---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: March 31, 2011

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

For the transition period from ____________ to _____________

Commission File No. 000-23806

YAYI INTERNATIONAL INC.(Exact name of registrant as specified in its charter)

|Delaware                        | 87-0046720                          
|------------------------------- | ------------------------------------
|(State or other jurisdiction of | (I.R.S. Employer Identification No.)
|incorporation or
organization)  |                                     

No. 9 Xingguang Road,  
Northern Industrial Park of Zhongbei Town,  
Xiqing District, Tianjin 300384, China (Address of principal executive offices)

(86)22-2798-4033(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

|Title of each class | Name of each exchange on which registered
|------------------- | -----------------------------------------
|None                | None                                     

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $0.001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.

Yes [    ]            
No [ X ]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.

Yes [    ]            
No [ X ]

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 Website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ X ]

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.

|Large Accelerated Filer [    ]                | Accelerated Filer [    ]       
|--------------------------------------------- | -------------------------------
|                                              |                                
|Non-Accelerated Filer [    ]                  | Smaller reporting company [ X ]
|(Do not check if a smaller reporting company) |                                

Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Act)

Yes [    ]               
No [ X ]

---

As of September 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the shares of the registrant’s common stock held by non-affiliates (based upon the closing
price of such shares as reported on the Over-the-Counter Bulletin Board) was approximately $12.5 million.  Shares of the registrant’s common stock held by each executive officer and director and by each person who owns 10% or more of the
outstanding comff mon stock have been excluded from the calculation in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

There were a total of 26,454,558 shares of the registrant’s common stock outstanding as of June 28, 2011.

DOCUMENTS INCORPORATED BY REFERENCE

None.

---



YAYI INTERNATIONAL INC.

Annual Report on FORM 10-K

For the Fiscal Year Ended March 31, 2011


TABLE OF CONTENTS

|PART I                                                                                                                            | 
|--------------------------------------------------------------------------------------------------------------------------------- | 
|                                                                                                                                  | 
|ITEM 1. BUSINESS.                                                                                                                 | 
|ITEM 1A. RISK FACTORS.                                                                                                            | 
|ITEM 1B. UNRESOLVED STAFF
      COMMENTS.                                                                                         | 
|ITEM 2. PROPERTIES.                                                                                                               | 
|ITEM 3. LEGAL
      PROCEEDINGS.                                                                                                  | 
|ITEM 4. [REMOVED AND RESERVED]                                                                                                    | 
|                                                                                                                                  | 
|PART II                                                                                                                           | 
|                                                                                                                                  | 
|ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY,
      RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
      SECURITIES. | 
|ITEM 6. SELECTED FINANCIAL
      DATA.                                                                                            | 
|ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS.                              | 
|ITEM 7A. QUANTITATIVE AND
      QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                                                        | 
|ITEM 8. FINANCIAL STATEMENTS AND
      SUPPLEMENTARY DATA.                                                                        | 
|ITEM 9. CHANGES IN AND
      DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.                         | 
|ITEM 9A. CONTROLS AND PROCEDURES.                                                                                                 | 
|ITEM 9B. OTHER
      INFORMATION.                                                                                                 | 
|ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
      CORPORATE GOVERNANCE.                                                            | 
|ITEM 11. EXECUTIVE
      COMPENSATION.                                                                                            | 
|ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
      OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.                    | 
|ITEM 13. CERTAIN RELATIONSHIPS
      AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.                                         | 
|ITEM 14. PRINCIPAL ACCOUNTING FEES AND
      SERVICES.                                                                            | 
|                                                                                                                                  | 
|PART IV                                                                                                                           | 
|                                                                                                                                  | 
|ITEM 15. EXHIBITS, FINANCIAL STATEMENT
      SCHEDULES.                                                                           | 

i

---

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such
as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim” or similar expressions which are intended to
identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other
financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China, as well as all
assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in
Item 1A, “Risk Factors” included herein, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such
forward-looking statements.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility
for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date
of this report to conform our prior statements to actual results or revised expectations.

Use of Terms

Except as otherwise indicated by the context, references in this report to:

- “BVI” refer to the British Virgin Islands;
- “China,” “Chinese” and “PRC,” refer to the People’s Republic of China and for the purpose of this report, do not include Taiwan and the special administrative regions of Hong Kong and Macau;
- “Exchange Act” refer to the Securities Exchange Act of 1934, as amended;
- “Fuping Milkgoat” refer to Fuping Milkgoat Dairy Co., Ltd., a company organized under the laws of the PRC;
- “Milkgoat China” refer to Milkgoat (China) Goat Dairy Co., Ltd., a company organized under the laws of the PRC;
- “Milkgoat Industrial” refer to Milkgoat Industrial Co., Ltd, a limited liability company organized under the laws of BVI;
- “Renminbi” and “RMB” refer to the legal currency of China;
- “SEC” refer to the United States Securities and Exchange Commission;
- “Securities Act” refer to the Securities Act of 1933, as amended;
- “U.S. dollars,” “dollars” and “$” refer to the legal currency of the United States;
- “we,” “us,” “our company,” “our” and “Yayi” refer to the combined business of Yayi International Inc. and/or its consolidated subsidiaries, as the case may be; and
- “Weinan Milkgoat” refers to Weinan Milkgoat Production Co., Ltd., a company organized under the laws of the PRC.

1

---

PART I

ITEM 1.     BUSINESS.

Business Overview

According to the China Quality Net, maintained by China Quality Inspection Association, we are the first and one of the leading producers and distributors of premium goat milk formula products for infants, toddlers, young children, and adults in
China. We began selling powder products in Tianjin and Beijing in 2001, in Southern China in 2004 and Northern China in 2006. Our current formula product lines are targeted at the premium segment of the dairy market and health-conscious consumers.
Headquartered in Tianjin, we sell and distribute our products through a nationwide network of retail points across China in 23 provinces and municipalities including infant-maternity chain stores, supermarkets (including multinational chains) and
drug stores, as well as catalogue sales and our dedicated online store at Taobao.com. We are vertically integrated and source raw goat milk from our proprietary dairy farms as well as neighboring goat dairy farmers on a long-term contract basis in
milk collection centers, which helps us maintain quality control.

Our powder products are sold throughout most of China. Since the end of 2009, we have been working with Trout & Partners to streamline our product portfolio and refine our brand image in order to position and strengthen our “Milk
Goat” brand as the premium goat milk brand throughout China. We have restructured our original product portfolio of dozens of products and specifications and refined our marketing strategy. Our new product portfolio consists of 26 formula
products under the “Milk Goat” brand with three package sizes of 600, 665 and 365 grams with upgraded formula. Most of our goat milk products are formulated through the inclusion of supplements such as vitamins, calcium, iron, selenium,
chromium and omega-3 fatty acids, as needed to address the nutritional or health needs of the consumers. We sell and distribute our products through a network of approximately 3,800 retail points including infant-maternity chain stores, domestic and
multinational supermarkets and drug stores, as well as catalogue sales across China. We sell most of our products to more than 200 distributors, who in turn sell our products to the retail points. The distributors are located in 23 provinces in
China. In addition, since the end of December 2010, we have been selling our products with 365-gram, 600-gram and 665-gram package sizes to the infant-maternity retail stores.  We expect such new sales strategy to help further strengthen our market
presence in this distribution channel.

Corporate History and Structure

General

We were originally incorporated in Delaware in 1986 under the name of Commercial Ventures Ltd. We changed our name to FIN U.S.A., Inc. in 1987, and in 1993 to I/NET, INC, when we developed and marketed computer software for mid range computers. In
2006, Tryant acquired a majority of our outstanding capital stock. In connection with that acquisition, we ceased our operations and became a shell company in search of an operating business to acquire. On April 15, 2007, our name was changed to
Ardmore Holding Corporation and in September 2008, following the Merger with Milkgoat Industrial, we ceased being a shell company and began active goat milk and related products production and sale operations.

On September 12, 2008, we filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware and changed our name to Yayi International Inc.

Acquisition of Milkgoat Industrial and Formation of Our Other Subsidiaries

Charleston Industrial Ltd, or Charleston, is a limited liability company organized under the laws of BVI on October 31, 2007 in anticipation of a business combination with a U.S. reporting company. On January 15, 2008, Charleston acquired Tianjin
Yayi Industrial Co., Ltd., or Tianjin Yayi, and its wholly-owned subsidiary, Weinan Milkgoat. Tianjin Yayi is a Chinese company formed in the PRC in May 1994. On June 6, 2008, pursuant to the Merger Agreement, we, our wholly owned subsidiary,
Ardmore Acquisition Corp., Charleston and Tryant consummated the Merger, pursuant to which Ardmore Acquisition Corp. was merged with and into Charleston and Charleston thus became the surviving entity of the Merger. As a result, Charleston became
our wholly owned subsidiary.

2

---

In connection with the Merger, all of the outstanding shares of Charleston were converted into an aggregate of 22,325,000 shares of our Common Stock. In addition, Jeff D. Jenson, Steve Markee and Alex Ferries resigned from their positions as of
directors and Li Liu, Fung Shek, and Cili Yan were appointed as our new directors. Our executive officers were also replaced by the Tianjin Yayi executive officers upon the closing of the Merger.

On June 6, 2008, in consideration for introducing us to Charleston, we issued to Grand Orient Fortune Investment Ltd., a BVI limited liability company, or Grand Orient, and its designees an aggregate of 2,000,000 shares of our Common Stock and our
Series B Warrants to acquire 2,148,148 shares of our Common Stock at an exercise price of $1.08 per share. These warrants are exercisable on a cashless basis and may be exercised through June 6, 2011. The exercise price of these warrants and the
number of shares issuable upon their exercise is subject to adjustment upon the occurrence of specified events.

In addition, on June 6, 2008, we entered into an indemnification agreement with Tryant, pursuant to which Tryant agreed to the cancellation of 325,198 shares of our Common Stock it owned and agreed to, among other things, indemnify us for one year
for breaches of representations and warranties in the Merger Agreement. In exchange, we (i) paid Tryant an aggregate of $200,000 (excluding $50,000 that had been previously paid), (ii) issued Tryant a note in principal amount of $250,000
maturing in August 2008, and (iii) issued Tryant and its designees our Series C Warrants, exercisable on a cashless basis to acquire through June 6, 2011, an aggregate of 185,185 shares of our Common Stock at an exercise price of $1.35 per
share. The exercise price and number of shares issuable upon exercise of these warrants is subject to specified anti-dilution adjustments.

On August 8, 2008, Tianjin Yayi acquired 100% ownership of Fuping Milkgoat, from eight individuals, including Jingchuan Chang, Lixue Du, Xilin Jia, Xuhe Zhang, Mingxun Zhang, Pingan Li, Chongli An and Fuping Xing for a cash consideration of RMB
4,240,846 (approximately $620,360). Fuping Milkgoat currently has a registered capital of RMB 5,000,000 (approximately $731,411). Fuping Milkgoat’s principal business is purchasing and processing raw liquid goat milk into raw goat milk
powder.

On September 9, 2009, Tianjin Yayi formed a wholly-owned PRC subsidiary, Shaanxi Milkgoat Dairy Co., Ltd, or Shaanxi Milkgoat, and obtained the business license from the Industrial and Commercial Bureau of Weinan City, Shaanxi Province with a
registered capital of RMB 5,000,000 (approximately $731,411). Shaanxi Milkgoat’s principal business is purchasing and processing raw liquid goat milk into raw goat milk powder. During the first quarter of 2010, Shaanxi Milkgoat increased
its registered capital by RMB 25,000,000 (approximately $3,657,056) to RMB 30,000,000 (approximately $4,388,467).

On August 18, 2010, Charleston changed its name to Milkgoat International to more accurately reflect our marketing and branding strategy and products.

On December 17, 2010, Tianjin Yayi changed its name to Milkgoat China to more accurately reflect our marketing and branding strategy and products.

Private Placement Transaction in 2008

Contemporaneously with, and as a condition to, the completion of the Merger, we issued, pursuant to an amended and restated securities purchase agreement, 52 units to certain investors for an aggregate purchase price of $1.3 million. Each unit
consisted of: (i) an 8% convertible promissory note in the principal amount of $25,000 and (ii) a Series A Warrant to subscribe for 11,575 shares of our Common Stock. As a result, we issued to the investors an aggregate of $1,300,000
principal amount of 8% convertible promissory notes and Series A Warrants to subscribe for 601,900 shares of our Common Stock. The notes are unsecured and are convertible into our Common Stock at a conversion price of $1.08. The Series A Warrant
included in each unit is exercisable (under specified circumstances, on a cashless basis) through June 6, 2011 (subject to extension if, under specified circumstances, the underlying shares are not registered for resale) to acquire 11,575 shares of
our Common Stock at an exercise price equal to the lesser of $1.35 and the Next Round Value. The term “Next Round Value” means the per share dollar value of the securities issued by us in the first private placement that is effected
after the Merger. As described below, as a result of the private placement transaction closed on June 18, 2009 and pursuant to a settlement agreement between us and the investors, dated November 24, 2009, the exercise price of Series A Warrants was
reduced to $0.98.

3

---

We paid the placement agent WestPark $104,000 in commissions and approximately $20,000 for expenses (including its non-accountable expense allowance) for its services in the offering and issued to it and its designees Series D Warrants (with
the same terms as the Series A Warrants) to acquire an aggregate of 144,448 shares of our Common Stock.

Pursuant to a registration rights agreement with these investors, we agreed to register the resale of the shares of Common Stock underlying the notes and Series A Warrants. If we fail, subject to specified exceptions, to comply with certain of our
obligations under this agreement, we may be required, for each 30 day period in which we are in default under such obligations, to pay the investors partial liquidated damages equal to 1.5% of the purchase price paid by the investor for any
unregistered securities held by them that are required to be registered; provided, however, that the maximum amount payable to an investor pursuant to such provisions shall not exceed 20% of the purchase price paid by the investor. We did not
register these shares in accordance with the registration rights agreement. On November 24, 2009, we and the investors entered into a Settlement Agreement pursuant to which, (i) each of the investors converted its own entire principal amount of and
accrued interest on all of the notes it holds into an aggregate 1,296,275 shares of our Common Stock at a conversion price of $1.08 per share, (ii) we adjusted the exercise price of Series A Warrants to $0.98 per share, and (iii) we agreed
to pay to the investors, on or before December 6, 2009, liquidated damages in the aggregate amount equal to $140,000 through Wellfleet Partners, Inc., the representative of the investors for pro rata distribution to the investors. We have
satisfied all of our obligations under the Settlement Agreement. Upon making such payment, the registration rights agreement was, as between us and each investor, terminated and all our obligations thereunder were discharged and all claims against
us arising therefrom were released.

Private Placement Transaction in 2009

On June 18, 2009, we entered into the Stock Purchase Agreement with Global Rock, Milkgoat Industrial, Milkgoat China, the individuals named thereto and SAIF. Pursuant to the Stock Purchase Agreement, we issued and sold to SAIF 1,530,612 shares of
our Series A Preferred Stock at a price per share of $9.80 for an aggregate purchase price of $15.0 million. The Series A Preferred Stock is convertible into our Common Stock at an initial conversion price at $0.98 per share, which
conversion price is subject to stock split, recapitalization and other anti-dilution protection, as well as adjustments based on our financial performance.

In connection with the above private placement transaction, on June 16, 2009, we filed the Certificate with the Secretary of State of the State of Delaware, which became effective upon filing. Pursuant to the Certificate, there are 1,530,612 shares
of Series A Preferred Stock authorized. The holders of the Series A Preferred Stock are entitled to receive non-cumulative dividends, when, as and if declared by the Board. The shares of Series A Preferred Stock may be converted into the
Company’s Common Stock at the option of the holders of the Series A Preferred Stock in whole or in part at any time at an initial conversion price of $0.98, subject to future adjustments set forth in the Certificate.

On July 20, 2010, we filed an Amended and Restated Certificate of Designation of Series A Preferred Stock with the Secretary of State of the State of Delaware, or the Amended Certificate, to modify the terms of the Series A Preferred Stock. Among
other things, the Amended Certificate removed Section 6(f) Special Conversion Price Adjustment Based on 2010 and 2011 Accounts of the Certificate and added the provisions relating to the make good shares that the holders of Series A Preferred Stock
may be entitled to receive if we fail to meet certain performance targets set forth in the Amended Certificate. Specifically, if our combined after tax net income reported in our Annual Report on Form 10-K for both of the fiscal years ending March
31, 2011 and 2012 is less than $20 million, we will issue up to 612,245 shares of Series A Preferred Stock to holders of shares of Series A Preferred Stock pursuant to a formula set forth in the Amended Certificate.

Private Placement Transaction in 2010

On September 27, 2010, we entered into the Securities Purchase Agreement, with the PIPE Investors and Euro Pacific, pursuant to which we issued and sold to the PIPE Investors 892 units at a purchase price of $10,000 per unit, resulting in gross
proceeds of $8.92 million to us. Each unit consists of a Convertible Note in the principal amount of $10,000 and a three-year Series F Warrant to purchase 1,250 shares of our Common Stock at an exercise price of $2.50 per share.

The Convertible Notes are payable at an interest rate of 9% per annum, payable semiannually in arrears on the last day of the first and third calendar quarters (i.e., March 31 and September 30) commencing March 31, 2011 and mature on September 26,
2013, or the Maturity Date. Except for our secured Indebtedness (as defined in the Convertible Note) in existence on September 27, 2010, our obligations under the Convertible Notes will rank senior with respect to all our
existing indebtedness as of September 27, 2010 and to any and all Indebtedness incurred thereafter. The Convertible Notes are also convertible into shares of Common Stock at any time prior to the Maturity Date at $2.00 per share, which
conversion price is subject to weighted average and other customary anti-dilution protections. At any time after September 26, 2011, we may redeem all but not less than all of the outstanding principal amount of any Convertible Note by payment of
108% of the outstanding principal amount of the Convertible Note, together with accrued but unpaid interest.

4

---

The Series F Warrants entitle the PIPE Investors to purchase an aggregate of 1,115,000 shares of Common Stock at an initial exercise of $2.50 per share, which exercise price is subject to the customary weighted average and stock based
anti-dilution protection. The Series F Warrants may be exercised in a cash or cashless way at any time upon the election of the holders until September 26, 2013.

Euro Pacific acted as the sole placement agent of the private placement transaction. Euro Pacific received from us a cash commission of $713,600, which is equal to 8% of the gross proceeds of the financing. In addition, we issued Series F
Warrants to the designees of Euro Pacific to purchase an aggregate of 312,200 shares of Common Stock at an exercise price of $2.50 per share, as partial compensation for services provided by them in connection with the private placement.

On September 27, 2010, we, Global Rock, Euro Pacific and Escrow, LLC, as escrow agent, or the Escrow Agent, entered into a make good escrow agreement, or the Make Good Escrow Agreement. Pursuant to the Make Good Escrow Agreement, Global Rock agreed
to place a total of 669,000 shares of Common Stock held by it, which is equal to 15% of the amount of shares of Common Stock issuable upon conversion of the Convertible Notes, or the Make Good Shares, into escrow to secure our certain make good
obligations. In the event that our combined net sales of both of the fiscal years ending March 31, 2011 and 2012 is less than $125 million, Global Rock will transfer the Make Good Shares to the PIPE Investors, on a pro rata basis, for no
additional consideration.

We and the PIPE Investors also entered into the Registration Rights Agreement, pursuant to which, we granted registration rights to holders of registrable securities, which include (i) the shares of Common Stock issuable upon the conversion of the
Convertible Notes, (ii) the Make Good Shares, as applicable, (iii) the shares of Common Stock issuable upon the exercise of Series F Warrants, and (iv) any securities issued or issuable upon any stock split, dividend or other distribution,
recapitalization or similar event, or any price adjustment as a result of such stock splits, reverse stock splits or similar events with respect to any of the securities referenced in (i) – (iii) above.

Pursuant to the Registration Rights Agreement, we are required to file a registration statement on Form S-1, or the Registration Statement, within 30 days after the closing of the private placement and cause the Registration Statement to be declared
effective by the SEC within 180 days after the closing of the private placement. We may be subject to liquidated damages in an amount up to 8% of the aggregate investment amount paid by the PIPE Investors in the private placement if we are unable to
file, obtain and maintain effectiveness of the Registration Statement as required by the Registration Rights Agreement.

On September 27, 2010, we also entered into a closing escrow agreement with Euro Pacific and the Escrow Agent, or the Closing Escrow Agreement, pursuant to which, among other things, we have placed a certain amount of cash received from the private
placement, or the Holdback Amount, with the Escrow Agent, which is sufficient to satisfy the payment to the PIPE Investors of one semiannual interest payment due on the aggregate principal amount of all Convertible Notes issued in the private
placement, which includes accrued interest due on the principal amount of the Convertible Notes from September 27, 2010 through March 31, 2011. If, an Event of Default (as defined in the Convertible Notes) is declared by Euro Pacific with respect to
a failure by us to make a semiannual interest payment to the PIPE Investors in accordance with the Convertible Notes, the Escrow Agent will disburse a certain portion of the Holdback Amount to the PIPE Investors, and within 30 days following the
disbursement, we will deposit an additional amount equal to the Holdback Amount with the Escrow Agent to be retained and disbursed. On the Maturity Date or at any time prior to the Maturity Date when 75% of all Convertible Notes have been converted,
all remaining funds of the Holdback Amount will be disbursed to us.

All of our business operations are conducted through our indirectly, wholly-owned Chinese subsidiaries. The following chart reflects our organizational structure as of the date of this report.

5

---



Dairy Industry in China

Industry Growth Drivers

China’s large population, growing disposable income and rapidly changing consumer habits create a favorable market for premium dairy products. The prospects for China’s infant formula market look particularly promising with on average 17
million newborns each year. The country may be experiencing a small baby boom due to an exception to China’s one-child policy; parents who are both single children of their respective families are allowed to have a second child. According to
Euromonitor, the infant formula market is expected to grow at a compound annual growth rate of 23.1% between 2008 and 2013. In general, the one-child policy makes Chinese parents inclined to prioritize their children’s health over other
consumption, which supports the market for premium infant formula products.

The Case of Goat Milk

China’s government has been promoting milk consumption since the mid 1990s because of its beneficial nutritional properties. The Eleventh Five-Year Plan (2006-2011) encourages every Chinese citizen to consume 0.5 kg of dairy products per day.
The favorable government policies coupled with the prevalence of sensitivity towards cow milk products in China further support the demand for goat milk. Independent studies demonstrate that goat milk has a beneficial protein structure compared with
cow milk, facilitating absorption of nutrients in goat milk by the human digestive system, which may make goat milk a more suitable alternative for Chinese consumers who have experienced problems with digesting cow milk.

Compared with cow milk, the molecules of lactose and fat globules are smaller in goat milk, making goat milk more easily absorbed by individuals who are sensitive to milk products. Moreover, lower acidity, the concentration of medium-chain
triglyceride fatty acids, and the absence of r-casein, the main allergen found in cow milk, improve the digestibility of goat milk, making it an appealing substitute for cow milk. We believe that we, with our broad product portfolio and first mover
position in goat milk production and distribution, are well positioned to take advantage of this increased demand.

Post Melamine Scandal Era

In 2008, the reputation of China’s dairy industry was severely damaged as melamine, a toxic chemical used to manufacture plastics, was discovered in products from 22 domestic dairy producers. In response, the Chinese government issued the
Regulation on the Supervision and Administration of the Quality and Safety of Dairy Products, which encourages stricter national standards for the quality and safety of dairy products, heightens sanitary requirements, and imposes more responsibility
on dairy processors to control the sources of raw milk. In addition, a Food Safety Act has been implemented in June 2009 to revise problems related to the scandal. Dairy processors are strongly encouraged to implement HACCP or GMP quality
certification systems. Further efforts to align the interests of different parties including farmers, processors, dairies and consumers are underway.

6

---

Following the scandal, the Ministry of Agriculture stipulated that only one milk processing plant be allowed on a ranch within the radius of 60 kilometers. New projects must reach processing capacity of 200 tons of raw milk per day based on raw milk
sources proprietary to or controlled by the dairy processor, and raw milk must contribute to no less than 30% of total processing capacity. The added capacity in expansion projects must reach at least 100 tons of raw milk per day, and 75% of the
existing processing capacity must be based on raw milk sources proprietary to or controlled by the dairy processor.

With the growing awareness and lingering safety concerns about cow milk, we are well positioned to take advantage of the unprecedented opportunity to solidify our presence in the goat milk and premium infant formula sectors. We place primary
importance on quality. In order to ensure the quality and safety of our raw materials, we have established our subsidiary, Weinan Milkgoat, in the main area where Saanen dairy goats are raised because most of our supply of raw goat milk comes from
Saanen dairy goats. We have designated staff monitoring the whole process of raw goat milk collection at each of our collection stations in this area. The collected raw goat milk is directly transported to our subsidiary for inspection in compliance
with national standards, including the detection of melamine. After the inspection, qualified raw goat milk will be sprayed to be milk powder, packed and transported to Milkgoat China for canning. Before the canning, our quality control staff
conducts a second inspection of the goat milk powder.

Compared with many cow milk powder producers with decentralized raw cow milk sources, we believe its more efficient and cost-effective for us to conduct quality control of our raw materials with a centralized raw goat milk collection system. The
melamine contamination incident has resulted in significant negative publicity for the entire domestic cow milk industry and consumers are seeking substitutes for cow milk due to such lingering safety concerns. We have increased our spending on
advertising in which we emphasize the fact that our products are always qualified in previous government inspections and melamine has never been detected in our products. We also conduct promotional activities with supermarket chains and
infant-maternity stores in order to reach out our target market. We believe our advertizing and promotional activities have allowed us to obtain preferential product placement in retail points and to compete effectively against multinational and
domestic cow milk powder producers. In addition, we believe that due to our current market position, brand recognition and customer loyalty, combined with our strong distribution network, the impact on our business will not be material when the
safety concerns regarding contaminated cow milk products begin to wane in the future.

Dairy Industry Access Conditions and Policies

In March 2008, the PRC National Development and Reform Commission, or the NDRC, promulgated the Access Conditions for Dairy Products Processing Industry, or the Access Conditions. The Access Conditions set forth the conditions an entity must satisfy
in order to engage, or continue to engage, in the dairy products processing business, including technique and equipment, product quality, energy and water consumption, sanitation and environmental protection, as well as production safety. Any new or
continuing dairy products processing projects or enterprises will be required to meet all the conditions and requirements set forth in the Access Conditions. For projects or enterprises that already commenced operations before the promulgation of
the Access Conditions, improvements or rectification actions may need to be taken in order to have such projects or enterprises meet the conditions within two years of the effective date of the Access Conditions on April 1, 2010.

The Access Conditions also set forth some requirements relating to the location, processing capacity and raw milk source for any new or continuing dairy products processing project or enterprise. Any new or continuing dairy products processing
projects or enterprises that fail to meet the requirements will not be able to procure land, license, permits, loan facility and electricity necessary for the processing of dairy products, and those projects or enterprises already in operation
before the promulgation of the Access Conditions will be deregistered and ordered to shut down if they fail to meet the conditions within a two-year rectification period.

In May 2008, the NDRC issued the Dairy Industry Policies, or the Policies. According to the PRC government, the Policies are the first set of comprehensive government policies on the PRC dairy industry, covering a broad range of matters such as
industry planning, closure of inefficient capacity, milk supply, quality control and product safety, environmental protection and promotion of milk consumption. Moreover, the Policies provide conditions that new entrants to the dairy industry must
meet in addition to the conditions set forth in the Access Conditions.

7

---

Our Competitive Strengths

We believe that our success to date and potential for future growth can be attributed to a combination of our strengths, including the following:

- First Mover Advantage.Various researches and publications indicate that goat milk is emerging as an ideal substitute to cow milk as consumers are increasingly aware of its benefits particularly for infants, who prefer a dairy product
with a nutritional and molecular composition closer to human milk. Goat milk differs from cow milk in a number of ways and some of its attributes make it closer to human milk, such as high level of bioactive components, similar casein composition
and secretion process in both human milk and goat milk. We are the first Chinese company to produce, sell and distribute goat milk formula products throughout China and we have been doing so since 2001. We believe we are in a strong position in
competing with our competitors because we have familiar products, brand loyalty and established distribution systems for being the first to market. Based on market analysis conducted by our marketing department, we believe in 2010 we were the
largest seller in the goat milk products in China by holding approximately 45% market share of goat milk products sold.
- Dedication to Quality Control.We source raw milk from our proprietary dairy farms and other goat dairy farmers on a long-term contractual basis in Shaanxi Province in northwestern China, where dairy goats are abundant and of optimal
breed for milk production. Vertically integrated production and the ability to control raw goat milk sources enable us to secure raw material supply, and thus maintain our leading position in the market. Proprietary dairy farm and goat milk
collection centers have also benefited us following the 2008 cow milk scandal, when melamine was found in various cow milk-based infant formula products in China. In the wake of the scandal, Chinese food safety authorities imposed stricter industry
regulation regarding supply chain quality control and expansion plans for dairy processors, which has benefited established players like us. Our facilities are ISO 9001 certified and have Hazard Analysis & Critical Control Point, or HACCP
certification issued by HSL Certification Service and Beijing Zhongdahuayuan Certification Center. ISO 9001 is an internationally recognized verification system for quality management overseen by the International Standard Organization based in
Geneva, Switzerland. The certification is based on a review of our programs and procedures designed to maintain and enhance quality production and is subject to annual review and recertification. HACCP is a system used to manage food safety through
the analysis and control of biological, chemical, and physical hazards from raw material production, procurement and handling, to manufacturing, distribution and consumption of the finished product.
- High-end Products.We have been a leading producer and distributor of goat milk formula products for infants, toddlers, young children, and adults in China. Our current formula product lines are targeted at the premium segment of the
dairy market and health-conscious consumers. Given goat milk’s nutritional and molecular composition closer to human milk as well as the relative scarcity of goat milk since dairy goats have limited production capacity when compared to dairy
cows, our goat milk products are positioned at the higher end of the dairy cost spectrum.
- Experienced Management.Our senior management team has extensive operating experience and industry knowledge. Ms. Li Liu, who is our founder, Chairwoman, CEO and President, started our company’s goat milk business in 2001. She is
a pioneer in the industry. Mr. Fung Shek, who serves as our Director and Vice President, also has significant experience in the goat milk business. He was formerly Director of Sales for P&G Taiwan, a company that provides consumer products in
various areas. Ms. Veronica Jing Chen, our CFO, has extensive auditing, accounting and financial management experience in various U.S. public companies. Prior to joining us, Ms. Chen held CFO positions in three U.S. public companies, including China
Natural Gas, Inc., a company primarily involved in the distribution of compressed natural gas in China, from May 2009 to January 2010, China Valves Technology, Inc., a company engaged in the business of developing, manufacturing and selling
high-quality metal valves, from October 2008 to February 2009 and Origin Agritech, Limited, a technology-focused crop seed company in China from December 2007 to September 2008.

Our Growth Strategy

As a leading goat milk producer and distributor in China, we believe we are well positioned to capitalize on future industry growth in China. We are dedicated to providing healthy and high quality products to our consumers. We will implement the
following strategic plans to take advantage of industry opportunities and our competitive strengths:

8

---

- Focus on brand development. In order to manifest our position as China’s leader in goat milk products and to educate consumers about the benefits of goat milk, we plan to invest in strengthening our brand equity. In November
2009, we engaged US-based branding and strategic positioning agency, Trout & Partners to enhance our brand position and build “Milk Goat” into a household brand in China. As part of the strategy, we intend to target more supermarkets
with our products. We believe that our products enjoy a reputation for high quality among those familiar with them, and our products routinely pass government and internal quality inspections. We have increased our advertising expenses and plan to
continue advertising on CCTV in order to market our products as premium goat milk powder products. We believe many consumers in China tend to regard higher prices as indicative of higher quality and higher nutritional value, and as a result
consumers with higher disposable incomes are increasingly inclined to purchase higher priced products, particularly in the areas of infant formula and nutritional products.
- Increase production capacity. We are in the process of increasing our production capacity for goat milk products by more than 400%. Our current raw milk powder processing capacity is approximately 1,000 metric tons per annum and
processed milk powder processing capacity is approximately 2,100 metric tons per year. We broke ground on a new spray drying processing facility in Shaanxi Province in November 2009, which is expected to commence production by the fourth calendar
quarter of 2013 and become the largest raw goat milk processing base in China with an expected production capacity of approximately 4,600 metric tons per annum. We have also invested in a new packing facility and warehouse in Tianjin, which is
expected to go into operation in the fourth calendar quarter of 2012 with an expected production capacity of approximately 5,200 metric tons per annum. While increasing production, we also develop our product portfolio in order to penetrate
additional consumer segments.
- Expand distribution network.We sell and distribute our products through a network of approximately 3,800 retail points including infant-maternity chain stores, supermarkets (including multinational chains) and drug stores, as well as
catalogue sales across China. Since 2010, we have expanded aggressively into the supermarkets segment as well as online sales through our online store at Taobao.com.
Currently, our sales through supermarkets and online sales constitute 37% of our
sales revenue while the infant-maternity chain stores contribute 63%.
- Focus on quality control. We continue to improve our product inspection procedures and monitor our raw milk suppliers in order to ensure the high quality of our products. We believe we can maintain our production of high quality dairy
products by continuing to enter exclusive contracts with dairy farmers who can deliver quality goat milk, strengthening our company-owned large-scale dairy farm operations, expanding our company-owned collection stations and production facilities,
and employing comprehensive testing and quality control measures.

We are also, as described under “Liquidity and Capital Resources,” engaged in expanding our administrative, processing and warehousing facilities.

Our Goat Milk Powder Products

We currently manufacture and distribute goat milk powder products. Our powder products are sold throughout most of China. We began selling powder products in Tianjin and Beijing in 2001, in Southern China in 2004 and Northern China in 2006. Since
the end of 2009, we have been working with Trout & Partners to streamline our product portfolio and refine our brand image in order to position and strengthen our “Milk Goat” brand as the premium goat milk brand throughout China. We
have restructured our original product portfolio of dozens of products and specifications and refined our marketing strategy. Our new product portfolio consists of 26 formula products under the “Milk Goat” brand with three package sizes
of 600, 665 and 365 grams with upgraded formula. Our principal goat milk powder products may generally be categorized as follows:

- powder products for infants aged from 0 - 6 months old, babies 6 - 12 months old;
- powder products for toddlers aged from 1-3 years old, pre-schools from 3-7 years old; and
- powder products for different target groups: students, seniors, women, men, pre-and post-natal women and gift packaging.

9

---

In addition, we still sell our original goat milk powder products. Our principal original goat milk powder product lines may generally be categorized as follows:

- Powder products for infants aged 0 - 6 months old, babies 6 - 12 months old, toddlers from 1 - 3 years old, pre-schoolers from 3-7 years old and children, teens and adolescents. Powders targeted to or formulated for pre-and post-natal women.
- Sugar-free goat milk powder products for those who desire to regulate their sugar intake.
- Powder products for health conscious adults.

Most of our goat milk products are formulated through the inclusion of supplements such as vitamins, calcium, iron, selenium, chromium and omega-3 fatty acids, as needed to address the nutritional or health needs of the consumer.

Raw Materials and Suppliers

We currently own ten dairy goat farms, which are located in Shaanxi Province and operated by our subsidiary, Weinan Milkgoat. For the fiscal years ended March 31, 2011 and ended October 31, 2009, our subsidiary, Weinan Milkgoat provided 2.84% and
0.1% of our raw goat milk, respectively.

Most of our supply of raw goat milk comes from Saanen dairy goats raised on individual and collective goat farms in Weinan City in China’s Shaanxi Province. The Saanen is believed to be one of most popular goats primarily because of their
consistency in producing large quantities of milk in conjunction with their capacity to tolerate environmental change. According to Angie Pollock, originating from the Saane Valley of Switzerland, the Saaneen is primarily kept for milk production
and is known for being easy to care for, having a docile temperament and good toleration of changes in their environment. Shaanxi Province is one of major goat milk producing areas in China; an area especially conducive to the production of goat
milk, with a reputation as one of the most fertile and agriculturally rich regions in China in which to raise dairy goats. According to Dairy Times, a newspaper published in China, the goat milk products produced by companies located in Shaanxi
Province constitute approximately 70% of the total goat milk products in China. Through Weinan Milkgoat, we entered into long-term supply arrangements with local governmental and quasi-governmental authorities pursuant to which we purchase all the
goat milk produced by the small collective farms at a price negotiated from time to time by us and the individual farms.

Pursuant to the raw goat milk supply agreements, our suppliers are obligated to provide us with a certain volume of raw goat milk during the terms of these agreements at a purchase price ranging between RMB 3.0 to RMB 3.5 per kilogram. Our suppliers
also are required to deliver to us raw goat milk at the contracted location between 6 am to 1 pm local time every day. Upon mutual written consent, the parties may amend or terminate the agreements. In addition, each agreement includes a force
majeure clause. If the supplier fails to perform its obligations due to unforeseen events beyond its control, neither party will be liable for any damages caused by the force majeure event. In addition, in that case, either party may terminate the
agreement. However, our suppliers are required to notify us within 10 days after the occurrence of a force majeure event and provide a certificate certifying this event issued by a relevant authority within 15 days. For the fiscal year 2011, we
entered into supply arrangement with 40 small-scale farms, which provided 7,063 tons of raw goat milk to us.

During the fiscal year 2011, there were two suppliers each accounted for more than ten percent of our raw goat milk supply. We believe that our relationships with our raw goat milk suppliers are satisfactory and that alternative sources of supply are
available to us on no less favorable terms than are currently available.

Other materials used to produce our powdered products include desalting whey powder, lactose, plant fat powder, lactalbumin, whey protein concentrate, soybean lecithin, various vitamin and mineral supplements and packaging materials. We have not
experienced any significant difficulty in purchasing these or any other materials. We believe that alternative sources of supply are available to us on no less favorable terms than are currently available.

Processing

The raw goat milk is collected by hand or machine and brought to a collection station. There are approximately 500 collection stations (sixty-five of which are engaged with us through cooperation) distributed throughout Weinan County
that are used to collect the goat milk into refrigerated storage tanks, which are then delivered by refrigerated vans to our processing plants.

10

---

The raw milk to be converted into a powder is passed through a high pressure gauge, converting the milk into a fine spray which, through the use of a high temperature fan, quickly dries the spray into a powder. The powder is then shipped to another
processing facility at which it is supplemented with various nutritional components and is then packaged into various types of containers for distribution to our wholesale distributors.

We own one spray tower in Fuping Milkgoat, which is used to make raw liquid goat milk into raw goat milk powder.

