Act of 1933, as amended. These statements include, but are not limited to, statements about our plans, objectives, expectations, strategies, intentions or other characterizations of future events or circumstances and are generally identified by the words “may,” “expects,” “anticipates,” “intends,” “plans,” “targets,” “believes,” “seeks,” “estimates,” “could,” “would,” and similar expressions. Because these forward-looking statements are subject to a number of risks and uncertainties, our actual results could differ materially from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the heading “Risk Factors” and in other documents we file from time to time with the Securities and Exchange Commission. All forward-looking statements included in this report are based on information available to us on the date hereof. Our business and the associated risks may have changed since the date this report was originally filed with the SEC. We assume no obligation to update any such forward-looking statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes appearing elsewhere in this Quarterly Report.  In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report, particularly in “Part II – Item 1A. Risk Factors” below.

Data for the period ended September 30, 2008 have been revised to present certain components as discontinued operations.

Overview

We are a leading producer and distributor of milk powder, soybean milk powder, and related dairy products in the People’s Republic of China, or the PRC.  Using proprietary processing techniques, we make products that are specially formulated for particular ages, dietary needs and health concerns.  We have over 200 company-owned milk collection stations, six production facilities with an aggregate milk powder production capacity of approximately 1,220 tons per day, and an extensive distribution network that reaches over 90,000 retail outlets throughout China.

Factors Affecting our Results of Operations

Our operating results are primarily affected by the following factors:

· Dairy Industry Growth.   We believe the market for dairy products in China is growing rapidly, driven by China’s economic growth, increased penetration of infant formula, and a growing female working population.  We expect these factors to continue to drive industry growth. We believe that the increasing affordability of infant formula in our primary markets has become an increasingly important driver of growth.

· Production Capacity.   We believe much of the dairy market in China is still underserved, particularly with respect to infant formula.  In addition, since the melamine crisis in 2008, which did not involve any of our products, we have often been able to operate our milk production facilities at maximum capacity.  Accordingly, we believe that the ability to increase production of high quality dairy products will allow well positioned companies to significantly increase revenues and market share.

· Perceptions of Product Quality and Safety. We believe that rising consumer wealth in China has contributed to a greater demand for higher-priced products with perceived quality advantages.  We believe many consumers in China tend to regard higher prices as indicative of higher quality and higher nutritional value, particularly in the areas of infant formula and nutritional products.  Accordingly, we believe our reputation for quality and safety allows us to command higher average selling prices and generate higher gross margins than competitors who do not possess the same reputation.  Conversely, any decrease in consumer perceptions of quality and safety could adversely impact us.

·  Seasonality. The dairy industry remains seasonal, with higher production in the summer season and greater demand in winter months. This seasonality is offset by production of powder products with longer shelf lives.

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· Raw Material Supply and Prices.  The per unit costs of producing our infant formula are subject to the supply and price volatility of raw milk and other raw materials, which are affected by the PRC and global markets. For example, in 2008 our raw milk prices increased by approximately 45% and we expect they will continue to be affected by factors such as geographic location, rising feed prices, general economic conditions such as inflation and fuel prices, and fluctuations in production, rising production costs and competition.

· Expenses Associated with Expansion.   In implementing our plan to expand our business, we face corresponding increases in expenses in order to attract and retain qualified talent, implement strategic advertising campaigns, and finance our expansion.  In addition, we face various non-cash charges associated with the convertible notes we have issued to finance our business plans, and we expect future non-cash charges in connection with the sale of our common stock pursuant to the agreement described below in “—Other Factors Affecting our Liquidity and Capital Resources—Common Stock Financing.”

Results of Operations

The following table sets forth certain information regarding our results of operations.

	Three Months Ended September 30,			Nine Months Ended September 30,
	2009		2008	2009		2008
	($ in thousands)			($ in thousands)
Sales		72,111	37,153		227,119		113,568
Cost of goods sold		35,130	24,685		93,428		74,120
Gross profit		36,981	12,468		133,691		39,448
Operating and administrative expenses:
Sales and marketing		27,456	15,675		79,772		32,448
General and administrative		5,656	5,249		16,957		10,166
Income (loss) from continuing operations		3,869	(8,456)		36,962		(3,166)
Other income (expenses)		5,591	(16,129)		9,759		(8,059)
Income tax expense		(1,672)	(2,479)		3,503		154
Net income from discontinued operations		-	1,964		3,290		3,316
Net income (loss) attributable to ordinary shareholders		11,141	(20,156)		46,559		(8,088)
Other comprehensive income (loss):
Cumulative currency translation adjustments		255	(3,140)		594		9,138
Total comprehensive income (loss)		11,393	(23,316)		47,194		952

Comparison of Three Month Periods Ended September 30, 2009 and 2008

Total Comprehensive Income

Total comprehensive income increased by approximately $34.7million, or 148.9%, from approximately $23.3 million loss for the three month period ended September 30, 2008 to approximately $11.4 million income for the three month period ended September 30, 2009.  This increase was primarily attributable to an increase of approximately $34.9 million, or 94.1%, in sales and an increase of approximately $21.7 million, or 134.5%,  in other income (expenses) and a increase of approximately $3.4 million, or 108.1%, in cumulative currency translation adjustments, offset in part a increase in cost of goods sold of approximately $10.4 million, or 42.2% and an increase of approximately $12.2 million or 58.4%, in total operating expenses.  Our gross profit margin increased from 33.6% for the three month period ended September 30, 2008 to 51.3% for the three month period ended September 30, 2009.

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Sales

Our sales consist primarily of revenues generated from sales of milk powder, raw milk powder, soybean powder, rice cereal, and walnut products.  Sales increased by approximately $34.9 million, or 94.1%, from approximately $37.2 million for the three month period ended September 30, 2008 to approximately $72.1 million for the three month period ended September 30, 2009.  This increase was primarily attributable to expanding our market areas and distribution network throughout China, increased demand for high quality products and strong market acceptance of these products, as well as an increase in sales quantities of several high profit margin products. We believe we have increased our market share for infant milk powder since the third quarter of 2008 while many competitors have been aggressively attempting to reclaim market share following the melamine crisis.

The following table sets forth information regarding the sales of our principal products during the three month periods ended September 30, 2009 and 2008:

	Three months ended September 30, 2009						Three months ended September 30, 2008						Three months ended September 30, 2009 over 2008
Product name	Quantity (Kg’000)		Amount ($’000)		% of Sales		Quantity (Kg’000)		Amount ($’000)		% of Sales		Quantity (Kg’000)		Amount ($’000)		% of Sales
Milk powder		6,561		55,854		77.5		2,607		18,096		48.7		3,954		37,758		208.7
Raw milk powder		3,780		9,216		12.8		4,355		16,428		44.2		(575)		(7,212)		(43.9)
Soybean powder		957		2,093		2.9		479		995		2.7		478		1,098		110.3
Rice cereal		194		1,189		1.6		147		888		2.4		47		301		33.9
Walnut products		174		878		1.2		78		387		1.0		96		491		126.9
Other		493		2,881		4.0		634		359		1.0		(141)		2,522		702.6
Total		12,159		72,111		100.0		8,300		37,153		100.0		3,859		34,958		94.1

In the three month period ended September 30, 2009, we also experienced an increase in the average sales price per kilogram of our products, as demonstrated in the table below:

	Three Months Ended September 30,
	2009		2008
Sales revenues (in thousands)	$	72,111	$	37,153
Total sales volume (kilograms in thousands)		12,159		8,300
Average selling prices/kilogram (in thousands)	$	5.93	$	4.48

The increase in average sales price per kilogram, as reflected in the table, is primarily attributable to a shift in product mix resulting from a significant increase in sales of milk powder, a higher end product.  The following table reflects the average sales price per kilogram by product for the three month period ended September 30, 2009 and 2008, and the percentage change in the sales price per kilogram.

	Average Price Per Kilogram
	Three Months ended September 30,				Percentage
Product	2009		2008		Change
Milk powder	$	8.51	$	6.94		22.6
Raw milk powder		2.44		3.77		(35.3	)
Soybean powder		2.19		2.08		5.2
Rice cereal		6.13		6.04		1.5
Walnut products		5.04		4.96		1.6
Other		5.84		0.57		924.5
Total	$	5.93	$	4.48		32.4

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The average selling price per kilogram for milk powder, our primary product, increased by 22.6% from $6.94 in the three month period ended September 30, 2008 to $8.51 in the three month period ended September 30, 2009.  This increase was primarily attributable to a shift in product mix resulting from a significant increase in sales of milk powder, a higher end product, coupled with an increase in the sales price of milk powder products.

Cost of Goods Sold

Our cost of goods sold consist primarily of direct and indirect manufacturing costs, including production overhead costs and shipping and handling costs for the products sold.  Cost of goods sold increased approximately $10.4 million, or 42.3%, from approximately $24.7 million for the three month period ended September 30, 2008 to approximately $35.1 million for the three month period ended September 30, 2009.  This increase was primarily attributable to an increase in sales volume, offset in part by a decrease of approximately $4.6 million, or 22%, in the cost of fresh milk.

Gross Profit Margin

Our gross profit margin increased from 33.6% for the three month period ended September 30, 2008 to 51.3% for the three month period ended September 30, 2009. This increase was primarily attributable to an increase in our sales quantities of milk powder and a decrease in sales quantities of raw milk powder, which has a lower gross profit margin than milk powder. We plan to continue monitoring how our competitors attempt to reclaim market share following the melamine crisis, pursuing strategic market opportunities to maintain and expand our sales of higher margin products, and strengthening our premium quality brand awareness and distribution reach.