We have also engaged two independent processors to assist us in the processing of our raw goat milk into powder products. They provide, among other things, production facilities, offices, dormitories, equipment and personnel to assist in the
processing of raw liquid goat milk into raw goat milk powder products. For the fiscal year ended March 31, 2011, we processed an aggregate of approximately 963 tons of raw goat milk powder, of which approximately 82.3% was processed through our
subsidiaries, Fuping Milkgoat and Weinan Milkgoat, and approximately 17.7% through external suppliers. For the fiscal year ended October 31, 2009, we processed an aggregate of approximately 1,117 tons of raw goat milk powder, of which approximately
89.7% was processed through Fuping Milkgoat and Weinan Milkgoat, and approximately 10.3% through external suppliers. We believe that our relationships with our raw goat milk powder suppliers are satisfactory and that alternative sources of supply
are available to us on no less favorable terms than are currently available.

Sales and Marketing

Currently, we have 804 experienced marketing personnel who are responsible for market research, promotion and advertisement. We strengthen our market presence by employing various types of marketing strategies. We participate in annual trade shows
such as the National Baby and Young Children Fair and the National Sugar and Spirit Fair, offer seminars and lectures to local communities regarding the health benefits of our goat milk products, television advertisements at national and local
levels, and other promotional activities. These activities help to promote our reputation and brand name recognition in the industry.

We use more than 200 distributors to sell our products. The distributors are located in 23 provinces in China. We sell and distribute our products through a network of approximately 3,800 retail points including infant-maternity chain stores,
supermarkets (including multinational chains) and drug stores, as well as catalogue sales across China.

We use two independent trucking contractors to distribute our products throughout China. We selected these trucking companies based on cost and efficiency. We believe that alternative shipping arrangements are available if required, on no less
favorable terms than are currently available.

We do not significantly depend on any single customer for the sales of our products. We did not have any customer constituting greater than 10% of net sales for the fiscal years ended March 31, 2011 and October 31, 2009.

Our Competition

The dairy industry in China is highly competitive and we face substantial competition from both cow and goat milk producers.

Cow milk accounts for more than 95% of the milk consumed in China. The principal producers and distributors of cow milk are Inner Mongolia Yili Industrial Group Co., Ltd. and Inner Mongolia Meng Niu Dairy (Group) Co., Ltd. We compete with cow milk
based on the nutritional advantages of goat milk. Those advantages include higher nutritional levels of proteins and vitamins (in particular, vitamins B1, B2 and C) and ease of digestibility. These factors make goat milk particularly attractive for
those interested in maintaining a healthy lifestyle and for use by infants and other consumers sensitive to dairy products or allergic to cow milk. However, cow milk’s competitive advantages over goat milk include more favorable pricing, easy
availability, and greater market acceptance. This greater market acceptance is attributable to, among other things, the historic association of goat milk with unfavorable smells, a much larger supply of available cow milk, and the fact that goat
milk has only recently developed as an alternative available to consumers in China on a mass-market basis. We are working to improve acceptance of goat milk through marketing efforts geared towards emphasizing its nutritional advantages and its
favorable taste and smell.

11

---

We also compete directly with China and foreign-based goat milk manufacturers. Our China based competitors include Xi’an Baiyue Yubao Dairy Co., Ltd., Qingdao Ruishi Biotechnology Co., Ltd. We believe that our principal competitive advantages
in competing with our China-based competitors are product recognition (including recognition based on quality flavor and price), strong distribution relationships, established supply sources, and quality. Our foreign competitors include Karihome
Dairy Goat Co-operative (NZ) Ltd. and other smaller New Zealand goat milk brands. We compete with our foreign competitors through more favorable pricing though we believe that the quality of our products is comparable to, if not superior to, the
quality of our competitors’ products. Based on market analysis conducted by our marketing department, we believe in 2010 we held approximately 45% market share of goat milk products sold, making us the largest seller of the goat milk products
in China, followed by Xi’an Baiyue Yubao Dairy Co., Ltd. with 25% market share, Qingdao Ruishi Biotechnology Co., Ltd with 10% and Karihome Dairy Goat Co-operative (NZ) Ltd. with 5%.

Research and Development

Our research and development activities focus on upgrading and enhancing our unique, traditional recipes for our products and improvement in packaging. We currently have five employees dedicated to research and development.

For the fiscal years ended March 31, 2011 and October 31, 2009, we expended $74,331 and $150,101, respectively, with respect to research and development activities.  We are in the process of developing new goat milk based products but do not
anticipate that such products will have a material impact in the near term on our results of operations.

Intellectual Property

In 2002, we registered in China the trademark, “Mei Ke Gao Te” (a transliteration of “Milk Goat” in Chinese) for use with our liquid and powder products and the trademark, “Yi Mei Shi” for use with our powder
products. The “Mei Ke Gao Te” mark is generally used for all our products other than those formulated to provide a particular nutritional or health benefit and the “Yi Mei Shi” mark is used for those products emphasizing a
specific health or nutritional benefit. Each of such trademarks has a term of ten years and may be renewed thereafter.

Our goat odor elimination technology which eliminates odor in our products is developed from the know-how that was exclusively licensed to us from Taiwan Richlink Enterprise Company Ltd., pursuant to an exclusive licensing agreement, dated April 10,
2001. The licensing agreement was amended on June 12, 2009.  Althoug the agreement expired on April 10, 2011, according to the agreement we have the right to use the know-how for free after the expiration.

Regulation

We are regulated under national, provincial and local laws in China. These regulations govern, among other things, the manufacture and composition of products and ingredients, product labeling and packaging (including the format and content of
product labels nutritional information), product safety and specified manufacturing practices (including mandating quality assurance programs). Our facilities are subject to inspection and licensing requirements and our trade practices (including
claims made with respect to product effectiveness of our products) are regulated.

The national, provincial and local governments have increased their oversight of the production and distribution of dairy products in response to melamine contamination of certain dairy products produced in China. In September 2008, our goat milk
products were inspected by China's Administration of Quality Supervision, Inspection and Quarantine, or AQSIQ. AQSIQ determined that our products are safe. We anticipate that we will incur additional expense in complying with additional governmental
regulation and oversight. We anticipate that we will generate additional net sales as consumers migrate to dairy products processed by companies, such as Milkgoat China, with reputations for producing quality products, though no assurance can be
given in this regard.  We believe that we comply in all material respects with applicable rules and regulations.

Following the media hormone allegations, on November 1, 2010, AQSIQ promulgated new rules which govern the licenses granted to producers of dairy products and infant formula powder (2010 version).  These new regulations require that such producers,
even if they have obtained a production license previously, must re-apply for a production license prior to December 31, 2010 and if a producer is not able to obtain a new production license by March, 2011, such producer must stop its production of dairy products and infant formula
powder. By March 31, 2011, we successfully renewed our production licenses with
AQSIQ.

12

---

Our Employees

As of March 31, 2011, we employed 973 full-time employees. The
following table sets forth the number of our employees by function as of March
31, 2011.

|FUNCTION              | NUMBER OF EMPLOYEES
|--------------------- | -------------------
|Sales Department      | 804                
|Production Department | 61                 
|Financial Department  | 24                 
|Administrative Office | 84                 
|TOTAL                 | 973                

Our employees are not represented by a labor organization or
covered by a collective bargaining agreement. We have not experienced any work
stoppages and we believe our relationship with our employees is satisfactory.

We are required by the PRC law to cover employees in China with
various types of social insurance. We believe that we are in material compliance
with the relevant PRC laws.

Seasonality

Goat milk
production is seasonal because goats generally do not produce milk from November
through February. During such period, we generate sales of goat milk powder from
our inventory that builds during the period preceding such hiatus.  In
addition, the consumption of goat milk is also seasonal with greater demand in
winter and public holiday seasons.

Insurance

We do not have any business liability, interruption or
litigation insurance coverage for our operations in China. Insurance companies
in China offer limited business insurance products. While business interruption
insurance is available to a limited extent in China, we have determined that the
risks of interruption, cost of such insurance and the difficulties associated
with acquiring such insurance on commercially reasonable terms make it
impractical for us to have such insurance. Therefore, we are subject to business
and product liability exposure. See Risk Factors  We do not carry any business
interruption insurance, third-party liability insurance for our production
facilities or insurance that covers the risk of loss of our products in
shipment.

Litigation

From time to time, we may become involved in various lawsuits
and legal proceedings, which arise, in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these
or other matters may arise from time to time that may harm our business. We are
currently not aware of any such legal proceedings or claims that we believe will
have a material adverse affect on our business, financial condition or operating
results.

ITEM 1A.     RISK FACTORS.

The shares of our common stock are highly speculative in
nature, involve a high degree of risk and should be purchased only by persons
who can afford to lose the entire amount invested in the common stock. Before
purchasing any of the shares of common stock, you should carefully consider the
following factors relating to our business and prospects. You should pay
particular attention to the fact that we conduct all of our operations in China
and are governed by a legal and regulatory environment that in some respects
differs significantly from the environment that may prevail in the U.S. and
other countries. If any of the following risks actually occurs, our business,
financial condition or operating results will suffer, the trading price of our
common stock could decline, and you may lose all or part of your investment.

13

---

RISKS RELATED TO OUR BUSINESS

Our products may not achieve or maintain market acceptance

We may have difficulty gaining market acceptance for goat milk generally and our products in particular because cow milk dominates the milk market in China (constituting more than 95% of the milk sold), the favorable pricing of cow milk compared to
goat milk, and the historic and long-term association of goat milk with unpleasant smells and tastes. As a result, achieving and maintaining market acceptance for our products will require substantial marketing efforts and the expenditure of
significant funds to encourage consumption of goat milk in general, and the purchase of our products in particular. There is substantial risk that the market may not accept or be receptive to our products. Market acceptance of our 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 products may not be accepted by consumers or be able
to compete effectively.

Recently discovered contamination of milk powder products produced in China could result in negative publicity and have a material adverse effect on our business.

Recently, a number of milk powder products produced within China were found to contain unsafe levels of tripolycyanamide, also known as melamine, sickening thousands of infants. This prompted the Chinese government to conduct a nationwide
investigation into how the milk powder was contaminated, and caused a worldwide recall of certain milk powder products produced within China. It is possible that the illnesses caused by contamination in the milk powder industry may lead to a
sustained decrease in demand for milk powder products produced within China, thereby having a material adverse effect on our business.

We do not carry any business interruption insurance, third-party liability insurance for our production facilities or insurance that covers the risk of loss of our products in shipment.

Operation of our facilities involves many risks, including equipment failures, natural disasters, industrial accidents, power outages, labor disturbances and other business interruptions. Furthermore, if any of our products are faulty, then we may
become subject to product liability claims or we may have to engage in a product recall. We do not carry any business interruption insurance, product recall or third-party liability insurance for our production facilities or with respect to our
products to cover claims pertaining to personal injury or property or environmental damage arising from defects in our products, product recalls, accidents on our property or damage relating to our operations. As a result, we may be required to pay
for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and
results of operations.

Our sales and reputation may be affected by product liability claims, litigation, product recalls, or adverse publicity in relation to our products.

The sale of products for human consumption involves an inherent risk of injury to consumers. We face risks associated with product liability claims, litigation, or product recalls, if our products cause injury, or become adulterated or misbranded.
Our products are subject to product tampering, and to contamination risks, such as mold, bacteria, insects, and other pests, and off-flavor contamination during the various stages of the procurement, production, transportation and storage processes.
If any of our products were to be tampered with, or become tainted in any of these respects and we were unable to detect this, our products could be subject to product liability claims or product recalls. We cannot predict what impact such product
liability claims or resulting negative publicity would have on our business or on our brand image. The successful assertion of product liability claims against us could result in potentially significant monetary damages, diversion of management
resources and require us to make significant payments and incur substantial legal expenses. We do not have product liability insurance and have not made provisions for potential product liability claims. Therefore, we may not have adequate resources
to satisfy a judgment if a successful claim is brought against us. 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. Finally,
serious product quality concerns could result in governmental action against us, which, among other things, could result in the suspension of production or distribution of our products, loss of certain licenses, or other governmental penalties. A
widespread product recall could result in significant loss due to the cost of conducting a product recall including destruction of inventory and the loss of sales resulting from the unavailability of the product for a period of time. In addition,
product liability claims and product recalls could have a material adverse effect on the demand for our products
and on our business goodwill and reputation. Adverse publicity could result in a loss of consumer confidence in our products.

14

---

Our business and financial results depend on maintaining a consistent and cost-effective supply of raw milk and other raw materials, which come from limited geographic areas in China. Any interruption in our supply of raw milk could materially
and adversely affect our results of operations, financial condition and business prospects.

Raw goat milk is the primary raw material we use to produce our products. We currently own ten dairy goat farms. However, most of our supply of raw goat milk comes from Saanen dairy goats raised on individual and collective goat farms in Weinan City
in China’s Shaanxi Province. We have long-term supply arrangements with local governmental and quasi-governmental authorities pursuant to which we purchase all the milk produced by the small collective farms at a price negotiated from time to
time by us and the individual farms. If we are not able to maintain our relationships with current suppliers and develop new sources of supply, we will not be able to meet our production goals and our sales will fall. If we are forced to expand our
sources for raw milk, it may be more and more difficult for us to maintain our quality control over the handling of the product in our supply and manufacturing chain. A decrease in the quality of our raw materials would cause a decrease in the
quality of our product and could damage our reputation and cause sales to decrease.

Raw goat milk production is, in turn, influenced by a number of factors that are beyond our control including, but not limited to, the following:

- seasonal factors: goats generally do not produce milk from November through February; further goats produce more milk in temperate weather than in cold or hot weather and extended unseasonably cold or hot weather could lead to lower than
expected production;
- environmental factors, with the volume and quality of milk produced by dairy goats closely linked to the quality of the nourishment provided by the environment around them. A major outbreak of any illness or disease in goats could lead to a
serious loss of consumer confidence in, and demand for, our goat milk products; and
- governmental agricultural and environmental policy: declines in government grants, subsidies, provision of land, technical assistance and other changes in agricultural and environmental policies may have a negative effect on the viability of
individual and small farms, and the numbers of dairy goats and quantities of milk they are able to produce.

Even if we are able to source sufficient quantities of raw milk or our other raw materials to meet our needs, downturns in the supply of such raw materials caused by one or more of these factors could lead to increased raw material costs which we
may not be able to pass on to the consumers of our products, causing our profit margins to decrease.

We depend on the national and local governments to support our industry and us.

The government plays a significant role in the economy in general and, the dairy industry in particular. Governmental authorities provide support for the development of the goat milk industry by, among other things, providing land, space and
equipment for goat farms, financing goat farms, waiving compliance with otherwise applicable regulations, and reducing or eliminating tax obligations. Changes in governmental policies supportive of the development of this industry or failure to
maintain good relations with governmental authorities may require us to incur expenses we are otherwise not required to incur. We may not have sufficient funds to pay such additional expenses and even if we do, our profitability may be reduced.

Our failure to protect our exclusive rights to use the knowhow provided by Taiwan Richlink Enterprise Company Ltd. may have a negative effect on our results of operations.

Our goat odor elimination technology which eliminates odor in our products is developed from the know-how that was exclusively licensed to us from Taiwan Richlink Enterprise Company Ltd., or Taiwan Richlink, pursuant to an exclusive licensing
agreement, dated April 10, 2001. The licensing agreement was amended on June 12, 2009 and expired on April 10, 2011.  Although we have the right to use the knowhow for free after the expiration of this agreement, there can be no assurance that such
rights will be exclusive. Taiwan Richlink may license the knowhow to other Chinese goat milk producers in the future, which may increase our competition because we may lose this competitive advantage and as a result may have a negative impact on our
operations.  In addition, while we are not aware of any disputes between Taiwan Richlink and us or any third party, in the event the goat odor elimination technology is challenged or infringed, Taiwan Richlink may determine not to protect its
intellectual property rights that we license from it and we may be unable defend
such intellectual property rights on our own or we may have to undertake costly litigation to defend the intellectual property rights of Taiwan Richlink.  Such litigation could result in substantial costs and diversion of management resources,
either of which could harm our business, operating results and financial condition.

15

---

Failure to timely collect amounts due to us from Tianjin Mengyang should Tianjin Mengyang fail to complete construction projects relating to the building of an office building, warehouses and factory for us could adversely affect our
liquidity, financial condition and results of operations.

Pursuant to our agreements with Tianjin Mengyang Biological Development Co., Ltd, or Tianjin Mengyang, as of March 31, 2011, we had paid Tianjin Mengyang an aggregate of $16,193,741 as advances to purchase an office building and certain
warehouses and factory. These advances accounted for approximately 29.1% of our total assets as of March 31, 2011. After several delays, the construction of these projects was completed in September 2010. These projects are currently under
inspections by the relevant PRC government authorities before they can be delivered to us by Tianjin Mengyang. Although we expect that the inspections will be completed during the fourth calendar quarter of 2011 there is no guarantee that these
projects will not continue to be delayed. According to the agreements between us and Tianjin Mengyang, if these projects continue to be delayed due to construction quality issues, we have a right to terminate the agreements and under the contract
law of PRC, are entitled to receive a full refund of the paid advances plus any accrued interests from Tianjin Mengyang. However, there is no assurance that Tianjin Mengyang will pay us the full advances plus interests timely upon our request. Our
ability to collect the amounts that may become due to us from Tianjin Mengyang could be impacted by various factors such as a deterioration in the financial condition of Tianjin Mengyang, inability of Tianjin Mengyang to obtain bank credit lines and
our efforts to pursue collections. If our collection efforts fail, we may have to undertake costly litigation to collect these amounts or request possession of the properties that we intend to purchase. Any such lawsuit would be time-consuming and
result in substantial costs and diversion of management resources, either of which could harm our business, operating results and financial condition.

The milk business is highly competitive and, therefore, we face substantial competition in connection with the marketing and sale of our products.

We face competition from cow milk and goat milk producers. Most of our competitors producing cow milk are well established, have greater financial, marketing, personnel and other resources than we have and have been in business for longer periods of
time than we have, and have products that have gained wide customer acceptance in the marketplace. 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 our advertising claims. The milk industry 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 that have superior qualities or gain wider market acceptance than ours.

We compete in an industry that is brand-conscious, and unless we are able to establish and maintain brand name recognition, our sales may be negatively impacted.

Our business is substantially dependent upon awareness and market acceptance of our products and brand by our targeted consumers. In addition, our business depends on acceptance by our suppliers and consumers of our brand. Although we believe that
we have made progress towards establishing market recognition for our brands “Mei Ke Gao Te” and “Yi Mei Shi” in the dairy products industry in China, it is too early in the product life cycle of the brand to determine
whether our products and brand will achieve and maintain satisfactory levels of acceptance by our customers.

Possible volatility of raw milk costs makes our operating results difficult to predict, and a steep cost increase could cause our profits to diminish significantly.

The policy of China since the mid-1990s has focused on moving the industry in a more market-oriented direction. These reforms have resulted in the potential for greater price volatility relative to past periods, as prices are more responsive to the
fundamental supply and demand aspects of the market. These changes in China’s dairy policy could increase the risk of price volatility in the dairy industry, making our net income difficult to predict. Also, if prices are allowed to escalate
sharply, our costs will rise which will lead to a decrease in profits.

16

---

Our inability to protect our intellectual property may prevent us from successfully marketing our products and competing effectively

Failure to protect our intellectual property could harm our brands and our reputation, and adversely affect our ability to compete effectively. Further, enforcing or defending our intellectual property rights, including our trademarks, patents,
copyrights, know how and trade secrets, could result in the expenditure of significant financial and managerial resources. We produce, market and sell our products using trademarks of “Mei Ke Gao Te” and “Yi Mei Shi.” We
regard our intellectual property, particularly our trademark, know how and trade secrets to be of considerable value and importance to our business and our success. We rely on a combination of patent, trademark, trade secrecy laws, and contractual
provisions to protect our intellectual property rights. There can be no assurance that the steps taken by us to protect these proprietary rights will be adequate or that third parties will not infringe or misappropriate our patent, trademark, trade
secrets or similar proprietary rights. Implementation and enforcement of PRC intellectual property-related laws have historically been deficient and ineffective, mainly due to lack of procedural rules for discovery of evidence, low damage awards and
low rates of criminal penalties against intellectual property right infringements. Accordingly, protection of intellectual property rights in China may not be as effective as in the United States and other western countries. In addition, there can
be no assurance that other parties will not assert infringement claims against us, and we may have to pursue litigation against other parties to assert our rights. However, policing unauthorized use of proprietary technology is difficult and
expensive, and we may need to commence litigation to enforce or defend our proprietary rights or to determine the enforceability, scope and validity of our proprietary rights or those of others. Any such claim or litigation could be costly and we
may lack the resources required to defend against such claims. The experience and capabilities of PRC courts in handling intellectual property litigation vary, and outcomes are unpredictable. In addition, any event that would jeopardize our
proprietary rights or any claims of infringement by third parties could have a material adverse affect on our ability to market or sell our brands, and profitably exploit our products.

The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact
that no governmental agency that is located in China where all of our operations and business are located have conducted any due diligence on our operations or reviewed or cleared any of our disclosure.

We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies
whose operations are located primarily in the United States, however, all of our operations are located in China. Since all of our operations and business takes place in China, it may be more difficult for the Staff of the SEC to overcome the
geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC
reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the China Securities
Regulatory Commission, or CSRC, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator
has done any due diligence on our company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.

If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business
operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.

Recently, U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions, have been the subject of intense scrutiny, criticism and negative
publicity by investors, financial commentators and regulatory agencies, such as the SEC.  Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of effective internal
controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud.  As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many
U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits, SEC enforcement actions and are conducting internal
and external investigations into the allegations.  It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company, our business and our stock price.  If we become the subject of any unfavorable
allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company.  This situation will be costly and time consuming and distract our
management from growing our company.  If such allegations are not proven to be groundless, our company and business operations will be severely and your investment in our stock could be rendered worthless.

17

---

Our management has identified deficiencies in our internal control over financial reporting, which if not properly remediated could result in material misstatements in our future interim and annual financial statements and have a material
adverse effect on our business, financial condition and results of operations and the price of our Common Stock.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles.

Management assessed our internal control over financial reporting as of March 31, 2011 and concluded that that our internal controls over financial reporting as of March 31, 2011 were not effective due to certain significant deficiencies. See
“Item 9A. Controls and Procedures” for a discussion of matters pertaining to our internal controls over financial reporting.

Although we are in the process of implementing initiatives aimed at addressing these deficiencies, there is no guarantee that these initiatives will remediate the inadequacy completely. Failure to achieve and maintain an effective internal control
environment could result in us not being able to accurately report our financial results, prevent or detect fraud or provide timely and reliable financial and other information pursuant to the reporting obligations we have as a public company, which
could have a material adverse effect on our business, financial condition and results of operations. Further, it could cause our investors to lose confidence in the information we report, which could adversely affect the price of our Common Stock.

We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act could have a material adverse effect on our business.

We are subject to the Foreign Corrupt Practice Act, or the FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the
statute for the purpose of obtaining or retaining business. We have operations, agreements with third parties and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of
payments by one of the employees, consultants, sales agents or distributors of our company, because these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. We have
adopted a general FCPA policy in our amended Code of Ethics and have informed our personnel and third-party sales agents and distributors regarding the requirements of the FCPA. We plan to further develop and implement systems for formalizing
contracting processes, performing diligence on agents and improving our record-keeping and auditing practices. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held
responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may
seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

The global economic crisis could further impair the dairy industry thereby limiting demand for our products and affecting the overall availability and cost of external financing for our operations.

The continuation or intensification of the global economic crisis and turmoil in the global financial markets may adversely impact our business and our potential sources of capital financing. Our ability to access the capital markets may be
restricted at a time when we would like, or need, to raise capital, which could have an impact on our flexibility to react to changing economic and business conditions. In addition, these economic conditions also impact levels of consumer spending,
which have recently deteriorated significantly and may remain depressed for the foreseeable future. Consumer purchases of discretionary items, including our goat milk powder, generally decline during recessionary periods and other
periods where disposable income is adversely affected. If demand for our products fluctuates as a result of economic conditions or otherwise, our revenue and gross margin could be harmed. Presently, it is unclear whether and to what extent the
economic stimulus measures and other actions taken or contemplated by the Chinese government and other governments throughout the world will mitigate the effects of the crisis on the dairy industry and other industries that affect our business.
Although these conditions have not presently impaired our ability to access credit markets and finance our operations, the impact of the current crisis on our ability to obtain capital financing in the future, and the cost and terms of same, is
unclear.

18

---

We have not voluntarily implemented various corporate governance measures, in the absence of which, shareholders may have limited protections against related party transactions, conflicts of interest and similar matters.

Since our Common Stock is not listed for trading on a national securities exchange, we are not subject to certain of the corporate governance requirements established by the national securities exchanges pursuant to the Sarbanes-Oxley Act of 2002,
or SOX. These include rules relating to independent directors, and independent director nomination, audit and compensation committees. We do not currently have a majority of independent directors on our board of directors. As a result, we have not
established independent audit, compensation, or nominating committees of our board of directors. In the absence of a majority of independent directors, our officers and directors could establish policies and enter into transactions without
independent review and approval. In certain circumstances, management may not have the same interests as the shareholders and conflicts of interest may arise. Notwithstanding the exercise of their fiduciary duties as directors and executive officers
and any other duties that they may have to us or our shareholders in general, these persons may have interests different than yours which could adversely affect your investment.

There are limitations on the liability of our directors, and we may have to indemnify our officers and directors in certain instances.

Our amended and restated certificate of incorporation contains a specific provision that eliminates the personal liability of our directors for monetary damages for breach of their fiduciary duties as directors to the extent provided by Delaware
law. Our bylaws provide that we will indemnify our officers and directors and may indemnify our employees and other agents. We may also have contractual indemnification obligations under agreements with our executive officers and directors. The
foregoing indemnification obligations could result in us incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may
also discourage us from bringing a lawsuit against directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such
actions, if successful, might otherwise benefit us and our stockholders.

Expansion of our business may put added pressure on our management and operational infrastructure impeding our ability to meet any potential increased demand for the products that we sell and possibly hurting our future operating
results.

Our business plan is to grow our operations significantly to meet anticipated growth in demand for the products that we sell, and by the introduction of new product offerings. Growth in our business may place a significant strain on our personnel,
management, financial systems and other resources. The evolution of our business also presents numerous risks and challenges, including:

- our ability to successfully and rapidly expand sales to potential new distributors in response to potentially increasing demand;
- the costs associated with such growth, which are difficult to quantify, but could be significant; and
- rapid technological change.

To accommodate any such growth and compete effectively, we may need to obtain additional funding to improve information systems, procedures and controls and expand, train, motivate and manage our employees, and such funding may not be available in
sufficient quantities, if at all. If we are not able to manage these activities and implement these strategies successfully to expand to meet any increased demand, our operating results could suffer.

19

---

We depend heavily on key personnel, and turnover of key employees and senior management could harm our business.

Our future business and results of operations depend in significant part upon the continued contributions of our key technical and senior management personnel, including Li Liu, our chief executive officer and chairperson, and Fung Shek, our Vice
President. If we lose any of these key employees and are unable to find a qualified replacement in a timely manner, our business will be negative impacted. In addition, if a key employee fails to perform in his or her current position, or if we are
not able to attract and retain skilled employees as needed, our business could suffer. Significant turnover in our senior management could significantly deplete the institutional knowledge held by our existing senior management team. We depend on
the skills and abilities of these key employees in managing the reclamation, technical, and marketing aspects of our business, any part of which could be harmed by turnover in the future.

We may have to pay up to 8% of the gross proceeds we received in the recent private placement as liquidated damages to the investors since the registration statement has not been declared effective within the time periods specified.

In connection with the recent private placement described above, on September 27, 2010, we entered into a registration rights agreement with the PIPE Investors, or the Registration Rights Agreement, pursuant to which, we granted registration rights
to holders of registrable securities, which include (i) the shares of Common Stock issuable upon the conversion of the Convertible Notes, (ii) the make good shares deposited in connection with the private placement, as applicable, (iii) the shares
of Common Stock issuable upon the exercise of Series F Warrants, and (iv) any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event, or any price adjustment as a result of such stock
splits, reverse stock splits or similar events with respect to any of the securities referenced in (i) – (iii) above. Under the terms of the Registration Rights Agreement, if this registration statement is not declared effective by the SEC
within the time period specified in the Registration Rights Agreement, then we are required to pay the PIPE Investors, as liquidated damages, 1.0% of the amount invested for each 30-day period during which such failure continues, for up to a maximum
of 8% of each PIPE Investor’s investment pursuant to the Registration Rights Agreement, except that we will not be obligated to pay any such fee if we are unable to fulfill our registration obligations as a result of rules, regulations,
positions or releases issued or actions taken by the SEC with respect to Rule 415 of the Securities Act, so long as we register at such time the maximum number of securities permissible by the SEC.  We have failed to cause this registration
statement to be declared effective by the SEC with the prescribed period.  There can be no assurance that this registration statement will be declared effective by the SEC in the coming future.  Therefore, we may have to suffer monetary losses by
paying up to 8% of the gross proceeds we received in this private placement as liquidated damages to the investors.

RISKS RELATED TO DOING BUSINESS IN CHINA

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 county and local authorities in jurisdictions in which our products are processed or sold, regarding the processing, packaging, storage, distribution and
labeling of our products. 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, county and local
authorities. To the extent that new regulations are adopted, we will be required to conform 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.

Because Shaanxi Coalfield Geology Bureau Hydrological Team failed to obtain necessary approval from relevant government authority when they leased an allocated land to Fuping Milkgoat, there is no guarantee that the PRC government will not
challenge the validity of the lease in the future.

In 2004, when Shaanxi Coalfield Geology Bureau Hydrological Team, or Shaanxi Coalfield, leased an allocated land to Fuping Milkgoat for its business use, it did not obtain necessary approvals from relevant land administrations of municipal or county
governments or complete necessary administrative procedures. On August 8, 2008, Milkgoat China acquired Fuping Milkgoat. According to Provisional Rules on Administration of Allocated Land Use Right of PRC, promulgated by State Land Administration on
March 8, 1992, land users who transfer, lease or mortgage allocated land use right must bear state-owned land use certificate and legal documents of the premises and attached structures and properties and apply in written form to land
administrations of local municipal or county people's governments. Land administrations of municipal or county people's governments, through negotiations, sign land use right transfer contract with the applicant. Land users
shall, within 60 days after the signing of land use right leasing contracts, pay lease fees to local municipal or county people's governments and have the land use right leasing registered at the land administrations of the municipal or county
people's governments. Both parties involved in transfer, leasing or mortgaging of land use right shall, within 15 days after the registration of a land use right lease, go to land administrations of municipal or county people's governments to have
the transfer, leasing or mortgaging of land use right registered. Shaanxi Coalfield failed to comply with the above requirement for not obtaining the government approval or completing the necessary administrative procedures before they leased the
allocated land to us. Shaanxi Coalfield is in the process of applying for the approval from the PRC regulatory authorities with respect to their lease of the allocated land to Fuping Milkgoat. There is no guarantee that the PRC regulatory agency
will not challenge the validity of our lease in the future. If these leases are deemed invalid by the PRC regulatory authorities, we will lose the land use right to this allocated land. As a result, Fuping Milkgoat’s business of processing raw
goat milk could be affected negatively. We believe that our cost of raw milk powder will increase by approximately RMB 332 (approximately $50.5) per ton as we will need to have third-party processors to spray dry raw goat milk into milk powder.

20

---

Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand for our products and damage our business.

We conduct substantially all of our operations and generate all 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. The PRC economy differs from the economies of most developed countries in many respects, including:

- a higher level of government involvement;
- a early stage of development of the market-oriented sector of the economy;
- a rapid growth rate;
- a higher level of control over foreign exchange; and
- the allocation of resources.

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

Although the PRC government 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 the 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 economic conditions or government policies in China could have a material adverse effect on the overall economic growth in China, which in turn could lead to a reduction in demand for our services and consequently have a
material adverse effect on our business and prospects.

Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.

We conduct substantially all of our business through our operating subsidiaries in the PRC. Our operating subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to
foreign-invested enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly
enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of
these laws, regulations and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management
attention. In addition, all of our executive officers and all of our directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be
difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiaries.

21

---

If we are found to have failed to comply with applicable laws, we may incur additional expenditures or be subject to significant fines and penalties.

Our operations are subject to PRC laws and regulations applicable to us. However, many PRC laws and regulations are uncertain in their scope, and the implementation of such laws and regulations in different localities could have significant
differences. In certain instances, local implementation rules and/or the actual implementation are not necessarily consistent with the regulations at the national level. Although we strive to comply with all the applicable PRC laws and regulations,
we cannot assure you that the relevant PRC government authorities will not later determine that we have not been in compliance with certain laws or regulations. Our failure to comply with applicable PRC laws and regulations could subject us to
administrative penalties and injunctive relief, as well as civil remedies, including fines, injunctions and recalls of our products. It is possible that changes to such laws or more rigorous enforcement of such laws or with respect to our current or
past practices could have a material adverse effect on our business, operating results and financial condition.

The PRC government exerts substantial influence over the manner in which we must conduct our business activities.

The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and
regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and
regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our
part to ensure our compliance with such regulations or interpretations.

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies,
could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

Restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively.

All our sales revenue and expenses are denominated in RMB. Under PRC law, the RMB is currently convertible under the “current account,” which includes dividends and trade and service-related foreign exchange transactions, but not under
the “capital account,” which includes foreign direct investment and loans. Currently, our PRC operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us,
without the approval of the State Administration of Foreign Exchange, or the SAFE, by complying with certain procedural requirements. However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies
in the future. Since a significant amount of our future revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in RMB to fund our business activities outside
China that are denominated in foreign currencies.

Foreign exchange transactions by our PRC operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC government authorities, including the
SAFE. In particular, if our PRC operating subsidiaries borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with the SAFE, and if we finance the subsidiaries by means of additional capital
contributions, these capital contributions must be approved by certain government authorities, including the Ministry of Commerce, or the MOFCOM, or their respective local counterparts. These limitations could affect their ability to obtain foreign
exchange through debt or equity financing.

22

---

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

The value of our Common Stock will be indirectly affected by the foreign exchange rate between U.S. dollars and RMB and between those currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of
the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the
relative value of any dividend we issue in the future as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People's Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may
appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in
the foreign exchange market.

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability
and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our
ability to convert RMB into foreign currencies.

Restrictions under PRC law on our PRC subsidiaries' ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to
you, and otherwise fund and conduct our businesses.

Substantially all of our revenues are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to its offshore parent company. PRC legal restrictions permit payments
of dividend by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at
least 10% of our annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of our registered capital. Allocations to these statutory reserve funds can only be used
for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make
investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

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

China passed a new Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, both of which became effective on January 1, 2008. Under the New EIT Law, 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. The implementing rules of the New EIT Law define de facto
management as “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, no official
interpretation or application of this new “resident enterprise” classification is available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.

If the PRC tax authorities determine that Yayi International Inc. is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise
income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that non-China source income would be subject to PRC enterprise income tax at a rate of 25%. 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,” we cannot guarantee that such dividends will not 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 stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares. We are actively monitoring the possibility of “resident enterprise” treatment for the 2008 tax year and are evaluating
appropriate organizational changes to avoid this treatment, to the extent possible.

23

---

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

If the CSRC, or another PRC regulatory agency determines that CSRC approval is required in connection with the acquisition of Milkgoat Industrial, the acquisition may be unwound, or we may become subject to penalties.

On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006. The
M&A Rule, among other things, requires that an offshore company controlled by PRC companies or individuals that have acquired a PRC domestic company for the purpose of listing the PRC domestic company’s equity interest on an overseas stock
exchange must obtain the approval of the CSRC prior to the listing and trading of such offshore company’s securities on an overseas stock exchange. On September 21, 2006, the CSRC, pursuant to the M&A Rule, published on its official web
site procedures specifying documents and materials required to be submitted to it by offshore companies seeking CSRC approval of their overseas listings.

We do not believe that the M&A Rule concerning the CSRC approval for acquisition of a PRC domestic company by an offshore company controlled by PRC companies or individuals applies to our reverse acquisition of Milkgoat Industrial because
neither Yayi International Inc. nor Milkgoat Industrial is a “Special Purpose Vehicle” or an “offshore company controlled by PRC companies or individuals” as defined in the M&A Rule. If the CSRC or another PRC
governmental agency subsequently determines that we must obtain CSRC approval prior to the completion of the reverse acquisition, the reverse acquisition may be unwound and we may face regulatory actions or other sanctions from the CSRC or other PRC
regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China and limit our operating privileges in China, or take other actions that could have a material adverse effect on our business, financial
condition, results of operations, reputation and prospects, as well as the trading price of our shares.

The M&A Rule establishes more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

The M&A Rule establishes additional procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the PRC Ministry of
Commerce be notified in advance of any change-of-control transaction and in some situations, require approval of the PRC Ministry of Commerce when a foreign investor takes control of a Chinese domestic enterprise. In the future, we may grow our
business in part by acquiring complementary businesses, although we do not have any plans to do so at this time. The M&A Rule also requires PRC Ministry of Commerce anti-trust review of any change-of-control transactions involving certain types
of foreign acquirers. Complying with the requirements of the M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the PRC 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 implementation of the new PRC employment contract law and increases in the labor costs in China may hurt our business and profitability.

A new employment contract law became effective on January 1, 2008 in China. It imposes more stringent requirements on employers in relation to entry into fixed-term employment contracts, recruitment of temporary employees and dismissal of employees.
In addition, under the newly promulgated Regulations on Paid Annual Leave for Employees, which also became effective on January 1, 2008, employees who have worked continuously for more than one year are entitled to paid vacation ranging from 5 to 15
days, depending on the length of the employee’s service. Employees who waive such vacation entitlements at the request of the employer will be compensated for three times their normal daily salaries for each vacation day so waived. As a result
of the new law and regulations, our labor costs may increase. There is no assurance that
disputes, work stoppages or strikes will not arise in the future. Increases in the labor costs or future disputes with our employees could damage our business, financial condition or operating results.

24

---

You may have difficulty enforcing judgments against us.

We are a Delaware holding company and most of our assets are located outside of the United States. Most of our current operations are conducted in the PRC. In addition, most of our directors and officers are nationals and residents of countries
other than the United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also
be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial
majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Courts in China may recognize and enforce foreign judgments
in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that
provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and
officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.

RISKS RELATED TO THE MARKET FOR OUR STOCK GENERALLY

Our Common Stock is quoted on the OTCBB which may have an unfavorable impact on our stock price and liquidity.

Our Common Stock is quoted on the OTCBB.  The OTCBB is a significantly more limited market than the New York Stock Exchange or NASDAQ system. The quotation of our shares on the OTCBB may result in a less liquid market available for existing and
potential stockholders to trade shares of our Common Stock, could depress the trading price of our Common Stock and could have a long-term adverse impact on our ability to raise capital in the future.

The market price of our Common Stock is volatile, leading to the possibility of its value being depressed at a time when you may want to sell your holdings.