Operating and Administrative Expenses

Our total operating expenses consist primarily of sales and marketing expenses and general and administrative expenses.  Our total operating expenses increased by approximately $12.2 million, or 58.4%, from approximately $20.9 million in the three month period ended September 30, 2008 to approximately $33.1 million in the three month period ended September 30, 2009. This increase was primarily attributable to an increase of approximately $11.8 million, or 75.2%, in sales and marketing expenses from approximately $15.7 million for the three month period ended September 30, 2008 to approximately $27.5 million for the three month period ended September 30, 2009, and an increase of approximately $0.4 million, or 7.7%, in general and administrative expenses from approximately $5.2 million for the three month period ended September 30, 2008 to approximately $5.7 million for the three month period ended September 30, 2009.  Increased operating and administrative expenses relate to our efforts to expand our distribution network, market share, and awareness of our premium quality products throughout China and the grant of performance stock options under our 2009 Stock Incentive Plan, or our 2009 Plan.

Income from Continuing Operations

As a result of the foregoing, our income from continuing operations increased by approximately $12.3 million, or 145.5%, from a loss of approximately $8.5 million in the three month period ended September 30, 2008 to approximately $3.9 million of income in the three month period ended September 30, 2009.

Other Income (Expenses)

Our other income (expenses) consists primarily of interest income, interest and finance costs, amortization of deferred charges, registration rights penalty, gain on derivatives, gain on sale of a subsidiary, government subsidies and tax refunds, and other income and expense accounts.  Other income (expenses) increased approximately $21.7 million from approximately $16.1 million expenses for the three month period ended September 30, 2008 to approximately $5.6 million income for the three month period ended September 30, 2009.  The increase was primarily attributable to a decrease in interest and finance costs of approximately $3.5 million, or 67.0%, from approximately $5.2 million for the three month period ended September 30, 2008 to approximately $1.7 million for the three month period ended September 30, 2009 and an increase of government tax refund of approximately $9.4 million, or 628.0%, from approximately negative $1.5 million for the three month period ended September 30, 2008 to approximately $7.9 million or the three month period ended September 30, 2009, offset in part by a decrease in gain on derivatives of approximately $7.9 million, from approximately $8.7 million for the three month period ended September 30, 2008 to a loss of $790,000 for the three month period ended September 30, 2009.

Income Tax Expense

We are subject to U.S. federal and state income taxes, and our subsidiaries incorporated in the PRC are subject to enterprise income taxes in the PRC.  We recorded a provision for income tax of $(1.7) million and $(2.5) million for the three months ended September 30, 2009 and 2008, respectively.  The income tax expense is comprised primarily of enterprise income taxes related to the business operations of our PRC subsidiaries.  The increase of approximately $0.8 million in our income tax expense resulted from an increase in our income subject to PRC tax.

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We have cumulatively accrued approximately $0.8 million for estimated interest and penalties related to unrecognized tax benefits at September 30, 2009.  For the three months ended September 30, 2009, we recorded $89,000 of estimated interest and penalties.

Net Income from Discontinued Operations

As further explained below under “—Ausnutria Transaction,” due to the completion of the sale of our subsidiary, Heilongjiang Moveup Co., Limited, or Moveup, in May 2009, Moveup’s accounts are reflected in our financial statements as discontinued operations.  Our net income from discontinued operations decreased by approximately $2.0 million, from approximately $2.0 million for the three month period ended September 30, 2008 to $0 million for the three month period ended September 30, 2009.

Cumulative Currency Translation Adjustments

Our principal country of operations is the PRC and our functional currency is the Renminbi, but our reporting currency is the U.S. dollar.  All translation adjustments resulting from the translation of our financial statements into U.S. dollars are reported as cumulative currency translation adjustments.  Our cumulative currency translation adjustments increased by approximately $3.4 million, or 108.1%, from approximately negative $3.1 million in the three month period ended September 30, 2008 to approximately $255,000 in the three month period ended September 30, 2009.

Comparison of Nine Month Periods Ended September 30, 2009 and 2008

Total Comprehensive Income

Total comprehensive income increased by approximately $46.2 million, or 4,857.4%, from approximately $952,000 for the nine month period ended September 30, 2008 to approximately $47.2 million for the nine month period ended September 30, 2009.  This increase was primarily attributable to an increase of approximately $113.5 million, or 100%, in sales, offset in part by an increase of approximately $19.3 million, or 26.0%, in cost of goods sold, a decrease of approximately $8.5 million, or 93.5%, in cumulative currency translation adjustments, an increase of approximately $54.1 million, or 127.0%, in total operating expenses and a increase of approximately $17.8 million in other income (expenses), or 221.1%.  Our gross profit margin increased from 34.7% for the nine month period ended September 30, 2008 to 58.9% for the nine month period ended September 30, 2009.

Sales

Sales increased by approximately $113.5 million, or 100%, from approximately $113.6 million for the nine month period ended September 30, 2008 to approximately $227.1 million for the nine month period ended September 30, 2009.  This increase was primarily attributable to expanding our market areas and distribution network throughout China, increased demand for high quality products and strong market acceptance of these products, as well as an increase in sales quantities of several high profit margin products. We believe this increase also reflects our success in capitalizing on market opportunities presented to us primarily during the first quarter of 2009 because, unlike many of our competitors, our products were not involved in the melamine crisis at the end of 2008. We believe we have increased our market shares for infant milk powder since the third quarter of 2008 while many competitors have been aggressively attempting to reclaim market share following the melamine crisis.

The following table sets forth information regarding the sales of our principal products during the nine month periods ended September 30, 2009 and 2008:

	Nine months ended September 30, 2009						Nine months ended September 30, 2008						Nine months ended September 30, 2009 over 2008
Product name	Quantity (Kg’000)		Amount ($’000)		% of Sales		Quantity (Kg’000)		Amount ($’000)		% of Sales		Quantity (Kg’000)		Amount ($’000)		% of Sales
Milk powder		23,906		195,483		86.0		9,051		61,934		54.5		14,855		133,549		215.6
Raw milk powder		6.206		15,410		6.8		11,567		44,080		38.8		(5,361)		(28,670)		(65.0)
Soybean powder		2,638		5,569		2.5		1,360		2,780		2.5		1,278		2,789		100.3
Rice cereal		844		5,116		2.3		569		3,198		2.8		275		1,918		60.0
Walnut products		474		2,288		1.0		239		1,217		1.1		234		1,071		88.0
Other		528		3,253		1.4		634		359		0.3		(106)		2,894		806.2
Total		34,596		227,119		100.0		23,420		113,568		100.0		11,175		113,551		100.0

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In the nine month period ended September 30, 2009, we also experienced an increase in the average sales price per kilogram of our products, as demonstrated in the table below:

	2009		2008
Sales revenues (in thousands)	$	227,119	$	113,568
Total sales volume (kilograms in thousands)		34,596		23,420
Average selling prices/kilogram (in thousands)	$	6.56	$	4.85

The increase in average sales price per kilogram, as reflected in the table, is primarily attributable to a shift in product mix resulting from a significant increase in sales of milk powder, a higher end product, coupled with an increase in the sales price of milk powder products.  The following table reflects the average sales price per kilogram by product for the nine month period ended September 30, 2009 and the nine month period ended September 30, 2008, and the percentage change in the sales price per kilogram.

	Average Price Per Kilogram
	Nine Months ended September 30,				Percentage
	2009		2008		Change
Product
Milk powder	$	8.18	$	6.84		19.5
Raw milk powder		2.48		3.81		(35.0	)
Soybean powder		2.11		2.04		3.4
Rice cereal		6.06		5.62		7.8
Walnut products		4.83		5.09		(5.1	)
Other		6.16		0.57		980.7
Total	$	6.56	$	4.85		35.3

Cost of Goods Sold

Cost of goods sold increased approximately $19.3 million, or 26.0%, from approximately $74.1 million for the nine month period ended September 30, 2008 to approximately $93.4 million for the nine month period ended September 30, 2009.  This increase was primarily attributable to a general increase in sales, offset in part by a decrease of approximately $14.6 million, or 25.4%, in the cost of fresh milk.

Gross Profit Margin

Our gross profit margin increased from 34.7% for the nine month period ended September 30, 2008 to 58.9% for the nine month period ended September 30, 2009. This increase was primarily attributable to an increase in our sales quantities of milk powder and a decrease in sales quantities of raw milk powder, which has a lower gross profit margin than milk powder.

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Operating and Administrative Expenses

Our total operating expenses increased by approximately $54.1 million, or 127.0%, from approximately $42.6 million in the nine month period ended September 30, 2008 to approximately $96.7 million in the nine month period ended September 30, 2009. This increase was primarily attributable to an increase of approximately $47.3 million, or 145.8%, in sales and marketing expenses from approximately $32.4 million for the nine month period ended September 30, 2008 to approximately $79.7 million for the nine month period ended September 30, 2009, and an increase of approximately $6.8 million, or 66.8%, in general and administrative expenses from approximately $10.2 million for the nine month period ended September 30, 2008 to approximately $17.0 million for the nine month period ended September 30, 2009.  Increased operating and administrative expenses relate to our efforts to expand our distribution network, market share, and awareness of our premium quality products throughout China and the grant of performance stock options under our 2009 Plan.

Income from Continuing Operations

As a result of the foregoing, our income from continuing operations increased by approximately $40.1 million, or 1,267.5%, from a loss of approximately $3.1 million in the nine month period ended September 30, 2008 to approximately $37.0 million of income in the nine month period ended September 30, 2009.

Other Income (Expenses)

Other income (expenses) increased approximately $17.8 million from approximately $8.1 million expenses for the nine month period ended September 30, 2008 to approximately $9.8 million income for the nine month period ended September 30, 2009.  The increase was primarily attributable to an increase in government subsidies and tax refunds of approximately $12.3 million, or 516.4%, from approximately $2.4 million for the nine month period ended September 30, 2008 to approximately $14.6 million for the nine month period ended September 30, 2009,  a decrease in interest and finance costs of approximately $10.4 million, or 67.1%, from approximately $15.5 million for the nine month period ended September 30, 2008 to approximately $5.1 million for the nine month period ended September 30, 2009 and decrease in registration rights penalty of approximately $2.2 million, or 100%, which we only incurred in the nine month period ended September 30, 2008, offset in part by a decrease in gain (loss) on derivatives from a gain of approximately $7.0 million for the nine month period ended September 30, 2008 to a loss of $790,000 for the nine month period ended September 30, 2009.

Income Tax Expense

We recorded a provision for income tax of $3.5 million and $154,000 for the nine months ended September 30, 2009 and 2008, respectively.  The income tax expense is comprised primarily of enterprise income taxes related to the business operations of our PRC subsidiaries.  The increase of approximately $3.3 million in our income tax expense resulted from an increase in our income subject to PRC tax.

As of September 30, 2009, unrecognized tax benefits approximated $5.0 million.  The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate is $3.2 million at September 30, 2009.

We have cumulatively accrued approximately $0.8 million for estimated interest and penalties related to unrecognized tax benefits at September 30, 2009.  For the nine months ended September 30, 2009, we recorded $0.3 million of estimated interest and penalties.

Net Income from Discontinued Operations

Our net income from discontinued operations remained at approximately $3.3 million for each the nine month periods ended September 30, 2008 and 2009.

Cumulative Currency Translation Adjustments

Our cumulative currency translation adjustments decreased by approximately $8.5 million, or 93.5%, from approximately $9.2 million in the nine month period ended September 30, 2008 to approximately $594,000 in the nine month period ended September 30, 2009.

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Liquidity and Capital Resources

We had retained earnings of approximately $100.7 million at September 30, 2009 and $54.1 million at December 31, 2008.  As of September 30, 2009, we had cash and cash equivalents of approximately $43.5 million and total current assets of approximately $181.7 million.  As of September 30, 2009, we had a working capital surplus of approximately $41.9 million. We have financed our activities to date principally from cash generated from operations, the proceeds from sales of convertible notes, the proceeds from sale of a subsidiary and common stock financing.

Our summary cash flow information is as follows:

	Nine Months Ended September 30,
Net cash provided by (used in):	2009			2008
	($ in thousands)
Operating activities		14,293			16,433
Investing activities		(22,686	)		(32,461	)
Financing activities		37,565			8,517

Net Cash Provided by Operating Activities

Net cash provided by operating activities decreased approximately $2.1 million, from net cash provided by operating activities approximately $16.4 million in the nine month period ended September 30, 2008 to net cash provided by operating activities approximately $14.3 million in the nine month period ended September 30, 2009.  This decrease was primarily attributable to a decrease in interest expense from accrual of guaranteed redemption value of approximately $11.6 million, an  increase in trade receivables of approximately $11.1 million, an increase in advance to suppliers approximately $4.8 million, an increase in refundable taxes approximately $3.1 million, an increase in other receivables approximately $3.7 million, a decrease in accounts payable and accrued expenses of approximately $10.6 million and a decrease in advance from customers approximately $14.4 million. This decrease was offset in part by an increase in net income from continuing operations of approximately $54.6 million, an increase in compensation expense for option awards approximately $2.3 million, a decrease in gain on derivatives of approximately $7.8 million, a decrease in inventories of approximately $4.6 million, an increase in long term tax payable of approximately $2.1 million, and a decrrease in discontinued operation of approximately $3.7 million.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities decreased approximately $9.8 million, from net cash used in investing activities of approximately $32.5 million in the nine month period ended September 30, 2008 to net cash used by investing activities of approximately $22.7 million in the nine month period ended September 30, 2009.  This increase was primarily attributable to proceeds from sale of a subsidiary of approximately $39.0 million, a decrease in purchase of biological assets of approximately $1.7 million, and a decrease in short term notes and loans receivable of approximately $3.0 million. This increase was offset in part by an increase of approximately $23.7 million in purchase of property and equipment, cash used in purchase of Longjiang dairy operation of approximately $3.3 million and a decrease in time deposit of approximately $8.4 million.

Net Cash Provided by Financing Activities

Net cash provided by financing activities increased approximately $29.0 million, from net cash provided by financing activities of approximately $8.5 million in the nine month period ended September 30, 2008 to net cash provided by financing activities of approximately $37.6 million in the nine month period ended September 30, 2009.  This increase was primarily attributable to an increase of approximately $63.0 million in proceeds from issuance of new shares, an increase of approximately $31.2 million in proceeds from short term notes and loans payable and repayment and an increase of approximately $9.8 million in proceeds from long term debt. This decrease was offset in part by an increase of approximately $76.2 million in repayment of short term debt.

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Outstanding Indebtedness

7.75% Convertible Notes Due 2009

On October 3, 2006, pursuant to a subscription agreement, we issued an aggregate principal amount of $18.2 million in 7.75% Convertible Notes due 2009, or the 2009 Notes, and warrants to purchase up to an aggregate of approximately 251,000 shares of our common stock.  As of October 2, 2009, the entire $18.2 million in principal amount of the 2009 Notes had been converted into 1,549,122 shares of our common stock.

1.00% Guaranteed Senior Secured Convertible Notes Due 2012

On November 12, 2008, we entered into a supplemental indenture with respect to the 2012 Notes. The supplemental indenture granted each holder of the 2012 Notes the option to elect that we repurchase all or any portion of such holder’s 2012 Notes, at a repurchase price of 115% of the principal amount of 2012 Notes for which such holder elected early repurchase.  On November 13, 2008, the holders of 100% of the outstanding 2012 Notes elected to exercise the early repurchase option with respect to all of the outstanding 2012 Notes, which obligated us to repurchase the 2012 Notes for an aggregate amount of $92.0 million in accordance with the terms and conditions of the supplemental indenture.  Accordingly, we have repurchased all of the 2012 Notes, of which $11.0 million was paid in November 2008, $4.3 million was paid in January 2009, $15.3 million was paid in April 2009, $15.3 million was paid in July 2009, $34.0 million was paid in August 2009 (in lieu of $34.5 that would have been payable in October 2009, and the gain on waived interest of $550,000 was recorded as other income), and $11.5 million was paid in October 2009.  As part of the first repurchase payment, we also paid $407,000 in accrued and unpaid interest and accrued registration rights penalty to holders of the 2012 Notes.  Costs of $123,354 associated with the 2012 Notes restructuring were capitalized as a deferred charge and are shown as an other asset in the condensed consolidated balance sheets. These costs are amortized over the term of the restructured 2012 Notes.  Amortization of $33,914 and $0 was charged to expense during the three months ended September 30, 2009 and 2008, respectively, and amortization of $101,742 and $0 was charged to expense during the nine months ended September 30, 2009 and 2008, respectively.

Other Factors Affecting our Liquidity and Capital Resources

Expansion Strategy

We believe the market for dairy products in China is growing rapidly, including the market for high quality dairy products.  Our growth strategy involves capturing as much of this market as possible during this rapid growth phase.  To implement this strategy we plan to expand our production capabilities by investing in world-class production processes, to enhance our distribution capabilities into first-tier PRC markets, to strengthen our premium quality brand awareness, and to strategically align sourcing, production and distribution by region.  Our expansion strategy will require the continued retention and investment of our earnings from operations and, we believe, additional funding from private debt and equity financing.  In general, the commitment of funds to the acquisition or construction of plant and equipment tends to impair liquidity.  However, we believe that because of the upward trend in our revenues in recent years, even if this trend levels off, our income from operations coupled with such additional financing should provide sufficient liquidity to meet our needs.  Based upon our short term liabilities, we believe our cash and cash equivalents are adequate to satisfy our working capital needs and sustain our ongoing operations for the next twelve months.  In the event of an unanticipated shortfall, we have access to a line of credit with the China Construction Bank and other Chinese banks to fund our operations.  We have credit facilities in place with an aggregate limit of approximately $36.5 million provided by two banks in the PRC.

Ausnutria Transaction

Moveup was initially formed in October 2007 to serve as an acquisition vehicle in connection with our proposed acquisition of 100% of the outstanding equity interest in Ausnutria Dairy (Hunan) Company Ltd., or Ausnutria, a distributor of dairy products focused on the high-end segment of the dairy products market in the PRC.  In August 2007, we made an advance payment to Ausnutria in connection with the proposed acquisition.  The transaction did not close and we entered into renegotiations with the sellers.