The market price of our Common Stock is volatile, and this volatility may continue. Numerous factors, many of which are beyond our control, may cause the market price of our Common Stock to fluctuate significantly. In addition to market and industry
factors, the price and trading volume for our Common Stock may be highly volatile for specific business reasons. Factors such as variations in our revenues, earnings and cash flow, announcements of new investments, cooperation arrangements or
acquisitions, and fluctuations in market prices for our products could cause the market price for our shares to change substantially.

Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources.
Moreover, the trading market for our Common Stock will be influenced by research or reports that industry or securities analysts publish about us or our business. If one or more analysts who cover us downgrade our Common Stock, the market price for
our Common Stock would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price for our Common
Stock or trading volume to decline.

Furthermore, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. These market fluctuations may adversely affect the price of our Common
Stock and other interests in our company at a time when you want to sell your interest in us.

We are subject to penny stock regulations and restrictions and you may have difficulty selling shares of our Common Stock.

The SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain
exemptions. Because our
Common Stock is a “penny stock”, we are subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than
established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by
Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell
our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.

25

---

For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made
about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stock.

There can be no assurance that our Common Stock will qualify for exemption from the Penny Stock Rule. In any event, even if our Common Stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act,
which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.

Certain provisions of our amended and restated certificate of incorporation may make it more difficult for a third party to effect a change-of-control.

Our amended and restated certificate of incorporation authorizes our board of directors to issue up to 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of
issuance by the board of directors without further action by the stockholders. These terms may include preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock
could diminish the rights of holders of our Common Stock, and therefore could reduce the value of such Common Stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or
sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our
stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our Common Stock. In connection with our private placement transaction in June 2009, we filed a
Certificate of Designation of Series A Preferred Stock with the Secretary of State of the State of Delaware on June 16, 2009, pursuant to which we designated and issued 1,530,612 shares of Series A Preferred Stock to SAIF.

The conversion of preferred stock and convertible notes or the exercise of warrants we issued in our previous private placements may result in dilution to the holders of our Common Stock and cause the price of our Common Stock to decline.

Dilution of the per share value of our Common Stock could result from the conversion of our outstanding Series A Preferred Stock and the Convertible Notes or the exercise of outstanding warrants that we issued in connection with our previous private
placement transactions. As of March 31, 2011, there were 1,530,612 shares of our Series A Preferred Stock outstanding, which may be converted into our Common Stock at the option of the holders of the Series A Preferred Stock in whole or in part at
any time at an initial conversion price of $0.98. Our outstanding Convertible Notes are also convertible into an aggregate of 4,460,000 shares of Common Stock with an initial conversion price of $2.00 per share. In addition, as of March 31,
2011, there were outstanding warrants to purchase an aggregate of 4,414,439 shares of our Common Stock. When the conversion price of the Series A Preferred Stock and the Convertible Notes or the exercise price of the warrants is less than the
trading price of our Common Stock, the conversion of Series A Preferred Stock and the Convertible Notes or the exercise of the warrants would have a dilutive effect on our shareholders. The possibility of the issuance of shares of our Common Stock
upon the conversion of Series A Preferred Stock and the conversion of our Convertible Notes or the exercise of the warrants could cause the trading price of our Common Stock to decline as well.



26

---

We may not have sufficient funds to redeem our outstanding Series A Preferred Stock upon the request of the holders and we may have difficulties to raise the funds necessary to settle redemption of the Series A Preferred Stock, which could
negatively affect our financial condition and results of operations.

We filed the Certificate with the Secretary of State of the State of Delaware on June 16, 2009, in which we authorized 1,530,612 shares of Series A Preferred Stock. According to the Certificate, at any time and from time to time after June 30, 2012,
the holders of the Series A Preferred Stock have the right to request the Company to redeem all of the then outstanding shares of Series A Preferred Stock in cash, if any of the following qualified events has not occurred: (i) the Company’s
shares of Common Stock are listed on the New York Stock Exchange or the NASDAQ Global Market, and (ii) the closing market price of such listing securities represents a price of no less than $4.25 per share of Common Stock, subject to adjustment,
in any consecutive 30-trading-day period. It will cost an amount equals to the sum of (x) the purchase price plus an annualized internal rate of return of 25% for the period from the issuance date of the Series A Preferred Stock to the redemption
date and (y) an amount equal to all declared but unpaid dividends for each outstanding share of Series A Preferred Stock, proportionally adjusted for recapitalizations to redeem a share of Series A Preferred Stock. We cannot assure you that we would
have sufficient financial resources, or would be able to arrange financing, to redeem all of the shares of the Series A Preferred Stock upon the request of the holders. According to the Certificate, to the extent our available cash flow is
insufficient to fund all redemption requests, those funds will be used to redeem the maximum possible number of such shares ratably among the holders. The shares not redeemed shall remain outstanding and at any time thereafter when additional funds
of the Company are available for the redemption, such funds will immediately be used to redeem the balance of the shares. Our obligations to redeem the balance of the shares may limit our ability to borrow money or sell stock to fund and as a
result, may require a substantial portion of our cash flow from operations to be used for the redemption of these shares, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other
general corporate purposes. One or a combination of these factors could adversely affect our financial condition and results of operations.

We do not intend to pay dividends for the foreseeable future.

We have not paid a dividend in the past and it is unlikely that we will declare or pay a dividend in the foreseeable future. The declaration, amount and date of distribution of any dividends in the future will be decided by the Board of Directors
from time-to-time, based upon, and subject to our earnings, financial requirements and other conditions prevailing at the time.

ITEM 1B.     UNRESOLVED STAFF COMMENTS.

Not Applicable.

ITEM 2.         PROPERTIES.

All land in China is owned by the State or collectives. Individuals and companies are permitted to acquire land use rights for general or specific purposes. In the case when land is used for industrial purposes, the land use rights are granted for a
period of 50 years. The rights may be renewed at the expiration of the initial and any subsequent terms according to the relevant Chinese laws. Granted land use rights are transferable and may be used as security for borrowings and other
obligations.

We own or lease the following manufacturing and production facilities:

- we own a facility located in Fuping County of Shaanxi Province capable of spray drying 40 metric tons of raw milk per day. The facility occupies an area of 100 square meters.
- our wholly owned facility located in the Xiqing District of Tianjin City, which is, on the basis of a daily double shift, capable of combining and formulating the milk powder with the nutritional supplements and then packaging the end product at a
rate of approximately six metric tons per day. The facility occupies an area of 800 square meters.

Construction in progress of goat farm facilities

We entered into a series of agreements in 2009 to purchase and construct 9 farm facilities and 10 raw milk collection stations, to ensure a steady supply of raw liquid goat milk.

As of March 31, 2011, we had signed several agreements with two construction companies, Zhuangli Construction Team and Fupin County Qinzheng Construction Engineering Corporation, or Qinzheng Construction, for the construction of farm
facilities with a total amount of RMB17, 260,000 (approximately $2,524,831).  In September 2009, we signed a supplemental agreement with Qinzheng Construction to reduce the construction cost by RMB1,900,000 (approximately $277,936) due to
the change of construction location.  As of March 31, 2011, RMB11, 962,000 (approximately $1,749,828) had been paid and the remaining balance will be paid in installments.  In January 2011, the construction of the farm facilities was completed
and the facilities have since been operating.

27

---

During the year ended March 31, 2010, we signed an agreement with Zhuangli Construction Team for the construction of goat milking collection stations with the total amount of RMB3, 300,000 (approximately $482,731).  As of March 31, 2011, RMB3,
140,000 (approximately $459,326) has been paid and the remaining balance of RMB160,000 (approximately $23,405) is due in one year after the construction is completed and accepted.  As of the date of this report, the construction of ten
collection stations has been completed and the facilities are currently operating.

Purchase of Office Building, Factory & Warehouse

On January 15, 2007, we entered into a sales and purchase agreement with  Tianjin Mengyang to buy a four-story office building of an approximate construction area of 7,800
square meters located at Jinghai Industrial Park, for a total consideration of RMB29,640,000 (approximately $4,511,348).

On September 26, 2008, we entered into a factory transfer agreement with Tianjin Mengyang to purchase three warehouses and a factory of an approximate construction area of 30,165 square meters situated at Jinghai Industrial Park for a total
consideration of RMB90,495,000 (approximately $13,773,763).  We paid a total of RMB44,404,000 (approximately $6,758,497) in 2008.

On January 20, 2009, we entered into a supplemental agreement with Tianjin Mengyang to postpone the construction completion date to December 31, 2009.  On June 12, 2009, we signed a second supplemental agreement with Tianjin Mengyang under which the
parties agreed that the remaining balance for factory and warehouse of RMB31,091,000 (approximately $4,732,195) will be paid with 3 installments.

The construction of the main office building, factory and warehouse was completed in September 2010.  We were required by local government to complete the inspection of the facilities before the innovation can start.  On September 16, 2010, the
Chinese State Council issued the “Circular on Further Strengthening the Quality and Safety of Dairy Products No. (2010)”, which requires newly established dairy product manufacturing companies to comply with “Rules for
Implementation of Regulations on Issuing Infant Formula Milk Powder Production License” which was issued by AQSIQ in November 2010.  The rules tighten the examination criteria of production license and inspection standard of milk product.  As
a result, we are subject to more stringent inspection before the project can be completed.  We expect that the inspection will be completed by October 2011.

On June 16, 2011, Shaanxi Milkgoat entered into a construction agreement with China Tenth Metallurgical Group Corporation, or China Metallurgical, pursuant to which China Metallurgical agreed to construct the research and development part of the raw
goat milk processing project of Shaanxi Milkgoat for a construction fee of RMB 10,673,522.75 (approximately $1.65 million).  According to the construction agreement, the construction should be completed by December 31, 2011. Shaanxi Milkgoat has
already paid RMB3.5 million (approximately $0.54 million) to China Metallurgical as an advance payment.

Purchase of Machinery & Equipment

During the fiscal year ended March 31, 2010, we entered into a purchase agreement to acquire certain machinery and equipment to expand our liquid goat milk production line, for an amount of RMB25,627,000 (approximately $3,900,549). As of March
31, 2011, RMB6,965,300 (approximately $1,060,806) has been paid to the supplier and the remaining of RMB18,657,400 (approximately $2,839,743) is expected to be paid in the fourth calendar quarter of 2013.

We also entered into a purchase agreement with Shanghai Dahe Rongyi Packaging
Machinery Co., Ltd. for purchasing goat milk powder production lines, for a total amount of RMB16,379,500 (approximately $2,493,037).  As of March 31, 2011, we had paid RMB5,732,700
(approximately $872,544) and the remaining RMB10,646,800 (approximately $1,620,493) will be paid in installments.

28

---

Installation of central system pipelines

On October 28, 2009, Shaanxi Milkgoat entered into a Project Installation Agreement, or the Installation Agreement, with Heilongjiang Tianhong Food Equipment Co., Ltd., or Heilongjiang Tianhong, which provided for, among others, and install all the
process pipelines and the central system pipelines at Shaanxi Milkgoat’s new joint production facility.  Pursuant to the Installation Agreement, Shaanxi Milkgoat agreed to pay Heilongjiang Tianhong an aggregate of RMB 12,535,000 (approximately
$1,907,886) in five installments for the service that Heilongjiang Tianhong will provide.  Heilongjiang Tianhong agreed to complete the installation within 90 days after Shaanxi Milkgoat provides to Heilongjiang Tianhong an appropriate
construction site for the installation according to the Installation Agreement.  The estimated completion date of installation is postponed to October 2013.

We believe that all our properties have been adequately maintained, are generally in good condition, and suitable and adequate for our business.

ITEM 3.     LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise
from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

ITEM 4.     [REMOVED AND RESERVED]

29

---

PART II

ITEM 5.     MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our Common Stock is quoted under the symbol YYIN on the OTCBB
but had not been traded in the OTCBB except on a limited and sporadic basis. The
CUSIP number is 985290105.

The following table sets forth, for the periods indicated, the
high and low closing prices of our Common Stock. These prices reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.

|                                |   | Closing Bid Prices (1) | 
|------------------------------- | - | ---------------------- | 
|                                |   | High                   | 
|Year Ended March 31, 2011       |   |                        | 
|1stQuarter                      | $ | 2.95                   | 
|2ndQuarter                      | $ | 1.85                   | 
|3rdQuarter                      | $ | 1.63                   | 
|4thQuarter                      | $ | 1.30                   | 
|Year Ended March 31,
      2010 |   |                        | 
|1stQuarter                      | $ | 0.80                   | 
|2ndQuarter                      | $ | 1.25                   | 
|3rdQuarter                      | $ | 1.90                   | 
|4thQuarter                      | $ | 3.95                   | 

(1)The above table sets forth the
range of high and low closing bid prices per share of our Common Stock as
reported by www.quotemedia.com for the periods indicated.

Approximate Number of Holders of Our Common Stock

On June 28, 2011, there were approximately 381 stockholders of
record of our Common Stock. The number of record holders does not include
persons who held our Common Stock in nominee or street name accounts through
brokers.

Dividends

We have never declared or paid a cash dividend. Any future
decisions regarding dividends will be made by our board of directors. We
currently intend to retain and use any future earnings for the development and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors has complete discretion on whether to
pay dividends, subject to the approval of our stockholders. Even if our board of
directors decides to pay dividends, the form, frequency and amount will depend
upon our future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions and other factors that the
board of directors may deem relevant.

Securities Authorized for Issuance Under Equity Compensation
Plans

See Item 12, Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters  Securities Authorized for
Issuance Under Equity Compensation Plans.

Recent Sales of Unregistered Securities

We have not sold any equity securities during the fiscal year
ended March 31, 2011 that were not previously disclosed in a quarterly report on
Form 10-Q or a current report on Form 8-K that was filed during the 2011 fiscal
year.

30

---

Purchases of Equity Securities

No repurchases of our common stock were made during the fourth quarter of 2010.

ITEM 6.     SELECTED FINANCIAL DATA.

Not Applicable.

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. In addition to historical
information, the following discussion contains certain forward-looking information. See “Special Note Regarding Forward Looking Statements” above for certain information concerning those forward looking statements.

According to the China Quality Net, maintained by China Quality Inspection Association, we are the first and one of the leading producers and distributors of premium goat milk formula products for infants, toddlers, young children, and adults in
China. Our powder products are sold throughout most of China. We began selling powder products in Tianjin and Beijing in 2001, in Southern China in 2004 and Northern China in 2006. Our current formula product lines are targeted at the premium
segment of the dairy market and health-conscious consumers. Headquartered in Tianjin, we sell and distribute our products through a nationwide network of retail points across China in 23 provinces and municipalities including supermarkets (including
multinational chains), infant-maternity chain stores and drug stores, as well as catalogue sales and our dedicated online store at Taobao.com. We are vertically integrated and source raw goat milk from our proprietary dairy farms as well as
neighboring goat dairy farmers on a long-term contract basis in milk collection centers, which helps us maintain quality control.

Since the end of 2009, we have been working with Trout & Partners to streamline our product portfolio and refine our brand image in order to position and strengthen our “Milk Goat” brand as the premium goat milk brand throughout
China. We have restructured our original product portfolio of dozens of products and specifications and refined our marketing strategy. Our new product portfolio consists of three segments, infant formula products, adult products and children
products with an aggregate 22 formula products under the "Milk Goat" brand with three package sizes of 600, 665 and 365 grams. As of March 2011, approximately 43.6% of our revenues were generated from the infant formula products, approximately 10.7%
from products for children and approximately 45.7% from products for students and adults.

Principal Factors Affecting Our Financial Performance

Our operating results are primarily affected by the following factors:

- Perceptions of Product Quality and Safety. Rising consumer wealth in China has contributed to a greater acceptance by consumers in China of and desire for higher-priced products with perceived quality advantages associated with such
products. Thus, we believe that infant formula producers with a reputation for quality and safety should be able to command higher average selling prices and thereby generate higher gross margins than competitors that do not possess the same
perceived reputation for quality and safety. Conversely, any decrease in consumer perceptions of quality and safety could adversely impact such producers’ sales and gross margins. We believe our past growth has benefited from our brand
recognition and from real and perceived safety and quality of our formula products. Moreover, a decrease in the quality and safety of any particular producer could trigger wider negative perception of the decrease in the quality and safety of all
producers, thereby affecting the industry generally. For example, the melamine contamination incident had resulted in a significant reduction in the sales of a number of major dairy product companies in China. If a future market crisis involving any
of our products should occur, especially if management fails to respond to such a crisis in a timely and effective manner, our brand recognition and reputation could be severely damaged, which could adversely affect our results of operations.
- Brand Recognition and Customer Loyalty.In recent years, there has been growing demand in China for premium formula products due to increasing consumer awareness of brand image and nutritional value of the products offered by leading
producers. Although the market is still highly competitive, we believe that companies with strong national brands and customer loyalty will increasingly capture market share from regional brands with less
brand recognition. Our success depends on sustaining the strength of our brands. If we fail to promote and maintain the brand equity of our products, then consumer perception of the superior nutritional benefits of our products may be diminished. If
the difference in the value attributed to our products as compared to those of our competitors narrows, consumers may choose not to buy our products.

31

---

- Competition and Market PositionWhile China’s formula market is expected to grow significantly, we are facing intense competition. The market has become highly fragmented in recent years as an increasing number of formula
producers have entered the market. We face significant competition from domestic and multinational producers of both cow and goat milk. We focus on developing and marketing premium products for the goat formula market in China. By leveraging our
focused marketing strategy, our brand name and our sales and marketing infrastructure, we have been able to sell formula products to consumers in China’s largest cities and we believe that we are perceived as a company that is able to deliver
premium quality that justifies our premium prices. This strategy has allowed us to maintain and improve our market share in our primary markets.
- Product Offering and Pricing.As China becomes more affluent, formula products have become more affordable, resulting in the rapid growth of the overall market for formula in China. Despite the recent rapid growth, we believe much of
the market is still underserved with respect to formula. We expect that this growth in demand will help drive sales for many formula producers, but companies with strong brand loyalty and extensive distribution networks in China will have greater
ability to capitalize on such growth as well as to increase prices and pass on higher raw material costs to customers.
- Raw Material Supply and Prices.The per unit costs of producing our formula are subject to the supply and price volatility of raw milk and other raw materials. For example, raw milk prices are affected by fluctuations in production and
competition. Historically, we have been able to meet our raw milk supply needs by building our processing facilities close to our milk suppliers. Through our subsidiary Weinan Milkgoat located in Shaanxi Province, we have entered into long-term
supply arrangements with local governmental and quasi-governmental authorities pursuant to which we purchase all the goat milk produced by the small collective farms at a price negotiated from time to time by us and the individual farms.

Taxation

United States

Yayi International Inc. is subject to United States federal income tax at a tax rate of 41%. No provision for income taxes in the United States has been made as Yayi International Inc. had no income taxable in the United States.

British Virgin Islands

Milkgoat Industrial was incorporated in the BVI and under the current laws of the BVI, is not subject to income taxes.

PRC

In 2007, the PRC government promulgated the new Enterprise Income Tax Law, or EIT Law, and the relevant implementation rules, which became effective on January 1, 2008. Under the EIT Law and its implementation rules, all domestic and foreign
investment companies will be subject to a uniform enterprise income tax at the rate of 25% and dividends from PRC subsidiaries to their non-PRC shareholders will be subject to a withholding tax at a rate of 20%, which is further reduced to 10% by
the implementation rules, if the non-PRC shareholder is considered to be a non-PRC tax resident enterprise without any establishment or place within China or if the dividends payable has no connection with the non-PRC shareholder’s
establishment or place within China, unless any such non-PRC shareholder’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. In addition, pursuant to the EIT Law, enterprises
established under the laws of non-PRC jurisdictions, but whose “de facto management body” is located in the PRC, should be treated as resident enterprises for PRC tax purposes However, it is currently uncertain whether we may be deemed a
resident enterprise, or how to interpret whether any income or gain is derived from sources within China. See “Risk Factors - Under the New EIT Law, we may be classified as a “resident enterprise” of China. Such classification will
likely result in unfavorable tax consequences to our non-PRC shareholders and us.” If we, as a Delaware company with substantially all of our management located in China, were treated as a resident enterprise for PRC tax purposes, we will be subject to PRC tax on our worldwide income
at the 25% uniform tax rate, which would have an impact on our effective tax
rate.

32

---

The EIT Law and the Implementing Rules also imposes a unified
EIT of 25% on both foreign invested enterprises and domestic enterprises,
effective January 1, 2008. As a result, each of our PRC subsidiaries, Milkgoat
China, Weinan Milkgoat, Fuping Milkgoat, and Shaanxi Milkgoat have been subject
to a 25% income tax rate in calendar year 2008, 2009, 2010 and 2011.

Results of Operations

Year Ended March 31, 2011 Compared to Year Ended October 31,
2009

The following table sets forth a summary of certain key
components of our results of operations for periods indicated, in dollars and
the percentage of change from the prior period.

|                                                                |   | Year Ended     |   |   |                  |   |   |            |  
|--------------------------------------------------------------- | - | -------------- | - | - | ---------------- | - | - | ---------- | -
|                                                                |   | March 31, 2011 |   |   | October 31, 2009 |   |   | change     |  
|Net Sales                                                       | $ | 26,909,879     |   | $ | 24,845,685       |   | $ | 2,064,194  |  
|Cost of goods sold                                              |   | (10,075,452    | ) |   | (8,025,009       | ) |   | (2,050,443 | )
|Gross profit                                                    |   | 16,834,427     |   |   | 16,820,676       |   |   | 13,751     |  
|Operating expenses                                              |   |                |   |   |                  |   |   |            |  
|Sales and marketing expenses                                    |   | (12,353,238    | ) |   | (5,760,446       | ) |   | (6,592,792 | )
|General and administrative expenses                             |   | (4,304,356     | ) |   | (1,972,190       | ) |   | (2,332,166 | )
|Income from continuing operations                               |   | 176,833        |   |   | 9,088,040        |   |   | (8,911,207 | )
|Other income (expenses), net                                    |   | (1,000,246     | ) |   | (1,491,027       | ) |   | 490,781    |  
|Income tax (expense)                                            |   | (468,086       | ) |   | (2,201,032       | ) |   | 1,732,946  |  
|Net (loss) income attributable to Yayi International
      Inc. |   | (1,291,499     | ) |   | 5,395,981        |   |   | (6,687,480 | )

Net Sales. Our net sales are generated from sales of
products of premium goat milk formula. Net sales for the fiscal year ended March
31, 2011 were approximately $26.9 million, an increase of 8.3% compared to the
fiscal year ended October 31, 2009. This increase was primarily attributable to
the increase in the unit sales price, which was offset in part by an increase in
the slotting fees offset to revenue as incurred and a decrease in sales volume.
The unit sales price increased by 25.2% from $19,260 to $24,111 per ton, mainly
due to an upgrade of formula and increased prices of main raw materials. In the
first quarter of calendar year 2010, we started to streamline our product
portfolio from 58 Store Keeping Units (SKU) to 10 SKU under the MilkGoat brand
with upgraded formula. In addition, in order to develop infant-maternity stores
as a sales channel alongside our commitment to establish our presence in
supermarkets, we launched 14 infant-formula products specifically targeting
infant-maternity stores in this fiscal year. The slotting fees increased to $5.5
million for the fiscal year ended March 31, 2011 compared to $1.0 million for the fiscal year
ended October 31, 2009 mainly due to the expanding sales channels in
hypermarkets and supermarkets. The sales volume decreased by 13.5% from 1,290
ton to 1,116 ton mainly due to the time required for the acceptance of the new
products by the market.

In late 2010, AQSIQ announced new regulatory measures based on
Chinas Food Safety Law adopted by the Peoples Congress earlier in 2010
requiring all infant milk formula and dairy product companies to submit
applications to renew manufacturing licenses by the end of 2010 and to complete
the renewal process by the end of March 2011. AQSIQs inspections have disrupted our normal manufacturing schedules
and the roll out of our supermarket-focused distribution strategy has been
slower than expected in the second half of calendar 2010. The distributors were
hestitant to order our products after the new regulations were issued, which
caused the slower growth of our sales volume than expected during September 2010
to March 2011. We obtained the renewed production licenses on March 31, 2011.

33

---

We believe the recent scandal will change the competitive
landscape of Chinas infant formula market and we expect more visibility after
June 2011 when the approval process for new licenses is finalized. In the
meantime, we are confident that our dual-pronged approach of developing
infant-maternity stores while continuing to execute on our supermarket
penetration strategy will build a solid foundation for our future growth
momentum and profitability.

The following table sets forth the information relating to the
quantity and sales price of goat milk powder we sold during the periods
indicated:

|                 |  |                |  |   | Year Ended     | 
|---------------- |  | -------------- |  | - | -------------- | 
|Product Name     |  |                |  |   | March 31, 2011 | 
|Goat Milk Powder |  | Quantity (ton) |  |   | 1,116          | 
|Products         |  | Unit price     |  | $ | 24,111 $       | 

Cost of goods sold.Our cost of goods sold is primarily
comprised of the costs of our raw materials, labor and overhead. Cost of goods
sold for the year ended March 31, 2011 was approximately $10.1 million, an
increase of 25.6% from the year ended October 31, 2009, primarily due to the
giveaways that we distributed to customers for promotion purposes under the "buy
two get one free" strategy and the increase in raw milk and added nutrients. The
unit cost increased by 45.1%, from $6,221 per ton to $9,027 per ton. Due to the
formula upgrading, the unit cost of manufacturing increased by 35.5% from $5,971
per ton to $8,093 per ton. The giveaway cost increased by 223.4% from $0.3
million for the year ended October 31, 2009 to $1.0 million for the year ended
March 31, 2011. As a part of our marketing strategy for the new products, our
sales people provided free promotional products to the new purchasers of our
products.

Gross Profit. Our gross profit is equal to the
difference between our net sales and the cost of goods. Gross profit for the
2011 fiscal year was approximately $16.8 million, an increase of 0.1% compared
to the fiscal year ended October 31, 2009. Our gross margin for the fiscal year
2011 decreased to 62.6% from 67.7% for the fiscal year ended October 31, 2009.
The decrease in gross margin is mainly due to the increase in slotting fees paid
to supermarkets, giveaway costs and raw material prices.

Operating expenses. Our total operating and
administrative expenses consist primarily of sales and marketing expenses and
general and administrative expenses. Our total operating and administrative
expenses for the fiscal year ended March 31, 2011 increased by approximately
$8.9 million to $16.7 million or 115.4% from the fiscal year ended October 31,
2009. The following is a discussion of the reasons for this increase broken down
by category of operating expense:

Sales and marketing expenses.For the fiscal year
2011, sales and marketing expenses increased approximately 114.4% to $12.4
million from $5.8 million for the fiscal year ended October 31, 2009. The
increase was a combined result of an increase in temporary promoters salaries,
promotional and advertising expenses. Promotional expenses were approximately
$6.2 million for the fiscal year ended March 31, 2011, an increase of 210.0%
compared with $2.0 million for the fiscal year ended October 31, 2009, which is
mainly due to our sales road show program organized across 23 provinces and
municipalities for the new products. Advertising expenses were approximately
$2.1 million for the fiscal year ended March 31, 2011, an increase of 312.1%
compared with $0.5 million for the fiscal year ended October 31, 2009. The
primary reason for the increase was that we launched our new television
advertisement campaign in CCTV to promote the new product portfolio nationwide.
The television commercials started airing on January 1, 2010 on China Central
Television Channel, which is generally considered one of the most valuable
channels in China. Temporary promoters salaries increased 75.2% from 1.7
million to 2.9 million compared with the fiscal year ended October 31, 2009,
which mainly due to expanding sales channels in supermarkets this fiscal year.
In the second half of 2009, we spent $0.4 million to
engage Trout & Partners, a U.S.-based marketing strategy consultancy with a
strong presence in China, to assist us in refining our product positioning and
marketing strategy. Trout & Partners has a proven track record in China of
transforming regional Chinese brands into nationally recognized names. We
believe that our investment in sales and marketing for building our "Milkgoat"
brand as well as further strengthening our distribution capability will bring
substantial and tangible benefits in the long term.

34

---

General and administrative expenses. General and administrative expenses for the fiscal year ended March 31, 2011 increased by 118.3% to $4.3 million from $2.0 million for the fiscal year ended October 31, 2009. It was
primarily attributable to $1.1 million for the stock options granted to key employees and certain directors in June 2010, as well as the increased compensation of $0.7 million for the current and new senior managers and executives.

Other income/(expenses).Our other income (expenses) consists primarily
of change in fair value of derivative liabilities, interest and amortization of
deferred debt issuance cost. Other expenses for the fiscal year ended March 31,
2011 was approximately $1.0 million, decreased by approximately $0.5 million
compared to the fiscal year ended October 31, 2009. This decrease was a combined
result of an increase income of $2.8 million for the fair value of derivative
liabilities related to the $8.92 million convertible notes, the decrease
expenses of $0.1 million for liquidated damages arising from the registration
rights agreement settlement in November 2009 and modification expense of Series
A and D warrants in December 2009, offset by an increase expense of $0.4 million
in amortization of deferred financing costs and debt discount, an increased
expense of $0.2 million for make good shares and $0.3 million registration
penalties related to $8.92 million convertible notes, an increase of $1.5
million in interest expenses for $15 million Series A Preferred Stock.  See
Note 20 to the Consolidated Financial Statements for our accounting treatment of
Series A Preferred Stock.

Income Tax. Our income tax expenses for the fiscal year ended March 31, 2011 decreased by 78.7%, from approximately $2.2 million for the fiscal year ended October 31, 2009, to approximately $0.5 million. The decrease was primarily
attributable to decrease in income before tax in the year ended March 31, 2011.

Net Income (Loss).As a result of the factors described above, net loss was approximately $1.3 million for the fiscal year ended March 31, 2011 as compared to net income of $5.4 million for the fiscal year ended October 31, 2009.

Liquidity and Capital Resources

As of March 31, 2011, we had cash and cash equivalents of approximately $13.4 million and working capital of approximately $9.7 million.

We intend to, and are in the process of, expanding our administrative and
production facilities to meet our current needs and anticipated increased demand
for our products. In connection therewith, we plan to spend approximately $8.0
million during the eighteen months ending September 30, 2012 ($3.4 million during the fiscal year ending March 31, 2012 and $4.6 million during the six months ending September 30, 2012. The $8.0 million in capital
expenditure is expected to be mainly used for the following items:

- the purchase of machineries and equipment for the new powder processing plant in Weinan, Shaanxi and machineries and equipment in Fuping, Shaanxi with the capital expenditure of $3.1 million;
- the purchase of livestock, the construction of goat farms and goat milk collection stations in an amount of $0.5 million;
- the packing equipment purchase and renovation of the office and staff apartment building in Jinghai, Tianjin in an amount of $4.2 million; and the purchase of information technology equipment and systems in an amount of $0.2 million.

On July 30, 2010, Milkgoat China renewed a loan of RMB 10,000,000 (approximately $1,469,000) from Shanghai Pudong Development Bank, Tianjin Branch, or Pudong Bank, for use as working capital. The loan has an annual interest rate of 6.372% and
the interest must be paid on a quarterly basis on the 20th of the last month of each quarter. Under the terms of the loan agreement, Milkgoat China is subject to customary affirmative and negative covenants. The loan may be accelerated
and Pudong Bank may demand immediate payment of the principal and accrued interest upon the occurrence of an event of default which includes, among other things, a failure to make principal or interest payments, a failure to comply with other
covenants and certain events of liquidation or bankruptcy.

35

---

On September 27, 2010, we entered into a securities purchase
agreement, or the Securities Purchase Agreement, with 119 U.S. accredited
investors, or the PIPE Investors, and Euro Pacific Capital, Inc., as
representative of the PIPE Investors, pursuant to which we issued and sold to
the PIPE Investors 892 units at a purchase price of $10,000 per unit, resulting
in gross proceeds of $8.92 million to us. Each unit consists of a three-year, 9%
convertible promissory note in the principal amount of $10,000, or the
Convertible Note, and a three-year Series F Warrant, to purchase 1,250 shares of
our common stock at an exercise price of $2.50 per share. The Convertible Notes
are payable at an interest rate of 9% per annum, payable semiannually in arrears
on the last day of the first and third calendar quarters commencing March 31,
2011 and mature on September 26, 2013, or the Maturity Date. The Convertible
Notes are also convertible into shares of our common stock at any time prior to
the Maturity Date at $2.00 per share, which conversion price is subject to
weighted average and other customary anti-dilution protections. See our Current
Report on Form 8-K filed on October 1, 2010 for more information of this private
placement transaction.

On November 4, 2010, Milkgoat China entered into a working
capital loan agreement with Tianjin Bank, Shaoxing Dao Branch, or Tianjin Bank,
pursuant to which, Tianjin Bank loaned to Milkgoat China RMB20,000,000
(approximately $2,991,862) to purchase raw materials. The loan has a term of 12
months and expires on November 3, 2011. The fixed annual interest rate of the
loan is 6.672% . Under the terms of the loan agreement, Milkgoat China is
subject to customary affirmative and negative covenants. The loan may be
accelerated and Tianjin Bank may demand immediate payment of the principal and
accrued interests upon the occurrence of an event of default which includes,
among other things, a failure to make principal or interest payments timely, a
failure to comply with other covenants and certain events of bankruptcy. On
November 5, 2010, RMB15, 000,000 (approximately $2,246,922) was disbursed to
Milkgoat China, and the remaining RMB 5,000,000 (approximately $744,940) was
disbursed to Milkgoat China on January 6, 2011.

On November 8, 2010, Milkgoat China entered into a
non-committed short term revolving facility agreement with CITI Bank (China)
Co., Ltd, Tianjin Branch, or Citi Bank, pursuant to which, Citi Bank agreed to
make available to Milkgoat China a RMB 8 million (approximately $1,217,637)
revolving credit facility to purchase raw materials and for working capital
purposes. A separate agreement will be entered into each time as advance is made
under the credit facility. The term of each advance is up to three months. The
interest rate on each advance will be memorialized in the separate agreement.
Tianjin Mengyang Biotechnology Co., Ltd., Fung Shek and Li Liu acted as
guarantors under this agreement. As of March 31, 2011, no advance had been made.

On January 6, 2011, Milkgoat China entered into a working
capital loan agreement with Bank of Beijing. Pursuant to the short-term loan
agreement, Bank of Beijing agreed to loan to the Company an aggregate RMB
10,000,000 (approximately $1,489,880) for the use as working capital. The loan
has a monthly interest rate of 0.5084% and the interests must be paid on a
quarterly basis on the 20th of the last month of each quarter. The
loan expires on January 5, 2012 but can be renewed upon the written consent by
Bank of Beijing. Under the terms of the loan agreement, we are subject to
customary affirmative and negative covenants. The loan may be accelerated and
Bank of Beijing. may demand immediate payment of the principal and accrued
interests upon the occurrence of an event of default which includes, among other
things, a failure to make principal or interest payments, a failure to comply
with other covenants and certain events of liquidation or bankruptcy.

On June 10, 2011, Milkgoat China renewed a loan agreement with
Tianjin Rural Commercial Bank for RMB30,000,000 (approximately $4,566,140). The
annual interest rate is 7.572% and the loan is due on June 9, 2012. The loan is
guaranteed by Tianjin Haitai Investment Guarantee Co., Ltd.

We believe that our currently available working capital should
be adequate to sustain our operations at our current levels through at least the
next twelve months. However, depending on our future needs, changes and trends
in the capital markets affecting our shares and the Company, we may determine to
seek additional debt financing from commercial bank or equity financing in the
private or public markets.

The following table summarizes information about our net cash
flows for the periods as indicated.

|                                                          |   | Years Ended    |  
|--------------------------------------------------------- | - | -------------- | -
|                                                          |   | March 31, 2011 |  
|                                                          |   |                |  
|Net cash (used in)
      provided by operating activities | $ | (1,181,337     | )
|Net cash (used in) investing activities                   |   | (1,765,867     | )
|Net cash provided by
      financing activities           |   | 11,359,250     |  
|Net increase in cash and cash equivalent                  | $ | 8,632,715      |  

36

---

Operating Activities:

Net cash used in operating activities for the fiscal year ended March 31, 2011 was approximately $1.2 million compared to net cash provided by operating activities of approximately $6.5 million for the fiscal year ended October 31, 2009.
Net cash used in operating activities for the fiscal year ended March 31, 2011 was mainly attributable to the net loss from operations of approximately $1.3 million, non-cash items not affecting cash flows of $2.0 million and an
approximately $1.9 million increase in working capital. The changes in working capital for the fiscal year ended March 31, 2011 was primarily related to a $1.0 million increase in accounts receivable reflecting extended credit term for new
products promotion. We increased goat milk powder production to meet expected sales demand, which resulted in a $1.2 million increase in inventory and a $0.2 million increase in accounts payables. We increased bank’s acceptance bills
paid to our suppliers instead of paying by cash in bank directly during the three months ended March 31, 2011, which resulted in a $1.0 million increase in restricted cash and a $0.5 million increase in notes payables. There was a $0.8
million decrease in advance to suppliers due to the decrease in the prepayment for CCTV advertising expenses and the prepayment for packaging materials.  We issued $8.92 million convertible notes in September 2010, which caused $0.4 million
increase in restricted cash that should be left in the escrow account and $0.4 million increase in other payables due to the accrued interest expenses.

Net cash provided by operating activities for the fiscal year ended October 31, 2009 was mainly attributable to the net income of $5.4 million, non-cash items not affecting cash flows of $0.8 million and a $0.3 million
decrease in
working capital.

Investing Activities:

Net cash used in investing activities for the fiscal year ended March 31, 2011 was approximately $1.8 million, a decrease of approximately $10.6 million from the fiscal year ended October 31, 2009. The change was mainly caused by the fact
that the prepayment of $9.9 million for the construction of Jinghai fortifying plant; $1.8 million for the prepayment of Jinghai equipment during the fiscal year ended October 31, 2009, while we did not make similar payments during the
fiscal year ended March 31, 2011. During the fiscal year ended March 31, 2011, there was also an increase in capital expenditures of approximately $1.8 million, among which $0.6 million for Shaanxi new processing plant, $0.5 million for
the prepayment of production equipment for the new fortifying plant in Jinghai, Tianjin; $0.7 million for Tianjin and Fuping production facilities upgrading related to our production licenses renewal.

Financing Activities:

Net cash provided by financing activities for the fiscal year ended March 31, 2011 was approximately $11.4 million compared to approximately $15.4 million of net cash provided by these activities during the fiscal year ended October 31,
2009. The change is primarily attributable to the $8.9 million gross proceeds from the convertible debt transaction closed on September 27, 2010, compared with $15.0 million gross proceeds from the private placement transaction closed in
June 2009. In addition, the net cash provided by bank loans increased by $2.5 million for the fiscal year ended March 31, 2011 compared with the fiscal year ended October 31, 2009.

Effects of Inflation

Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.  However, our management will closely monitor the
price change and continually maintain effective cost control in operations.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital
expenditures or capital resources that is material to an investor in our securities.