In October 2007, we entered into an equity purchase agreement pursuant to which we agreed to purchase, through our subsidiary Heilongjiang Moveup Co., Limited, or Moveup, 75% of the outstanding equity interests of Ausnutria, for consideration that included the amount of the advance payment we previously made.  The transaction did not close because the sellers failed to comply with certain closing conditions under the equity purchase agreement, and we entered into renegotiations with the sellers, including discussions regarding our proposed acquisition (directly or indirectly) of the other 25% of the outstanding equity interests of Ausnutria.  

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In November 2007, when our efforts to close the Ausnutria transaction were not successful, we decided to commence limited business activities using Moveup as an importer of higher-end milk powder that Ausnutria was willing to purchase and sell to its customers.  These business activities consisted of Moveup’s purchasing milk powder for its own account from a small number of third party suppliers in Australia that it selected, taking the products into its inventory, and then selling those products in arms-length transactions at market-based prices to Ausnutria, which then distributed the products in the PRC through Ausnutria’s distribution channels.

In February 2008, we made a deposit payment of approximately $1.4 million to Ausnutria Holding Co., Ltd., which indirectly owns Ausnutria, in connection with our efforts to resolve the incomplete transactions in 2007. Although Moveup had obtained certain preliminary government approvals in connection with the proposed Ausnutria acquisition, other government approvals had not been obtained, and the sellers failed to comply with certain closing conditions under the equity purchase agreement. The transaction did not close and we entered into renegotiations.  In connection with this transaction, total deposit for investment of $31,586,473 was recorded in the financial records of Moveup as of December 31, 2008.

On December 16, 2008, we and Ausnutria’s owners entered into a letter of intent to unwind the transactions.  In considering an orderly way to do so under PRC law, the parties concluded that it would be more efficient to sell all of the business activities and operations of Moveup, rather than attempt to have the applicable government authorities cancel the approvals granted to Moveup.  Selling Moveup also provided an orderly mechanism for returning to us the approximately $31 million in consideration we had paid to Ausnutria in 2007 and 2008, plus an amount reflecting a settlement from Ausnutria’s owners for their failure to complete the transactions.  Accordingly, the prior transactions to acquire Ausnutria were effectively cancelled and Moveup is reflected in our consolidated financial statements as a discontinued operation.  On February 18, 2009, we, through our subsidiary Heilongjiang Feihe Dairy Co., Limited, or Feihe Dairy, entered into a new equity purchase agreement pursuant to which Feihe Dairy and the minority shareholder of Moveup, Liu Sheng-Hui, one of our directors and Vice President of Finance of Feihe Dairy, each agreed to sell to Hunan Xindaxin Co., Ltd. 100% of their equity interests in Moveup for aggregate consideration of approximately $43.3 million.  We received approximately $11.0 million from the purchasers, including approximately $4.4 million in 2008 and approximately $6.6 million in January 2009, and the second tranche of approximately $32.3 million was deposited into an escrow account to be released to Feihe Dairy and Mr. Liu upon satisfaction of the closing conditions under the agreement, including completion of the application for amendment of shareholders with the local counterpart of the State Administration of Industry and Commerce in Kedong County, Heilongjiang Province, China.  In May 2009, the second tranche of approximately $32.3 million was released to Feihe Dairy and Mr. Liu.

Longjiang Feihe Acquisition

In January 2009, our subsidiary Gannan Flying Crane Dairy Products Co., Limited, or Gannan Feihe, entered into a letter of intent with Heilongjiang Xin Tian Dairy Co., Ltd., or Xin Tian, to acquire Xin Tian’s dairy operation located in Longjiang County, Heilongjiang Province, China, or Longjiang Feihe, for approximately $4.4 million, payable in three tranches.  Approximately $2.2 million was paid on January 12, 2009 and the second payment in the amount of approximately $1.1 million was paid on June 30, 2009 and the remaining amount of approximately $1.1 million is due on or before December 31, 2009.

In January 2009, Gannan Feihe entered into an agreement with the Government of Longjiang County, Heilongjiang Province, China, to provide subsidy support, subject to certain provisions, to Gannan Feihe for its planned acquisition of Longjiang Feihe.  The agreement provides that we will receive aggregate subsidies of approximately $4.4 million, payable in three tranches.  We received approximately $2.2 million in January 2009 and approximately $1.1 million in June 2009, and the remaining amount of approximately $1.1 million is due on or before December 31, 2009.

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Common Stock Financing

In August 2009, we entered into a subscription agreement with Sequoia Capital China Growth Fund I, L.P. and certain of its affiliates, or the Purchasers, pursuant to which we issued 2,100,000 shares of our common stock for an aggregate purchase price of $63.0 million, including $47.0 million in cash and the conversion of a $16.0 million bridge loan we previously received from the Purchasers. We used a portion of the proceeds from the transaction to repurchase our 2012 Notes.  In connection with the subscription agreement, we entered into a registration rights agreement, which required us to file a registration statement covering the resale of the securities issued or issuable pursuant to the subscription agreement.  The registration rights agreement also grants demand and piggy-back registration rights to the Purchasers.  On October 23, 2009 the SEC declared effective the Company's registration statement on Form S-1, which registers for resale up to 2,647,542 shares of our common stock by the selling shareholders named in the registration statement. 

In the subscription agreement, we agreed that the Purchasers may nominate Neil Shen to our Board of Directors, or another representative designated by the Purchasers reasonably acceptable to our Board of Directors and its Nominating/Corporate Governance Committee, and to nominate and recommend that our shareholders elect such nominee to the Board of Directors.

In the subscription agreement, we also agreed, for a period of approximately three years following the closing date, not to issue new shares of our common stock at a price below $30.00 per share (as adjusted for stock splits, dividends, and similar events) without the prior written consent of a majority in interest of the Purchasers, subject to certain exceptions.  In addition, we agreed to grant each of the Purchasers a participation right to purchase up to such person’s pro rata share of any new securities we may, from time to time, propose to issue after the closing date, subject to certain exceptions.  If we fail to meet certain earnings per share targets for 2009 and 2010, we have agreed to issue additional shares of common stock to the Purchasers in proportion to the amount by which we fail to meet the target, up to a maximum amount of 525,000 shares (as adjusted for stock splits, dividends, and similar events).  If the average of closing prices of our common stock for the fifteen trading days commencing on the third anniversary of the closing date is less than $39.00 (as adjusted for stock splits, dividends, and similar events), the Purchasers will have the right to cause us to repurchase all (but not less than all) of the securities acquired by the Purchaser in connection with the agreement.  The repurchase price is an amount equal to the issuance price plus a 5% annual compounded return, subject to certain adjustments if there is a performance adjustment event.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

The consolidated financial statements include the financial statements of us and our subsidiaries.  All transactions and balances among us and our subsidiaries have been eliminated upon consolidation. Certain amounts included in or affecting our consolidated financial statements and related disclosures must be estimated, requiring us to make certain assumptions with respect to values or conditions that cannot be known with certainty at the time the financial statements are prepared. These estimates and assumptions affect the amounts we report for assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates, and the reported amounts of revenues and expenses during the reporting periods.  We routinely evaluate these estimates, utilizing historical experience, consulting with experts and other methods we consider reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates. Any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.

We believe that certain accounting policies are of more significance in our consolidated financial statement preparation process than others, which policies are discussed below.

Estimates of allowances for bad debts – We must periodically review our trade and other receivables to determine if all are collectible or whether an allowance is required for possible uncollectible balances. We perform this review quarterly, and in determining the allowances, a number of factors are considered, including the length of time the receivable is past due, past loss history, the counter party’s current ability to pay and the general condition of the economy and industry.  As a result of this review, we have decreased our estimated allowance for bad debts by $311,555 for the nine months ended September 30, 2009 and increased it by $641,218 for the year ended December 31, 2008.   Although our write-offs of bad debts have been minimal in recent years and we have no write-offs in the nine months ended September 30, 2009, events and circumstances could occur that would require that we increase our allowance in the future.

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Estimate of the useful lives of property and equipment and biological assets – We must estimate the useful lives and residual values of our property and equipment and biological assets. We must also review property and equipment and biological assets for possible impairment whenever events and circumstances indicate that the carrying value of those assets may not be recovered from the estimated future cash flows expected to result from their use and eventual disposition.  We recognized no impairments in the nine month period ended September 30, 2009 and the year ended December 31, 2008.

Inventory – We value inventories at the lower of cost or market value.  We determine the cost of inventories using the weighted average cost method and include any related production overhead costs incurred in bringing the inventories to their present location and condition.  We must determine whether we have any excessive, slow moving, obsolete or impaired inventory.  We perform this review quarterly, which requires management to estimate the future demand of our products and market conditions.  We make provisions on the value of inventories at period end equal to the difference between the cost and the estimated market value.  If actual market conditions change, additional provisions may be required.  In addition, we may write off some provisions if we later sell some of the subject inventory.  As a result of these reviews, we reduced our estimated reserve for obsolescence by $30,789 for the nine months ended September 30, 2009 and reduced it by $217,045 for the year ended December 31, 2008.

Goodwill – We must test goodwill annually for impairment or more frequently if events or changes in circumstances indicate that it might be impaired. We perform impairment tests at the reporting unit level to identify potential goodwill impairment.  We recognize a goodwill impairment loss in our statements of operations and comprehensive income when the carrying amount of goodwill exceeds its implied fair value.  We perform the impairment test at the end of the fourth quarter each year.  As a result of this impairment testing, we recognized no impairment loss for the nine months ended September 30, 2009.