37

---

Critical Accounting Policies and Estimates

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, our disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reported
periods. We routinely evaluate these estimates, utilizing historical experience, consulting with experts and utilizing 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.

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. When 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. Accounts receivable
are written off if reasonable collection efforts are not successful.

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.

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.

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.

Land use rights– Land use rights are stated at cost less accumulated amortization. Amortization is charged using the straight-line method over the period of lease term.

Revenue recognition - The Company recognizes revenue on product sales when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an
arrangement exists and the sales price is fixed or determinable. Net sales of products represent the invoiced value of goods, net of value added taxes (“VAT”), sales returns, trade discounts and allowances. The Company is subject to VAT
which is levied on majority of the Company’s products at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the
invoiced value of purchases to the extent not refunded for export sales. Input VAT paid is recoverable from output VAT charged to customers.

Prior to January 1, 2009, the Company allows for exchange of goods that are near expiration. The Company provided for an allowance for return products since the Company has experienced returns in the normal course of business. Subsequent to January
1, 2009, the Company revised its sales contracts to disallow returns for sales made after January 1, 2009.

The Company treats temporary price reduction programs, merchandising fees, co-operative advertising and slotting expenses as a reduction in gross sales. The Company records the liability when pervasive evidence exists that the Company and the
customer or distributor have reached agreement and that an advertising action will result in an expense to the company in the near future. The liability is maintained until the customer takes the deduction against payments due. In
addition, in accordance with ASC 605-50 in accounting for customer payments and incentives, if the temporary price reduction recorded is in excess of gross sale for any retailer, the amount in excess will be recorded as selling expense.

38

---

Slotting fees - The Company accounts for slotting fees in accordance with ASC 605-50. ASC 605-50 requires that cash considerations, including sales incentives, given by a vendor to a customer is presumed to be a reduction of the selling
price, and therefore, should be characterized as a reduction to gross sales. This presumption is overcome and the consideration would be characterized as an expense incurred if the vendor receives an identifiable benefit in exchange for the
consideration and the fair value of that identifiable benefit can be reasonably estimated. Furthermore, if the consideration recorded is in excess of gross sale of any retailer, the amount in excess will be recorded as selling expense.

The Company treats one-time slotting fees paid to retails shops who are direct customers of the Company’s distributors as a reduction in gross sales.

Recent Accounting Pronouncements

In December 2010, FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.The amendments in this
Update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this Update modify Step 1 so
that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment
exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested
for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted.

Upon adoption of the amendments, any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of an adoption. Any goodwill impairments occurring after the initial adoption of the
amendments should be included in earnings. This standard is not currently applicable to the Company.

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820), Improving Disclosures about Fair Value Measurements. This update provides amendments to ASC Topic 820 that will provide more robust
disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This
standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material impact to the Company’s financial position or results of
operations.

In January 2010, FASB issued ASU No. 2010-05, Compensation – Stock Compensation (ASC Topic 718), Escrowed Share Arrangements and the Presumption of Compensation. This update codifies Emerging Issues Task Force D-110. This standard is
not currently applicable to the Company.

In January 2010, FASB issued ASU N0. 2010-01, Equity (ASC Topic 505), Accounting for Distributions to Shareholders with Components of Stock and Cash. The update clarifies that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected prospectively in earnings per share and is
not considered a stock dividend for purposes of ASC Topic 505 and Topic 260, Earnings Per Share. This standard is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis.
This standard is not currently applicable to the Company.

39

---

In April 2010 the FASB issued Accounting Standards Update (ASU) No. 2010-13, Compensation – Stock Compensation (ASC Topic 718), Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which
the Underlying Equity Security Trades. This Update provides amendments to Accounting Standards Codification (ASC) Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in
which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability
if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a
cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if
the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. This standard will be adopted as of April 1,2011 and the adoption of
this standard will not have a material impact to the financial statements.

In December 2010,FASB issued ASU No.2010-29 Business Combinations(Topic 805):Disclosure of Supplementary Pro Forma Information for Business Combinations.The amendments in this Update specify that if a public entity presents comparative financial
statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The
amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma
revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.The
Company intends to adopt the disclosure requirements for any business combinations after April 1, 2011. The adoption of this standard will not have any material impact to the Company's financial statements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Company’s consolidated audited financial statements for the year ended March 31, 2010, the five-month period ended March 31, 2010 and the year ended October 31, 2009 together with the report of the independent certified public accounting
firm thereon and the notes thereto, are presented beginning at page F-1 of this report.

40

---

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.  CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, Ms. Li Liu and Ms. Veronica Jing Chen, respectively, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure
controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports,
such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its
principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Ms. Li Liu and Ms. Veronica Jing Chen
concluded that as of March 31, 2011, our disclosure controls and procedures were not effective due to the significant deficiencies in our internal control over financial reporting for the period as disclosed below.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Exchange Act defines internal control over financial reporting
as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

- Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
- Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and directors; and
- Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of March 31, 2011. In making this assessment, management used the framework set forth in the report entitled Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii)
control activities, (iv) information and communication, and (v) monitoring.

41

---

Based on that evaluation, our management concluded that our internal controls over financial reporting as of March 31, 2011 were not effective due to the following significant deficiencies:

- Our internal audit function is significantly deficient due to insufficient qualified resources and appropriate system to perform such function. Therefore, our ability to prevent and control lapses and errors in our accounting function could not be
rendered effectively.
- Our current accounting staff is relatively inexperienced with respect to U.S. GAAP and needs substantial training to meet the higher demands of being a U.S. public company.

In order to correct the foregoing significant deficiencies, during the fiscal year 2011, we have taken and are taking the following remediation measures that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting:

- We have engaged a third party professional consultant, as announced on November 17, 2009, to assist us in assessing, improving and monitoring our internal control over financial reporting. We have been actively working with the external consultant
to assess our data collection, financial reporting, and control procedures and to strengthen our internal controls over financial reporting. As of March 31, 2011, they have completed the control tests and another round of control tests is expected
to be conducted by November 2011.
- We are committed to develop a comprehensive and risk-based internal audit function within the Company. Due to the scarcity of qualified candidates with extensive experience in U.S. GAAP reporting and accounting in the region, we have engaged an
external professional consultancy firm to assist the management in developing the internal audit system. At the same time, we have employed experienced staff with respect to U.S. GAAP-based reporting. We have enhanced our efforts to hire sufficient
internal audit resources with assistance from recruiters and through referrals.

In connection with the above remediation measures, we agreed to pay the third party professional consultant a service fee of approximately RMB0.7 million (approximately $0.11 million) for their assistance in the improvement of our internal
control over financial reporting. In addition, we hired five more staff to work in our Sarbanes-Oxley Act compliance department with an aggregate monthly salary of RMB17, 980 (approximately $2,700).

Our management is committed to improving our internal controls. We believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes
that our management deems appropriate to put effective controls in place.

Changes in Internal Control Over Financial Reporting

We will regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment.
Changes may include such activities as implementing new and more efficient systems, consolidating activities, and migrating processes.

Except as described above, during the fourth quarter of fiscal year ended March 31, 2011, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to affect materially, our
internal control over financial reporting.

ITEM 9B.  OTHER INFORMATION.

We have no information to disclose that was required to be disclosed in a report on Form 8-K during fourth quarter of fiscal year 2011, but was not reported.

42

---

PART III

ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.

Directors and Executive Officers

The following sets forth information about our directors and
executive officers as of the date of this report:

|NAME               | AGE | POSITION                            
|------------------ | --- | ------------------------------------
|Li Liu             | 52  | Chairperson, CEO and
      President
|Fung Shek          | 55  | Director and Vice President         
|Cili Yan           | 52  | Director                            
|Veronica Jing Chen | 45  | Chief Financial Officer             
|Kenneth Jue Lee    | 43  | Director                            
|Gang Sheng         | 37  | Director                            

Li Liu. Ms. Liu has been our Chairwoman, CEO and
President since the completion of the reverse acquisition of Charleston on June
6, 2008. Ms. Liu has also served as Chairwoman and General Manager of Milkgoat
China since 1994. Ms. Liu has extensive experience in operational management and
business development. Ms. Liu graduated with a medical degree from Tianjin
Medical University in 1983 and received her Executive MBA from Tshinghua
University, China in September 2006.

Fung Shek. Mr. Shek became our director and Vice
President on June 6, 2008. Mr. Shek has served as a Deputy General Manager of
Milkgoat China since 2000. As Deputy General Manager, he is responsible for
Milkgoat Chinas sales network and market development. He was formerly a
Director of Sales at P&G Taiwan. Mr. Shek graduated from University of
Massachusetts Boston.

Cili Yan. Ms. Yan became our director on June 6, 2008.
She is a committee member of the Tianjin Subcommission of the Chinese
Revolutionary Nationalist. Ms. Yan has been teaching at Tianjin Huanhu Secondary
School since 1999. She graduated from Tianjin Normal Specialized Postsecondary
College.

Veronica Jing Chen. Ms. Chen became our Chief Financial
Officer on February 24, 2010. Prior to joining us, Ms. Chen held Chief Financial
Officer positions at several NASDAQ listed Chinese companies, including China
Natural Gas, Inc., a company primarily involved in the distribution of
compressed natural gas in China, from May 2009 to January 2010, China Valves
Technology, Inc., a company engaged in the business of developing, manufacturing
and selling high-quality metal valves, from October 2008 to February 2009 and
Origin Agritech, Limited, a technology-focused crop seed company in China from
December 2007 to September 2008. Before that, she served as Senior Director of
Finance at iKang Healthcare, Inc., a leading healthcare management service
provider in China from December 2006 to November 2007, Director of Finance at
eLong, a Beijing-based online travel service provider from August 2001 to
November 2006, and Finance Manager of the North China Region for Eli Lilly
Asias China Representative Office, a global pharmaceutical company from
September 2000 to July 2001. Ms. Chen currently holds memberships with CPA
Australia and The National Institute of Accountants (MNIA) of Australia. She
received a degree of Doctor of Business Administration from Victoria University,
Neuchatel, Switzerland and an MBA degree from City University of Seattle,
Washington.

Kenneth Jue Lee. Mr. Lee became our director on June 16,
2009. Mr. Lee is a Principal at SAIF Partners, which is one of the largest and
most successful growth venture capital funds focused on China. He has about 15
years of experience across private equity investment, corporate finance, and
business development in China. Before becoming a member of the SAIF team in
2007, Mr. Lee had served as the CFO of Topsec Holdings, a leading domestic
network security company in China, from 2006 to 2007. From 2004 to 2005, he
worked as a Principal at RimAsia Capital Partners, an independent, pan-Asia
private equity firm established in 2004 with a deeply connected local presence
across Asia. Prior to RimAsia Capital Partners, Mr. Lee was with Delta
Associates  the exclusive advisor to Asia Equity Infrastructure Fund, CNK
Telecom, H&Q Asia Pacific, and Salomon Brothers in New York. Mr. Lee is a
graduate of Amherst College with a Bachelor of Arts degree in Philosophy.

Gang Sheng.Mr. Sheng became our director on June
16, 2009. Mr. Sheng is a Vice President at SAIF Partners. Prior to joining SAIF
Partners in 2007, Mr. Sheng was a director in investment banking with Latitude
Capital Group in Hong Kong
and Beijing from 2004 to 2007 where he executed cross-border mergers & acquisitions, private placement transactions for Chinese companies. From 2003 to 2004, Mr. Sheng worked as a Senior Investment Manager of China Digital TV Holdings Co., Ltd.
(NYSE:STV), a leading provider of conditional access systems to China’s expanding digital television market. Mr. Sheng holds a Bachelor’s degree in Economics from Renmin University of China and a MBA degree from Peking University.

43

---

In connection with the private placement transaction consummated on June 18, 2009, we, Global Rock, Ms. Liu, Mr. Shek and SAIF entered into a voting agreement, or the Voting Agreement, pursuant to which, among other things, the parties agreed to
vote, or cause to be voted, all shares owned by them, to ensure that (i) the size of our Board of Directors will be set and remain at five directors, which size can only be changed with first obtaining the approval of the holders of at least
two-thirds of the then outstanding shares of Series A Preferred Stock voting separately as a single class and (ii) two representatives designated by the holders of a majority of the outstanding shares of Series A Preferred Stock will be elected to
our Board of Directors. No director elected pursuant to the Voting Agreement may be removed without the vote or written consent of the stockholders entitled to designate such director pursuant to the Voting Agreement. In the event of the
resignation, death or disqualification of a director, the stockholders entitled to designate such director shall promptly nominate a new director and the parties to the Voting Agreement shall promptly vote his, her or its shares of capital stock of
the Company to elect such nominee to the Board of Directors.

The obligation of the parties to the Voting Agreement to vote, or cause to be voted, all shares owned by them to ensure that two representatives designated by the holders of a majority of the outstanding shares of Series A Preferred Stock will be
elected as our directors exists until the Voting Agreement is terminated by the parties. Other than a mutual termination, there is no specific termination date in the agreement and the voting arrangement is otherwise perpetual. Such obligation is
binding upon the successors in interest, heirs and assigns to any of the shares owned by the parties. On June 16, 2009, pursuant to the Voting Agreement, two representatives of SAIF, Mr. Lee and Mr. Sheng were elected as directors to our Board of
Directors.

Except as noted above, there is no other arrangement or understanding between any of our executive officers or directors and any other person pursuant to which such executive officer or director was or is to be selected as an officer or a director.
Directors are elected until their successors are duly elected and qualified.

Director Qualifications

Below is a summary of the qualifications, attributes, skills and experience of each of our directors that led us to the conclusion that such director should serve as a director of our Company, in light of our business and structure.

Ms. Li Liu

- Leadership and Management experience – founder of Milkgoat China and has been Milkgoat China’s Chairwoman since 1994 and the Company’s Chairwoman since 2008
- Education background – Medical degree from Tianjin Medical University and Executive MBA from Tsinghua University

Mr. Fung Shek

- Leadership and Management experience – has served as a Deputy General Manager of Milkgoat China since 2000 and the Company’s director and Vice President since 2008
- Education background – graduated from University of Massachusetts Boston

Ms. Cili Yan

• Leadership and Management experience – has been the Company’s director since 2008

Mr. Kenneth Jue Lee

- Leadership and Management experience – a Principal at SAIF Partners and served as the CFO of Topsec Holdings, a leading domestic network security company in China, from 2006 to 2007
- Education background - Bachelor’s degree in Philosophy from Amherst College

44

---

Mr. Sheng Gang

- Leadership and Management experience  a Vice President at SAIF Partners
  and severed as a Director in investment banking with Latitude Capital Group in
  Hong Kong and Beijing from 2004 to 2007
- Education background - Bachelors degree in Economics from Renmin
  University of China and MBA degree from Peking University.

Significant Employees

In addition to the foregoing named officers and directors, the
following employee is also key to our business and operations:

|NAME     | AGE | POSITION          
|-------- | --- | ------------------
|Bao Zhou | 35  | Marketing Director

Bao Zhou. Mr. Zhou has served as our Marketing Director
since May 11, 2010. Mr. Zhou is a seasoned executive with over 15 years of
experience in sales and marketing planning and execution, in addition to a solid
background in the dairy industry. From February 2008 to May 2010, Mr. Zhou was
Director of Sales Operations and Director of Strategic Planning at Xiamen
Huierkang Food Co., Ltd., a food and beverage supplier based in Southeast China
that is best known for its PET glucose beverage, rice pudding and peanut milk.
Before that, from April 2001 to September 2009, he successively served as Sales
Director at Milopo Nutrition (Shanghai) Corporation Ltd., General Manager, Milk
Powder Division at American Dairy, Inc. (NYSE: ADY), and National Sales Support
Manager at Mead Johnson Guangzhou Co., Ltd. Mr. Zhou has also had different
sales and marketing responsibilities at well-known multinational consumer
product companies such as Wrigley, Henkel, Pillsbury and Nestle in China. Mr.
Zhou obtained a Bachelors degree of Business English from Beijing Construction
University and an Executive MBA degree from Renmin University of China.

Board Composition and Committees

The board of directors is currently composed of five members,
Ms. Li Liu, Mr. Fung Shek, Ms. Cili Yan, Mr. Kenneth Jue Lee and Mr. Gang Sheng.
All Board action requires the approval of a majority of the directors in
attendance at a meeting at which a quorum is present.

We currently do not have standing audit, nominating or
compensation committees. Our board of directors handles the functions that would
otherwise be handled by each of the committees. We intend, however, to establish
an audit committee, a nominating committee and a compensation committee of the
board of directors as soon as practicable. We envision that the audit committee
will be primarily responsible for reviewing the services performed by our
independent auditors, evaluating our accounting policies and our system of
internal controls. The nominating committee would be primarily responsible for
nominating directors and setting policies and procedures for the nomination of
directors. The nominating committee would also be responsible for overseeing the
creation and implementation of our corporate governance policies and procedures.
The compensation committee will be primarily responsible for reviewing and
approving our compensation and benefit policies, including compensation of
executive officers.

Our board of directors has not made a determination as to
whether any member of our board is an audit committee financial expert. Upon the
establishment of an audit committee, the board will determine whether any of the
directors qualify as an audit committee financial expert.

Family Relationships

Other than the relationship between Fung Shek and Li Liu as
husband and wife, there is no family relationship among any of our officers or
directors.

Section 16(A) Beneficial Ownership Reporting Compliance

Under U.S. securities laws, directors, certain executive
officers and persons holding more than 10% of our common stock must report their
initial ownership of the common stock, and any changes in that ownership, to the
SEC. The SEC has designated specific due dates for these reports. Based solely
on our review of copies of such reports filed with the SEC by and written
representations of our directors and executive offers, we believe that our
directors and executive offers filed the required reports on time in 2011 fiscal
year.

45

---

Code of Ethics

Our board of directors has adopted a code of business conduct
and ethics that applies to all employees, officers and directors of us. The code
of ethics addresses, among other things, ethical conduct, conflicts of interest,
compliance with laws, regulations and policies, including disclosure
requirements under the federal securities laws, confidentiality, trading on
inside information, FCPA compliance and reporting of violations of the code. A
copy of the code of business conduct and ethics was filed as Exhibit 14.1 to our
Current Report on Form 8-K on January 28, 2011 and will be made available on our
website, www.milkgoatchina.com as soon as possible. Any amendments or
waivers to the code of ethics will be posted on our website within four business
days of such amendment or waiver.

Involvement in Certain Legal Proceedings

None of our directors or executive officers has, during the
past ten years:

- been convicted in a criminal proceeding or been subject to a pending
  criminal proceeding (excluding traffic violations and other minor offences);
- had any bankruptcy petition filed by or against the business or property
  of the person, or of any partnership, corporation or business association of
  which he was a general partner or executive officer, either at the time of the
  bankruptcy filing or within two years prior to that time;
- been subject to any order, judgment, or decree, not subsequently reversed,
  suspended or vacated, of any court of competent jurisdiction or federal or
  state authority, permanently or temporarily enjoining, barring, suspending or
  otherwise limiting, his involvement in any type of business, securities,
  futures, commodities, investment, banking, savings and loan, or insurance
  activities, or to be associated with persons engaged in any such activity;
- been found by a court of competent jurisdiction in a civil action or by
  the Securities and Exchange Commission or the Commodity Futures Trading
  Commission to have violated a federal or state securities or commodities law,
  and the judgment has not been reversed, suspended, or vacated;
- been the subject of, or a party to, any federal or state judicial or
  administrative order, judgment, decree, or finding, not subsequently reversed,
  suspended or vacated (not including any settlement of a civil proceeding among
  private litigants), relating to an alleged violation of any federal or state
  securities or commodities law or regulation, any law or regulation respecting
  financial institutions or insurance companies including, but not limited to, a
  temporary or permanent injunction, order of disgorgement or restitution, civil
  money penalty or temporary or permanent cease-and-desist order, or removal or
  prohibition order, or any law or regulation prohibiting mail or wire fraud or
  fraud in connection with any business entity; or
- been the subject of, or a party to, any sanction or order, not
  subsequently reversed, suspended or vacated, of any self-regulatory
  organization (as defined in Section 3(a)(26) of the Exchange Act, any
  registered entity (as defined in Section 1(a)(29) of the Commodity Exchange
  Act), or any equivalent exchange, association, entity or organization that has
  disciplinary authority over its members or persons associated with a member.

ITEM 11. EXECUTIVE COMPENSATION.Summary
Compensation Table

The following table sets forth information concerning all cash
and non-cash compensation awarded to, earned by or paid to the named persons for
services rendered in all capacities during the noted periods. No other executive
officer received total annual salary and bonus compensation in excess of
$100,000.

|                            |  |                                 |  |  | Salary  |  |  | Bonus |  |  | Total   | 
|--------------------------- |  | ------------------------------- |  |  | ------- |  |  | ----- |  |  | ------- | 
|Name and Principal Position |  | Period                          |  |  | ($)     |  |  | ($)   |  |  | ($)     | 
|Li Liu, CEO and President   |  | Year Ended March 31,
      2011 |  |  | 76,102  |  |  | -     |  |  | 76,102  | 
|                            |  | Year Ended March 31, 2010       |  |  | 65,827  |  |  | -     |  |  | 65,827  | 
|                            |  |                                 |  |  |         |  |  |       |  |  |         | 
|Veronica Jing Chen, CFO(1)  |  | Year Ended March 31, 2011       |  |  | 121,764 |  |  | -     |  |  | 121,764 | 
|                            |  | Year Ended March 31,
      2010 |  |  | 9,752   |  |  | -     |  |  | 9,752   | 

(1) Ms. Chen became our Chief Financial Officer on
February 24, 2010.

46

---

Narrative Disclosure to Executive Compensation

Our indirect subsidiary Milkgoat China entered into the
following employment agreements with our executive officers:

Milkgoat China entered into an employment agreement with our
CEO and President, Ms. Li Liu. Ms. Lius employment agreement has a three-year
term beginning on June 1, 2009 and ending on June 30, 2012. Ms. Lius employment
agreement provides for an annual salary of RMB 450,000 (approximately $65,828).
Ms. Liu is subject to customary non-competition and confidentiality covenants
under the agreement. The employment agreement does not entitle Ms. Liu to
severance payments or payments following a change in control. On June 1, 2010,
Milkgoat China entered into a supplemental employment agreement with Ms. Liu,
pursuant to which, effective on June 1, 2010, Ms. Liu's annual compensation was
increased to RMB 510,000 (approximately $75,000).

Milkgoat China entered into an employment agreement with our
Vice President Mr. Fung Shek. Mr. Sheks employment agreement has a three-year
term beginning on June 1, 2009 and ending on June 30, 2012. Mr. Sheks
employment agreement provides for an annual salary of RMB 350,000 (approximately
$51,200). Mr. Shek is subject to customary non-competition and confidentiality
covenants under the agreement. The employment agreement does not entitle Mr.
Shek to severance payments or payments following a change in control.

Milkgoat China entered into an employment agreement with our
CFO, Ms. Veronica Jing Chen. Ms. Chens employment agreement is for three years
commencing on February 24, 2010 and terminating on February 23, 2013. Ms. Chens
employment agreement provides for an annual salary of RMB 800,000 (approximately
$121,764). Ms. Chen is subject to customary non-competition and confidentiality
covenants under the agreement. The employment agreement does not entitle Ms.
Chen to severance payments or payments following a change in control.

Outstanding Equity Awards at Fiscal Year End

On May 31, 2010, we entered into separate Yayi International
Inc. 2010 Employee Stock Option and Stock Award Plan Award Agreements, or the
Option Agreements, with each of Ms. Veronica Jing Chen and Mr. Fung Shek. Under
the terms of the Option Agreements, we agreed to grant a stock option, at an
exercise price at $2.25 per share, to each of Ms. Chen and Mr. Shek for the
purchase of 250,000 shares of Common Stock and 106,000 shares of Common Stock,
respectively. According to the Option Agreements, 25% of the option granted to
each of Ms. Chen and Mr. Shek will vest on the first anniversary of the grant
date, and the balance will vest in equal quarterly installments over the next
three years on the last day of each quarter, subject to Ms. Chen's and Mr.
Shek's continuing employment with us through these dates.

The following table sets forth information concerning the
fiscal 2011 year-end value of unexercised options for Mr. Fung Shek and Ms.
Veronica Jing Chen. No other executive officers received unexercised options or
stock that has not vested or equity incentive plan awards that remained
outstanding as of the end of the fiscal year 2011.

|OUTSTANDING EQUITY AWARDS AT FISCAL
      YEAR-END | 
|-------------------------------------------------- | 
|                                                   | 
|Name                                               | 
|Fung Shek                                          | 
|Veronica Jing Chen                                 | 

47

---

Compensation of Directors

Except as disclosed below, no member of our board of directors
received any compensation for his or her service as a director during the fiscal
year ended March 31, 2011.

On June 11, 2010, we entered into an Option Agreement with Mr.
Kenneth Lee. Under the terms of the Option Agreement, we granted a stock option,
at an exercise price at $0.98 per share, to Mr. Lee for the purchase of 707,992
shares of Common Stock of the Company. According to the Option Agreement, the
option will fully vest after six months from the grant date. Pursuant to the
employment arrangement between Mr. Lee and SAIF, Mr. Lee is deemed to hold such
option for the benefit of SAIF.

|                |  |                |  |  |        |  |  |         |  |  | Non-Equity     |  |  |              |  |  |         | 
|--------------- |  | -------------- |  |  | ------ |  |  | ------- |  |  | -------------- |  |  | ------------ |  |  | ------- | 
|                |  | Fees Earned or |  |  | Stock  |  |  | Option  |  |  | Incentive Plan |  |  | All Other    |  |  |         | 
|                |  | Paid in Cash   |  |  | Awards |  |  | Awards  |  |  | Compensation   |  |  | Compensation |  |  | Total   | 
|Name            |  | ($)            |  |  | ($)    |  |  | ($)     |  |  | ($)            |  |  | ($)          |  |  | ($)     | 
|                |  |                |  |  |        |  |  |         |  |  |                |  |  |              |  |  |         | 
|Kenneth Jue Lee |  | -              |  |  | -      |  |  | 951,315 |  |  | -              |  |  | -            |  |  | 951,315 | 

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Security Ownership of Certain Beneficial Owners and
Management

The following table sets forth information regarding beneficial
ownership of our Common Stock as of June 28, 2011 (i) by each person who is
known by us to beneficially own more than 5% of our voting securities; (ii) by
each of our officers and directors; and (iii) by all of our officers and
directors as a group. Unless otherwise specified, the address of each of the
persons set forth below is in care of Yayi International Inc., No. 9 Xingguang
Road, Northern Industrial Park of Zhongbei Town, Xiqing District, Tianjin
300384, China.

|                                                                               |                                    | Shares Beneficially Owned(1)
|------------------------------------------------------------------------------ | ---------------------------------- | ----------------------------
|                                                                               |                                    | Common Stock(2)             
|                                                                               |                                    |                             
|Name &
      Address of Beneficial Owner                                       | Office,
      If Any               | Shares                      
|Directors and Officers                                                        
|Li Liu                                                                         | Chairperson, CEO &
      President | 15,024,725(5)(6)            
|Veronica Jing Chen                                                             | Chief Financial Officer            | 0                           
|Fung Shek                                                                      | Director                           | 15,024,725(5)(6)            
|Cili Yan                                                                       | Director                           | 1,000,160                   
|Kenneth Jue Lee                                                                | Director                           | 707,992(7)                  
|Gang Sheng                                                                     | Director                           | 0                           
|All Officers and Directors as a
      group 
    (6 persons
      named above) |                                    | 16,732,877                  
|5% Security Holders                                                           
|                                                                               |                                    | Shares Beneficially Owned(1)
|                                                                               |                                    | Common
      Stock(2)       
|                                                                               |                                    |                             
|Name of
      Beneficial Owner                                                 | Office,
      If Any               | Shares                      
|Global Rock Stone Industrial Ltd.                                              |                                    | 15,024,725(5)(6)            
|SAIF
      Partners III L.P.                                                   |                                    | 707,992(7)(8)               
|Andrew Y. Yan                                                                  |                                    | 707,992(7)(8)               

*Less than 1%

48

---

|(1) | Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole
voting power and investment power with respect to the shares of the Company’s stock. For each Beneficial Owner above, any options exercisable within 60 days have been included in the denominator.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(2) | Based on 26,454,558 shares of Common Stock issued and outstanding as of June 28, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(3) | Based on 1,530,612 shares of Series A Preferred Stock issued and outstanding as of June 28, 2011. Shares of Series A Preferred Stock are convertible, at the option of the holder thereof, at any time, into Common Stock on a 1-to-10
basis. Holders of Series A Preferred Stock vote with the holders of Common Stock on all matters on an as-converted to Common Stock basis. See “Description of Securities – Preference Shares” below for more information regarding our
Series A Preferred Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(4) | Percentage of Total Capital Stock represents total ownership with respect to all shares of our Common Stock and Series A Preferred Stock, as a single class and on an as-converted to Common Stock basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(5) | Including 15,024,725 shares of Common Stock indirectly held by her spouse, Mr. Fung Shek.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(6) | Includes 15,024,725 shares of Common Stock held by Global Rock. Mr. Shek is the sole shareholder and sole director of Global Rock and has voting and dispositive power over the shares held by Global Rock. Pursuant to a stock pledge
agreement, dated April 30, 2010, between Global Rock and SAIF Partners III L.P., or SAIF, Global Rock pledged 13,024,725 shares of Common Stock of the Company as security for certain obligations of the Company. In addition, pursuant to the Make Good
Escrow Agreement, dated September 27, 2010, Global Rock placed a total of 669,000 shares held by it into escrow that may be released to the investors in the event we do not meet the performance thresholds for the fiscal years 2011 and 2012 required
in the Make Good Escrow Agreement. The remaining 14,355,725 shares of Common Stock owned by Global Rock are subject to a lock up agreement with Euro Pacific, dated September 27, 2010 for a 90-day lock up period.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(7) | Includes an option to acquire 707,992 shares of Common Stock granted to Mr. Lee under our 2010 Employee Stock Option and Stock Award Plan, dated June 11, 2010. The option will fully vest after six months from the grant date.
Because Mr. Lee is an employee of SAIF and pursuant to the employment arrangement between Mr. Lee and SAIF, Mr. Lee is deemed to hold the reported option for the benefit of SAIF, and must exercise the option solely upon the direction of SAIF, which
is entitled to the shares issued upon exercise. SAIF may be deemed the indirect beneficial owner of the option and Mr. Lee may be deemed the indirect beneficial owner of the option through his employment arrangement with SAIF. Mr. Lee disclaims
beneficial ownership of the option except to the extent of his pecuniary interest therein.                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(8) | Andrew Y. Yan is the sole shareholder and sole director of SAIF III GP Capital Ltd., a limited liability entity formed under the laws of the Cayman Islands, the sole general partner of SAIF III GP, L.P., a limited partnership
formed under the laws of the Cayman Islands, which in turn is the sole general partner of SAIF Partners III L.P., a limited partnership formed under the laws of the Cayman Islands. Mr. Yan is deemed to have sole voting and dispositive powers with
respect to the securities held by SAIF Partners III L.P.                                                                                                                                                                                                                                                                                                                                                                                                                            

Changes in Control

There are no arrangements known to us, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of the Company.

49

---

Securities Authorized for Issuance Under Equity Compensation
Plans

The following table includes the information as of the end of
fiscal year 2011 for each category of our equity compensation plan:

|                                                                |                         |                      | Number of securities remaining
|--------------------------------------------------------------- | ----------------------- | -------------------- | ------------------------------
|                                                                | Number of securities to | Weighted-average     | available for future issuance 
|                                                                | be issued upon exercise | exercise price of    | under equity compensation     
|                                                                | of outstanding options, | outstanding options, | plans (excluding securities   
|                                                                | warrants and rights     | warrants and rights  | reflected in column (a))      
|Plan
      category                                             | (a)                     | (b)                  | (c)                           
|Equity compensation plans approved by
      security holders(1) | 1,521,092(2)            | $1.66                | 838,882                       
|Equity compensation plans not approved by security holders      | _                       | _                    | _                             
|Total                                                           |                         |                      |                               

|(1) | On May 31, 2010, our Board of Directors adopted the Plan.
      Up to 2,359,974 shares of common stock of the Company, (subject to
      adjustment as described in the Plan) may be issued under the Plan. The
      Plan permits the grant of Nonqualified Stock Options, Restricted Stock,
      and Incentive Stock to employees, officers, directors, and consultants of
      the Company and its subsidiaries. The Plan was approved by our
      shareholders on May 25, 2011.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(2) | Including options granted to our officers, director and
      certain employees under the Plan.                                                                                                                                                                                                                                                                                                                                                                                       

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.

Transactions with Related Persons

The following includes a summary of transactions since the
beginning of the 2010 fiscal year, or any currently proposed transaction, in
which we were or are to be a participant and the amount involved exceeded or
exceeds the lesser of $120,000 or one percent of the average of our total assets
at year-end for the last two completed fiscal years, and in which any related
person had or will have a direct or indirect material interest (other than
compensation described under Item 11 Executive Compensation).

- We have borrowed money from time to time from Li Liu, our chief executive
  officer. Such borrowings do not bear interest, are unsecured and have no
  stated maturity date. As of March 31, 2011, we owed her $3,531,966 in
  connection with these borrowings.
- On June 18, 2009, we entered into separate indemnification agreements with
  each of our directors, Mr. Kenneth Lee and Mr. Gang Sheng, or the
  Indemnification Agreements. Under the terms of the Indemnification Agreements,
  the Company agreed to indemnify each of Messrs. Lee and Sheng against
  expenses, judgments, fines, penalties or other amounts paid or incurred by
  them in connection with any proceeding unless Mr. Lee or Mr. Sheng committed
  (i) acts of active and deliberate dishonesty, (ii) with actual dishonest
  purpose and intent, and (iii) which acts were material to the cause of action
  so adjudicated.
- On April 30, 2010, we entered into a loan agreement with SAIF, or the Loan
  Agreement, pursuant to which the Company borrowed $3.0 million from SAIF. The
  loan has an interest rate of twelve percent (12%) per annum, calculated on the
  basis of the actual number of days elapsed during the relevant period and a
  360- day year. In addition, the entire principal amount of the loan and any
  accrued interest on the loan shall become fully due and payable on the date
  that is the earlier to occur of (i) the date that is six (6) months after the
  release of the principal of the loan, unless extended in the sole discretion
  of SAIF; and (ii) the acceleration of the maturity of the loan upon the
  occurrence of an Event of Default (as defined in the Loan Agreement), without
  further action on the part of SAIF. On the same day, to secure repayment by
  the Company of the loan, the Companys major shareholder, Global Rock executed
  in favor of SAIF a stock pledge agreement, pursuant to which Global Rock
  pledged 13,024,725 shares of Common Stock of the Company as security
for the obligations of the Company under the Loan Agreement. The loan was paid
off on September 30, 2010.

50

---

Except as set forth in our discussion above, none of our
directors, director nominees or executive officers has been involved in any
transactions with us or any of our directors, executive officers, affiliates or
associates which are required to be disclosed pursuant to the rules and
regulations of the SEC.

Promoters and Certain Control Persons

We did not have any promoters at any time during the past five
fiscal years.

Parents of the Company

Global Rock currently owns 56.8% of the outstanding common
stock of Yayi International Inc.

Director Independence

We currently do not have any independent directors, as the term
independent is defined by the rules of the NASDAQ Stock Market.

ITEM 14.     PRINCIPAL ACCOUNTING FEES AND SERVICES.

Independent Auditors Fees

The following is a summary of the fees billed to the Company by
its principal accountants for professional services rendered for the indicated
periods:

|                      |   | Year Ended     |  |   | Year Ended       | 
|--------------------- | - | -------------- |  | - | ---------------- | 
|                      |   | March 31, 2011 |  |   | October 31, 2009 | 
|Audit fees(1)         | $ | 189,000        |  | $ | 176,200          | 
|Audit-related fees(2) |   | 69,230         |  |   | 6,000            | 
|Tax fees              |   |                |  |   |                  | 
|All other fees        |   | 5,000          |  |   |                  | 
|                      |   |                |  |   |                  | 
|Total                 | $ | 263,230        |  | $ | 182,200          | 

|(1) | Audit Fees consisted of the aggregate fees billed or
      accrued for professional services rendered for the audit of our annual
      financial statements and the reviews of the financial statements included
      in our Forms 10-Q and for any other services that were normally provided
      in connection with our statutory and regulatory filings or
    engagements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                     
|(2) | Audit Related Fees consisted of the aggregate fees
      billed for professional services rendered for assurance and related
      services that were reasonably related to the performance of the audit or
      review of our financial statements and were not otherwise included in
      Audit Fees.                                                                         

Pre-Approval Policies and Procedures

Under the Sarbanes-Oxley Act of 2002, all audit and non-audit
services performed by our auditors must be approved in advance by our Board to
assure that such services do not impair the auditors independence from us. In
accordance with its policies and procedures, our Board pre-approved all of the
audit and non-audit service performed by Morison Cogen LLP for our consolidated
financial statements as of and for the year ended March 31, 2011.

51

---

PART IV

ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

Financial Statements and Schedules

The financial statements are set forth under Item 8 of this
annual report on Form 10-K. Financial statement schedules have been omitted
since they are either not required, not applicable, or the information is
otherwise included.