Revenue recognition – Revenue from the sale of goods is recognized on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are shipped to customers and the title has passed. Revenue is shown net of sales returns, which amounted to 0% and less than 0.50% of total sales for the three months and nine months ended September 30, 2009, respectively, and net of sales rebates, which is determined based on our distributors’ sales volumes.

Share-based compensation – Share-based compensation to employees is measured by reference to the fair value of the equity instrument as at the date of grant using the Black-Scholes model, which requires assumptions for dividend yield, expected volatility and expected life of stock options.  The expected life of stock options is estimated by observing general option holder behavior.  The assumption of the expected volatility has been set by reference to the implied volatility of our shares in the open market and historical patterns of volatility.

Performance and service vesting conditions attached to the options are included in assumptions about the number of shares that the option holder will ultimately receive.  On a regular basis we review the assumptions made and revise the estimates of the number of options expected to be settled, where necessary.

In connection with the 2,073,190 performance stock options granted to certain employees on May 7, 2009, the fair value of the option awards was estimated on the date of grant to be $22,106,218, of which $1,114,012 and $1,856,685 was recorded as compensation expense in the three and nine months ended September 30, 2009, in accordance with the graded vesting attribution method.  The valuation was based on the assumptions noted in the following table.

Expected volatility	74.94	%
Risk-free rate	2.27	%
Expected dividends	0	%
Expected term (in years)	5.2

Significant differences in employee option activity and market performance may materially affect future compensation expense.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We conduct all of our operations in the PRC, and the Renminbi is the national currency in which our operations are conducted. We have not utilized any derivative financial instruments or any other financial instruments, nor do we utilize any derivative commodity instruments in our operations, nor any similar market sensitive instruments.

The exchange rate between the Renminbi and the U.S. dollar is subject to the PRC government’s foreign currency conversion policies, which may change at any time.  The exchange rate at December 31, 2008 was approximately 6.8 Renminbi to 1 U.S. dollar.  The exchange rate at September 30, 2009 was approximately 6.8 Renminbi to 1 U.S. dollar.  The exchange rate is currently permitted to float within a very limited range.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

During our review of our financial statements and results for the year ended December 31, 2008, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, identified several internal control matters that constitute material weaknesses and significant deficiencies, which we view as an integral part of our disclosure controls and procedures.  Consequently, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at December 31, 2008.  These weaknesses and deficiencies are discussed below under “—Management’s Report on Internal Control Over Financial Reporting.”

Because of these weaknesses and deficiencies, management has taken additional steps to ensure the reliability of our financial reporting.  These steps have included our internal review that identified revisions to our previously issued financial statements, additional Audit Committee review, efforts to remediate the material weaknesses and significant deficiencies in internal control over financial reporting described below, and the performance of additional procedures by management with respect to the financial statements contained in this report.

Management’s Report on Internal Control Over Financial Reporting

Management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d(f) under the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States, or GAAP.  Internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, (c) provide reasonable assurance that receipts and expenditures are being made only in accordance with appropriate authorization of management and the board of directors, and (d) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.  A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.  A “significant deficiency” is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.  A “deficiency” in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.

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During our review of our financial statements and results for the year ended December 31, 2008, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, and concluded that these controls were not effective at December 31, 2008.  As a result of that assessment, we identified the following internal control matters that constituted material weaknesses or significant deficiencies:

· Material weaknesses in our internal controls over financial reporting:

o Financial statement review procedures – We did not establish review procedures and retain qualified personnel to ensure the financial statements were prepared in compliance with GAAP and SEC disclosure requirements, including the proper classification of cash flow items and discontinued operations.  In addition, we did not adequately review GAAP adjustment procedures, our disclosure reporting process and our consolidated financial statements preparation processes.

o Accounting treatment for routine and non-routine transactions – We did not effectively and timely assess the accounting treatment for transactions, including sales, purchases, inventory, taxation, acquisition and disposition of assets, asset valuations and capital assets.

o Internal audit function – We did not maintain effective oversight of our internal control over financial reporting, including ineffective communication and understanding of our Code of Business Conduct and Ethics, lack of an appointed chief officer of internal audit functions, lack of selection criteria for a chief officer of internal audit functions, lack of an established reporting channel between our internal audit function and our Audit Committee, a lack of documented review or approval by our Audit Committee of our risk assessment, lack of effective and documented procedures that ensured relevant and sufficient financial-related information was provided to the Audit Committee in the course of its review of financial statements, and lack of documented evidence that the Audit Committee accomplished its tasks under its charter.

o Timing of management’s assessment – We did not timely perform and document our management assessment of our internal controls over financial reporting.

· Significant deficiencies in our internal controls over financial reporting:

o Period-end closing procedures – We did not have formal period-end closing procedures in place, which did not allow effective identification, approval and detection of routine and non-routine accounting journal entries.

o Access to administrative and accounting systems – We did not adequately control the accountants and financial controllers who were assigned system administrator rights on our accounting systems while also preparing or reviewing journal entries.

o Documentation of accounts receivable transfers and promoters expenses – We did not have adequate documentation of approval by our management or confirmation from our customers for transfers of certain accounts receivable amounts.  In addition, we did not have adequate documentation of the incurrence, authorization or recordation of promoters expenses.

o Division of treasury and accounting duties – We did not adequately assess the compatibility of treasury and accounting duties, including the use of payment authorization stamps by accounting personnel who also acted as preparers or reviewers of journal entries or as accounting system administrators and the performance or review of bank reconciliations.

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In addition, management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, identified several control deficiencies that it believes do not rise to the level of significant deficiencies.

Remediation Plan

We are devoting significant resources to remediating and improving our internal controls, including hiring additional accounting, internal audit and finance staff, engaging consultants to assist with these functions, upgrading our systems, and implementing additional financial and management controls, reporting systems and procedures.  These measures cost us an aggregate of approximately $737,400 as of November 14, 2009, are not expected fully to remediate our material weaknesses until at least December 31, 2009, and may not ensure the adequacy of our internal controls over our financial processes and reporting in the future.  These measures may not ensure the adequacy of our internal controls over our financial processes and reporting in the future.  If we are unable to remediate successfully these material weaknesses and significant deficiencies in a timely manner, investors may lose confidence in our reported financial information, which could lead to a decline in our stock price, limit our ability to access the capital markets in the future, and require us to incur additional costs to improve our internal control systems and procedures.

Changes in Internal Controls

Since the end of our 2008 fiscal year, we have begun the implementation of many of the remedial measures described above, including hiring additional staff, engaging consultants, training our staff, implementing more rigorous policies and procedures relating to period-end financial reporting, journal-entry approval, supporting documentation, account reconciliations, and management representation letters, and increasing our corporate audit focus on key accounting controls and processes, including documentation requirements.  We expect to continue to implement additional financial and management controls, reporting systems and procedures.

Progress Toward Remediation of Material Weaknesses and Significant Deficiencies

Material weaknesses and significant deficiencies that existed in our internal controls over financial reporting as of December 31, 2008, and progress toward their remediation as of September 30, 2009, are summarized below. Progress toward remediation is reported in the following stages:

· In process — We are in the process of designing and implementing controls to correct identified internal control deficiencies and conducting ongoing evaluations to ensure all deficiencies have been identified.

· Remediation activities implemented — We have designed and implemented the controls that we believe are necessary to remediate the identified internal control deficiencies.

· Remediated —After a sufficient period of operation of the controls implemented to remediate the control deficiencies, management has evaluated the controls and found them to be operating effectively.

· Material weaknesses in our internal controls over financial reporting noted as of December 31, 2008:

o Financial statement review procedures – Remediation activities implemented and results of those activities are under assessment.

o Accounting treatment for routine and non-routine transactions – Remediation activities implemented and results of those activities are under assessment.

o Internal audit function – Remediation activities implemented and results of those activities are under assessment.

o Timing of management’s assessment – Remediation activities implemented and results of those activities are under assessment.

· Significant deficiencies in our internal controls over financial reporting noted as of December 31, 2008:

o Period-end closing procedures – Remediation activities implemented and results of those activities are under assessment.

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o Access to administrative and accounting systems – Remediation activities implemented and results of those activities are under assessment.

o Documentation of accounts receivable transfers and promoters expenses – Remediation activities implemented and results of those activities are under assessment.

o Division of treasury and accounting duties – Remediation activities implemented and results of those activities are under assessment.

Additionally, during the three and nine months ended September 30, 2009, management has identified additional deficiencies in internal controls over financial reporting and is in process of evaluating and remediating those deficiencies.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in various claims and lawsuits incidental to our business.  Other than as disclosed below, we know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation.

We are a plaintiff in a lawsuit entitled American Dairy, Inc. v. Murrell, Hall, McIntosh & Co. PLLP et al. (“MHM”), filed on April 15, 2008 in the United States District Court for the Western District of Oklahoma. This suit alleges that our previous independent auditor, MHM, breached its duties of due care and professional competence by failing to perform its audits in accordance with professional standards of care in that MHM improperly and negligently (i) accepted Henny Wee & Co.’s representation that it was independent and otherwise failed to make sufficient inquiries concerning Henny Wee & Co.’s independence, and (ii) permitted Henny Wee & Co. to perform such a significant and material part of the audit work that MHM should have evaluated whether it could act as principal auditor and report on our financial statements. We are seeking compensatory damages of not less than $10.0 million in connection with this suit.