Exhibit List

The following exhibits are filed as part of this report or
incorporated by reference:

|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                 
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Agreement and Plan of Merger by and among Ardmore,
      Ardmore Acquisition Corp, Tryant LLC and Charleston Industrial Ltd.
      [incorporated by reference to Exhibit 2.1 to the Companys Current Report
      on Form 8-K filed on June 12, 2008].                                     
|            |  |                                                                                                                                                                                                                                                                                             
|3.1         |  | Amended and Restated Certificate of Incorporation
      [incorporated by reference to Exhibit 3.1 to the Companys Quarterly
      Report on Form 10-Q filed on September 22, 2008].                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                             
|3.2         |  | Amended and Restated Bylaws of the Company adopted on
      November 27, 2010 [incorporated by reference to Exhibit 3.1 to the
      Companys Current Report on Form 8-K filed on December 2, 2010].                                                                                       
|            |  |                                                                                                                                                                                                                                                                                             
|3.3         |  | Amended and Restated Certificate of Designation of Series
      A Preferred Stock, as filed with the Secretary of State of the State of
      Delaware on July 20, 2010 [incorporated by reference to Exhibit 3.1 to the
      Companys Current Report on Form 8-K filed on July 23, 2010].
|            |  |                                                                                                                                                                                                                                                                                             
|4.1         |  | Form of 9% Convertible Promissory Note [incorporated by
      reference to Exhibit 4.1 to the Companys Registration Statement on Form
      S-1 filed on March 2, 2011].                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                             
|4.2         |  | Form of Series A Warrant [incorporated by reference to
      Exhibit 4.2 to the Companys Current Report on Form 8-K filed on June 12,
      2008].                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                             
|4.3         |  | Form of Series B Warrant [incorporated by reference to
      Exhibit 4.3 to the Companys Current Report on Form 8-K filed on June 12,
      2008].                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                             
|4.4         |  | Form of Series C Warrant [incorporated by reference to
      Exhibit 4.4 to the Companys Current Report on Form 8-K filed on June 12,
      2008].                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                             
|4.5         |  | Form of Series D Warrant [incorporated by reference to
      Exhibit 4.5 to the Companys Quarterly Report on Form 10-Q filed on
      September 22, 2008].                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                             
|4.6         |  | Form of Series E Warrant [incorporated by reference to
      Exhibit 4.6 to the Companys Quarterly Report on Form 10-Q filed on
      September 22, 2008].                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                             
|4.7         |  | Form of Series F Common Stock Purchase Warrant
      [incorporated by reference to Exhibit 4.2 to the Companys Current Report
      on Form 8-K filed on October 1, 2010].                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                             
|10.1        |  | Form of Amended and Restated Securities Purchase
      Agreement dated as of May 12, 2008, by and among Ardmore and the investors
      signatories thereto [incorporated by reference to Exhibit 10.1 to the
      Companys Current Report on Form 8-K filed on June 12, 2008].           
|            |  |                                                                                                                                                                                                                                                                                             
|10.2        |  | Form of Registration Rights Agreement dated as of May 12,
      2008 [incorporated by reference to Exhibit 10.2 to the Companys Current
      Report on Form 8-K filed on June 12, 2008].                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                             
|10.3        |  | Lease Contract of Premises between Tianjin Milk Goat
      Dairy Co., Ltd. and Tianjin Yayi Industrial Co.,
Ltd. (Translation) [incorporated by reference to Exhibit 10.3
      to the Companys Current Report on Form 8-K filed on June 12,
  2008].                                      

52

---

|10.4  | Building Property Transfer Agreement between Tianjin Milk
      Goat Dairy Co., Ltd. and Tianjin Yayi Industrial Co, Ltd. (Translation)
      [incorporated by reference to Exhibit 10.4 to the Companys Current Report
      on Form 8-K filed on June 12, 2008].                                                                                                                               
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.5  | Project Construction Contract between Tianjin Yayi
      Industrial Co., Ltd. and the Peoples Government of Linwei District,
      Weinan City [incorporated by reference to Exhibit 10.5 to the Companys
      Quarterly Report on Form 10-Q filed on September 22, 2008].                                                                                                                     
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.6  | Supplementary Agreement to the Project Construction
      Contract dated July 25, 2008 between Tianjin Yayi Industrial Co., Ltd. and
      the Peoples Government of Linwei District, Weinan City [incorporated by
      reference to Exhibit 10.6 to the Companys Quarterly Report on Form 10-Q
      filed on September 22, 2008].                                                            
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.7  | Plant Transfer Contract dated September 26, 2008 between
      Tianjin Yayi and Tianjin Mengyang Biotechnology Co., Ltd. [incorporated by
      reference to Exhibit 10.7 to the Companys Annual Report on Form 10-K
      filed on February 13, 2009].                                                                                                                                          
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.8  | Supplementary Agreement dated October 12, 2008 between
      Tianjin Yayi and Tianjin Mengyang Biotechnology Co., Ltd. to the House
      Property Transfer Contract dated January 15, 2007 [incorporated by
      reference to Exhibit 10.8 to the Companys Annual Report on Form 10-K
      filed on February 13, 2009].                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.9  | Supplementary Agreement dated January 20, 2009 between
      Tianjin Yayi and Tianjin Mengyang Biotechnology Co., Ltd. to the Plant
      Transfer Contract dated September 26, 2008 [incorporated by reference to
      Exhibit 10.9 to the Companys Annual Report on Form 10-K filed on February
      13, 2009].                                                                              
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.10 | Short Term Loan Agreement for RMB 10 million with
      Shanghai Pudong Development Bank SPDB [incorporated by reference to
      Exhibit 10.10 to the Companys Quarterly Report on Form 10-Q filed on
      March 23, 2009].                                                                                                                                                                  
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.11 | Entrusted Loan Contract by and among SPDB, Tianjin Yayi
      Industrial Co., Ltd. and Tianjin Haitai Investment Guarantee Co., Ltd.
      [incorporated by reference to Exhibit 10.11 to the Companys Quarterly
      Report on Form 10-Q filed on March 23, 2009].                                                                                                                             
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.12 | Loan Contract between Tianjin Yayi Industrial Co., Ltd.
      and Tianjin Rural Cooperative Bank. [incorporated by reference to Exhibit
      10.12 to the Companys Quarterly Report on Form 10-Q filed on March 23,
      2009].                                                                                                                                                                
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.13 | Loan Contract for Operating Fund between Tianjin Yayi
      Industrial Co., Ltd. and Industrial & Commercial Bank of China.
      [incorporated by reference to Exhibit 10.13 to the Companys Quarterly
      Report on Form 10-Q filed on March 23, 2009].                                                                                                                                      
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.14 | Short Term Loan Agreement for RMB 10 million with
      Shanghai Pudong Development Bank [incorporated by reference to Exhibit
      10.10 to the Companys Current Report on Form 8-K filed on April 8,
      2009].                                                                                                                                                                             
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.15 | Series A Preferred Stock Purchase Agreement, by and among
      Yayi International Inc., Global Rock Stone Industrial Ltd, Charleston
      Industrial Ltd, Tianjin Yayi Industrial Co., Ltd., Li Liu, Fung Shek and
      SAIF Partners III L.P., dated June 18, 2009 [incorporated by reference to
      Exhibit 10.1 to the Companys Current Report on Form 8-K filed on June 19,
      2009].
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.16 | Investor and Registration Rights Agreement, by and among
      Yayi International Inc., Global Rock Stone Industrial Ltd, Li Liu, Fung
      Shek and SAIF Partners III L.P., dated June 18, 2009 [incorporated by
      reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed
      on June 19, 2009].                                                                      
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.17 | Voting Agreement, by and among Yayi International Inc.,
      Global Rock Stone Industrial Ltd, Li Liu, Fung Shek and SAIF Partners III
      L.P., dated June 18, 2009 [incorporated by reference to Exhibit 10.2 to
      the Companys Current Report on Form 8-K filed on June 19,
      2009].                                                                                               

53

---

|10.18 | Management Rights Agreement, by and between Yayi
      International Inc. and SAIF Partners III L.P., dated June 18, 2009
      [incorporated by reference to Exhibit 10.3 to the Companys Current Report
      on Form 8-K filed on June 19, 2009].                                                                     
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                           
|10.19 | Form of Indemnification Agreement [incorporated by
      reference to Exhibit 10.4 to the Companys Current Report on Form 8-K
      filed on June 19, 2009].                                                                                                                                                             
|      |                                                                                                                                                                                                                                                                                                                           
|10.20 | Termination and Release Agreement, by and among the
      Company, Global Rock and Allied Merit, dated July 8, 2009 [incorporated by
      reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
      filed on July 14, 2009].                                                                           
|      |                                                                                                                                                                                                                                                                                                                           
|10.21 | English Summary of Loan Agreement, by and between Tianjin
      Yayi and Rural Corporative Bank of Tianjin, dated May 22, 2009
      [incorporated by reference to Exhibit 10.1 to the Companys Quarterly
      Report on Form 10-Q filed on September 14, 2009].                                                        
|      |                                                                                                                                                                                                                                                                                                                           
|10.22 | English Summary of Comprehensive Credit Agreement, by and
      between Tianjin Yayi and Rural Corporative Bank of Tianjin, dated July 3,
      2009 [incorporated by reference to Exhibit 10.2 to the Companys Quarterly
      Report on Form 10-Q filed on September 14, 2009].                                        
|      |                                                                                                                                                                                                                                                                                                                           
|10.23 | English Translation of Zhuangli Construction Agreement,
      by and between Weinan Milkgoat and Zhuangli Construction Team, dated June
      10, 2009 [incorporated by reference to Exhibit 10.3 to the Companys
      Quarterly Report on Form 10-Q filed on September 14, 2009].                                      
|      |                                                                                                                                                                                                                                                                                                                           
|10.24 | English Translation of Qinzheng Construction Agreement,
      by and between Weinan Milkgoat and Fuping County Qinzheng Construction
      Engineering Corporation, dated July 2, 2009 [incorporated by reference to
      Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q filed on
      September 14, 2009].
|      |                                                                                                                                                                                                                                                                                                                           
|10.25 | Project Installation Agreement, by and between Shaanxi
      Milkgoat and Heilongjiang Tianhong, dated October 28, 2009 [incorporated
      by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
      filed on November 3, 2009].                                                                    
|      |                                                                                                                                                                                                                                                                                                                           
|10.26 | Form of Settlement Agreement, by and among the Company
      and the Investors, dated November 24, 2009 [incorporated by reference to
      Exhibit 10.1 to the Companys Current Report on Form 8-Kfiled on December
      1, 2009].                                                                                     
|      |                                                                                                                                                                                                                                                                                                                           
|10.27 | English Translation of Employment Agreement, dated
      February 24, 2010, by and between TianjinYayi Industrial Co. Ltd. and
      Veronica Chen [incorporated by reference to Exhibit 10.1 to the Companys
      Current Report on Form 8-K filed on March 2, 2010].                                                  
|      |                                                                                                                                                                                                                                                                                                                           
|10.28 | Loan Agreement, by and between the Company and SAIF
      Partners III L.P., dated April 30, 2010 [incorporated by reference to
      Exhibit 10.1 to the Companys Current Report on Form 8-K filed on May 6,
      2010].                                                                                               
|      |                                                                                                                                                                                                                                                                                                                           
|10.29 | Yayi International Inc. 2010 Employee Stock Option and
      Stock Award Plan [incorporated by reference to Exhibit 10.1 to the
      Companys Current Report on Form 8-K filed on May 31, 2010].                                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                           
|10.30 | Form of Yayi International Inc. 2010 Employee Stock
      Option and Stock Award Plan Award Agreement [incorporated by reference to
      Exhibit 10.2 to the Companys Current Report on Form 8-K filed on May 31,
      2010].                                                                                          
|      |                                                                                                                                                                                                                                                                                                                           
|10.31 | English Translation of Supplemental Employment Agreement,
      dated June 1, 2010, by and between Tianjin Yayi Industrial Co. Ltd. and Li
      Liu [incorporated by reference to Exhibit 10.3 to the Companys Current
      Report on Form 8-K filed on June 4, 2010].                                                 

54

---

|10.32 | English Translation of Licensing Agreement, dated April
      10, 2001, by and among Tianjin Yayi and Taiwan Richlink [incorporated by
      reference to Exhibit 10.31 to the Companys Annual Report on Form 10-K
      filed on June 29, 2010].                                                                                        
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                           
|10.33 | English Translation of Supplemental Agreement, dated June
      12, 2009, by and among Tianjin Yayi, Taiwan Richlink Enterprise Company
      Ltd. and Li Liu [incorporated by reference to Exhibit 10.32 to the
      Companys Annual Report on Form 10-K filed on June 29, 2010].                                                      
|      |                                                                                                                                                                                                                                                                                                                                           
|10.34 | English Translation of Supplemental Agreement, dated June
      12, 2009, by and between Tianjin Yayi and Tianjin Mengyang [incorporated
      by reference to Exhibit 10.33 to the Companys Annual Report on Form 10-K
      filed on June 29, 2010].                                                                                   
|      |                                                                                                                                                                                                                                                                                                                                           
|10.35 | English Translation of Form of Loan Agreement, dated June
      3, 2010, by and between Tianjin Yayi Industrial Co. Ltd. and Tianjin Rural
      Cooperative Bank, Kexin Branch [incorporated by reference to Exhibit 10.34
      to the Companys Annual Report on Form 10-K filed on June 29,
  2010].                                  
|      |                                                                                                                                                                                                                                                                                                                                           
|10.36 | English Translation of Shanghai Pudong Development Bank
      Working Capital Loan Agreement, dated July 30, 2010, by and between
      Tianjin Yayi and Shanghai Pudong Development Bank, Tianjin Branch
      [incorporated by reference to Exhibit 10.1 to the Companys Quarterly
      Report on Form 10-Q filed on August 16, 2010].
|      |                                                                                                                                                                                                                                                                                                                                           
|10.37 | English Translation of Purchase Agreement, dated May 24,
      2010, by and between Tianjin Yayi and Tianjin Jinhongji Import &
      Export Trading Co., Ltd [incorporated by reference to Exhibit 10.2 to the
      Companys Quarterly Report on Form 10-Q filed on August 16,
  2010].                                                
|      |                                                                                                                                                                                                                                                                                                                                           
|10.38 | English Translation of Construction Agreement, dated May
      25, 2010, by and between Tianjin Yayi and Tianjin Jinghai Power Co., Ltd.
      [incorporated by reference to Exhibit 10.3 to the Companys Quarterly
      Report on Form 10-Q filed on August 16, 2010].                                                                 
|      |                                                                                                                                                                                                                                                                                                                                           
|10.39 | English Translation of Agreement on GMP Cleaning Workshop
      Installation, dated May 26, 2010, by and between Tianjin Yayi and Tianjin
      Jinquan Co., Ltd. [incorporated by reference to Exhibit 10.4 to the
      Companys Quarterly Report on Form 10-Q filed on August 16,
  2010].                                            
|      |                                                                                                                                                                                                                                                                                                                                           
|10.40 | Form of Securities Purchase Agreement, dated September
      27, 2010, by and among the Company, the Investors and Euro Pacific
      Capital, Inc. as representative of the Investors [incorporated by
      reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
      filed on October 1, 2010].                      
|      |                                                                                                                                                                                                                                                                                                                                           
|10.41 | Make Good Escrow Agreement, dated September 27, 2010, by
      and among the Company, Global Rock Stone Industrial Ltd, Euro Pacific
      Capital, Inc. and Escrow, LLC [incorporated by reference to Exhibit 10.2
      to the Companys Current Report on Form 8-K filed on October 1,
    2010].                                      
|      |                                                                                                                                                                                                                                                                                                                                           
|10.42 | Form of Registration Rights Agreement, dated September
      27, 2010, by and among the Company, the Investors and Euro Pacific
      Capital, Inc. as representative of the Investors [incorporated by
      reference to Exhibit 10.3 to the Companys Current Report on Form 8-K
      filed on October 1, 2010].                      
|      |                                                                                                                                                                                                                                                                                                                                           
|10.43 | Closing Escrow Agreement, dated September 27, 2010, by
      and among the Company, Euro Pacific Capital, Inc. and Escrow, LLC
      [incorporated by reference to Exhibit 10.4 to the Companys Current Report
      on Form 8-K filed on October 1, 2010].                                                                              
|      |                                                                                                                                                                                                                                                                                                                                           
|10.44 | English Translation of Employment Agreement, dated May
      21, 2009, by and between Tianjin Yayi Industrial Co., Ltd. and Li Liu
      [incorporated by reference to Exhibit 10.44 to the Companys Registration
      Statement on Form S-1 filed on March 2, 2011]..**                                                                
|      |                                                                                                                                                                                                                                                                                                                                           
|10.45 | English Translation of Employment Agreement, dated May
      21, 2009, by and between Tianjin Yayi Industrial Co., Ltd. and Fung Shek
      [incorporated by reference to Exhibit 10.45 to the Companys Registration
      Statement on Form S-1 filed on March 2, 2011].**                                                              

55

---

|10.46 | Working Capital Loan Agreement, dated November 4, 2010,
      between Tianjin Yayi and Tianjin Bank, Shaoxing Dao Branch. [incorporated
      by reference to Exhibit 10.1 to the Companys Quarterly Report on Form
      10-Q filed on November 15, 2010].                                   
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                
|10.47 | English Translation of Form of Raw Goat Milk Supply
      Agreement [incorporated by reference to Exhibit 10.47 to the Companys
      Registration Statement on Form S-1 filed on March 2, 2011].                                                                                             
|      |                                                                                                                                                                                                                                                                                                
|10.48 | English Translation of Construction Agreement, dated June
      16, 2011, between Shaanxi Milkgoat Dairy Co., Ltd and China Tenth
      Metallurgical Group Corporation [incorporated by reference to Exhibit 10.1
      to the Companys Current Report on Form 8-K filed on June 22,
  2011].
|      |                                                                                                                                                                                                                                                                                                
|10.49 | English Translation of Working Capital Loan Agreement,
      dated June 10, 2011, between Milkgoat (China) Goat Dairy Co., Ltd. and
      Tianjin Rural Commercial Bank, High-Tech Branch.*                                                                                                    
|      |                                                                                                                                                                                                                                                                                                
|14.1  | Code of Business Conduct and Ethics [incorporated by
      reference to Exhibit 14.1 to the Companys Current Report on Form 8-K
      filed on January 28, 2011]                                                                                                                              
|      |                                                                                                                                                                                                                                                                                                
|21    | Subsidiaries of the registrant*                                                                                                                                                                                                                                                                
|      |                                                                                                                                                                                                                                                                                                
|23.1  | Consent of Morison Cogen LLP, Independent Registered
      Public Accounting Firm.*                                                                                                                                                                                                            
|      |                                                                                                                                                                                                                                                                                                
|31.1  | Certifications of Chief Executive Officer Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                   
|      |                                                                                                                                                                                                                                                                                                
|31.2  | Certifications of Chief Financial Officer Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                   
|      |                                                                                                                                                                                                                                                                                                
|32.1  | Certification of Chief Executive Officer Pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                    
|      |                                                                                                                                                                                                                                                                                                
|32.2  | Certification of Chief Financial Officer Pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                    

*Filed herewith. 
**Represents management contract or compensatory plan or
arrangement.

56

---

SIGNATURES

In accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereto duly authorized individual.

Date: June 29, 2011

YAYI INTERNATIONAL INC.

By:
	/s/ Li LiuLi LiuChief Executive OfficerBy:
	/s/ Veronica Jing ChenVeronica Jing ChenChief Financial Officer


In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.  Each person whose signature appears below hereby
authorizes Li Liu as attorneys-in-fact to sign on his or her behalf, individually, and in each capacity stated below, and to file all amendments and/or supplements to this annual report on Form 10-K.

|Signature              |  | Title                                              |  | Date         
|---------------------- |  | -------------------------------------------------- |  | -------------
|                       |  |                                                    |  |              
|/s/ Li Liu             |  | Chairperson, Chief Executive Officer and President |  | June 29, 2011
|Li Liu                 |  | (Principal Executive Officer)                      |  |              
|                       |  |                                                    |  |              
|/s/ Veronica Jing Chen |  | Chief Financial Officer                            |  | June 29, 2011
|Veronica Jing Chen     |  | (Principal Financial and Accounting Officer)       |  |              
|                       |  |                                                    |  |              
|/s/ Fung Shek          |  | Director and Vice President                        |  | June 29, 2011
|Fung Shek              |  |                                                    |  |              
|                       |  |                                                    |  |              
|/s/ Cili Yan           |  | Director                                           |  | June 29, 2011
|Cili Yan               |  |                                                    |  |              
|                       |  |                                                    |  |              
|/s/ Kenneth Jue Lee    |  | Director                                           |  | June 29, 2011
|Kenneth Jue Lee        |  |                                                    |  |              
|                       |  |                                                    |  |              
|/s/ Gang Sheng         |  | Director                                           |  | June 29, 2011
|Gang Sheng             |  |                                                    |  |              

---

EXHIBIT INDEX

|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                 
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Agreement and Plan of Merger by and among Ardmore,
      Ardmore Acquisition Corp, Tryant LLC and Charleston Industrial Ltd.
      [incorporated by reference to Exhibit 2.1 to the Companys Current Report
      on Form 8-K filed on June 12, 2008].                                     
|            |  |                                                                                                                                                                                                                                                                                             
|3.1         |  | Amended and Restated Certificate of Incorporation
      [incorporated by reference to Exhibit 3.1 to the Companys Quarterly
      Report on Form 10-Q filed on September 22, 2008].                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                             
|3.2         |  | Amended and Restated Bylaws of the Company adopted on
      November 27, 2010 [incorporated by reference to Exhibit 3.1 to the
      Companys Current Report on Form 8-K filed on December 2, 2010].                                                                                       
|            |  |                                                                                                                                                                                                                                                                                             
|3.3         |  | Amended and Restated Certificate of Designation of Series
      A Preferred Stock, as filed with the Secretary of State of the State of
      Delaware on July 20, 2010 [incorporated by reference to Exhibit 3.1 to the
      Companys Current Report on Form 8-K filed on July 23, 2010].
|            |  |                                                                                                                                                                                                                                                                                             
|4.1         |  | Form of 9% Convertible Promissory Note [incorporated by
      reference to Exhibit 4.1 to the Companys Registration Statement on Form
      S-1 filed on March 2, 2011].                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                             
|4.2         |  | Form of Series A Warrant [incorporated by reference to
      Exhibit 4.2 to the Companys Current Report on Form 8-K filed on June 12,
      2008].                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                             
|4.3         |  | Form of Series B Warrant [incorporated by reference to
      Exhibit 4.3 to the Companys Current Report on Form 8-K filed on June 12,
      2008].                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                             
|4.4         |  | Form of Series C Warrant [incorporated by reference to
      Exhibit 4.4 to the Companys Current Report on Form 8-K filed on June 12,
      2008].                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                             
|4.5         |  | Form of Series D Warrant [incorporated by reference to
      Exhibit 4.5 to the Companys Quarterly Report on Form 10-Q filed on
      September 22, 2008].                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                             
|4.6         |  | Form of Series E Warrant [incorporated by reference to
      Exhibit 4.6 to the Companys Quarterly Report on Form 10-Q filed on
      September 22, 2008].                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                             
|4.7         |  | Form of Series F Common Stock Purchase Warrant
      [incorporated by reference to Exhibit 4.2 to the Companys Current Report
      on Form 8-K filed on October 1, 2010].                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                             
|10.1        |  | Form of Amended and Restated Securities Purchase
      Agreement dated as of May 12, 2008, by and among Ardmore and the investors
      signatories thereto [incorporated by reference to Exhibit 10.1 to the
      Companys Current Report on Form 8-K filed on June 12, 2008].           
|            |  |                                                                                                                                                                                                                                                                                             
|10.2        |  | Form of Registration Rights Agreement dated as of May 12,
      2008 [incorporated by reference to Exhibit 10.2 to the Companys Current
      Report on Form 8-K filed on June 12, 2008].                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                             
|10.3        |  | Lease Contract of Premises between Tianjin Milk Goat
      Dairy Co., Ltd. and Tianjin Yayi Industrial Co., Ltd. (Translation)
      [incorporated by reference to Exhibit 10.3 to the Companys Current Report
      on Form 8-K filed on June 12, 2008].                                  
|            |  |                                                                                                                                                                                                                                                                                             
|10.4        |  | Building Property Transfer Agreement between Tianjin Milk
      Goat Dairy Co., Ltd. and Tianjin Yayi Industrial Co, Ltd. (Translation)
      [incorporated by reference to Exhibit 10.4 to the Companys Current Report
      on Form 8-K filed on June 12, 2008].                         
|            |  |                                                                                                                                                                                                                                                                                             
|10.5        |  | Project Construction Contract between Tainjin Yayi
      Industrial Co., Ltd. and the Peoples Government of Linwei District,
      Weinan City [incorporated by reference to Exhibit 10.5 to the Companys
      Quarterly Report on Form 10-Q filed on September 22, 2008].               

---

|10.6  | Supplementary Agreement to the Project Construction
      Contract dated July 25, 2008 between Tianjin Yayi Industrial Co., Ltd. and
      the Peoples Government of Linwei District, Weinan City [incorporated by
      reference to Exhibit 10.6 to the Companys Quarterly Report on Form 10-Q
      filed on September 22, 2008].                                                            
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.7  | Plant Transfer Contract dated September 26, 2008 between
      Tianjin Yayi and Tianjin Mengyang Biotechnology Co., Ltd. [incorporated by
      reference to Exhibit 10.7 to the Companys Annual Report on Form 10-K
      filed on February 13, 2009].                                                                                                                                          
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.8  | Supplementary Agreement dated October 12, 2008 between
      Tianjin Yayi and Tianjin Mengyang Biotechnology Co., Ltd. to the House
      Property Transfer Contract dated January 15, 2007 [incorporated by
      reference to Exhibit 10.8 to the Companys Annual Report on Form 10-K
      filed on February 13, 2009].                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.9  | Supplementary Agreement dated January 20, 2009 between
      Tianjin Yayi and Tianjin Mengyang Biotechnology Co., Ltd. to the Plant
      Transfer Contract dated September 26, 2008 [incorporated by reference to
      Exhibit 10.9 to the Companys Annual Report on Form 10-K filed on February
      13, 2009].                                                                              
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.10 | Short Term Loan Agreement for RMB 10 million with
      Shanghai Pudong Development Bank SPDB [incorporated by reference to
      Exhibit 10.10 to the Companys Quarterly Report on Form 10-Q filed on
      March 23, 2009].                                                                                                                                                                  
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.11 | Entrusted Loan Contract by and among SPDB, Tianjin Yayi
      Industrial Co., Ltd. and Tianjin Haitai Investment Guarantee Co., Ltd.
      [incorporated by reference to Exhibit 10.11 to the Companys Quarterly
      Report on Form 10-Q filed on March 23, 2009].                                                                                                                             
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.12 | Loan Contract between Tianjin Yayi Industrial Co., Ltd.
      and Tianjin Rural Cooperative Bank. [incorporated by reference to Exhibit
      10.12 to the Companys Quarterly Report on Form 10-Q filed on March 23,
      2009].                                                                                                                                                                
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.13 | Loan Contract for Operating Fund between Tianjin Yayi
      Industrial Co., Ltd. and Industrial & Commercial Bank of China.
      [incorporated by reference to Exhibit 10.13 to the Companys Quarterly
      Report on Form 10-Q filed on March 23, 2009].                                                                                                                                      
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.14 | Short Term Loan Agreement for RMB 10 million with
      Shanghai Pudong Development Bank [incorporated by reference to Exhibit
      10.10 to the Companys Current Report on Form 8-K filed on April 8,
      2009].                                                                                                                                                                             
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.15 | Series A Preferred Stock Purchase Agreement, by and among
      Yayi International Inc., Global Rock Stone Industrial Ltd, Charleston
      Industrial Ltd, Tianjin Yayi Industrial Co., Ltd., Li Liu, Fung Shek and
      SAIF Partners III L.P., dated June 18, 2009 [incorporated by reference to
      Exhibit 10.1 to the Companys Current Report on Form 8-K filed on June 19,
      2009].
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.16 | Investor and Registration Rights Agreement, by and among
      Yayi International Inc., Global Rock Stone Industrial Ltd, Li Liu, Fung
      Shek and SAIF Partners III L.P., dated June 18, 2009 [incorporated by
      reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed
      on June 19, 2009].                                                                      
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.17 | Voting Agreement, by and among Yayi International Inc.,
      Global Rock Stone Industrial Ltd, Li Liu, Fung Shek and SAIF Partners III
      L.P., dated June 18, 2009 [incorporated by reference to Exhibit 10.2 to
      the Companys Current Report on Form 8-K filed on June 19,
2009].                                                                                                     
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.18 | Management Rights Agreement, by and between Yayi
      International Inc. and SAIF Partners III L.P., dated June 18, 2009
      [incorporated by reference to Exhibit 10.3 to the Companys Current Report
      on Form 8-K filed on June 19, 2009].                                                                                                                                             
|      |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.19 | Form of Indemnification Agreement [incorporated by
      reference to Exhibit 10.4 to the Companys Current Report on Form 8-K
      filed on June 19, 2009].                                                                                                                                                                                                                                     

---

|10.20 | Termination and Release Agreement, by and among the
      Company, Global Rock and Allied Merit, dated July 8, 2009 [incorporated by
      reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
      filed on July 14, 2009].                                                                           
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                           
|10.21 | English Summary of Loan Agreement, by and between Tianjin
      Yayi and Rural Corporative Bank of Tianjin, dated May 22, 2009
      [incorporated by reference to Exhibit 10.1 to the Companys Quarterly
      Report on Form 10-Q filed on September 14, 2009].                                                        
|      |                                                                                                                                                                                                                                                                                                                           
|10.22 | English Summary of Comprehensive Credit Agreement, by and
      between Tianjin Yayi and Rural Corporative Bank of Tianjin, dated July 3,
      2009 [incorporated by reference to Exhibit 10.2 to the Companys Quarterly
      Report on Form 10-Q filed on September 14, 2009].                                        
|      |                                                                                                                                                                                                                                                                                                                           
|10.23 | English Translation of Zhuangli Construction Agreement,
      by and between Weinan Milkgoat and Zhuangli Construction Team, dated June
      10, 2009 [incorporated by reference to Exhibit 10.3 to the Companys
      Quarterly Report on Form 10-Q filed on September 14, 2009].                                      
|      |                                                                                                                                                                                                                                                                                                                           
|10.24 | English Translation of Qinzheng Construction Agreement,
      by and between Weinan Milkgoat and Fuping County Qinzheng Construction
      Engineering Corporation, dated July 2, 2009 [incorporated by reference to
      Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q filed on
      September 14, 2009].
|      |                                                                                                                                                                                                                                                                                                                           
|10.25 | Project Installation Agreement, by and between Shaanxi
      Milkgoat and Heilongjiang Tianhong, dated October 28, 2009 [incorporated
      by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
      filed on November 3, 2009].                                                                    
|      |                                                                                                                                                                                                                                                                                                                           
|10.26 | Form of Settlement Agreement, by and among the Company
      and the Investors, dated November 24, 2009 [incorporated by reference to
      Exhibit 10.1 to the Companys Current Report on Form 8-Kfiled on December
      1, 2009].                                                                                     
|      |                                                                                                                                                                                                                                                                                                                           
|10.27 | English Translation of Employment Agreement, dated
      February 24, 2010, by and between TianjinYayi Industrial Co. Ltd. and
      Veronica Chen [incorporated by reference to Exhibit 10.1 to the Companys
      Current Report on Form 8-K filed on March 2, 2010].                                                  
|      |                                                                                                                                                                                                                                                                                                                           
|10.28 | Loan Agreement, by and between the Company and SAIF
      Partners III L.P., dated April 30, 2010 [incorporated by reference to
      Exhibit 10.1 to the Companys Current Report on Form 8-K filed on May 6,
      2010].                                                                                               
|      |                                                                                                                                                                                                                                                                                                                           
|10.29 | Yayi International Inc. 2010 Employee Stock Option and
      Stock Award Plan [incorporated by reference to Exhibit 10.1 to the
      Companys Current Report on Form 8-K filed on May 31, 2010].                                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                           
|10.30 | Form of Yayi International Inc. 2010 Employee Stock
      Option and Stock Award Plan Award Agreement [incorporated by reference to
      Exhibit 10.2 to the Companys Current Report on Form 8-K filed on May 31,
      2010].                                                                                          
|      |                                                                                                                                                                                                                                                                                                                           
|10.31 | English Translation of Supplemental Employment Agreement,
      dated June 1, 2010, by and between Tianjin Yayi Industrial Co. Ltd. and Li
      Liu [incorporated by reference to Exhibit 10.3 to the Companys Current
      Report on Form 8-K filed on June 4, 2010].                                                 
|      |                                                                                                                                                                                                                                                                                                                           
|10.32 | English Translation of Licensing Agreement, dated April
      10, 2001, by and among Tianjin Yayi and Taiwan Richlink [incorporated by
      reference to Exhibit 10.31 to the Companys Annual Report on Form 10-K
      filed on June 29, 2010].                                                                        
|      |                                                                                                                                                                                                                                                                                                                           
|10.33 | English Translation of Supplemental Agreement, dated June
      12, 2009, by and among Tianjin Yayi, Taiwan Richlink Enterprise Company
      Ltd. and Li Liu [incorporated by reference to Exhibit 10.32 to the
      Companys Annual Report on Form 10-K filed on June 29, 2010].                                      
|      |                                                                                                                                                                                                                                                                                                                           
|10.34 | English Translation of Supplemental Agreement, dated June
      12, 2009, by and between Tianjin Yayi and Tianjin Mengyang [incorporated by reference to Exhibit
      10.33 to the Companys Annual Report on Form 10-K filed on June 29,
      2010].                                                                   

---

|10.35 | English Translation of Form of Loan Agreement, dated June
      3, 2010, by and between Tianjin Yayi Industrial Co. Ltd. and Tianjin Rural
      Cooperative Bank, Kexin Branch [incorporated by reference to Exhibit 10.34
      to the Companys Annual Report on Form 10-K filed on June 29,
  2010].                                  
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                           
|10.36 | English Translation of Shanghai Pudong Development Bank
      Working Capital Loan Agreement, dated July 30, 2010, by and between
      Tianjin Yayi and Shanghai Pudong Development Bank, Tianjin Branch
      [incorporated by reference to Exhibit 10.1 to the Companys Quarterly
      Report on Form 10-Q filed on August 16, 2010].
|      |                                                                                                                                                                                                                                                                                                                                           
|10.37 | English Translation of Purchase Agreement, dated May 24,
      2010, by and between Tianjin Yayi and Tianjin Jinhongji Import &
      Export Trading Co., Ltd [incorporated by reference to Exhibit 10.2 to the
      Companys Quarterly Report on Form 10-Q filed on August 16,
  2010].                                                
|      |                                                                                                                                                                                                                                                                                                                                           
|10.38 | English Translation of Construction Agreement, dated May
      25, 2010, by and between Tianjin Yayi and Tianjin Jinghai Power Co., Ltd.
      [incorporated by reference to Exhibit 10.3 to the Companys Quarterly
      Report on Form 10-Q filed on August 16, 2010].                                                                 
|      |                                                                                                                                                                                                                                                                                                                                           
|10.39 | English Translation of Agreement on GMP Cleaning Workshop
      Installation, dated May 26, 2010, by and between Tianjin Yayi and Tianjin
      Jinquan Co., Ltd. [incorporated by reference to Exhibit 10.4 to the
      Companys Quarterly Report on Form 10-Q filed on August 16,
  2010].                                            
|      |                                                                                                                                                                                                                                                                                                                                           
|10.40 | Form of Securities Purchase Agreement, dated September
      27, 2010, by and among the Company, the Investors and Euro Pacific
      Capital, Inc. as representative of the Investors [incorporated by
      reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
      filed on October 1, 2010].                      
|      |                                                                                                                                                                                                                                                                                                                                           
|10.41 | Make Good Escrow Agreement, dated September 27, 2010, by
      and among the Company, Global Rock Stone Industrial Ltd, Euro Pacific
      Capital, Inc. and Escrow, LLC [incorporated by reference to Exhibit 10.2
      to the Companys Current Report on Form 8-K filed on October 1,
    2010].                                      
|      |                                                                                                                                                                                                                                                                                                                                           
|10.42 | Form of Registration Rights Agreement, dated September
      27, 2010, by and among the Company, the Investors and Euro Pacific
      Capital, Inc. as representative of the Investors [incorporated by
      reference to Exhibit 10.3 to the Companys Current Report on Form 8-K
      filed on October 1, 2010].                      
|      |                                                                                                                                                                                                                                                                                                                                           
|10.43 | Closing Escrow Agreement, dated September 27, 2010, by
      and among the Company, Euro Pacific Capital, Inc. and Escrow, LLC
      [incorporated by reference to Exhibit 10.4 to the Companys Current Report
      on Form 8-K filed on October 1, 2010].                                                                              
|      |                                                                                                                                                                                                                                                                                                                                           
|10.44 | English Translation of Employment Agreement, dated May
      21, 2009, by and between Tianjin Yayi Industrial Co., Ltd. and Li Liu
      [incorporated by reference to Exhibit 10.44 to the Companys Registration
      Statement on Form S-1 filed on March 2, 2011]..**                                                                
|      |                                                                                                                                                                                                                                                                                                                                           
|10.45 | English Translation of Employment Agreement, dated May
      21, 2009, by and between Tianjin Yayi Industrial Co., Ltd. and Fung Shek
      [incorporated by reference to Exhibit 10.45 to the Companys Registration
      Statement on Form S-1 filed on March 2, 2011].**                                                              
|      |                                                                                                                                                                                                                                                                                                                                           
|10.46 | Working Capital Loan Agreement, dated November 4, 2010,
      between Tianjin Yayi and Tianjin Bank, Shaoxing Dao Branch. [incorporated
      by reference to Exhibit 10.1 to the Companys Quarterly Report on Form
      10-Q filed on November 15, 2010].                                                                              
|      |                                                                                                                                                                                                                                                                                                                                           
|10.47 | English Translation of Form of Raw Goat Milk Supply
      Agreement [incorporated by reference to Exhibit 10.47 to the Companys
      Registration Statement on Form S-1 filed on March 2, 2011].                                                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                                           
|10.48 | English Translation of Construction Agreement, dated June
      16, 2011, between Shaanxi Milkgoat Dairy Co., Ltd and China Tenth
      Metallurgical Group Corporation [incorporated by reference to Exhibit 10.1
      to the Companys Current Report on Form 8-K filed on June 22,
      2011].                                       

---

|10.49 | English Translation of Working Capital Loan Agreement,
      dated June 10, 2011, between Milkgoat (China) Goat Dairy Co., Ltd. and
      Tianjin Rural Commercial Bank, High-Tech Branch.*
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                            
|14.1  | Code of Business Conduct and Ethics [incorporated by
      reference to Exhibit 14.1 to the Companys Current Report on Form 8-K
      filed on January 28, 2011]                          
|      |                                                                                                                                                                                            
|21    | Subsidiaries of the registrant*                                                                                                                                                            
|      |                                                                                                                                                                                            
|23.1  | Consent of Morison Cogen LLP, Independent Registered
      Public Accounting Firm.*                                                                                                        
|      |                                                                                                                                                                                            
|31.1  | Certifications of Chief Executive Officer Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                               
|      |                                                                                                                                                                                            
|31.2  | Certifications of Chief Financial Officer Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                               
|      |                                                                                                                                                                                            
|32.1  | Certification of Chief Executive Officer Pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002. *                                                                                
|      |                                                                                                                                                                                            
|32.2  | Certification of Chief Financial Officer Pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002. *                                                                                

*Filed herewith. 
**Represents management contract or compensatory plan or
arrangement.

---

|YAYI INTERNATIONAL INC. AND SUBSIDIARIES                                    |     
|--------------------------------------------------------------------------- | ----
|FOR THE YEARS ENDED MARCH 31, 2011 AND 2010                                 |     
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                  |     
|                                                                            | Page
|Report of Independent Registered
      Public Accounting Firm               | F-2 
|Consolidated Balance Sheets                                                 | F-3 
|Consolidated Statements of
      Operations and Comprehensive Income (Loss) | F-5 
|Consolidated Statements of Stockholders Equity                             | F-6 
|Consolidated Statements of Cash
      Flows                                 | F-7 
|Notes to Consolidated Financial Statements                                  | F-9 

F-1

---

Report of Independent Registered Public Accounting Firm

To the Board of Directors and  
Stockholders of Yayi International Inc.