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. If any of the following events were to occur, our business, financial condition or results of operations could be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you could lose some or all of your investment. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial could also materially and adversely affect our business, financial condition, operating results and/or cash flow.

Any negative public perception regarding our products or industry, or any ill effects or product liability claims, could harm our reputation, damage our brand, result in costly and damaging recalls, and expose us to government investigations and sanctions, which would materially and adversely affect our results of operations.

We sell products for human consumption, which involves risks such as product contamination, spoilage and tampering. In 2008, sales in China of substandard milk formula contaminated with a substance known as melamine caused the death of six infants as well as illness of nearly 300,000 others.  Although this incident did not involve any of our products, China’s Administration of Quality Supervision, Inspection and Quarantine found that the products of 22 Chinese milk and formula producers were contaminated by melamine, a substance not approved for use in food, which caused significant negative publicity for the entire dairy industry in China.  The mere publication of information asserting that our milk powder, infant formula or other products contain melamine or other contaminants could have a material adverse effect on us, regardless of whether these reports are scientifically supported or concern our products or the raw materials used in our products.  In addition, if the consumption of any of our products causes injury, illness or death, we may face product liability claims, product recalls, temporary or permanent suspensions of operations, government investigations or sanctions, any of which could be extremely expensive and damaging to our business.

Prior to the 2008 melamine crisis, there have also been widely publicized occurrences of counterfeit, substandard milk products in China.  For example, in April 2004, such sales of counterfeit and substandard infant formula in Anhui Province, China caused the deaths of 13 infants and harmed many others.  Counterfeiting or imitation of our products may occur in the future, and we may not be able to detect it and deal with it effectively. Any occurrence of counterfeiting or imitation could negatively impact our corporate brand and image or consumers’ perception of our products or similar nutritional products generally, particularly if the counterfeit or imitation products cause injury or death to consumers.

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We expect to incur costs related to our planned acquisitions and expansion into new plants and ventures, which may not prove to be profitable. Moreover, any delays in our expansion plans could cause our profits to decline and jeopardize our business.

We anticipate that our proposed expansion of our milk production facilities may include the acquisition and construction of new or additional facilities. Our cost estimates and projected completion dates for construction of new production facilities may change significantly as the projects progress. In addition, our projects will entail significant construction risks, including shortages of materials or skilled labor, unforeseen environmental or engineering problems, weather interferences and unanticipated cost increases, any of which could have a material adverse effect on the projects and could delay their scheduled openings. A delay in scheduled openings of production facilities will delay our receipt of sales revenues from such facilities, which, when coupled with the increased costs and expenses of our expansion, could cause a decline in our profits.

Our plans to finance, develop, and expand our production facilities will be subject to the many risks inherent in the rapid expansion of a high growth business enterprise, including unanticipated design, construction, regulatory and operating problems, and the significant risks commonly associated with implementing a marketing strategy in changing and expanding markets. These projects may not become operational within their estimated time frames and budgets as projected at the time we enter into a particular agreement, or at all. In addition, we may develop projects as joint ventures in an effort to reduce our financial commitment to individual projects. The significant expenditures required to expand our production plants may not ultimately result in increased profits.

When our future expansion projects become operational, we will be required to add and train personnel, expand our management information systems and control expenses. If we do not successfully address our increased management needs or are otherwise unable to manage our growth effectively, our operating results could be materially and adversely affected.

Our products may not achieve market acceptance.

We are currently selling our products principally in northern, central, and eastern China.  Achieving market acceptance for our products, particularly in new markets, will require substantial marketing efforts and the expenditure of significant funds.  There is substantial risk that any new markets may not accept or be as receptive to our products.  In addition, we intend to market our products as premium and super-premium products and to adopt a corresponding pricing model, which may not be accepted in new or existing markets.  Market acceptance of our current and proposed products will depend, in large part, upon our ability to inform potential customers that the distinctive characteristics of our products make them superior to competitive products and justify their pricing.  Our current and proposed products may not be accepted by consumers or able to compete effectively against other premium or non-premium dairy products. Lack of market acceptance would limit our revenues and profitability.

Our planned growth may require more raw milk than is available and could diminish the quality of our dairy products.

Our business requires a supply of raw milk. Our growth will be limited if the supply of raw milk is insufficient to meet demand. Moreover, as we attempt to implement our growth strategy, it may become difficult to maintain current levels of quality control. Inadequate quality control could harm our reputation and the demand for our products, which would also limit our growth. The raw milk used in our products is supplied to us by numerous local farms under output contracts. We believe that our farmers can increase their production of raw milk. We further believe, however, that this supply may not be sufficient to meet increased demand for our products associated with our proposed marketing efforts and that such increase may compromise quality. Though we believe that additional raw milk is available locally, if needed, we may not be able to enter into arrangements with the producers of such milk on terms acceptable to us, if at all. An inadequate supply of raw milk, coupled with concern over quality control, could increase costs for raw milk or decrease the sales price for our products, which could limit our ability to grow, cause our earnings to decline and make our business less profitable.

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The recent global economic and financial market crisis could significantly impact our financial condition.

Current global economic conditions could have a negative effect on our business and results of operations. Economic activity in China, United States and throughout much of the world has undergone a sudden, sharp economic downturn following the recent housing downturn and subprime lending collapse in both the United States and Europe.  Market disruptions have included extreme volatility in securities prices, as well as severely diminished liquidity and credit availability.  The economic crisis may adversely affect us in a variety of ways. Access to lines of credit or the capital markets may be severely restricted, which may preclude us from raising funds required for operations and to fund continued expansion.  It may be more difficult for us to complete strategic transactions with third parties. The financial and credit market turmoil could also negatively impact our suppliers and customers, which could decrease our ability to source, produce and distribute our products and could decrease demand for our products. While it is not possible to predict with certainty the duration or severity of the current disruption in financial and credit markets, if economic conditions continue to worsen, it is possible these factors could significantly impact our financial condition.

Our results of operations may be affected by fluctuations in availability and price of raw materials.

The raw materials we use are subject to price fluctuations due to various factors beyond our control, including, among other pertinent factors:

· increasing market demand;

· inflation;

· severe climatic and environmental conditions;

· seasonal factors, with dairy cows generally producing more milk in temperate weather as opposed to cold or hot weather and extended unseasonably cold or hot weather potentially leading to lower than expected production;

· commodity price fluctuations;

· currency fluctuations; and

· changes in governmental and agricultural regulations and programs.

For example, our raw milk cost increased by approximately 45% in 2008 due to various factors, including, we believe, general economic conditions, such as inflation and fuel prices, and rising production costs.  We also expect that our raw material prices will continue to fluctuate and be affected by these factors in the future. Changes to our raw materials prices may result in increases in production and packaging costs, and we may be unable to raise the prices of our products to offset such increases in the short term or at all. As a result, our results of operations may be materially and adversely affected.

We are subject to public company reporting and other requirements for which we will incur substantial costs and our accounting and other management systems and resources may not be adequately prepared.

We incur significant legal, accounting, insurance and other expenses as a result of being a public company.  For example, laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, or SOX, and rules related to corporate governance and other matters subsequently adopted by the SEC and the NYSE, result in substantial costs to us, including legal and accounting costs, and may divert our management’s attention from other matters that are important to our business.  Compliance with Section 404 of SOX requires that our management annually assess the effectiveness of our internal control over financial reporting and that our independent auditors report on management’s assessment.  During our review of our financial statements and results for the year ended December 31, 2008, our management identified several internal control matters that constitute material weaknesses and significant deficiencies and, consequently, has concluded that our internal control over financial reporting was not effective at December 31, 2008.  In addition, management has concluded, based primarily on the identification of the material weaknesses and significant deficiencies, that our disclosure controls and procedures were not effective at December 31, 2008.  See “Part I—Item 4—Controls and Procedures” above.  Material weaknesses in our internal controls over financial reporting related to financial statement review procedures, accounting treatment for routine and non-routine transactions, our internal audit function, and our untimely assessment of our internal controls over financial reporting.  Significant deficiencies in our internal controls over financial reporting related to period-end closing procedures, access to administrative and accounting systems, documentation of accounts receivable transfers and promoters expenses, and division of treasury and accounting duties.

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A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.  A “significant deficiency” is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.  A “deficiency” in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.  We are devoting significant resources to remediating and improving our internal controls, including hiring additional accounting, internal audit and finance staff, engaging consultants to assist with these functions, upgrading our systems, and implementing additional financial and management controls, reporting systems and procedures.  These measures cost us an aggregate of approximately $737,400 as of November 14, 2009, are not expected fully to remediate our material weaknesses until at least December 31, 2009, and may not ensure the adequacy of our internal controls over our financial processes and reporting in the future.  These measures may not ensure the adequacy of our internal controls over our financial processes and reporting in the future.  If we are unable to remediate successfully these material weaknesses and significant deficiencies in a timely manner, investors may lose confidence in our reported financial information, which could lead to a decline in our stock price, limit our ability to access the capital markets in the future, and require us to incur additional costs to improve our internal control systems and procedures.

We significantly depend on our management team.

Each of our executive officers is responsible for an important aspect of our operations.  In addition, we rely on management and senior personnel to ensure that our sourcing, production, sales, distribution and other business functions are effective.  Losing the services of our executive officers or key personnel could be detrimental to our operations.  We do not have key-man life insurance for any of our executive officers or other employees.