We have audited the accompanying consolidated balance sheets of Yayi International Inc. (“the Company”) as of March 31, 2011 and 2010, and the related consolidated statements of operations and  comprehensive income (loss), stockholders'
equity and cash flows for the year ended March 31, 2011, the five-month period ended March 31, 2010 and the year ended October 31, 2009. The Company’s management is responsible for these financial statements.  Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we
express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2011 and 2010, and the consolidated results of their operations and their cash
flows for the year ended March 31, 2011, the five-month period ended March 31, 2010 and the year ended October 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

/s/Morison Cogen LLP 
Bala Cynwyd, Pennsylvania
June 29, 2011

F-2

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES 
CONSOLIDATED
BALANCE SHEETS

|                                                                    |   | March 31 2011 |  |   | March 31 2010 | 
|------------------------------------------------------------------- | - | ------------- |  | - | ------------- | 
|                                                                    |   |               |  |   |               | 
|                                                                    |   |               |  |   |               | 
|ASSETS                                                              |  
|Current assets:                                                     |   |               |  |   |               | 
|Cash and cash
      equivalents                                     | $ | 13,360,392    |  | $ | 4,727,677     | 
|Restricted cash                                                     |   | 1,412,404     |  |   | 28,314        | 
|Accounts receivable,
      net of allowances of $72,036 and $53,771 |   | 4,776,780     |  |   | 3,530,937     | 
|Other receivable, net of allowances of
      $43,230 and $22,833    |   | 574,383       |  |   | 598,170       | 
|Inventories, net of
      allowances of $0 and $0                   |   | 3,885,481     |  |   | 2,561,265     | 
|Prepaid expenses                                                    |   | 309,894       |  |   | 121,523       | 
|Land use rights -
      current portion                             |   | 19,611        |  |   | 18,847        | 
|Advances                                                            |   | 900,033       |  |   | 1,560,743     | 
|Deferred tax asset 
      current portion                          |   | 374,124       |  |   | -             | 
|Deferred financing cost - current
      portion                     |   | 159,496       |  |   | -             | 
|Total current assets                                                |   | 25,772,598    |  |   | 13,147,476    | 
|                                                                    |   |               |  |   |               | 
|Property, plant and
      equipment, net                            |   | 8,063,507     |  |   | 6,505,130     | 
|Livestock, net                                                      |   | 563,402       |  |   | 659,584       | 
|Goodwill                                                            |   | 289,643       |  |   | 278,372       | 
|Land use rights                                                     |   | 942,939       |  |   | 923,525       | 
|Advances on property,
      plant and equipment                     |   | 19,063,439    |  |   | 17,816,135    | 
|Deferred tax asset                                                  |   | 31,225        |  |   | 472,889       | 
|Deferred financing cost                                             |   | 867,552       |  |   | -             | 
|                                                                    |   |               |  |   |               | 
|Total assets                                                        | $ | 55,594,305    |  | $ | 39,803,111    | 
|                                                                    |   |               |  |   |               | 
|                                                                    |   |               |  |   |               | 
|LIABILITIES AND STOCKHOLDERS
      EQUITY                          |  
|Current liabilities:                                                |   |               |  |   |               | 
|Short term loans                                                    | $ | 10,654,328    |  | $ | 6,704,406     | 
|Accounts payable                                                    |   | 884,407       |  |   | 662,120       | 
|Other payable and accrued expenses                                  |   | 3,172,782     |  |   | 1,257,185     | 
|Advance from customers                                              |   | 90,232        |  |   | 141,136       | 
|Income and other tax payable                                        |   | 1,214,494     |  |   | 1,338,194     | 
|Accrued sales return                                                |   | -             |  |   | 45,503        | 
|Long term loans - current portion                                   |   | 17,697        |  |   | 40,823        | 
|Total current liabilities                                           |   | 16,033,940    |  |   | 10,189,367    | 
|                                                                    |   |               |  |   |               | 
|Long-term liabilities:                                              |   |               |  |   |               | 
|Due to shareholders                                                 |   | 5,450,233     |  |   | 5,312,801     | 
|Derivative liabilities                                              |   | 1,776,400     |  |   | -             | 
|Convertible notes, net of discount of
      $3,858,839 and $0       |   | 5,061,161     |  |   | -             | 
|Accrued expenses - non
      current portion                        |   | 473,283       |  |   | -             | 
|Long-term loans                                                     |   | -             |  |   | 17,009        | 
|                                                                    |   | 12,761,077    |  |   | 5,329,810     | 
|                                                                    |   |               |  |   |               | 
|Total liabilities                                                   |   | 28,795,017    |  |   | 15,519,177    | 
|                                                                    |   |               |  |   |               | 
|Commitments and contingencies (Note
      18)                       |   | -             |  |   | -             | 

F-3

---

|PREFERRED STOCK, par value $0.001,
      10,000,000 shares authorized, Series A 10% non-cumulative redeemable
      convertible preferred stock, redemption $9.80 per share plus 25% interest
      from date of issuance to date of redemption, 1,530,612 shares issued and
      outstanding |   | 15,745,165 |  |   | 14,264,871 | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------- |  | - | ---------- | 
|                                                                                                                                                                                                                                                                                               |   |            |  |   |            | 
|STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                                           |   |            |  |   |            | 
|                                                                                                                                                                                                                                                                                               |   |            |  |   |            | 
|Common stock, par value $0.001, 100,000,000
      shares authorized, 26,454,558 and 26,387,728 shares issued and
      outstanding, respectively                                                                                                                                               |   | 26,454     |  |   | 26,387     | 
|Additional paid-in capital                                                                                                                                                                                                                                                                     |   | 5,840,290  |  |   | 4,721,337  | 
|Statutory surplus reserve fund                                                                                                                                                                                                                                                                 |   | 1,142,397  |  |   | 1,142,397  | 
|Retained earning                                                                                                                                                                                                                                                                               |   | 2,529,601  |  |   | 3,821,100  | 
|Accumulated other comprehensive
      income                                                                                                                                                                                                                                                   |   | 1,515,381  |  |   | 307,842    | 
|                                                                                                                                                                                                                                                                                               |   |            |  |   |            | 
|Total stockholders equity                                                                                                                                                                                                                                                                     |   | 11,054,123 |  |   | 10,019,063 | 
|                                                                                                                                                                                                                                                                                               |   |            |  |   |            | 
|Total liabilities and stockholders'
      equity                                                                                                                                                                                                                                               | $ | 55,594,305 |  | $ | 39,803,111 | 

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

F-4

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME

|                                                                 |   | Year ended March 31, |   |   | Five months ended March
      31, |   |   | Year ended October 31, |  
|---------------------------------------------------------------- | - | -------------------- | - | - | --------------------------------- | - | - | ---------------------- | -
|                                                                 |   | 2011                 |   |   | 2010                              |   |   | 2009                   |  
|                                                                 |   |                      |   |   |                                   |   |   | (unaudited)            |  
|Net sales                                                        | $ | 26,909,879           |   | $ | 6,085,193                         |   | $ | 9,283,420              |  
|                                                                 |   |                      |   |   |                                   |   |   |                        |  
|Cost of goods sold                                               |   | (10,075,452          | ) |   | (2,369,642                        | ) |   | (2,892,709             | )
|                                                                 |   |                      |   |   |                                   |   |   |                        |  
|Gross profit                                                     |   | 16,834,427           |   |   | 3,715,551                         |   |   | 6,390,711              |  
|                                                                 |   |                      |   |   |                                   |   |   |                        |  
|Operating expenses:                                              |   |                      |   |   |                                   |   |   |                        |  
|Sales and marketing expenses                                     |   | (12,353,238          | ) |   | (3,908,573                        | ) |   | (1,973,212             | )
|General and administrative expenses                              |   | (4,304,356           | ) |   | (1,318,077                        | ) |   | (685,843               | )
|                                                                 |   |                      |   |   |                                   |   |   |                        |  
|Total operating expenses                                         |   | (16,657,594          | ) |   | (5,226,650                        | ) |   | (2,659,055             | )
|                                                                 |   |                      |   |   |                                   |   |   |                        |  
|(Loss) income from operations                                    |   | 176,833              |   |   | (1,511,099                        | ) |   | 3,731,656              |  
|                                                                 |   |                      |   |   |                                   |   |   |                        |  
|Other income (expenses):                                         |   |                      |   |   |                                   |   |   |                        |  
|Interest income                                                  |   | 19,909               |   |   | 8,250                             |   |   | 2,902                  |  
|Interest expenses                                                |   | (2,195,219           | ) |   | (221,549                          | ) |   | (359,014               | )
|Amortization of deferred debt issuance cost                      |   | -                    |   |   | (91,227                           | ) |   | (333,160               | )
|Amortization of deferred financing costs
      and debt discount |   | (957,865             | ) |   | -                                 |   |   | -                      |  
|Change in fair value of derivative liabilities                   |   | 2,771,080            |   |   | -                                 |   |   | -                      |  
|Warrant modification expense                                     |   | -                    |   |   | (88,500                           | ) |   | -                      |  
|Liquidated damages                                               |   | -                    |   |   | -                                 |   |   | -                      |  
|Expense on make good provision                                   |   | (205,683             | ) |   | -                                 |   |   | -                      |  
|Registration penalties                                           |   | (267,600             | ) |   | -                                 |   |   | -                      |  
|Other (expenses) income                                          |   | (164,868             | ) |   | 12,237                            |   |   | 2,394                  |  
|                                                                 |   |                      |   |   |                                   |   |   |                        |  
|(Loss) income before income tax                                  |   | (823,413             | ) |   | (1,891,888                        | ) |   | 3,044,778              |  
|                                                                 |   |                      |   |   |                                   |   |   |                        |  
|Income tax benefit (expenses)                                    |   | (468,086             | ) |   | 289,093                           |   |   | (869,614               | )
|                                                                 |   |                      |   |   |                                   |   |   |                        |  
|Net (loss) income from operations                                |   | (1,291,499           | ) |   | (1,602,795                        | ) |   | 2,175,164              |  
|                                                                 |   |                      |   |   |                                   |   |   |                        |  
|Other comprehensive income                                       |   |                      |   |   |                                   |   |   |                        |  
|Foreign currency translation adjustment                          |   | 1,207,539            |   |   | 6,039                             |   |   | (44,791                | )
|                                                                 |   |                      |   |   |                                   |   |   |                        |  
|Comprehensive (loss) income                                      | $ | (83,960              | ) | $ | (1,596,756                        | ) | $ | 2,130,373              |  
|                                                                 |   |                      |   |   |                                   |   |   |                        |  
|(Loss) earnings per share of common stock                        |   |                      |   |   |                                   |   |   |                        |  
|- Basic                                                          | $ | (0.05                | ) | $ | (0.06                             | ) | $ | 0.09                   |  
|- Diluted                                                        | $ | (0.05                | ) | $ | (0.06                             | ) | $ | 0.09                   |  
|Weighted average shares of common stock
      outstanding        |   |                      |   |   |                                   |   |   |                        |  
|- Basic                                                          |   | 26,438,125           |   |   | 26,017,835                        |   |   | 25,000,000             |  
|- Diluted                                                        |   | 26,438,125           |   |   | 26,017,835                        |   |   | 25,000,000             |  

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

F-5

---

YAYI INTERNATIONAL INC. AND
SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

|                                                                                                 |  |              |  |   |            |  |   |           |   |   | Statutory |  |   |            |   |   | Accumulated   |  |   |               |  
|------------------------------------------------------------------------------------------------ |  | ------------ |  | - | ---------- |  | - | --------- | - | - | --------- |  | - | ---------- | - | - | ------------- |  | - | ------------- | -
|                                                                                                 |  | Common stock |  |   | Additional |  |   | Surplus   |   |   |           |  |   | Other      |   |   | Total         | 
|                                                                                                 |  | Number of    |  |   |            |  |   | paid-in   |   |   | Reserve   |  |   | Retained   |   |   | Comprehensive |  |   | Stockholders |  
|                                                                                                 |  | shares       |  |   | Amount     |  |   | capital   |   |   | Fund      |  |   | Earnings   |   |   | Income        |  |   | Equity        |  
|                                                                                                 |  |              |  |   |            |  |   |           |   |   |           |  |   |            |   |   |               |  |   |               |  
|Balance at October 31, 2009                                                                      |  | 25,000,000   |  | $ | 25,000     |  | $ | 3,234,224 |   | $ | 1,142,397 |  | $ | 5,423,895  |   | $ | 301,803       |  | $ | 10,127,319    |  
|                                                                                                 |  |              |  |   |            |  |   |           |   |   |           |  |   |            |   |   |               |  |   |               |  
|Conversion of convertible notes and accrued
      interest into 1,296,274 shares of common stock |  | 1,296,274    |  |   | 1,296      |  |   | 1,398,704 |   |   | -         |  |   | -          |   |   | -             |  |   | 1,400,000     |  
|                                                                                                 |  |              |  |   |            |  |   |           |   |   |           |  |   |            |   |   |               |  |   |               |  
|Warrant modification expense                                                                     |  | -            |  |   | -          |  |   | 88,500    |   |   | -         |  |   | -          |   |   | -             |  |   | 88,500        |  
|                                                                                                 |  |              |  |   |            |  |   |           |   |   |           |  |   |            |   |   |               |  |   |               |  
|Cashless exercise of 110,000 Series D
      Warrants into 78,432 shares of common stock          |  | 78,432       |  |   | 78         |  |   | (78       | ) |   | -         |  |   | -          |   |   | -             |  |   | -             |  
|                                                                                                 |  |              |  |   |            |  |   |           |   |   |           |  |   |            |   |   |               |  |   |               |  
|Cashless exercise of 17,363 Series A
      warrants into 13,022 shares of common stock           |  | 13,022       |  |   | 13         |  |   | (13       | ) |   | -         |  |   | -          |   |   | -             |  |   | -             |  
|                                                                                                 |  |              |  |   |            |  |   |           |   |   |           |  |   |            |   |   |               |  |   |               |  
|Net loss for the five months ended March
      31, 2010                                          |  | -            |  |   | -          |  |   | -         |   |   | -         |  |   | (1,602,795 | ) |   | -             |  |   | (1,602,795    | )
|                                                                                                 |  |              |  |   |            |  |   |           |   |   |           |  |   |            |   |   |               |  |   |               |  
|Foreign currency translation                                                                     |  | -            |  |   | -          |  |   | -         |   |   | -         |  |   | -          |   |   | 6,039         |  |   | 6,039         |  
|                                                                                                 |  |              |  |   |            |  |   |           |   |   |           |  |   |            |   |   |               |  |   |               |  
|Balance at March 31, 2010                                                                        |  | 26,387,728   |  |   | 26,387     |  |   | 4,721,337 |   |   | 1,142,397 |  |   | 3,821,100  |   |   | 307,842       |  | $ | 10,019,063    |  
|                                                                                                 |  |              |  |   |            |  |   |           |   |   |           |  |   |            |   |   |               |  |   |               |  
|Cashless exercise of 9,169 Series D
      warrants into 5,840 shares of common stock             |  | 5,840        |  |   | 6          |  |   | (6        | ) |   | -         |  |   | -          |   |   | -             |  |   | -             |  
|                                                                                                 |  |              |  |   |            |  |   |           |   |   |           |  |   |            |   |   |               |  |   |               |  
|Cashless exercise of 171,185 Series C
      warrants into 46,794 shares of common stock          |  | 46,794       |  |   | 47         |  |   | (47       | ) |   | -         |  |   | -          |   |   | -             |  |   | -             |  
|                                                                                                 |  |              |  |   |            |  |   |           |   |   |           |  |   |            |   |   |               |  |   |               |  
|                                                                                                 |  |              |  |   |            |  |   |           |   |   |           |  |   |            |   |   |               |  |   |               |  

F-6

---

|Cashless exercise of 34,725 Series A warrants into 14,196 shares
      of common stock |  | 14,196     |  |   | 14     |  |   | (14       | ) |   | -         |  |   | -          |   |   | -         |  |   | -          |  
|-------------------------------------------------------------------------------------- |  | ---------- |  | - | ------ |  | - | --------- | - | - | --------- |  | - | ---------- | - | - | --------- |  | - | ---------- | -
|                                                                                       |  |            |  |   |        |  |   |           |   |   |           |  |   |            |   |   |           |  |   |            |  
|Employee stock-based compensation                                                      |  | -          |  |   | -      |  |   | 1,119,020 |   |   | -         |  |   | -          |   |   | -         |  |   | 1,119,020  |  
|                                                                                       |  |            |  |   |        |  |   |           |   |   |           |  |   |            |   |   |           |  |   |            |  
|Net loss for the year ended March 31, 2011                                             |  | -          |  |   | -      |  |   | -         |   |   | -         |  |   | (1,291,499 | ) |   | -         |  |   | (1,291,499 | )
|                                                                                       |  |            |  |   |        |  |   |           |   |   |           |  |   |            |   |   |           |  |   |            |  
|Foreign currency translation                                                           |  | -          |  |   | -      |  |   | -         |   |   | -         |  |   | -          |   |   | 1,207,539 |  |   | 1,207,539  |  
|                                                                                       |  |            |  |   |        |  |   |           |   |   |           |  |   |            |   |   |           |  |   |            |  
|Balance at March 31, 2011                                                              |  | 26,454,558 |  | $ | 26,454 |  | $ | 5,840,290 |   | $ | 1,142,397 |  | $ | 2,529,601  |   | $ | 1,515,381 |  | $ | 11,054,123 |  

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

F-7

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES 
CONSOLIDATED
STATEMENTS OF CASH FLOWS

|                                                                                                  |   | Year Ended March 31, |   |   | Five months ended March
      31, |   |   | Year Ended October 31 |  
|------------------------------------------------------------------------------------------------- | - | -------------------- | - | - | --------------------------------- | - | - | --------------------- | -
|                                                                                                  |   | 2011                 |   |   | 2010                              |   |   | 2009                  |  
|                                                                                                  |   |                      |   |   |                                   |   |   | (unaudited)           |  
|                                                                                                  |   |                      |   |   |                                   |   |   |                       |  
|Cash flow from operating activities                                                               |   |                      |   |   |                                   |   |   |                       |  
|Net (loss) income                                                                                 | $ | (1,291,499           | ) | $ | (1,602,795                        | ) | $ | 2,175,164             |  
|Adjustments to reconcile net income to net cash provided by
      (used in) operating activities: |   |                      |   |   |                                   |   |   |                       |  
|Net foreign currency transaction loss                                                             |   | -                    |   |   | 337                               |   |   | -                     |  
|Depreciation of
      property, plant and equipment                                               |   | 646,028              |   |   | 195,151                           |   |   | 143,189               |  
|Depreciation of livestock                                                                         |   | 86,105               |   |   | 11,600                            |   |   | 1,449                 |  
|Amortization of
      land use rights                                                             |   | 17,612               |   |   | -                                 |   |   | -                     |  
|Amortization of deferred financing costs                                                          |   | 93,061               |   |   | 18,686                            |   |   | -                     |  
|Disposal of
      property, plant and equipment                                                   |   | -                    |   |   | 6,144                             |   |   | -                     |  
|Allowance of bad debts-Accounts receivable                                                        |   | 14,728               |   |   | 7,498                             |   |   | -                     |  
|Allowance of bad
      debts-Other receivable                                                     |   | 19,217               |   |   | 13,684                            |   |   | -                     |  
|Employee stock-based compensation                                                                 |   | 1,119,020            |   |   | -                                 |   |   | -                     |  
|Sales return
      allowance                                                                      |   | (45,520              | ) |   | (121,025                          | ) |   | 107,544               |  
|Warrant modification expense                                                                      |   | -                    |   |   | 88,500                            |   |   | -                     |  
|Change in fair
      value of derivative liabilities                                              |   | (2,771,080           | ) |   | -                                 |   |   | -                     |  
|Make good provision                                                                               |   | 205,683              |   |   | -                                 |   |   | -                     |  
|Registration
      penalties                                                                      |   | 267,600              |   |   | -                                 |   |   | -                     |  
|Accretion of debt discount                                                                        |   | 864,804              |   |   | 72,541                            |   |   | -                     |  
|Accretion of
      preferred stock                                                                |   | 1,480,294            |   |   | -                                 |   |   | -                     |  
|                                                                                                  |   |                      |   |   |                                   |   |   |                       |  
|(Increase) decrease in operating assets:                                                          |   |                      |   |   |                                   |   |   |                       |  
|Restricted cash                                                                                   |   | (1,379,798           | ) |   | (28,314                           | ) |   | -                     |  
|Accounts
      receivable                                                                         |   | (1,032,329           | ) |   | (499,891                          | ) |   | (632,746              | )
|Other receivable                                                                                  |   | 32,811               |   |   | 110,629                           |   |   | (332,944              | )
|Inventories                                                                                       |   | (1,167,287           | ) |   | (54,224                           | ) |   | 554,803               |  
|Prepaid expenses                                                                                  |   | (183,774             | ) |   | (37,588                           | ) |   | (3,394                | )
|Advances                                                                                          |   | 739,946              |   |   | (875,434                          | ) |   | 387,347               |  
|Other Assets                                                                                      |   | -                    |   |   | -                                 |   |   | -                     |  
|Deferred tax asset
      and current assets                                                       |   | 100,104              |   |   | (475,320                          | ) |   | 176,258               |  
|                                                                                                  |   |                      |   |   |                                   |   |   |                       |  
|Increase (decrease) in operating liability:                                                       |   |                      |   |   |                                   |   |   |                       |  
|Accounts payable                                                                                  |   | 231,265              |   |   | (606,517                          | ) |   | (288,104              | )
|Advance from
      customers                                                                      |   | (54,288              | ) |   | 84,769                            |   |   | (3,576                | )
|Income and other tax payable                                                                      |   | (177,240             | ) |   | (231,178                          | ) |   | 230,797               |  
|Other payable and
      accrued expenses                                                          |   | 1,003,200            |   |   | 25,889                            |   |   | 770,114               |  
|Net cash (used in) provided by
      operating activities                                         |   | (1,181,337           | ) |   | (3,896,858                        | ) |   | 3,285,901             |  
|                                                                                                  |   |                      |   |   |                                   |   |   |                       |  
|Cash flows from investing activities                                                              |   |                      |   |   |                                   |   |   |                       |  
|Purchase of
      property, plant and equipment                                                   |   | (1,200,949           | ) |   | (411,613                          | ) |   | (175,169              | )
|Advance for construction of factory and warehouse                                                 |   | -                    |   |   | -                                 |   |   | (3,795,704            | )
|Advance for
      acquisition of land use rights                                                  |   | -                    |   |   | -                                 |   |   | (145,989              | )
|Deposit for purchase of machinery and equipment                                                   |   | (597,987             | ) |   | (208,980                          | ) |   | -                     |  
|Proceeds from sale
      of livestock                                                             |   | 93,461               |   |   | -                                 |   |   | -                     |  
|Purchase and breeding of livestock                                                                |   | (60,392              | ) |   | (563,723                          | ) |   | (75,487               | )
|Acquisition of
      land use right                                                               |   | -                    |   |   | (796,106                          | ) |   | -                     |  
|Net cash used in investing activities                                                             |   | (1,765,867           | ) |   | (1,980,422                        | ) |   | (4,192,349            | )

F-8

---

|Cash flows from financing activities                                             |   |            |   |   |            |   |   |           |   |   |            |  
|-------------------------------------------------------------------------------- | - | ---------- | - | - | ---------- | - | - | --------- | - | - | ---------- | -
|Proceeds from
      short term loans                                             |   | 13,391,277 |   |   | 2,925,705  |   |   | 2,232,020 |   |   | 6,681,198  |  
|Repayment of short term loans                                                    |   | (9,608,176 | ) |   | (2,691,648 | ) |   | (729,943  | ) |   | (5,433,460 | )
|Proceeds from long
      term loans                                              |   | -          |   |   | 61,235     |   |   | 167,579   |   |   | -          |  
|Repayment of long term loans                                                     |   | (41,553    | ) |   | (3,402     | ) |   | (14,473   | ) |   | (33,999    | )
|Repayment of
      convertible debt and accrued interest                         |   | -          |   |   | (56,000    | ) |   | -         |   |   | -          |  
|Net proceeds from issuance of Series A preferred stock                           |   | -          |   |   | -          |   |   | -         |   |   | 14,264,871 |  
|Capital
      contribution from shareholders                                     |   | -          |   |   | -          |   |   | -         |   |   | 5,979      |  
|Net proceeds received from issuance of convertible notes                         |   | 7,623,729  |   |   | -          |   |   | -         |   |   | -          |  
|Dividend paid to
      previous stockholders of Milkgoat China                   |   | -          |   |   | -          |   |   | -         |   |   | (2,550,504 | )
|Due (from) to shareholders                                                       |   | (6,027     | ) |   | (23        | ) |   | (6,336    | ) |   | 2,426,005  |  
|Net cash provided by financing activities                                        |   | 11,359,250 |   |   | 235,867    |   |   | 1,648,847 |   |   | 15,360,090 |  
|                                                                                 |   |            |   |   |            |   |   |           |   |   |            |  
|Effect of exchange rate changes in cash                                          |   | 220,669    |   |   | 877        |   |   | (2,110    | ) |   | (17,516    | )
|                                                                                 |   |            |   |   |            |   |   |           |   |   |            |  
|Net increase in cash and cash equivalents                                        |   | 8,632,715  |   |   | (5,640,536 | ) |   | 740,289   |   |   | 9,476,935  |  
|                                                                                 |   |            |   |   |            |   |   |           |   |   |            |  
|Cash and cash equivalents, beginning of period                                   |   | 4,727,677  |   |   | 10,368,213 |   |   | 891,278   |   |   | 891,278    |  
|                                                                                 |   |            |   |   |            |   |   |           |   |   |            |  
|Cash and cash equivalents, end of period                                         | $ | 13,360,392 |   | $ | 4,727,677  |   | $ | 1,631,567 |   | $ | 10,368,213 |  
|                                                                                 |   |            |   |   |            |   |   |           |   |   |            |  
|Supplemental disclosure of cash flow information                                 |   |            |   |   |            |   |   |           |   |   |            |  
|Cash paid during the period                                                      |   |            |   |   |            |   |   |           |   |   |            |  
|                                                                                 |   |            |   |   |            |   |   |           |   |   |            |  
|Interest paid                                                                    | $ | 672,686    |   | $ | 242,458    |   | $ | 316,883   |   | $ | 604,633    |  
|Income tax paid                                                                  | $ | 634,096    |   |   | 372,528    |   | $ | 421,461   |   | $ | 2,050,646  |  
|                                                                                 |   |            |   |   |            |   |   |           |   |   |            |  
|Supplemental disclosure of non-cash financing and investing
      activities;    |   |            |   |   |            |   |   |           |   |   |            |  
|Accrued payment for purchase of
      property, plant and equipment              |   | 707,846    |   |   | -          |   |   | -         |   |   | -          |  
|                                                                                 |   |            |   |   |            |   |   |           |   |   |            |  
|Repayment of short-term loan from Tianjin
      Mengyang offset against advances | $ | -          |   | $ | -          |   | $ | -         |   | $ | 877,508    |  
|Settlement of dividend payable                                                   | $ | -          |   | $ | -          |   | $ | -         |   | $ | 1,916,669  |  
|Non-cash exercise of
    127,363
      warrants into common stock                | $ | -          |   | $ | 91         |   | $ | -         |   | $ | -          |  
|Conversion of convertible note plus accrued interest into
      common stock     | $ | -          |   | $ | 1,400,000  |   | $ | -         |   | $ | -          |  
|Non-cash exercise of 215,079
      warrants into common stock                    | $ | 67         |   | $ | -          |   | $ | -         |   | $ | -          |  
|Placement agent warrants in deferred cost
      financing                        | $ | 231,929    |   | $ | -          |   | $ | -         |   | $ | -          |  
|Advances transferred to
      property, plant and equipment                      | $ | 83,567     |   | $ | 269,124    |   | $ | -         |   | $ | -          |  
|Advance transferred to land use rights                                           | $ | -          |   | $ | 146,285    |   | $ | -         |   | $ | -          |  

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

F-9

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Nature of Business

Yayi International, Inc (“Yayi International”), formerly known as Ardmore Holding Corporation or “Ardmore”, was originally organized under the laws of the state of Delaware in 1986 under the name of a predecessor corporation
which engaged in a software development and consulting service business. During 2007 and 2006, Ardmore sold 875,000 post-stock split adjusted shares to Tryant, LLC, a then unrelated party, which represented over 85% of Ardmore’s outstanding
shares. Subsequently, Ardmore's management decided to wind up all business operations related to the former products sold by the predecessor corporation. On April 16, 2007, the name of the predecessor corporation was changed to Ardmore Holding
Corporation. From April 16, 2007 until June 6, 2008 when the Company completed a reverse acquisition transaction with Charleston Industrial Limited (“Charleston”), the Company was a blank check company and did not engage in active
business operations other than its search for, and evaluation of, potential business opportunities for acquisition or participation. The Company changed its fiscal year from December 31 to October 31. The Company amended its articles of
incorporation on September 12, 2008 and changed its name to Yayi International Inc.

On June 6, 2008, Ardmore, its wholly owned subsidiary, Ardmore Acquisition Corp. (“Ardmore Acquisition”), Charleston Industrial Ltd., (“Charleston”) and Tryant LLC, a Delaware limited liability company and at such time the
holder of a majority of Ardmore’s outstanding shares of common stock, consummated a merger pursuant to which Ardmore Acquisition was merged into Charleston and Charleston became Ardmore’s wholly owned subsidiary. Charleston is the owner
of Tianjin Yayi Industrial Co., Ltd. (“Tianjin Yayi”), an entity organized under the laws of the People’s Republic of China and as a result of this merger, Ardmore became the owner of Tianjin Yayi. Pursuant to the merger, all
50,000 shares of Charleston’s stock were exchanged for 22,325,000 shares newly issued common stock of Ardmore. Accordingly, all references to shares of Charleston’s common stock and per share amounts have been retroactively restated to
reflect the equivalent numbers of Ardmore shares. Charleston thereby became the Company’s wholly owned subsidiary and the former stockholders of Charleston became the Company’s controlling stockholders.

Under accounting principles generally accepted in the United States, the merger is considered to be a capital transaction in substance, rather than a business combination. That is, the merger is equivalent to the issuance of stock by Charleston for
the net monetary assets of Ardmore, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the merger will be identical to that resulting from a reverse acquisition, except that no
goodwill will be recorded. Under reverse takeover accounting, the post reverse acquisition comparative historical financial statements of the legal acquirer, Ardmore, are those of the legal acquiree, Charleston and subsidiary, which are considered
to be the accounting acquirer.

On August 18, 2010, one of the Company’s subsidiaries, Charleston Industrial Limited changed its name to Milkgoat Industrial Co., Ltd. (“Milkgoat Industrial”), under the BVI Business Companies Act, 2004.

On December 17, 2010, one of the Company’s subsidiaries, Tianjin Yayi Industrial Co., Ltd. changed its name to Milkgoat (China) Goat Dairy Co., Ltd. (“Milkgoat China”), as approved by Tianjin City Administration for Industry &
Commerce.

In March 2010, Yayi International Inc. changed its fiscal year end from October 31 to March 31.

The principal business activities of the Company consist of manufacturing and selling of goat milk powder. All business activities of the Company are conducted principally by its subsidiaries Milkgoat China, Weinan Milkgoat Production Co., Ltd.
(“Weinan Milkgoat”), Fuping Milkgoat Dairy Co., Ltd (“Fuping Milkgoat”) and Shaanxi Milkgoat Dairy Co., Ltd (“Shaanxi Milkgoat”) operating in the PRC whereas Milkgoat Industrial is a BVI investment holding
company.

2. Summary of Significant Accounting Policies

Basis of Consolidation - The consolidated financial statements include the accounts of Yayi International Inc. and its wholly-owned subsidiary, Milkgoat Industrial together with its wholly-owned subsidiaries, Milkgoat China, Weinan Milkgoat
Fuping Milkgoat and Shaanxi Milkgoat. All material intercompany transactions have been eliminated in consolidation.

Credit risk - The Company may be exposed to credit risk from its cash at bank, fixed deposits, and bills and accounts receivable. Bills and accounts receivable are subjected to credit evaluations. An allowance has been made for estimated
irrecoverable amounts determined by reference to past default experience and the current economic environment.

Cash and cash equivalents - Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts and time certificates of deposit with a maturity of three months or less when purchased.

F-10

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies 
Continued

Inventory - Inventory is stated at the lower of cost or
market, determined by the weighted average method. Work-in-progress and finished
goods inventories consist of raw materials, direct labor and overhead associated
with the manufacturing process.

Trade accounts receivable - Trade accounts receivable
are stated at the amount management expects to collect from balances outstanding
at the period end.

Outstanding account balances are reviewed individually for
collectability. Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for recovery is
considered remote.

Allowances for doubtful accounts receivable balances are
recorded when circumstances indicate that collection is doubtful for particular
accounts receivable or as a general reserve for all accounts receivable.
Management estimates such allowances based on historical evidence such as
amounts that are subject to risk. Accounts receivable are written off if
reasonable collection efforts are not successful.

Based on managements evaluation of historical experience, the
following policy for allowance of doubtful accounts is established:

|Trade and other receivables due: | % of Balance
|-------------------------------- | ------------
|Within 90 days:                  | 1.5%        
|Between 91 and 180 days:         | 5.0%        
|Between 181 and 360 days:        | 20.0%       
|Between 361 and 720 days:        | 50.0%       
|Over 721 days:                   | 100.0%      

Livestock  Livestock consists of goats for milk
production and for breeding purposes. The livestock is depreciated according to
its estimated useful lives, which is 5 years for male goats and 7 years for
female goats. The cost of raising the young goat is allocated to livestock and
depreciation starts upon reaching maturity 13 months from date of birth. Not all
young goats survive to maturity or disposition. Normal losses of young goats are
not expensed directly but allocated to the surviving young goats. When abnormal
losses of young goats occur, the accumulated costs of young goats lost are
written off in the period in which the abnormal losses occur.

Fair Value of Financial Instruments  FASB ASC 820-10
requires disclosing fair value to the extent practicable for financial
instruments that are recognized or unrecognized in the balance sheet. The fair
value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.

For certain financial instruments, including cash, accounts and
other receivables, accounts payable, short-term loans, accruals and other
payables, it was assumed that the carrying amounts approximate fair value
because of the near term maturities of such obligations. The carrying amounts of
long-term loans payable approximate fair value since the interest rate
associated with the debt approximates the current market interest rate.

Property, plant and equipment-Property, plant and
equipment are stated at cost including the cost of improvements. Maintenance and
repairs are charged to expense as incurred. Assets under construction are not
depreciated until construction is completed and the assets are ready for their
intended use. Depreciation and amortization are provided on the straight-line
method based on the shorter of the estimated useful lives of the assets or lease
term as follows:

|Leasehold improvement             | Lesser of term of the lease or the
      estimated useful lives of the assets
|--------------------------------- | -----------------------------------------------------------------------------
|Plant and machinery               | 10 years                                                                     
|Furniture, fixtures and equipment | 5 years                                                                      
|Motor vehicles                    | 5 years                                                                      

Recoverability of Long Lived Assets -The Company follows
FASB ASC 360. Long-lived assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the related carrying
amount may not be recoverable. The Company is not aware of any events or
circumstances that indicate the existence of impairment, which would be material
to the Companys financial statements.

F-11

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies – Continued

Goodwill - Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination, In accordance with FASB ASC 350-30, goodwill is no longer subject
to amortization. Rather, goodwill will be subject to at least an annual assessment for impairment, applying a fair-value based test fair value is generally determined using a discounted cash flow analysis.

Revenue recognition - The Company recognizes revenue on product sales when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an
arrangement exists and the sales price is fixed or determinable. Net sales of products represent the invoiced value of goods, net of value added taxes (“VAT”), sales returns, trade discounts and allowances. The Company is subject to VAT
which is levied on majority of the Company’s products at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the
invoiced value of purchases to the extent not refunded for export sales. Input VAT paid is recoverable from output VAT charged to customers.

Prior to January 1, 2009, the Company allows for exchange of goods that are near expiration. The Company provided for an allowance for return products since the Company has experienced returns in the normal course of business. Subsequent to January
1, 2009, the Company revised its sales contracts to disallow returns for sales made after January 1, 2009.

The Company treats temporary price reduction programs, merchandising fees, co-operative advertising and slotting expenses as a reduction in gross sales. The Company records the liability when pervasive evidence exists that the Company and the
customer or distributor have reached agreement and that an advertising action will result in an expense to the company in the near future. The liability is maintained until the customer takes the deduction against payments due. In addition, in
accordance with ASC 605-50 in accounting for customer payments and incentives, if the temporary price reduction recorded is in excess of gross sale for any retailer, the amount in excess will be recorded as selling expense.

Research and development - Research and development costs are expensed as incurred. Research and development expenses amounted to $74,337 and $150,101 for the year ended March 31, 2011 and October 31, 2009, respectively, $40,898
and $57,558 for the five months ended March 31, 2010 and 2009, respectively.

Advertising and promotion costs - Costs incurred in direct-response advertising are capitalized and amortized on a straight-line basis over the duration of the advertising campaign. As of March 31, 2011, there was no capitalized
direct-response advertising. All other advertising costs are expensed as incurred. Advertising and promotion costs amounted to $8,232,330 and $1,956,512 for the year ended March 31, 2011 and October 31, 2009, respectively,  As of March 31,
2010, there was no capitalized direct-response advertising. Advertising and promotion costs amounted to $2,727,631 and $1,046,940 for the five months ended March 31, 2010 and 2009, respectively.

Comprehensive income - The Company follows FASB ASC 220-10 in reporting comprehensive income. Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding
transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net (loss) income and foreign currency translation adjustments.

Income taxes – The Company follows FASB ASC 740 when accounting for income taxes. Income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes. Current tax is based on the profit or
loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred income tax
liabilities or assets are recorded to reflect the tax consequences in future differences between the tax basis of assets and liabilities and the financial reporting amounts at each year end. A valuation allowance is recognized if it is more likely
than not that some portion, or all, of a deferred tax asset will not be realized.

Foreign currency translation and transactions – The accompanying consolidated financial statements are presented in United States Dollars (“US$”). The Company’s functional currency is the US$, while the
Charleston’s functional currency is its local currency and the wholly-owned Chinese subsidiaries’ functional currency is the Renminbi (“RMB”). The functional currencies of the Company’s foreign operations are translated
into US$ for balance sheet accounts using the current exchange rates in effect as of the balance sheet date and for revenue and expense accounts using the weighted-average exchange rate during the fiscal year. The translation adjustments are
recorded as a separate component of stockholders’ equity, captioned accumulated other comprehensive income (loss).

Gains and losses resulting from transactions denominated in foreign currencies are included in other income (expense) in the consolidated statements of operations.