Investors may not be able to enforce judgments entered by United States courts against certain of our officers and directors.

We are incorporated in the State of Utah.  However, a majority of our directors and executive officers, and certain of our principal shareholders, live outside of the U.S., principally in China. As a result, you may not be able to effect service of process upon those persons within the U.S. or enforce against those persons judgments obtained in U.S. courts.

We face substantial competition in connection with the marketing and sale of our products.

Our products compete with other premium quality dairy brands as well as less expensive, non-premium brands. Our products face competition from non-premium producers distributing in our marketing area and other producers packaging their products in our marketing area. Many of our competitors are well established, have greater financial, marketing, personnel and other resources, have more established distribution channels into major markets, and have products that have gained wide customer acceptance in the marketplace. Our largest competitors are multinational dairy companies and dairies owned by the government of China.  The greater financial resources of such competitors will permit them to procure retail store shelf space and to implement extensive marketing and promotional programs, both generally and in direct response to advertising efforts by us. The dairy industry in China is also characterized by the frequent introduction of new products, accompanied by substantial promotional campaigns. We may be unable to compete successfully or our competitors may develop products which have superior qualities or gain wider market acceptance than ours.

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We face the potential risk of product liability associated with food products.

We face the risk of liability in connection with the sale and consumption of dairy products and other products should the consumption of such products cause injury, illness or death. Such risks may be particularly great in a company undergoing rapid and significant growth. The successful assertion of product liability claims against us could result in potentially significant monetary damages, divert management resources and require us to make significant payments and incur substantial legal expenses. We do not currently maintain product liability insurance. Any insurance that we may obtain in the future may be insufficient to cover potential claims or the level of insurance coverage needed may be unavailable at a reasonable cost. Even if a product liability claim is not successfully pursued to judgment by a claimant, we may still incur substantial legal expenses defending against such a claim and our brand image and reputation would suffer. Finally, serious product quality concerns could result in governmental action against us, which, among other things, could result in mandatory recalls of our products, the suspension of production or distribution of our products, loss of certain licenses, or other governmental penalties, including possible criminal liability.

Doing business in China involves various political and economic risks.

We conduct substantially all of our operations and generate most of our revenue in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including:

· the higher level of government involvement and regulation;

· the early stage of development of the market-oriented sector of the economy;

· the rapid growth rate;

· the higher level of control over foreign exchange; and

· government control over the allocation of many resources.

As China’s economy has been transitioning from a planned economy to a more market-oriented economy, the government of China has implemented various measures to encourage economic growth and guide the allocation of resources. While these measures may benefit the overall economy of China, they may also have a negative effect on us.

Although the government of China has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues to exercise significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways.  Any adverse change in the economic conditions or government conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of consumer spending in China, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our business and prospects.

Extensive regulation of the food processing and distribution industry in China could increase our expenses resulting in reduced profits.

We are subject to extensive regulation by China’s Agricultural Ministry, and by other provincial and local authorities in jurisdictions in which our products are processed or sold, regarding the processing, packaging, storage, distribution and labeling of our products.  For instance, in June 2009, regulatory requirements became effective in China requiring new package labeling for dairy products, which we believe impacted our sales cycles during the three months ended June 30, 2009.  Other applicable laws and regulations governing our products may include nutritional labeling and serving size requirements. Our processing facilities and products are subject to periodic inspection by national, provincial and local authorities. We believe that we are currently in substantial compliance with all material governmental laws and regulations and maintain all material permits and licenses relating to our operations. Nevertheless, we may fall out of substantial compliance with current laws and regulations or may be unable to comply with any future laws and regulations. To the extent that new regulations are adopted, we will be required, possibly at considerable expense, to adjust our activities in order to comply with such regulations. Our failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on our business, operations and finances.

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Regulations affecting acquisitions of PRC companies by foreign entities may make it more difficult for us to complete acquisitions and grow our business.

In 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued a public notice, known as “Circular 75,” concerning the application of foreign exchange regulations to mergers and acquisitions involving foreign investment in China.  Among other things, the public notice provides that if an offshore company controlled by PRC residents intends to acquire a PRC company, such acquisition will be subject to strict examination by the relevant foreign exchange authorities.  Under Circular 75, if an acquisition of a PRC company by an offshore company controlled by PRC residents occurred prior to the issuance of Circular 75, certain PRC residents were required to submit a registration form to the local SAFE branch to register their ownership interests in the offshore company before March 31, 2006.  Such PRC residents must also amend the registration form if there is a material event affecting the offshore company, such as, among other things, a change to the company’s share capital, a transfer of shares, or if the company is involved in a merger, an acquisition or a spin-off transaction or uses its assets in China to guarantee offshore obligations.  Certain PRC residents who own our common stock have not made these Circular 75 registration filings.

As there is still significant uncertainty in China regarding the interpretation and implementation of Circular 75, we cannot predict how these regulations will affect our future acquisition strategy and business operations. For example, if we decide to acquire additional PRC companies, we or the owners of such companies may not be able to complete the filings and registrations, if any, required by the SAFE notices. Failure to complete Circular 75 registrations may limit the ability of our PRC subsidiaries to issue dividends to us, limit our ability to inject additional capital into our subsidiaries, restrict our ability to implement our acquisition strategy, and adversely affect our business and prospects.

In addition, in 2006 six PRC regulatory authorities, including the PRC Ministry of Commerce and the PRC Securities Regulatory Commission, jointly promulgated a rule entitled “Provisions regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors,” or the New M&A Rules, in September 2006. The New M&A Rules establish additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including, in some circumstances, advance notice to the Ministry of Commerce of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Compliance with the New M&A Rules, and any related approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

The PRC government’s recent measures to curb inflation rates could adversely affect future results of operations.

China has faced rising inflation in recent years. The government of China undertook various measures to alleviate the effects of inflation, especially with respect to key commodities.  In January 2008, the PRC National Development and Reform Commission announced national price controls on various products, including milk.  Similarly, the government of China may conclude that the prices of infant formula or other of our products are too high and may institute price controls that would limit our ability to set prices for our products as we might wish.  The government of China has also encouraged local governments to institute price controls on similar products.  Such price controls could adversely affect our future results of operations and, accordingly, the price of our common stock.

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The PRC currency is not a freely convertible currency, which could limit our ability to obtain sufficient foreign currency to support our business operations in the future.

The PRC currency, the “Renminbi” or “RMB,” is not a freely convertible currency. We rely on the PRC government’s foreign currency conversion policies, which may change at any time, in regard to our currency exchange needs. We receive substantially all of our revenues in Renminbi, which is not freely convertible into other foreign currencies. In China, the government has control over Renminbi reserves through, among other things, direct regulation of the conversion of Renminbi into other foreign currencies and restrictions on foreign imports. Although foreign currencies that are required for current account transactions can be bought freely at authorized PRC banks, the proper procedural requirements prescribed by PRC law must be met. At the same time, PRC companies are also required to sell their foreign exchange earnings to authorized PRC banks and the purchase of foreign currencies for capital account transactions still requires prior approval of the PRC government. This substantial regulation by the PRC government of foreign currency exchange may restrict our business operations and a change in any of these government policies could negatively impact our operations, which could result in a loss of profits.

In order for our China subsidiaries to pay dividends to us, a conversion of Renminbi into U.S. dollars is required, which, if not permitted by the PRC government, would interrupt our cash flows. Under current PRC law, the conversion of Renminbi into foreign currency for capital account transactions generally requires approval from SAFE and, in some cases, other government agencies. Government authorities may impose restrictions that could have a negative impact in the future on the conversion process and upon our ability to meet our cash needs and to pay dividends to our shareholders. Although our subsidiaries’ classification as wholly foreign-owned enterprises, or WFOEs, under PRC law permits them to declare dividends and repatriate their funds to us in the United States, any change in this status or the regulations permitting such repatriation could prevent them from doing so.  Any inability to repatriate funds to us would in turn prevent us from utilizing our PRC cash to pay creditors in U.S. dollars or other currencies or to pay dividends to our shareholders.

Fluctuations in the exchange rate between the PRC currency and the U.S. dollar could adversely affect our operating results.

The functional currency of our operations in China is the Renminbi. However, results of our operations are translated at average exchange rates into U.S. dollars for purposes of reporting results. As a result, fluctuations in exchange rates may adversely affect our expenses and results of operations as well as the value of our assets and liabilities. Fluctuations may adversely affect the comparability of period-to-period results. We do not currently use hedging techniques, and any hedging techniques we may use in the future may not eliminate, and may exacerbate, the effects of currency fluctuations. Thus, exchange rate fluctuations could cause our profits, and therefore our stock prices, to decline.

Under the New EIT Law, we may be classified as a “resident enterprise” of China, which would likely result in unfavorable tax consequences to us and our non-PRC shareholders.

Under China’s Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, which became effective in 2008, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes.  Under the implementing rules of the New EIT Law, de facto management means substantial and overall management and control over the production and operations, personnel, accounting, and properties of the enterprise.  Because the New EIT Law and its implementing rules are new, it is unclear how tax authorities will determine tax residency based on the facts of each case.

If the PRC tax authorities determine that American Dairy, Inc. is a “resident enterprise” for PRC enterprise income tax purposes, unfavorable PRC tax consequences could follow. First, we may be subject to enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” such dividends may be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares. We are actively monitoring the possibility of “resident enterprise” treatment for the 2008 and 2009 tax years and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.