F-12

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies – Continued

Post-retirement and post-employment benefits - The Company’s subsidiaries contribute to a state pension plan in respect of its PRC employees. Other than the above, neither the Company nor its subsidiary provides any other
post-retirement or post-employment benefits.

Earnings Per Common Share - The Company follows FASB ASC 260-10, resulting in the presentation of basic and diluted earnings per share. Diluted earnings per common share assumes that outstanding common shares were increased by shares issuable
upon exercise of those stock warrants for which market price exceeds the exercise price, less shares that could have been purchased by the Company with related proceeds.

Use of estimates - The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts in the financial
statements and related disclosure in the accompanying notes. Actual results could differ from those estimates. The financial statements include some amounts that are based on management’s best estimates and judgments. The most significant
estimates relate to warrants valuation, discount on convertible notes, debts issuance cost, allowance for uncollectible accounts receivable, work in process inventory valuation, inventory obsolescence, depreciation, useful lives of property, plant
and equipment, taxes, contingencies and employee benefit plans. These estimates may be adjusted as more current information becomes available and any adjustment could be significant. Estimates and assumptions are periodically reviewed and the
effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.

Cost of goods sold - Cost of goods sold consists primarily of costs of raw materials, direct labor, depreciation of plant and machinery, and overhead associated with the manufacturing process.

Shipping and handling cost - Shipping and handling costs related to delivery of finished goods are included in other selling, general and administrative expenses. During the year ended March 31, 2011 and October 31, 2009, shipping and
handling costs were $445,688 and $504,353, respectively.  During the five months ended March 31, 2010 and 2009, shipping and handling costs were $137,942 and $89,011, respectively.

Slotting fees - The Company accounts for slotting fees in accordance with ASC 605-50. ASC 605-50 requires that cash considerations, including sales incentives, given by a vendor to a customer is presumed to be a reduction of the selling
price, and therefore, should be characterized as a reduction to gross sales. This presumption is overcome and the consideration would be characterized as an expense incurred if the vendor receives an identifiable benefit in exchange for the
consideration and the fair value of that identifiable benefit can be reasonably estimated. Furthermore, if the consideration recorded is in excess of gross sale of any retailer, the amount in excess will be recorded as selling expense.

The Company treats one-time slotting fees paid to retails shops who are direct customers of the Company’s distributors and the fees pays to distributors upon signing of contract as a reduction in gross sales.

Slotting fees of $5,526,217 and $1,032,609 were recorded as a reduction of sales revenue for the year ended March 31, 2011 and five months ended March 31, 2010, respectively. There were no slotting fees incurred for the year ended October
31, 2009 and five months ended March 31, 2009.

Retained earnings-appropriated - In accordance with the relevant PRC regulations and the Company’s PRC subsidiaries’ articles of association, Milkgoat China, Weinan Milkgoat and Fuping Milkgoat are required to allocate their
respective net income to statutory surplus reserve.

Statutory surplus reserve - In accordance with the relevant laws and regulations of the PRC and the articles of associations of the Company’s PRC subsidiaries, Milkgoat China, Weinan Milkgoat and Fuping Milkgoat are required to allocate
10% of their net income reported in the PRC statutory accounts, after offsetting any prior years’ losses, to the statutory surplus reserve, on an annual basis. When the balance of such reserve reaches 50% of the respective registered capital
of the subsidiaries, any further allocation is optional.

The statutory surplus reserves can be used to offset prior years’ losses, if any, and may be converted into registered capital, provided that the remaining balances of the reserve after such conversion is not less than 25% of registered
capital. The statutory surplus reserve is non-distributable.

F-13

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies – Continued

Recently Adopted Accounting Pronouncements

In January 2010, FASB issued ASU No. 2010-05, Compensation – Stock Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of Compensation. This update codifies Emerging Issues Task Force D-110. The adoption of this
standard did not have a material impact to the Company’s financial position or results of operations.

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This update provides amendments to ASC Topic 820 that will provide more robust disclosures
about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This standard is
effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The adoption of this standard did not have a material impact to the Company’s financial position.

In January 2010, FASB issued ASU N0. 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. The update clarifies that the stock portion of a distribution to shareholders that allows them
to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected prospectively in earnings per share and is not
considered a stock dividend for purposes of ASC Topic 505 and Topic 260, Earnings Per Share. This standard is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The adoption
of this standard did not have a material impact to the Company’s financial position or results of operations.

Recently Issued Accounting Pronouncements Not Yet Adopted

In April 2010 the FASB issued Accounting Standards Update (ASU) No. 2010-13,Compensation – Stock Compensation (ASC Topic 718), Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in
Which the Underlying Equity Security Trades. This Update provides amendments to ASC Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the
entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition.

Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15,
2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of
the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted.
This standard will be adopted effective April 1, 2011.

In December 2010, FASB issued ASU No. 2010-28,Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.  The amendments in this
Update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this Update modify Step 1 so
that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment
exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested
for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted.

Upon adoption of the amendments, any resulting goodwill
impairment should be recorded as a cumulative-effect adjustment to beginning
retained earnings in the period of an adoption. Any goodwill impairments
occurring after the initial adoption of the amendments should be included in
earnings.

This standard is not currently applicable to the Company.

F-14

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Upon adoption of the amendments, any resulting goodwill
impairment should be recorded as a cumulative-effect adjustment to beginning
retained earnings in the period of an adoption. Any goodwill impairments
occurring after the initial adoption of the amendments should be included in
earnings.

This standard is not currently applicable to the Company.

2. Summary of Significant Accounting Policies  Continued

In December 2010, FASB issued ASU No. 2010-29, Business
Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for
Business Combinations.The amendments in this Update specify that if a
public entity presents comparative financial statements, the entity should
disclose revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. The amendments
also expand the supplemental pro forma disclosures to include a description of
the nature and amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma
revenue and earnings. The amendments in this Update are effective prospectively
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2010. The Company intends to adopt the disclosure requirements for any
business combinations after April 1, 2011.

As of March 31, 2011, there were no other recently issued
accounting standards not yet adopted which would have had a material effect on
the Companys financial statements.

3. Restricted Cash

|                                                         |   | March 31, |  |   | March 31, | 
|-------------------------------------------------------- | - | --------- |  | - | --------- | 
|                                                         |   | 2011      |  |   | 2010      | 
|                                                         |   |           |  |   |           | 
|Bank deposits held as collateral for bills
      payable | $ | 1,004,314 |  | $ | 28,314    | 
|Bank deposits held in escrow (Note 15)                   |   | 408,090   |  |   | -         | 
|                                                         | $ | 1,412,404 |  | $ | 28,314    | 

Cash of $408,090 from the private placement was held in escrow
for the Company as of March 31, 2011 (Note 15).

4. Other Receivable

|                              |   | March 31, |   |   | March 31, |  
|----------------------------- | - | --------- | - | - | --------- | -
|                              |   | 2011      |   |   | 2010      |  
|                              |   |           |   |   |           |  
|Advance to staff              | $ | 37,892    |   | $ | 28,542    |  
|Security deposit              |   | 470,313   |   |   | 592,461   |  
|Sundry                        |   | 109,408   |   |   |           |  
|                              |   | 617,613   |   |   | 621,003   |  
|Less: allowance for bad debts |   | (43,230   | ) |   | (22,833   | )
|                              | $ | 574,383   |   | $ | 598,170   |  

The amount due from an unrelated party is interest-free,
unsecured and has no stated terms of repayment.

F-15

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

5. Inventories, net

Inventories, net consist of:

|               |   | March 31, |  |   | March 31, | 
|-------------- | - | --------- |  | - | --------- | 
|               |   | 2011      |  |   | 2010      | 
|               |   |           |  |   |           | 
|Raw materials  | $ | 2,709,596 |  | $ | 1,678,207 | 
|Packaging      |   | 497,341   |  |   | 289,188   | 
|Finished goods |   | 678,544   |  |   | 593,870   | 
|               | $ | 3,885,481 |  | $ | 2,561,265 | 

As of March 31, 2011 and 2010, there was no allowance made for
obsolete or slow moving inventory.

6. Advances on Property, Plant and Equipment

Advances and deposits on property, plant and equipment consist
of:

|                                                                             |   | March 31,  |  |   | March 31,  | 
|---------------------------------------------------------------------------- | - | ---------- |  | - | ---------- | 
|                                                                             |   | 2011       |  |   | 2010       | 
|                                                                             |   |            |  |   |            | 
|Advances to Tianjin Mengyang Biological Development Co.,
      Ltd ("Tianjin |   |            |  |   |            | 
|Menyang"), formerly Tianjin Milkgoat Dairy Co., Ltd.                         |   |            |  |   |            | 
|- purchase of office building
      (Note 18)                                | $ | 4,348,488  |  | $ | 4,179,284  | 
|- purchase of factory and warehouse (Note 18)                                |   | 11,489,095 |  |   | 11,042,041 | 
|- advances for renovation of
      office building (Note 18)                 |   | 356,159    |  |   | 342,300    | 
|Deposits for construction in progress (Note 18)                              |   | 572,366    |  |   | 331,696    | 
|Advanced payment for purchasing machinery
      and equipment                |   | 2,297,331  |  |   | 1,920,814  | 
|                                                                             | $ | 19,063,439 |  | $ | 17,816,135 | 

The main body construction of office building had been
completed as of September 2010. The construction project is under inspection and
the completion date is subject to the inspection report to be issued. Based on
the Companys estimate, the completion date is expected to be postponed to the
end of October, 2011 (Note 18). The Company expects that the building will be
operational during the fourth calendar quarter of 2012.

The main body construction of factory and warehouse had been
completed as of September 2010. The construction project is under inspection and
the completion date is subject to the inspection report to be issued. Based on
the Companys estimate, the completion date is expected to be postponed to the
end of October, 2011 (Note 18). The Company expects that the facility will start
operating during the fourth calendar quarter of 2012.

The construction in progress relates to the construction and
installation of central system pipelines. The estimated completion date of
installation is postponed to the fourth calendar quarter of 2013 (Note 18).

The advanced payment for purchasing machinery and equipment
relates to the purchases of machinery and equipment from several suppliers. They
are expected to be delivered to the Company between July 2012 and March 2013
after the approval of final inspection.

F-16

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

7. Property, Plant and Equipment, net

Property, plant and equipment, net consist of the following:

|                                                      |   | March 31,  |   |   | March 31,  |  
|----------------------------------------------------- | - | ---------- | - | - | ---------- | -
|                                                      |   | 2011       |   |   | 2010       |  
|                                                      |   |            |   |   |            |  
|At cost:                                              |   |            |   |   |            |  
|Leasehold improvement                                 | $ | 71,714     |   | $ | 68,924     |  
|Plant and buildings                                   |   | 4,338,544  |   |   | 1,708,463  |  
|Machinery                                             |   | 3,895,981  |   |   | 2,525,876  |  
|Furniture, fixtures and equipment                     |   | 239,364    |   |   | 202,581    |  
|Motor vehicles                                        |   | 338,091    |   |   | 324,936    |  
|                                                      |   | 8,883,694  |   |   | 4,830,780  |  
|Less: accumulated depreciation and
      amortization |   | (1,799,269 | ) |   | (1,096,228 | )
|                                                      |   | 7,084,425  |   |   | 3,734,552  |  
|Construction in progress                              |   | 979,082    |   |   | 2,770,578  |  
|                                                      | $ | 8,063,507  |   | $ | 6,505,130  |  

During the year ended March 31, 2011, depreciation expenses
amounted to $646,028, of which $550,895 and $95,133 was recorded as cost of
sales and other selling, general and administrative expense, respectively.

During the year ended October 31, 2009, depreciation expenses
amounted to $348,561, of which $275,487 and 73,074 was recorded as cost of sales
and other selling, general and administrative expense, respectively.

During the five months ended March 31, 2010, depreciation
expenses amounted to $195,151, of which $165,485 and $29,666 was recorded as
cost of sales and other selling, general and administrative expense,
respectively.

During the five months ended March 31, 2009, depreciation
expenses amounted to $143,189, of which $111,087 and $32,102 was recorded as
cost of sales and other selling, general and administrative expense,
respectively.

F-17

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

8. Land use rights

Land use rights consist of:

|                                        |   | March 31, |  |   | March 31, | 
|--------------------------------------- | - | --------- |  | - | --------- | 
|                                        |   | 2011      |  |   | 2010      | 
|                                        |   |           |  |   |           | 
|Land use rights                         | $ | 980,526   |  | $ | 942,372   | 
|Less: accumulated amortization          |   | 17,976    |  |   | -         | 
|                                        |   | 962,550   |  |   | 942,372   | 
|Less: current portion                   |   | 19,611    |  |   | 18,847    | 
|Land use rights, net of current portion | $ | 942,939   |  | $ | 923,525   | 

The estimated aggregate amortization expenses for intangible
assets for the five succeeding years are as follows:

|Year       |   |         | 
|---------- | - | ------- | 
|2011       | $ | 19,611  | 
|2012       |   | 19,611  | 
|2013       |   | 19,611  | 
|2014       |   | 19,611  | 
|2015       |   | 19,611  | 
|Thereafter |   | 864,495 | 
|           | $ | 962,550 | 

During the year ended March 31, 2011 and October 31, 2009,
amortization expenses amounted to $17,612 and $0 was recorded as cost of sales,
respectively. During the five months ended March 31, 2010 and 2009, there was no
amortization expenses incurred.

F-18

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

9. Short Term Loans

|Lender                                      |  | Loan Period                                                                                              |  |  | Collateral / Guarantee                                                |  |  | Interest Rate per annum |  |   | March 31, 2011 |  |   | March 31, 2010 | 
|------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- |  |  | --------------------------------------------------------------------- |  |  | ----------------------- |  | - | -------------- |  | - | -------------- | 
|                                            |  |                                                                                                          |  |  |                                                                       |  |  |                         |  |   |                |  |   |                | 
|Shanghai Pudong
      Development Bank      |  | Renew on July 30,
      2010and the new due date is July 30, 2011                                        |  |  | Guaranteed by the
      Tianjin Haitai Investment Guarantee Co., Ltd. |  |  | 6.4%                    |  |   | 304,409        |  |   | 292,565        | 
|                                            |  |                                                                                                          |  |  |                                                                       |  |  |                         |  |   |                |  |   |                | 
|Shanghai Pudong
      Development Bank      |  | Renew on July 30,
      2010and the new due date is July 30, 2011                                        |  |  | Guaranteed by the
      Tianjin Haitai Investment Guarantee Co., Ltd. |  |  | 6.4%                    |  |   | 1,217,637      |  |   | 1,170,258      | 
|                                            |  |                                                                                                          |  |  |                                                                       |  |  |                         |  |   |                |  |   |                | 
|Allied Merit International Investment, Inc. |  | November 5, 2007
      to the completion of first round of fund raising after the
      reverse merger - |  |  |                                                                       |  |  | -                       |  | $ | -              |  | $ | 121,705        | 
|                                            |  |                                                                                                          |  |  |                                                                       |  |  |                         |  |   |                |  |   |                | 
|Tianjin Rural Commercial
      Bank         |  | June 3, 2010 to
      June 2, 2011                                                                       |  |  | Guaranteed by the
      Tianjin Haitai Investment Guarantee Co., Ltd. |  |  | 5.8%                    |  |   | 913,229        |  |   | -              | 
|                                            |  |                                                                                                          |  |  |                                                                       |  |  |                         |  |   |                |  |   |                | 
|Tianjin Rural Commercial Bank               |  | June 3, 2010 to
      June 2, 2011                                                                       |  |  | Guaranteed by the
      Tianjin Haitai Investment Guarantee Co., Ltd. |  |  | 5.8%                    |  |   | 1,217,637      |  |   | -              | 
|                                            |  |                                                                                                          |  |  |                                                                       |  |  |                         |  |   |                |  |   |                | 
|Tianjin Rural Commercial
      Bank         |  | June 3, 2010 to
      June 2, 2011                                                                       |  |  | Guaranteed by the
      Tianjin Haitai Investment Guarantee Co., Ltd. |  |  | 5.8%                    |  |   | 1,217,637      |  |   | -              | 
|                                            |  |                                                                                                          |  |  |                                                                       |  |  |                         |  |   |                |  |   |                | 
|Tianjin Rural Commercial
      Bank         |  | June 3, 2010 to
      June 2, 2011                                                                       |  |  | Guaranteed by the
      Tianjin Haitai Investment Guarantee Co., Ltd. |  |  | 5.8%                    |  |   | 1,217,637      |  |   | -              | 
|                                            |  |                                                                                                          |  |  |                                                                       |  |  |                         |  |   |                |  |   |                | 
|Bank of Beijing                             |  | January 6, 2011
      to January 5, 2012                                                                 |  |  | Guaranteed by the
      Beijing Huaxia Jingu Guarantee Co., Ltd.      |  |  | 6.1%                    |  |   | 1,522,047      |  |   | -              | 
|                                            |  |                                                                                                          |  |  |                                                                       |  |  |                         |  |   |                |  |   |                | 
|Bank of Tianjin                             |  | January 6, 2011
      to November 3, 2011                                                                |  |  | Guaranteed by the
      Tianjin Bohai Investment Guarantee Co., Ltd.  |  |  | 6.7%                    |  |   | 761,024        |  |   | -              | 
|                                            |  |                                                                                                          |  |  |                                                                       |  |  |                         |  |   |                |  |   |                | 
|Bank of Tianjin                             |  | November 4, 2010
      to November 3, 2011                                                               |  |  | Guaranteed by the
      Tianjin Bohai Investment Guarantee Co., Ltd.  |  |  | 6.7%                    |  |   | 2,283,071      |  |   | -              | 
|                                            |  |                                                                                                          |  |  |                                                                       |  |  |                         |  |   |                |  |   |                | 
|China Development Bank
      Co., Ltd.      |  | December 25, 2009
      to December 24, 2010                                                             |  |  | Guaranteed by the
      Tianjin Haitai Investment Guarantee Co., Ltd. |  |  | 5.8%                    |  |   | -              |  |   | 1,462,822      | 
|                                            |  |                                                                                                          |  |  |                                                                       |  |  |                         |  |   |                |  |   |                | 
|Tianjin Rural Commercial
      Bank         |  | May 22, 2009 to
      May 21, 2010                                                                       |  |  | Guaranteed by the
      Tianjin Haitai Investment Guarantee Co., Ltd. |  |  | 6.4%                    |  |   | -              |  |   | 1,462,822      | 
|                                            |  |                                                                                                          |  |  |                                                                       |  |  |                         |  |   |                |  |   |                | 
|Tianjin Rural Commercial Bank               |  | July 3, 2009 to May 21, 2010                                                                             |  |  | Guaranteed by the Tianjin Haitai Investment
      Guarantee Co., Ltd. |  |  | 6.4%                    |  |   | -              |  |   | 2,194,234      | 
|                                            |  |                                                                                                          |  |  |                                                                       |  |  |                         |  |   |                |  |   |                | 
|                                            |  |                                                                                                          |  |  |                                                                       |  |  |                         |  | $ | 10,654,328     |  | $ | 6,704,406      | 

F-19

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

9. Short Term Loans  Continued

On April 30, 2010, the Company entered into a loan agreement
with SAIF Partners III L.P. (SAIF Partners), pursuant to which the Company
borrowed $3 million from SAIF Partners with an interest rate of 12% per annum.
SAIF Partners currently owns 1,530,612 shares of the Companys Series A
Preferred Stock with par value $0.001 per share (the Series A Preferred
Stock), which constitute all of the issued and outstanding Series A Preferred
Stock of the Company. To secure the repayment by the Company of the loan, the
Companys major shareholder, Global Rock Stone Industrial Ltd (Global Rock),
executed in favor of SAIF Partners a stock pledge agreement, pursuant to which
Global Rock pledged 13,024,725 shares of common stock of the Company as security
for the obligations of the Company under the loan agreement. The loan was repaid
on September 30, 2010.

On June 3, 2010, the Company entered into three loan agreements
with Tianjin Rural Commercial Bank for RMB8,000,000 (approximately $1,217,637)
each and a loan agreement for RMB6,000,000 (approximately $913,229). The annual
interest rate is 5.8% and the loans are due on June 2, 2011. These loans are
guaranteed by Tianjin Haitai Investment Guarantee Co., Ltd. with the guarantee
fee of RMB360,000 (approximately $54,794) paid on July 20, 2010. The loans were
subsequently renewed on June 10, 2011 (Note 22).

On July 30, 2010, the Company renewed two loan agreements
with Shanghai Pudong Development Bank for RMB2,000,000 (approximately $304,409)
and RMB8,000,000 (approximately $1,217,637).  RMB 10,000,000
(approximately $1,522,047) was paid on November 4, 2010 and RMB 5,000,000
(approximately $761,024) was paid on January 6, 2011. The annual interest rate is 6.4%
and the loans are due on November 3, 2011. These loans are guaranteed by Tianjin Haitai Investment Guarantee Co., Ltd. with the guarantee fee of RMB150,000
(approximately 22,831) paid on July 30, 2010.

On November 4, 2010, the Company entered into a loan agreement
with Bank of Tianjin for RMB15,000,000 (approximately $2,283,071). The annual
interest rate is 6.7% and the loan is due on November 3, 2011.  The loan is
guaranteed by Tianjin Bohai Investment Guarantee Co., Ltd. with the guarantee
fee of RMB400,000 (approximately $60,882) paid on November 4, 2010.

On January 6, 2011, the Company entered into a loan agreement
with Bank of Beijing for RMB10,000,000 (approximately $1,522,047). The annual
interest rate is 6.1% and the loan is due on January 5, 2012. The loan is
guaranteed by Beijing Huaxia Jingu Guarantee Co., Ltd. with the guarantee fee of
RMB230,400 (approximately $35,068) paid on January 6, 2011.

F-20

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

|10. Due to Shareholders                                                    |   |           |  |   |           | 
|-------------------------------------------------------------------------- | - | --------- |  | - | --------- | 
|                                                                           |   | March 31, |  |   | March 31, | 
|                                                                           |   | 2011      |  |   | 2010      | 
|                                                                           |   | (audited) |  |   | (audited) | 
|                                                                           |   |           |  |   |           | 
|Li Liu, a director of the Company, officer
      and principal shareholder | $ | 3,531,966 |  | $ | 3,394,534 | 
|Other shareholders                                                         |   | 1,918,267 |  |   | 1,918,267 | 
|                                                                           | $ | 5,450,233 |  | $ | 5,312,801 | 

On June 12, 2009, the persons who were shareholders of Milkgoat
China before Milkgoat Industrial acquired their interests in Milkgoat China on
January 15, 2008 (the Original Shareholders) entered into a restructuring
agreement whereby the Original Shareholders, upon receipt of RMB30,500,000
(approximately $4,564,345) of dividend payable from Milkgoat Industrial agreed
to provide an interest-free loan of the same amount to Milkgoat China. The
entire amount of dividend was paid to the Original Shareholders and was lent to
Milkgoat China by the Original Shareholders.

The amounts due to director, Li Liu and the other shareholders
are unsecured with no stated interest and are not expected to be repaid within
the fiscal year ending March 31, 2012.

11. Long-Term Loans

As of March 31, 2011 and 2010, the Company has the following
long-term loans:

|                                                                                                                                                                                         |   | March 31, |   |   | March 31, |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | --------- | - | - | --------- | -
|                                                                                                                                                                                         |   | 2011      |   |   | 2010      |  
|                                                                                                                                                                                         |   |           |   |   |           |  
|Installment loan from
      Daimler-chrysler Automotive Finance Ltd, interest free, monthly
      principal and interest payment of $3,402 from February 5, 2010 to
      August 5, 2011 | $ | 17,697    |   | $ | 57,832    |  
|Less: current portion                                                                                                                                                                    |   | (17,697   | ) |   | (40,823   | )
|Long-term loans, net of
      current portion                                                                                                                                            | $ | -         |   | $ | 17,009    |  

(a) The convertible notes payable, net of debt discount
consists of the following as of March 31, 2011 and 2010:

|                                                                              |   | March 31, |  |   | March 31, | 
|----------------------------------------------------------------------------- | - | --------- |  | - | --------- | 
|                                                                              |   | 2011      |  |   | 2010      | 
|                                                                              |   |           |  |   |           | 
|Convertible notes payable                                                     | $ | 4,604,447 |  | $ | -         | 
|Accretion of debt discount - warrants and beneficial
      conversion feature |   | 456,714   |  |   | -         | 
|Convertible notes payable, net                                                | $ | 5,061,161 |  | $ | -         | 

Accrued interest on the convertible notes payable as of March
31, 2011 was $0. The interest expense on the convertible notes for the year
ended March 31, 2011 was $154,342.

Accrued interest on the convertible notes payable as of March
31, 2010 was $0. The interest expense on the convertible notes for the five
months ended March 31, 2010 was $9,829. These notes have been converted into
common shares on December 6, 2009.

F-21

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

12. Income and Other Tax Payables

Income and other tax payables consist of the following:

|                                          |   | March 31, |   |   | March 31, | 
|----------------------------------------- | - | --------- | - | - | --------- | 
|                                          |   | 2011      |   |   | 2010      | 
|                                          |   |           |   |   |           | 
|Income tax (receivable) payable           | $ | (251,670  | ) | $ | 17,585    | 
|Value added tax payable                   |   | 1,439,970 |   |   | 1,295,321 | 
|Individual income withholding tax payable |   | 4,962     |   |   | 316       | 
|Other tax payables                        |   | 21,232    |   |   | 24,972    | 
|                                          | $ | 1,214,494 |   | $ | 1,338,194 | 

13. Income Tax

The enterprise income tax is reported on a separate entity
basis.

United States

The Company was incorporated in Delaware and is subject to
United States of America tax law. No provisions for income taxes have been made
as the Company has a taxable loss for the year ended March 31, 2011. No tax
benefit has been realized since a valuation allowance has offset the deferred
tax asset resulted from the net operating loss.

BVI

Milkgoat Industrial was organized in the British Virgin Islands
and is not subject to income taxes under the current laws of the British Virgin
Islands.

PRC

Milkgoat China, Weinan Milkgoat, Fuping Milkgoat and Shaanxi
Milkgoat are subject to PRC income tax. Income tax expense for the year ended
March 31, 2011 and October 31, 2009 were $468,086 and $2,201,032, respectively.
Income tax expense (benefit) for the five months ended March 31, 2010 and 2009
were ($289,093) and $869,614 respectively.

Effective January 1, 2008, the statutory PRC tax rate is 25%.
Therefore, the statutory PRC rate for the years ended March 31, 2011 and October
31, 2009 and the five months ended March 31, 2010 and 2009 was 25%.

The income tax provision (benefit) consists of the following:

|                              |   | Year ended |   |   | Five months ended |   |   | Year ended  |  
|----------------------------- | - | ---------- | - | - | ----------------- | - | - | ----------- | -
|                              |   | March 31,  |   |   | March 31,         |   |   | October 31, |  
|                              |   | 2011       |   |   | 2010              |   |   | 2009        |  
|                              |   |            |   |   |                   |   |   | (unaudited) |  
|Current                       | $ | 535,626    |   | $ | (155,700          | ) | $ | 1,090,628   |  
|                              |   | -          |   |   | -                 |   |   | -           |  
|Deferred                      |   | 368,713    |   |   | (472,893          | ) |   | (17,514     | )
|Change in valuation allowance |   | (436,253   | ) |   | 339,500           |   |   | (203,500    | )
|                              | $ | 468,086    |   | $ | (289,093          | ) | $ | 869,614     |  

F-22

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

13. Income Tax  Continued

The following is a reconciliation of the tax derived by
applying the PRC statutory rate to the earnings before income taxes, and
comparing that to the recorded income tax provision (benefit):

|                                                            |  | Year ended |   |  | Five months ended |   |  | Year ended  | 
|----------------------------------------------------------- |  | ---------- | - |  | ----------------- | - |  | ----------- | 
|                                                            |  | March 31,  |   |  | March 31,         |   |  | October 31, | 
|                                                            |  | 2011       |   |  | 2010              |   |  | 2009        | 
|                                                            |  |            |   |  |                   |   |  | (unaudited) | 
|                                                            |  |            |   |  |                   |   |  |             | 
|Tax provision (benefit) at PRC statutory
      rate         |  | (25.0%     | ) |  | (25.0%            | ) |  | 25.0%       | 
|(Over) under accrual in prior years                         |  | (10.5%     | ) |  | 0.0%              |   |  | 0.1%        | 
|Unrecognized tax benefit of current period
      tax losses |  | 16.8%      |   |  | 0.6%              |   |  | 0.0%        | 
|Parent company's expenses not subject to PRC tax            |  | 75.5%      |   |  | 9.1%              |   |  | 3.5%        | 
|Effective tax rate                                          |  | 56.8%      |   |  | (15.3%            | ) |  | 28.6%       | 

The components of the deferred tax assets are as follows:

|                                                                           |   | March 31,  |   |   | March 31,  |  
|-------------------------------------------------------------------------- | - | ---------- | - | - | ---------- | -
|                                                                           |   | 2011       |   |   | 2010       |  
|                                                                           |   |            |   |   |            |  
|Deferred tax asset for NOL carryforwards -
      China                     | $ | 263,600    |   | $ | 173,000    |  
|Deferred tax asset for NOL carryforwards - US                              |   | 1,538,769  |   |   | 1,618,300  |  
|Warrant and option expense                                                 |   | 1,168,384  |   |   | 743,200    |  
|Temporary difference from advertisement                                    |   | -          |   |   | 232,236    |  
|Temporary difference from intercompany
      sales profit                  |   | 2,409      |   |   | 1,259      |  
|Temporary difference from slotting fee                                     |   | 374,124    |   |   | 220,243    |  
|Temporary difference from allowance for
      doubtful accounts receivable |   | 28,816     |   |   | 19,151     |  
|                                                                           |   | 3,376,102  |   |   | 3,007,389  |  
|Valuation allowance                                                        |   | (2,970,753 | ) |   | (2,534,500 | )
|Total deferred tax assets                                                  | $ | 405,349    |   | $ | 472,889    |  

Deferred income taxes have been classified in the consolidated
balance sheets as of March 31, 2011 and 2010 as follows:

|                        |   | March 31, |  |   | March 31, | 
|----------------------- | - | --------- |  | - | --------- | 
|                        |   | 2011      |  |   | 2010      | 
|                        |   |           |  |   |           | 
|Current assets          | $ | 374,124   |  | $ | -         | 
|Noncurrent assets       |   | 31,225    |  |   | 472,889   | 
|                        |   |           |  |   |           | 
|Net deferred tax assets | $ | 405,349   |  | $ | 472,889   | 

The valuation allowance for deferred tax assets as of March 31,
2011 and 2010 was $2,970,753 and $2,534,500, respectively. The change in total
allowance for the year ended March 31, 2011was an increase of $436,253 and for
the 5 months ended March 31,2010 was an increase of $339,500.

F-23

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

13. Income Tax  Continued

In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which the net operating losses and temporary differences
become deductible. Management considered projected future taxable income and tax
planning strategies in making this assessment. At March 31, 2011, the Company
had net operating loss carry forwards for United States Federal and State income
tax purposes of approximately $3,585,455 (the NOL carry forwards-US), which
were available to offset future US taxable income, if any, through 2031. At
March 31, 2011, the Company had net operating loss carry forwards, associated
with its subsidiaries Weinan Milkgoat, Fuping Milkgoat and Shaanxi Milkgoat, for
PRC income tax purposes of approximately $1,054,542 (the NOL carry forwards 
China), which are available to offset future PRC taxable income, if any, until
it is fully offset against future taxable income subject to the approval of the
Chinese tax authority. Based upon the uncertainty of future US taxable income,
the limited operating histories of its subsidiaries, Weinan Milkgoat, Fuping
Milkgoat, and Shaanxi Milkgoat, management has fully reserved the deferred tax
asset associated with the warrant expense and NOL carry forwards for US and PRC
income tax purposes.

The Company did not recognize any interest or penalties related
to unrecognized tax benefits in the year ended March 31, 2011 and five months
ended March 31, 2010. The
Company had no uncertain positions that would necessitate recording of tax
related liability. The Company is subject to examination by the respective tax
authorities.

14. Warrants

Series A Warrants

During the year ended March 31, 2011, 14,196 shares of common
stock had been issued upon the cashless exercise of 34,725 Series A Warrants.
For the five months ended March 31, 2010, 13,022 shares of common stock had been
issued upon the cashless exercise of 17,363 Series A Warrants.

Series C Warrants

As of March 31, 2011, 46,794 shares of common stock had been
issued upon the cashless exercise of 171,185 Series C Warrants.

Series D Warrants and Placement Agent Fee

In connection with the merger with Milkgoat Industrial on June
6, 2008, we paid the placement agent an aggregate of approximately $104,000 in
commissions and approximately $21,000 for expenses for its services in the
offering. We also issued the placement agent and its designees Series D Warrants
(which generally have the same terms as the Series A Warrants) to acquire an
aggregate of 144,448 shares of common stock. The Series D Warrants were valued
at $67,368 as the fair value. Of the total placement agent expense of $192,368,
$150,828 was allocated to debt issuance costs and the remaining $41,540 of
advisory cost was recorded as an expense. The debt issuance costs are amortized
by the interest method over the term of the convertible notes.

For the year ended March 31, 2011 and October 31, 2009,
amortization of debt issuance costs and accretion of debt discount from the
warrants and embedded derivatives issued in respect of the merger on June 6,
2008 totaled $0 and $487,821 as they have been fully amortized and accreted as
of March 31, 2011. For the five months ended March 31, 2010 and 2009,
amortization of debt issuance costs and accretion of debt discount from the
warrants and embedded derivatives issued in respect of the merger on June 6,
2008 (merger) totaled $91,227 and $118,913, respectively.

Each series of warrants issued in respect of the merger were
valued using a Black-Scholes model. The following assumptions were used to
calculate the fair value of Series B, C, E warrants: dividend yield of 0%,
expected volatility of 70.31%, risk-free interest rate of 2.73%, expected life
of 3 years, and stock price of $1.10 per share with exercise price of $1.08
-$1.35 per share. Assumptions were used to calculate the fair value of Series A
and D warrants: dividend yield of 0%, expected volatility of 100%, risk-free
interest rate of 0.73%, expected life of 1.5 years, and stock price of $1.4 per
share with exercise price of $0.98 per share.

Pursuant to a registration rights agreement with the purchasers
of 52 units of convertible promissory notes issued upon completion of merger
with Milkgoat Industrial on June 6, 2008, the Company agreed to register the
resale of the shares of common stock underlying these notes and Series A
Warrants. The Company did not file a registration statement by July 21, 2008, as
required by the agreement.

F-24

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

14. Warrants  Continued

On November 24, 2009, the Company and the investors entered
into a Settlement Agreement (the Settlement Agreement), to settle the
Companys obligations under the aforementioned registration rights agreement for
failure to file a registration statement in accordance with the terms of the
registration rights agreement. Pursuant to the Settlement Agreement, each
investor is entitled to convert the entire principal amount of and accrued
interest on all of the notes it holds into the Companys common stock at a
conversion price of $1.08 per share.

The Company modified the Series A and Series D warrant exercise
price to $0.98 per share in 2009 pursuant to the Settlement Agreement.
Additional expenses of $71,400 and $17,100, respectively, were recorded as a
result of the reduction in Series A and Series D warrant exercise prices.

During the year ended March 31, 2011, 5,840 shares of common
stock had been issued upon the cashless exercise of 9,169 Series D Warrants. For
the five months ended March 31, 2010, 78,432 shares of common stock had been
issued upon the cashless exercise of 110,000 Series D Warrants.

15. Issuance of Convertible Notes and Series of Warrants

On September 27, 2010, the Company issued and sold to certain
investors 892 units at a purchase price of $10,000 per unit, resulting in gross
proceeds of $8.92 million to the Company. Each unit consists of a three-year, 9%
convertible promissory note in the principal amount of $10,000 (the 9%
Convertible Note) and a three-year Series F common stock purchase warrant (the
Series F Warrant), to purchase 1,250 shares of the Companys common stock at
an exercise price of $2.50 per share.

The 9% Convertible Notes are payable at an interest rate of 9%
per annum, payable semiannually in arrears on the last day of the first and
third calendar quarters (i.e., March 31 and September 30) commencing March 31,
2011 and mature on September 26, 2013 (the Maturity Date). Except for the
secured Indebtedness (as defined in the 9% Convertible Note) of the Company and
its subsidiaries in existence on September 27, 2010, the obligations of the
Company under the 9% Convertible Notes will rank senior with respect to all
existing indebtedness of the Company as of September 27, 2010 and to any and all
Indebtedness incurred thereafter. The 9% Convertible Notes are also convertible
into shares of common stock at any time prior to the Maturity Date at $2.00 per
share, which conversion price is subject to weighted average and other customary
anti-dilution protections. At any time after September 26, 2011, the Company may
redeem all but not less than all of the outstanding principal amount of any 9%
Convertible Notes by payment of 108% of the outstanding principal amount of the
9% Convertible Notes, together with accrued but unpaid interest.

The 9% Convertible Notes contain customary affirmative and
negative covenants. The 9% Convertible Notes also contain customary events of
default, upon which the holders of the 9% Convertible Notes may declare all
outstanding 9% Convertible Notes to be due and payable immediately.

The Series F Warrants issued in connection with the private
placement in September 2010 entitle the investors to purchase an aggregate of
1,115,000 shares of common stock at an initial exercise of $2.50 per share,
which exercise price is subject to the customary weighted average and stock
based anti-dilution protection. The Series F Warrants may be exercised in a cash
or cashless way at any time upon the election of the holders until September 26,
2013.

Placement Agent Fee

The Company paid a cash commission of $713,600, which is equal
to 8% of the gross proceeds of the financing to the placement agent. In
addition, the Company issued Series F Warrants to the designees of the placement
agent to purchase an aggregate of 312,200 shares of common stock of the Company
at an exercise price of $2.50 per share, as partial compensation for services
provided by them in connection with the private placement.

F-25

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

15. Issuance of Convertible Notes and Series of Warrants -
Continued

Make Good Escrow Agreement

On September 27, 2010, the Company, a major shareholder of the
Company, Global Rock, Euro Pacific Capital, Inc. and Escrow, LLC entered into a
make good escrow agreement (the Make Good Escrow Agreement). Pursuant to the
Make Good Escrow Agreement, Global Rock agreed to place a total of 669,000
shares of common stock held by it, which is equal to 15% of the amount of shares
of common stock issuable upon conversion of the 9% Convertible Notes (the Make
Good Shares), into escrow to secure certain make good obligations of the
Company. In the event that the combined net sales of the Company of both of the
fiscal years ending March 31, 2011 and 2012 is less than $125 million, Global
Rock will transfer the Make Good Shares to the investors, on a pro rata basis to
the extent of shortfall of the actual net sales achieved compare to the
guaranteed net sales of $125 million for no additional consideration. As of
March 31, 2011, it is probable that the guaranteed net sales of $125 million for
fiscal years ending March 31, 2011 & 2012 may not be achieved. The estimated
fair value as of March 31, 2011 of the 266,390 shares expected to be delivered
is $205,683 and is reflected as accrued expenses  non current on the balance
sheet as of March 31, 2011. The fair value of Make Good Escrow Agreement will be
analyzed every period end using a probability weighted assessment method and
adjusted if necessary.

Registration Rights Agreement

In connection with the private placement of September 2010, the
Company and the investors entered into a registration rights agreement (the
Registration Rights Agreement), pursuant to which, the Company granted
registration rights to holders of registrable securities, which include (i) the
shares of common stock issuable upon the conversion of the 9% Convertible Notes,
(ii) the Make Good Shares, as applicable, (iii) the shares of common stock
issuable upon the exercise of Series F Warrants issued to the investors and the
placement agent, and (iv) any securities issued or issuable upon any stock
split, dividend or other distribution, recapitalization or similar event, or any
price adjustment as a result of such stock splits, reverse stock splits or
similar events with respect to any of the securities referenced in (i)  (iii)
above.

Pursuant to the Registration Rights Agreement, the Company is
required to file a registration statement on Form S-1 (the Registration
Statement), within 30 days after the closing of the private placement, or the
Closing, and cause the Registration Statement to be declared effective by the
Securities and Exchange Commission with 180 days after the Closing. The Company
may be subject to liquidated damages in an amount up to 8% ($713,600) of the
aggregate investment amount paid by the investors in the private placement if it
is unable to file, obtain and maintain effectiveness of the Registration
Statement as required by the Registration Rights Agreement by March 27, 2011.
The Company filed the Registration Statement on October 27, 2010. As of March
31, 2011, the Company has accrued a registration penalty of $267,600.

Closing Escrow Agreement

On September 27, 2010, the Company also entered into a closing
escrow agreement with the placement agent and the escrow agent (the Closing
Escrow Agreement), pursuant to which, among other things, the Company has
placed a certain amount of cash received from the private placement ($408,090)
(the Holdback Amount), with the escrow agent, which is sufficient to satisfy
the payment to the investors of one semiannual interest payment due on the
aggregate principal amount of all 9% Convertible Notes issued in the private
placement, which includes accrued interest due on the principal amount of the 9%
Convertible Notes from September 27, 2010 through March 31, 2011. If, an event
of default (as defined in the 9% Convertible Notes) is declared by the placement
agent with respect to a failure by the Company to make a semiannual interest
payment to the investors in accordance with the 9% Convertible Notes, the escrow
agent will disburse a certain portion of the Holdback Amount to the investors,
and within 30 days following the disbursement, the Company will deposit an
additional amount equal to the Holdback Amount with the escrow agent to be
retained and disbursed. On the Maturity Date or at any time prior to the
Maturity Date when 75% of all 9% Convertible Notes have been converted, all
remaining funds of the Holdback Amount will be disbursed to the Company.

F-26

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

15. Issuance of Convertible Note and Series of Warrants -
Continued

Accounting for Convertible Notes and Series F Common
Stock Warrants

The 9% Convertible Notes and Series F Warrants (issued to both
investors and the placement agent) contain ratchet provision which will reduce
the conversion and exercise price, based on a formula, if the Company sells or
issues securities at a price lower than the conversion or exercise price. The
embedded conversion option of the 9% Convertible Notes and the warrants do not
meet the test of being indexed only to the Companys common stock as defined in
ASC 815-40-15 because the formula is not based on the market price. Accordingly,
the embedded conversion option and warrants are accounted for as derivative
liabilities and are required to be re-measured at the end of every reporting
period with the change in fair value in the statement of operations.

The 8% placement agent fee and other offering costs totaling
$888,180 and the fair value of the Series F warrants issued to the placement
agent of $231,929 are accounted for deferred financing fees. The gross proceeds
of $8,920,000 are allocated to the fair value of the Series F warrants issued to
the investors of $828,319, fair value of the embedded conversion option of
$3,487,233, and the carrying value of the convertible notes of $4,604,447. The
fair value of the embedded conversion option is calculated using a
Cox-Ross-Rubinstein (CRR) binomial model with the following assumptions:
conversion price of $2.00, risk free interest rate of 0.66%, expected term of 3
years, and a volatility of 130%. The fair value of the warrants is calculated
using the CRR binomial model with the following assumptions: exercise price of
$2.5 per share, risk free interest rate of 0.66%, expected term of 3 years, and
a volatility of 130%. The expected volatility is based on average volatility of
five comparable companies in the same industry and the Companys historical
volatility.

The value of the embedded conversion option and the warrants
are re-measured at March 31, 2011 using the CRR binomial model with the same
assumptions as stated above except for a risk free interest rate of 0.91% and
volatility of 120%. The decrease in fair value of these derivative liabilities
for the year ended March 31, 2011 totaled $2,771,081, respectively (Note 16).

The initial carrying value of the convertible notes will be
accreted to their redemption value of $8,920,000 over the three years term of
the convertible notes at an effective interest rate of 34.77 %. Effective
interest expense recorded for the year ended March 31, 2011 is $864,805.

The following table summarizes all of the Companys warrants
outstanding as of March 31, 2011.

|                                                                                     |  | Shares outstanding |  |   | Fair
      Value | 
|------------------------------------------------------------------------------------ |  | ------------------ |  | - | ---------------- | 
|Warrants outstanding in respect of the merger:                                       |  |                    |  |   |                  | 
|Series A Warrants                                                                    |  | 549,812            |  | $ | 432,097          | 
|Series B Warrants                                                                    |  | 2,148,148          |  |   | 1,144,743        | 
|Series C Warrants                                                                    |  | 14,000             |  |   | 6,530            | 
|Series D Warrants                                                                    |  | 25,279             |  |   | 19,867           | 
|                                                                                     |  | 2,737,239          |  | $ | 1,603,237        | 
|                                                                                     |  |                    |  |   |                  | 
|Warrants outstanding for extension of
      maturity date of loan from Allied Merit: |  |                    |  |   |                  | 
|Series E Warrants                                                                    |  | 250,000            |  | $ | 233,547          | 

F-27

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

15. Issuance of Convertible Note and Series of Warrants -
Continued

|                                                                 |  |           |   |  |           |   |   | Exercise Price    | 
|---------------------------------------------------------------- |  | --------- | - |  | --------- | - | - | ----------------- | 
|                                                                 |  | Warrant   |   |  | Vested    |   |   | per Common        | 
|                                                                 |  | Shares    |   |  | Shares    |   |   | Stock
      Range | 
|                                                                 |  |           |   |  |           |   |   |                   | 
|Balance, October 31, 2009                                        |  | 3,329,681 |   |  | 3,329,681 |   | $ | 1.08-$1.35        | 
|                                                                 |  |           |   |  |           |   |   |                   | 
|Granted or vested during the 5 months ended
      March 31, 2010 |  | -         |   |  | -         |   |   | -                 | 
|Exercised during the 5 months ended March 31, 2010               |  | (127,363  | ) |  | (127,363  | ) | $ | 0.98              | 
|Expired during the 5 months ended March 31,
      2010           |  | -         |   |  | -         |   |   | -                 | 
|Balance, March 31, 2010                                          |  | 3,202,318 |   |  | 3,202,318 |   | $ | 0.98-$1.35        | 
|                                                                 |  |           |   |  |           |   |   |                   | 
|Granted or vested during the year ended March 31, 2011           |  | 1,427,200 |   |  | 1,427,200 |   | $ | 2.50              | 
|Exercised during the year ended March 31,
      2011             |  | (215,079  | ) |  | (215,079  | ) | $ | 0.98-$1.35        | 
|Expired during the year ended March 31, 2011                     |  | -         |   |  | -         |   |   | -                 | 
|Balance, March 31, 2011                                          |  | 4,414,439 |   |  | 4,414,439 |   | $ | 0.98-$1.35        | 

The following table summarizes the weighted average remaining
contractual life and exercise price of the Companys outstanding warrants.

|Warrants Outstanding          
|------------------------------
|                              
|                              
|Range of
      Exercise Prices
|                              
|$0.98-1.35                    
|$2.50                         

F-28

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

16. Fair Value Measurements

Fair Value Measurements and Fair Value of Financial
Instruments

The Company adopted the guidance of Accounting Standards
Codification 820, or ASC 820, for fair value measurements which clarifies the
definition of fair value, prescribes methods for measuring fair value, and
establishes a fair value hierarchy to classify the inputs used in measuring fair
value as follows:

Level 1 - Inputs are unadjusted quoted prices in active markets
for identical assets or liabilities available at the measurement date.

Level 2 - Inputs are unadjusted quoted prices for similar
assets and liabilities in active markets, quoted prices for identical or similar
assets and liabilities in markets that are not active, inputs other then quoted
prices that are observable, and inputs derived from or corroborated by
observable market data.

Level 3 - Inputs are unobservable inputs which reflect the
reporting entitys own assumptions on what assumptions the market participants
would use in pricing the asset or liability based on the best available
information.

The following table sets forth a summary of changes in fair
value of Level 3 liabilities for the year ended March 31, 2011:

|Liabilities:                                                 |   |            |  
|------------------------------------------------------------ | - | ---------- | -
|Balance of derivative liabilities as of
      March 31, 2010 | $ | -          |  
|Initial fair value of derivative liabilities                 |   | 4,547,481  |  
|Change the in fair value of derivative
      liabilities     |   | (2,771,081 | )
|Balance of derivative liabilities as of March 31, 2011       | $ | 1,776,400  |  

The fair value of the derivative liabilities was determined
using the CRR binominal model (Note 15), the following table sets forth the
components of derivative liabilities:

|                                                                         |   | March 31, |  |   | March 31, | 
|------------------------------------------------------------------------ | - | --------- |  | - | --------- | 
|                                                                         |   | 2011      |  |   | 2010      | 
|                                                                         |   |           |  |   |           | 
|Derivative liabilities  warrants to
      investors and placement agent | $ | 394,802   |  | $ | -         | 
|Derivative liabilities  conversion option on convertible
      notes    |   | 1,381,598 |  |   | -         | 
|Balance of derivative liabilities                                        | $ | 1,776,400 |  | $ | -         | 

Estimating fair values of derivative financial instruments
requires the development of significant and subjective estimates that may, and
are likely to, change over the duration of the instrument with related changes
in internal and external market factors. In addition, valuation techniques are
sensitive to changes in the trading market price of our common stock and its
estimated volatility. Because derivative financial instruments are initially and
subsequently carried at fair values, the Companys income may include
significant charges or credits as these estimates and assumptions change.

The carrying amounts reported in the balance sheets for cash,
accounts receivable, other receivables, short-term borrowings, accounts payable
and accrued expenses, customer advances, and amounts due to/from related parties
approximate their fair market value based on the short-term maturity of these
instruments. The carrying value of long-term loans approximates fair value since
the interest rate associated with the debt approximates the current market
interest rate.

F-29

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

17. Employee Stock Ownership Plan

On May 31, 2010, the Company adopted 2010 Employee Stock Option
and Stock Award Plan (the Plan). Up to 2,359,974 shares of common stock of the
Company may be issued under the Plan. The Plan permits the grant of Nonqualified
Stock Options, Restricted Stock, and Incentive Stock to employees, officers,
directors, and consultants of the Company and its subsidiaries. The Plan became
effective on May 31, 2010 when it was adopted by the Board of Directors but is
subject to approval by the stockholders of the Company within twelve months
after it.

The Company also entered into separate Yayi International Inc.
2010 Employee Stock Option and Stock Award Plan Award Agreements (the Option
Agreements), with each of Ms. Jing Chen, the Company's Chief Financial Officer
and Mr. Fung Shek, the Company's Vice President and Director. Under the terms of
the Option Agreements, the Company agreed to grant a stock option, at an
exercise price at $2.25 per share, to each of Ms. Chen and Mr. Shek for the
purchase of 250,000 shares of common stock and 106,000 shares of common stock,
respectively. According to the Option Agreements, 25% of the option granted to
each of Ms. Chen and Mr. Shek will vest on the first anniversary of the grant
date, and the balance will vest in equal quarterly installments over the next
three years on the last day of each quarter, subject to Ms. Chen's and Mr.
Shek's continuing employment with the Company through these dates. These options
are not vested as of March 31, 2011.

On May 31, 2010, the company also entered into separate Option
Agreements under the Plan with certain non-executive employees, pursuant to
which the Company granted to these employees options to purchase an aggregate of
842,400 shares of common stock, at an exercise price of $2.25 per share. These
options vests evenly over 4 years subject to such employees continuing
employment with the Company through these dates and meeting the performance
goals established by the department manager and/or the Companys CEO as the case
may be subject to the understanding that the Companys CEOs assessment shall be
final.

These options have been valued at $1,184,979 on grant date. The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of the options, with the following assumptions: no dividend yield,
expected volatility of 54%, risks free interest rate of 2.75% and expected
option life of seven years. The options expire ten years from the date of
issuance.

The compensation expenses accrued for the Plan which is subject
to employees continuing employment and meeting the performance goals
established by the department manager and/or the Companys CEO. During the year
ended March 31, 2011, a total of 385,300 shares of common stock failed to vest
and have been cancelled due to employee resignation and employees not meeting
performance target. For the year ended March 31, 2011, the Company reversed
compensation expense of $88,895 on these stock options that were not vested. As
of March 31, 2011, none of the options issued to non-executive employees are
vested.

On June 11, 2010, the Company entered into an Option Agreement
under the Plan with Mr. Kenneth Lee. Under the terms of the Option Agreement,
the Company granted a stock option, at an exercise price at $0.98 per share, to
Mr. Lee for the purchase of 707,992 shares of common stock of the Company.
According to the Option Agreement, the Option will fully vest after six months
from the grant date. Pursuant to the employment arrangement between Mr. Lee and
SAIF Partner, Mr. Lee is deemed to hold such option for the benefit of SAIF
Partner. These options are fully vested as of March 31, 2011.

These options have been valued at $951,315, the Company uses
the Black-Scholes option pricing model to calculate the grant-date fair value of
the options, with the following assumptions: no dividend yield, expected
volatility of 55%, risk free interest rate of 2.03%, expected term of 5.25
years. All of the options shall vest in one time after six months from the grand
date. The options expire ten years from the date of issuance.

The following table summarizes the weighted average remaining
contractual life and exercise price of the Companys outstanding options as of
March 31, 2011:

|                               |  | Options Outstanding           |  |  |                                         |  |  |                            | 
|------------------------------ |  | ----------------------------- |  |  | --------------------------------------- |  |  | -------------------------- | 
|                               |  | Number                        |  |  | Number Outstanding                      |  |  | Weighted Average Remaining | 
|Range of
      Exercise Prices |  | Outstanding at March 31, 2011 |  |  | Currently Exercisable at March 31, 2011 |  |  | Contractual Life (Years)   | 
|                               |  |                               |  |  |                                         |  |  |                            | 
|$0.98-2.25                     |  | 1,521,092                     |  |  | 707,992                                 |  |  | 9.19                       | 

F-30

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

17. Employee Stock Ownership Plan - Continued

The Company accounts for share-based payments in accordance
with ASC 718. Accordingly, the Company expenses the fair value of awards made
under its share-based plan. Total compensation expense related to the stock
options for the year ended March 31, 2011 was $1,119,020. For the year ended
March 31, 2011, $933,151 and $185,869 were recorded as general and
administrative expense and cost of goods sold respectively. As of March 31,
2011, there was $637,278 of unrecognized compensation costs related to unvested
share-based compensation arrangements granted under the Plan. There were 707,992
shares of options vested during the year ended March 31, 2011.

Expected volatilities utilized in the model are based on
average volatility of three comparable companies in the same industry. The risk
free interest rate is derived from the U.S. Treasury yield with a remaining term
equal to the expected life of the option in effect at the time of the grant.
Since the Company has limited option exercise history, it has elected to
estimate the expected life of an award based upon the SEC-approved simplified
method noted under the provisions of ASC 718-10-S99.

A summary of the Companys stock option activity as of March
31, 2011, and changes during the year ended March 31, 2011 is presented in the
following table:

|                                                               |  |           |   |   | Weighted-Average | 
|-------------------------------------------------------------- |  | --------- | - | - | ---------------- | 
|                                                               |  | Options   |   |   | Exercise Price   | 
|                                                               |  |           |   |   |                  | 
|Outstanding at March 31, 2010                                  |  | -         |   | $ | -                | 
|Granted                                                        |  | 1,906,392 |   |   | 1.78             | 
|Exercised                                                      |  | -         |   |   | -                | 
|Options of employees who resigned as of March 31,2011          |  | (324,300  | ) |   | 2.25             | 
|Options of employees who did not meet
      performance target |  | (61,000   | ) |   | 2.25             | 
|Outstanding at March 31, 2011                                  |  | 1,521,092 |   | $ | 1.66             | 
|                                                               |  |           |   |   |                  | 
|Vested at March 31, 2011                                       |  | 707,992   |   | $ | 0.98             | 
|                                                               |  |           |   |   |                  | 
|Exercisable at March 31, 2011                                  |  | 707,992   |   | $ | 0.98             | 

18. Commitments and Contingencies

Operating Leases

In the normal course of business, the Company leases office
space and factory under operating leases agreements, which expire through 2029.
The Company rents office space, primarily for regional sales administration
offices, in commercial office complexes that are conducive to administrative
operations. The operating leases agreements generally contain renewal options
that may be exercised in the Company's discretion after the completion of the
base rental terms. In addition, many of the leases provide for regular increases
to the base rental rate at specified intervals, which usually occur on an annual
basis.

As of March 31, 2011, the Company was obligated under operating
leases requiring minimum rentals as follows:

|2012       |   | 85,235  | 
|---------- | - | ------- | 
|2013       |   | 87,771  | 
|2014       |   | 88,279  | 
|2015       |   | 88,279  | 
|2016       |   | 88,279  | 
|Thereafter |   | 14,712  | 
|           | $ | 452,555 | 

For the years ended March 31, 2011 and October 31, 2009, rent
expense amounted to $265,342 and $213,914 respectively. For the five months
ended March 31, 2010 and 2009, rent expense amounted to $111,058 and $80,056
respectively.

F-31

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

18. Commitments and Contingencies - Continued

Purchase of Office Building with a total consideration of
$4,511,348

On January 15, 2007, the Company signed a sales and purchase
agreement with Tianjin Mengyang to buy a four-story office building of an
approximate construction area of 7,800 square meters located at Jinghai
Industrial Park, or Jinghai Project, for a total consideration of RMB29,640,000
(approximately $4,511,348). The main body construction of office building was
completed in September 2010. The construction project is under inspection and
the completion date is subject to the issuance of inspection report. Based on
the Companys estimate, the completion date would be October 2011. As of March
31, 2011, RMB28,570,000 (approximately $4,348,488) was paid and recorded as
advances on property, plant and equipment. The remaining RMB1,070,000
(approximately $162,860) would be paid in 2 installments of RMB535,000
(approximately $81,430) each upon receiving the certificate of right to use.

Renovation of Office Building with a total consideration of
$712,318

As of March 31, 2011, the first payment of RMB2,340,000
(approximately $356,159) was paid to Tianjin Mengyang for interior renovation of
the building and was recorded as advances and deposits on property, plant and
equipment. The remaining RMB2,340,000 (approximately $356,159) is to be paid
upon inspection of the completed renovation project. If the remaining balance is
not paid upon completion of the project, the balances will bear interest at the
PRC prime interbank rate of 6.03% per annum for a three months loan from Tianjin
Mengyang.

Purchase of Factory & Warehouse with a total
consideration of $13,773,763

On September 26, 2008, the Company signed a factory transfer
agreement with Tianjin Mengyang to purchase three warehouses and a factory of an
approximate construction area of 30,165 square meters situated at Jinghai
Industrial Park for a total consideration of RMB90,495,000 (approximately
$13,773,763). The Company paid a total of RMB44,404,000 (approximately
$6,758,497) in 2008.

On January 20, 2009, the Company signed a supplemental
agreement with Tianjin Mengyang to postpone the construction completion date to
December 31, 2009. Under the first supplement agreement, the parties agreed that
the RMB33,000,000 (approximately $5,022,754) is to be paid by 11 monthly
installments of RMB3,000,000 (approximately $456,614) each from January 2009 to
November 2009. The company paid RMB9,000,000 (approximately $1,369,842) in cash
and settled the other RMB6,000,000 (approximately $913,228) by offsetting a
short term loan due from Tianjin Mengyang up to May, 2009.

On June 12, 2009, the Company signed a second supplemental
agreement with Tianjin Mengyang under which the parties agreed that the
remaining balance for factory and warehouse of RMB31,091,000 (approximately
$4,732,195), will be paid by 3 installments. The first installment of
RMB16,080,500 (approximately $2,447,527) was paid on the completion of the main
framework of the construction in Oct, 2009. The second installment of
RMB7,505,250 (approximately $1,142,334) is due upon satisfactory inspection of
the construction. The final installment of RMB7,505,250 (approximately
$1,142,334) is due upon receiving the certificate of right to use.

The construction of the main office buildings, factory and
warehouse was completed in September 2010. Tianjin Construction Commission
requires the Company to provide the inspection report before the renovation
projects could begin. On September 16, 2010, the Chinese State Council issued a
Circular on Further Strengthening the Quality and Safety of Dairy Products No.
(2010) 42, which requires newly established dairy product manufacturing
companies to comply with Rules for Implementation of Regulations on Issuing
Infant Formula Milk Powder Production License which was issued by the
Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) in
November 2010. The rules tighten the examination criteria of production license
and inspection standard of milk product. Therefore, Jinghai Project is subject
to more stringent inspection before the inspection report could be issued. Based
on the Companys estimate, the completion date of Jinghai Project is postponed
to October, 2011 .

As of March 31, 2011, total payments of RMB75,484,500
(approximately $11,489,095) were made and recorded as advances and deposits on
property, plant and equipment. The remaining RMB15,010,500 (approximately
$2,284,668) are to be paid by 2 installments of RMB7,505,250 (approximately
$1,142,334) each. The first installment is due upon satisfactory inspection of
the construction. The second installment is due upon receiving the certificate
of ownership.

F-32

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

18. Commitments and Contingencies - Continued

Purchase of Machinery & Equipment of a total
consideration of $7,808,328

During the fiscal year ended March 31, 2010, the Company signed
a contract to purchase machinery and equipment to expand its liquid goat milk
production line, totaling RMB25,627,000 (approximately $3,900,549) and has been
paid to the supplier as of March 31, 2011. RMB1,703,000 (approximately $259,205)
of it was recorded in construction in progress and RMB5,266,600 (approximately
$801,601) of it was recorded in advances on property, plant and equipment for
those machinery and equipments not delivered yet. After March 31, 2010, the
Company adopted a new marketing strategy and signed a memorandum with the
supplier for switching the purchase contract of machinery and equipment RMB
5,266,600 (approximately $801,601) from Milkgoat China, our subsidiary company
to Shaanxi Milkgoat, our another subsidiary. The remaining of RMB18,657,400
(approximately $2,839,743) is expected to be paid in the fourth quarter calendar
year 2013.

On May 25, 2010, the Company entered into a construction
agreement with Tianjin Jinghai Power Co., Ltd., for the installation of a
10KV-1250KVA substation with a total amount of RMB5,000,000 (approximately
$761,023). As of March 31, 2011, the first payment of RMB1,000,000
(approximately $152,205) were paid and recorded in advances and deposits on
property, plant and equipment. The remaining RMB2,500,000 (approximately
$380,512) and RMB1,500,000 (approximately $228,306) are to be paid in July and
September 2012, respectively, when the construction is completed.

On May 26, 2010, the Company signed a contract with Tianjin
Jinquan Co., Ltd. for the GMP Cleaning Workshop Installation with the total
amount of RMB3,000,000 (approximately $456,614). As of March 31, 2011, the first
payment of RMB1,500,000 (approximately $228,306) were paid and recorded in
advances and deposits on property, plant and equipment. The remaining
RMB1,500,000 (approximately $228,306) are to be paid by 2 installments. The
first installment of RMB 1,050,000 (approximately $159,815) will be paid in
August 2012 when the main construction materials are delivered. The final
installment of RMB 450,000 (approximately $ 68,491) will be paid in September
2012 when the construction is completed.

During the fiscal year ended March 31, 2011, the Company signed
a contract with Shantou Xinyi for milk production equipment, totaling RMB670,000
(approximately $101,977). As of March 31, 2011, the Company paid RMB201,000
(approximately $30,593) and was recorded in advances on property, plant and
equipment. The Company expects the equipment will be delivered in July 2012. The
remaining will be paid progressively, RMB 335,000 (approximately $50,988) and
RMB 100,500 (approximately $15,297) will be paid in July and August 2012,
respectively, when the machinery and equipment is delivered and inspected. The
final payment of RMB 33,500 (approximately $5,099) is to be paid in November
2012 after the approval of final inspection of equipment.

There is a contract signed with ShangHai Dahe for purchasing
goat milk powder production lines, totaling RMB16,379,500 (approximately
$2,493,037). As of March 31, 2011, the Company paid RMB5,732,700 (approximately
$872,544) and recorded in advances on property, plant and equipment. The
remaining RMB10,646,800 (approximately $1,620,493) will be paid progressively,
RMB7,339,550 ($1,117,114), RMB2,456,925 ($373,956) and RMB850,325 ($129,423)
will be paid in July, September 2012 and March 2013, respectively when the
construction of factory and warehouse pass the inspection and upon receiving the
certificate of ownership.

The Company signed some small contracts for purchasing
machinery and equipment with a total amount of RMB625,000 (approximately
$95,128) and recorded in advances and deposits on property, plant and equipment
as of March 31, 2011.

Installation of central system pipelines with a total
consideration of $1,907,886

On October 28, 2009, Shaanxi Milkgoat entered into a Project
Installation Agreement (the Installation Agreement), with Heilongjiang
Tianhong Food Equipment Co., Ltd. (Heilongjiang Tianhong), which provided for,
among others, and install all the process pipelines and the central system
pipelines at Shaanxi Milkgoats new joint production facility. Pursuant to the
Installation Agreement, Shaanxi Milkgoat agreed to pay Heilongjiang Tianhong an
aggregate of RMB 12,535,000 (approximately $1,907,886) in five installments for
the service that Heilongjiang Tianhong will provide.

As of March 31, 2011, the first payment of RMB3,760,500
(approximately $572,366) representing 30% of the consideration, was paid and
recorded in advances and deposits on property, plant and equipment. The
remaining balance of RMB8,774,500 (approximately $1,335,520) includes
RMB3,760,500 (approximately $572,366) is expected to be paid within seven days
after the beginning of installation, RMB1,253,500 (approximately $190,789) is
expected to be paid within ten days after the completion of installation,
RMB3,133,750 (approximately $476,971) is expected to be paid within ten days
after the inspection of installation and RMB626,750 (approximately $95,394) is expected to be paid one year after
the inspection of installation. Heilongjiang Tianhong agreed to complete the
installation within 90 days after Shaanxi Milkgoat provides to Heilongjiang
Tianhong an appropriate construction site for the installation according to the
Installation Agreement. The estimated completion date of installation is
postponed to October 2013.

F-33

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

19. Concentrations, Risks, and Uncertainties

The Company did not have any customer constituting 10% or
greater of net sales for the year ended March 31, 2011 and October 31, 2009.

The Company did not have any customer constituting 10% or
greater of net sales for the five months ended March 31, 2010 and 2009.

The Company has not experienced any significant difficulty in
collecting its accounts receivable in the past and is not aware of any financial
difficulties of its major customers.

The Company has the following concentrations of business with
suppliers constituting 10% or greater of the Companys purchased value for the
year ended March 31, 2011 and October 31, 2009, for the five months ended March
31, 2010 and 2009:

|                               |  | Year ended  |  |  | Five months ended |  |  | Year ended  | 
|------------------------------ |  | ----------- |  |  | ----------------- |  |  | ----------- | 
|                               |  | March 31,   |  |  | March 31,         |  |  | October 31, | 
|                               |  | 2011        |  |  | 2010              |  |  | 2009        | 
|                               |  | (unaudited) |  |  | (unaudited)       |  |  | (unaudited) | 
|                               |  |             |  |  |                   |  |  |             | 
|CPMC Holding (Tianjin) Limited |  | *           |  |  | 15.4%             |  |  | *           | 

* Constitute less than 10% of the Company's purchased value.

20. Series A Redeemable Convertible Preferred Stock

On June 18, 2009, the Company entered into a series A preferred
stock purchase agreement, or the Stock Purchase Agreement, where it issued and
sold to SAIF Partners 1,530,612 shares of the Companys Series A Preferred
Stock, par value $0.001 per share, or the Series A Redeemable Convertible
Preferred Stock, at a price per share of $9.80 for an aggregate purchase price
of $15.0 million. The Series A Redeemable Convertible Preferred Stock is
convertible into the Companys common stock, at the option of the holder at any
time, at an initial conversion price at $0.98 per share, which conversion price
is subject to stock split, recapitalization and other anti-dilution protection,
as well as adjustments based on the Companys financial performance.

On June 16, 2009, the Company filed a Certificate of
Designation of Series A Preferred Stock with the Secretary of State of the State
of Delaware, or the Certificate, which became effective upon filing. Pursuant to
the Certificate, there are 1,530,612 shares of Series A Redeemable Convertible
Preferred Stock authorized.

Series A Redeemable Convertible Preferred Stock, subject to
stock split, stock dividend, recapitalization or other similar events as
provided for in the Certificate.

Dividends and Liquidation Rights

The holders of the Series A Redeemable Convertible Preferred
Stock are entitled to receive non-cumulative dividends prior and in preference
to any declaration or payment of dividend on the Companys common stock, at the
rate of 10% of US$9.80 per share per annum, when, as and if declared by the
Board. In the event of the Companys Liquidation Event, as defined in the
Certificate, the holders of the Series A Redeemable Convertible Preferred Stock
will be entitled to receive, prior to any distribution to holders of the common
stock, an amount per share equal to the sum of (i) $9.80 plus an annualized
internal rate of return of 15% for the period from the issuance date of the
Series A Redeemable Convertible Preferred Stock to the date when the full
payment is made and (ii) an amount equal to all declared but unpaid dividends
for each outstanding share of Series A Redeemable Convertible Preferred Stock,
subject to stock split, stock dividend, recapitalization or other similar events
as provided for in the Certificate.

F-34

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

20. Series A Redeemable Convertible Preferred Stock -
Continued

Voting Rights

The holders of Series A Redeemable Convertible Preferred Stock
have the right to one vote for each share of the Companys common stock into
which a share of Series A Redeemable Convertible Preferred Stock could then be
converted. The holders of Series A Redeemable Convertible Preferred Stock have
full voting rights and powers equal to the voting rights and powers of the
holders of the Companys common stock, and are entitled to notice of any
stockholders meeting in accordance with the Bylaws of the Company and to vote,
together with the holders of the Companys common stock as a single class, with
respect to any matter upon which holders of the Companys common stock have the
right to vote. In addition, as long as there are at least 15,306 shares of
Series A Redeemable Convertible Preferred Stock outstanding, the Company may
not, without the approval of the holders of at least two-thirds of the then
outstanding shares of Series A Redeemable Convertible Preferred Stock voting
together as a single class or the approval from at least one director elected by
the holders of shares of Series A Redeemable Convertible Preferred Stock, take
certain material corporate actions as provided for in the Certificate.

Redemption

At any time and from time to time after June 30, 2012, the holders
of not less than a majority of the then outstanding Series A Redeemable
Convertible Preferred Stock have the right to request the Company to redeem all
of the then outstanding shares of Series A Redeemable Convertible Preferred
Stock in cash, if the following qualified events has not occurred: (i) the
Companys shares of common stock or American Depository Shares representing
shares of the common stock are listed on the New York Stock Exchange or the
NASDAQ Global Market, and (ii) the closing market price of such listing
securities represents a price of no less than $4.25 per share of common stock,
subject to adjustment, in any consecutive 30-trading-day period. The per share
redemption amount is equal to the sum of (i) the purchase price of $9.8 per
share plus an internal rate of return of 25% for the period from the issuance
date of the Series A Redeemable Convertible Preferred Stock to the redemption
date, and (ii) an amount equal to all declared but unpaid dividends for each
outstanding share of Series A Redeemable Convertible Preferred Stock.
In accordance with FASB Accounting Standards Codification (ASC), the initial
amount of such redeemable preferred stock should be its fair value at date of
issue. If such convertible preferred stock is not currently redeemable and it is
not probable that such convertible preferred stock will become redeemable,
subsequent adjustment to its redemption amount is not necessary until it is
probable that the such convertible preferred stock will become redeemable. The
Series A Redeemable Convertible Preferred Stock is not redeemable currently.
Management assesses the probability of the above two qualified events not
occurring on a quarterly basis. The Company is currently working on complying
with the NASDAQ listing requirements however based on managements future
projection of earnings per share and considering P/E ratio of similar companies
in the dairy industry, management believes it is not probable that the Company
will be able to maintain a closing market price of no less than $4.25 per share
of common stock for 30 consecutive trading days. Therefore, the Company accreted
the change in the redemption value using the effective interest method starting
from January 2011. The fair value of the Series A Redeemable Convertible
Preferred Stock of $15,000,000 is accreted to equal the redemption value of
$26,383,562 over the 18 months period from January 1, 2011 to June 30, 2012 at
an effective interest rate of 45.7%. Interest expenses of $1,480,294 are being
accreted for the year ended March 31, 2011. 
In accordance with FASB ASC, the Series A Redeemable Convertible Preferred Stock
is classified outside of permanent equity because the occurrence of the
qualified events are not solely within the control of the Company. In accordance
with FASB ASC, the issuance costs of $735,129 are netted against the Private
Placement of the Series A Redeemable Convertible Preferred Stock.

F-35

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

21. Earnings Per Share

Basic earnings per share are computed on the basis of the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share is computed on the basis of the weighted average
number of shares of common stock plus the effect of dilutive potential common
shares outstanding during the period using the if-converted method for the
convertible notes and preferred stock and the treasury stock method for warrants
and options. The following table sets forth the computation of basic and diluted
net income per share:

|                                                                                                                                                    |   | Year ended |   |   | Five months ended |   |   | Year ended  |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------- | - | - | ----------------- | - | - | ----------- | -
|                                                                                                                                                    |   | March 31,  |   |   | March 31,         |   |   | October 31, |  
|                                                                                                                                                    |   | 2011       |   |   | 2010              |   |   | 2009        |  
|                                                                                                                                                    |   |            |   |   |                   |   |   | (unaudited) |  
|                                                                                                                                                    |   |            |   |   |                   |   |   |             |  
|Net (loss) income available for common
      shareholders                                                                                           |   |            |   |   |                   |   |   |             |  
|- basic                                                                                                                                             | $ | (1,291,499 | ) | $ | (1,602,795        | ) | $ | 2,175,164   |  
|Less: write-off of total debt discount on
      convertible debt since unamortized debt discount is written-off upon
      conversion               |   | -          |   |   | -                 |   |   | (167,578    | )
|Less: write-off of total deferred financing costs on
      convertible debt since unamortized financing costs are written-off upon
      conversion |   | -          |   |   | -                 |   |   | (43,167     | )
|Add: Accretion of interest expense to
      redemption value of Series A Preferred Stock                                                            |   | -          |   |   | -                 |   |   | -           |  
|Add: Accretion of debt discount on convertible debt                                                                                                 |   | -          |   |   | -                 |   |   | -           |  
|Add: Interest expense on convertible note                                                                                                           |   | -          |   |   | -                 |   |   | -           |  
|Add: Amortization of deferred financing fees                                                                                                        |   | -          |   |   | -                 |   |   | 43,025      |  
|Net (loss) income available for common
      shareholders                                                                                           |   |            |   |   |                   |   |   |             |  
|- diluted                                                                                                                                           |   | (1,291,499 | ) |   | (1,602,795        | ) |   | 2,007,444   |  
|                                                                                                                                                    |   |            |   |   |                   |   |   |             |  
|Weighted average outstanding shares of common stock                                                                                                 |   | 26,438,125 |   |   | 26,017,835        |   |   | 25,000,000  |  
|Dilutive effect of warrants                                                                                                                         |   | -          |   |   | -                 |   |   | -           |  
|Dilutive effect of options                                                                                                                          |   | -          |   |   | -                 |   |   | -           |  
|Dilutive effect of Series A convertible
      preferred stock                                                                                       |   | -          |   |   | -                 |   |   | -           |  
|Dilutive effect of convertible promissory notes                                                                                                     |   | -          |   |   | -                 |   |   | -           |  
|Diluted weighted average outstanding shares                                                                                                         |   | 26,438,125 |   |   | 26,017,835        |   |   | 25,000,000  |  
|                                                                                                                                                    |   |            |   |   |                   |   |   |             |  
|Earnings per share:                                                                                                                                 |   |            |   |   |                   |   |   |             |  
|Basic                                                                                                                                               | $ | (0.05      | ) | $ | (0.06             | ) | $ | 0.09        |  
|                                                                                                                                                    |   |            |   |   |                   |   |   |             |  
|Diluted                                                                                                                                             | $ | (0.05      | ) | $ | (0.06             | ) | $ | 0.09        |  

For the year ended March 31, 2011, no convertible preferred
stock, convertible notes and warrants were included in the calculation of the
Companys diluted loss per share because the Company reported net losses from
continuing operations.

For the five months ended March 31, 2010, no convertible
preferred stock, convertible notes and warrants were included in the calculation
of the Companys diluted loss per share because the Company reported net losses
from continuing operations.

For the five months ended March 31, 2009, common stock
equivalents including convertible notes and warrants were anti-dilutive;
therefore the amounts reported for basic and dilutive earning per share were the
same.

F-36

---

YAYI INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

For the year ended October 31, 2009, common stock equivalents
including convertible preferred stock, convertible notes and warrants were
anti-dilutive; therefore the amounts reported for basic and dilutive earning per
share were the same.

22. Subsequent Event

On June 10, 2011, the Company has signed a loan agreement with
Tianjin Rural Commercial Bank for RMB 30,000,000 (approximately $4,566,140). The annual
interest rate is 7.6% and the loan is due on June 9, 2012. The loan is
guaranteed by Tianjin Haitai Investment Guarantee Co., Ltd.

On June 16, 2011, the Company signed a construction agreement
with China Tenth Metallurgy Group Limited Corporation for the construction of a
research and development building in Weinan, PRC, for a total consideration of
RMB10,673,523 (approximately $1,624,560). RMB3,500,000 (approximately $532,716)
was paid to the contractor as a deposit as of March 31,2011. The Company has
paid RMB3,000,000 (approximately $456,614) and RMB500,000 (approximately
$76,102) on May 3 and June 27, 2011, respectively. The estimated completion date
of the construction is December 31, 2011 and the balance will be paid
progressively during the construction. The Company expected to pay RMB1,000,000
(approximately $152,205) in July 2011, RMB2,139,847 (approximately $325,695) in
December 2011 and RMB533,676 (approximately $81,228) in March 2012.

F-37

---