If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to tax in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.

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We do not intend to pay and may be restricted from paying dividends on our common stock.

We have never declared or paid dividends on our capital stock and we do not intend to declare dividends in the foreseeable future. We currently intend to retain future earnings to fund our continued growth. Furthermore, if we decide to pay dividends, foreign exchange and other regulations in China may restrict our ability to distribute retained earnings from China or convert those payments from Renminbi into foreign currencies.

Lack of bank deposit insurance puts our funds at risk of loss from bank foreclosures or insolvencies.

We maintain certain bank accounts in China that are not protected by FDIC insurance or other insurance. As of September 30, 2009, we held approximately $29.4 million in bank accounts in China.  If a PRC bank holding our funds experienced insolvency, it may not permit us to withdraw our funds, which would result in a loss of such funds and reduction of our net assets.

Limited and uncertain trademark protection in China makes the ownership and use of our trademark uncertain.

We have obtained trademark registrations for the use of our trade name “Feihe” as well as our “Feifan,” “Feirei,” “Feiyue,” and “Beidiqi” Chinese brands and our “Firmus” and “Babyrich” English brand names, which have been registered with the PRC Trademark Bureau of the State Administration for Industry and Commerce with respect to our milk products. We believe our trademark is important to the establishment of consumer recognition of our products.  However, due to uncertainties in PRC trademark law, the protection afforded by our trademark may be less than we currently expect and may, in fact, be insufficient. Moreover, even if it is sufficient, in the event it is challenged or infringed, we may not have the financial resources to defend it against any challenge or infringement and such defense could in any event be unsuccessful. Moreover, any events or conditions that negatively impact our trademark could have a material adverse effect on our business, operations and finances.

Our lack of patent protection could permit our competitors to copy our trade secrets and formula and thus gain a competitive advantage.

We have no patents covering our products or production processes, and we expect to rely principally on know-how and the confidentiality of our formula and production processes for our products and our flavoring formula in producing competitive product lines. Any breach of confidentiality by our executives or employees having access to our formula could result in our competitors gaining access to such formula. The ensuing competitive disadvantage could reduce our revenues and our profits.

One of our shareholders owns a significant percentage of our stock and will be able to exercise significant influence over our affairs.

Leng You-Bin, our Chairman, Chief Executive Officer, President, and General Manager, beneficially owned approximately 41% of our common stock as of November 10, 2009.  Our executive officers and directors as a group beneficially owned approximately 50% of our common stock as of November 10, 2009.  Consequently, these individuals will likely be able to determine the composition of our board of directors, retain the voting power to approve certain matters requiring shareholder approval and continue to have significant influence over our operations.  The interests of these shareholders may be different than the interests of other shareholders on these matters.  This concentration of ownership could also have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our common stock.

Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

Since we are a Utah corporation and a public company in the United States, we are subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Non-U.S. companies, including some that may compete with our company, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur in China. Although such practices are prohibited at our company, our employees or other agents may engage in such conduct for which we might be held responsible.  If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

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We have a significant amount of indebtedness, which may limit our operating flexibility.

As of September 30, 2009 we had approximately $ 183.0 million of total liabilities, which included approximately $16.0 million of outstanding principal on our 2009 Notes and our 2012 Notes. Although all of our 2009 Notes have converted into shares of our common stock and we have repurchased all of our 2012 Notes as of October 15, 2009, we expect to continue to incur debt to fund capital and operating expenses. Our high level of indebtedness could have important consequences, including the following:

· it may be difficult for us to satisfy our obligations with respect to our indebtedness;

· our ability to obtain additional financing for working capital, capital expenditures, or general corporate or other purposes may be impaired;

· a substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness, reducing the funds available to us for other purposes;

· it may cause our trade creditors to change their terms for payment on goods and services provided to us, thereby negatively impacting our ability to receive products and services on acceptable terms;

· it may place us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged; and

· we may be more vulnerable to economic downturns, may be limited in our ability to respond to competitive pressures and may have reduced flexibility in responding to changing business, regulatory and economic conditions.

Our ability to pay interest on and to satisfy our debt obligations will depend upon, among other things, our future operating performance and our ability to refinance indebtedness when necessary.  Each of these factors is, to a large extent, dependent upon economic, financial, competitive and other factors beyond our control.  If, in the future, we cannot generate sufficient cash from operations to meet our debt obligations, we will need to refinance our existing debt, obtain additional financing or sell assets.  Our business may not generate sufficient cash flows to satisfy our existing indebtedness and funding sufficient to satisfy our debt service requirements may not be available on satisfactory terms, if at all.

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The terms of our subscription agreement with the Purchasers may have adverse impacts on us.

On August 11, 2009, we entered into a subscription agreement pursuant to which we agreed to issue 2,100,000 shares of our common stock to the Purchasers for an aggregate purchase price of $63.0 million.  We completed the transaction on the proposed terms on August 26, 2009.  The subscription agreement includes several provisions that could have an adverse effect on us.  We have agreed not to issue new shares of our common stock at a price below $30.00 per share without the prior written consent of a majority in interest of the purchasers, subject to certain exceptions, which could preclude us from raising additional funds.  In addition, if we fail to meet certain earnings per share targets for 2009 and 2010, we have agreed to issue additional shares of our common stock to the Purchasers in proportion to the amount by which we fail to meet the target, up to a maximum amount of 525,000 shares, which would result in immediate and substantial dilution to our shareholders.  Furthermore, if the average closing prices of our common stock for the fifteen trading days commencing on the third anniversary of the closing date is less than $39.00, the purchasers will have the right to cause us to repurchase all of the securities acquired in connection with the agreement, which could significantly impact our liquidity and capital resources.

We are at risk of securities litigation.

We are at risk of being subject to securities litigation, including possible enforcement action or class action lawsuits.  Following notification by the SEC in 2007 of an informal investigation related to our former independent registered public accountants, we dismissed our former auditors, sued our former auditors, engaged new independent registered public accountants, commenced a re-audit of historical financial statements, and restated our financial statements as of and for our fiscal years ended December 31, 2005 and 2006.  Accordingly, we were unable to file Exchange Act reports for 2007 and 2008 in a timely manner.  In addition, we have restated our quarterly financial statements for the quarter ended March 31, 2009 to reclassify certain items from operating activities to investing activities, and we have amended our Form 10-K for the 2008 fiscal year to restate items in our statements of cash flows and to revise the note to our financial statements regarding quarterly operating results.  Securities class action litigation has often been brought against companies who have been unable to provide current public information or who have restated previously filed financial statements.  Such litigation is complex and could result in substantial costs, divert management’s attention and resources, and seriously harm our business, financial condition and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

At our Annual Meeting of Shareholders on July 8, 2009, our shareholders elected Leng You-Bin, Liu Hua, Liu Sheng-Hui, Hui-Lan Lee, Kirk G. Downing, Esq. and James C. Lewis, Esq. for a one-year term.  There were no other directors who had terms of office continuing after the meeting.  The following table sets forth the voting results for each proposal our shareholders considered at the meeting:

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Proposal	Votes For		Votes Against		Votes Withheld/ Abstained		Broker Non-votes
Elect six directors to serve until their successors are duly elected and qualified
Leng You-Bin		15,169,744		N/A		826,555		N/A
Liu Hua		15,183,850		N/A		488,812		N/A
Liu Sheng-Hui		15,507,487		N/A		368,702		N/A
Hui-Lan Lee		15,627,989		N/A		812,449		N/A
Kirk G. Downing, Esq.		15,627,597		N/A		368,310		N/A
James C. Lewis, Esq.		15,603,975		N/A		392,324		N/A
Approve our 2009 Stock Incentive Plan		10,846,133		2,545,134		2,605,032		N/A
Ratify the selection of Grant Thornton, the Hong Kong member firm of Grant Thornton International Ltd., as our independent registered public accounting firm for the fiscal year ending December 31, 2009		15,955,276		40,028		995		N/A

Item 5. Other Information

None.

Item 6. Exhibits

			IncorporatedbyReference
Exhibit No.	ExhibitTitle	Filed Herewith	Form	Exhibit No.	FileNo.	Filing Date
10.1	Subscription Agreement, dated as of August 12, 2009, by and among American Dairy, Inc. and the Purchasers		8-K	10.1	001-32473	8/12/09
10.2	Registration Rights Agreement, dated as of August 26, 2009, by and among American Dairy, Inc. and the Purchasers		8-K	10.1	001-32473	8/26/09
31.1	Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
31.2	Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	American Dairy, Inc.
Date: November 16, 2009	By:	/s/ Leng You-Bin
		Leng You-Bin Chief Executive Officer and President (Principal Executive Officer)
	By:	/s/ Jonathan H. Chou
		Jonathan H. Chou Chief Financial Officer (Principal Accounting and Principal Financial Officer)

EXHIBIT INDEX

			Incorporated by Reference
Exhibit No.	Exhibit Title	Filed Herewith	Form	Exhibit No.	File No.	Filing Date
10.1	Subscription Agreement, dated as of August 12, 2009, by and among American Dairy, Inc. and the Purchasers		8-K	10.1	001-32473	8/12/09
10.2	Registration Rights Agreement, dated as of August 26, 2009, by and among American Dairy, Inc. and the Purchasers		8-K	10.1	001-32473	8/26/09
31.1	Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
31.2	Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X