U.S. Securities and Exchange Commission
                             Washington, D.C. 20549

                                  Form 10-KSB/A

                   |X| ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                   OF THE SECURITIES AND EXCHANGE ACT OF 1934
                   for the fiscal year ended December 31, 2003

                | |TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
        For the transition period from ______________ to ________________

                         Commission File Number: 0-27351

                              American Diary, Inc.
                 (Name of small business issuer in its charter)

                 Utah                               87-0445575
                 ----                               ----------
     (State or other jurisdiction of      (I.R.S. Employer Identification No.)
      incorporation or organization)

       1st Qingxiang Street, Kedong County, Heilongjiang Province 164800,
                         The People's Republic of China
                    (Address of principal executive offices)

                                011-0452-4312688
                           (Issuer's telephone number)

         Securities registered under Section 12(b) of the Exchange Act:

                               Title of each class
                                       N/A

                    Name of each exchange on which registered
                                       N/A

         Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock, par value $.001

      Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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

      Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. |X|

      State issuer's revenues for its most recent fiscal year: $26,635,832

The aggregate market value of voting and non-voting equity held by
non-affiliates of the registrant as of December 31, 2003: Common stock, $.001
par value: $3,781,908

<PAGE>

      ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS

      Check whether the issuer has filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes | | No | |

      The number of shares of the registrant's common stock outstanding as of
March 29, 2004: 11,750,970 shares.

      Documents incorporated by reference: None

      Transitional Small Business Disclosure Format: Yes | | No |X|



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                                TABLE OF CONTENTS

PART I

Item 1. Description of Business                                                4

Item 2. Description of Property                                               17

Item 3. Legal Proceedings                                                     17

Item 4. Submission of Matters to a Vote of Security Holders                   17

PART II

Item 5. Market for Common Equity and Other Stockholder Matters                18

Item 6. Managements' Discussion and Analysis or Plan of Operations            20

Item 7. Financial Statements                                                  25

Item 8. Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure                                                26

PART III

Item 9. Directors and Executive Officers of Registrant                        26

Item 10. Executive Compensation                                               27

Item 11. Security Ownership of Certain Beneficial Owners and Management and
       Related Stockholder Matters                                            30

Item 12. Certain Relationships and Related Transactions                       31

Item 13. Exhibits and Reports on Form 8-K 32

Item 14. Controls and Procedures                                              33

Item 15. Principal Accountant Fees and Services 34

Signatures                                                                    35

Exhibit Index                                                                 36
                                       3
<PAGE>

ITEM I DESCRIPTION OF BUSINESS

      American Dairy, Inc. ("American Dairy") was incorporated under the
corporate laws of the State of Utah on December 31, 1985, originally with the
corporate name of Gaslight, Inc. It was inactive until March 30, 1988 when it
changed its corporate name to Lazarus Industries, Inc. and engaged in the
business of manufacturing and marketing medical devices. This line of business
was discontinued in 1991, and it became a non-operating public company shell.

      Effective May 7, 2003, American Diary completed the acquisition of 100% of
the issued and outstanding capital stock of American Flying Crane Corporation
(formerly called American Dairy Holdings, Inc.) ("AFC"), a Delaware corporation.
As a result, AFC become a wholly-owned subsidiary of American Dairy. In
addition, American Dairy amended its Articles of Incorporation to change its
name to "American Dairy, Inc." and completed a one-for-nineteen (1-for-19)
reverse split of its Common Stock. AFC holds 100% of the issued and outstanding
capital of Heilongjiang Feihe Dairy Co., Limited ("Feihe Dairy") in The People's
Republic of China. The principal activity of Feihe Dairy is the production and
distribution of milk powder and other dairy products. Feihe Dairy has two 99%
owned subsidiaries, Heilongjiang Sanhao Dairy Co., Limited ("Sanhao Dairy") and
BaiQuan Feihe Dairy Co., Limited ("BaiQuan Dairy"), that are engaged in the
production and supply of processed milk and soybean products for Feihe Dairy.

      American Dairy purchased all of the outstanding capital stock of AFC from
its stockholders in exchange for 9,650,000 restricted shares (post-split) of the
Common Stock of American Dairy. Pursuant to a written consent by stockholders
holding approximately 66% of the outstanding Common Stock of American Dairy, the
stockholders approved:

      1.    an amendment to the Articles of Incorporation of American Dairy to
            change its corporate name to "American Dairy, Inc.";

      2.    a one-for-nineteen (1-for-19) reverse split of the Common Stock of
            American Dairy; and

      3.    the establishment of its 2003 Stock Incentive Plan covering
            3,000,000 shares of Common Stock for its key employees, including
            officers, employees, directors and consultants.

      In addition to these actions, at the closing of the transaction effective
May 7, 2003, all of the directors of American Dairy resigned and Leng You-Bin,
Liu Sheng-Hui, Lee Hui-Lan, and Liu Hua were elected as the new directors and
officers of American Dairy.

                                       4
<PAGE>

Current  Corporate  Structure

      The following chart reflects the current corporate structure of the
American Dairy entities:

                              American Dairy, Inc.
                    formerly named "Lazarus Industries, Inc."
                                      100%

                        American Flying Crane Corporation
                                      100%

                      Heilongjiang Feihe Dairy Co., Limited

                100%(1)                                   100%(2)

  Heilongjiang Sanhao Dairy Co., Limited       BaiQuan Feihe Dairy Co., Limited

Heilongjiang Feihe Dairy Co., Limited and Subsidiaries

      Heilongjiang Feihe Dairy Co., Limited ("Feihe Dairy") and its subsidiaries
are companies organized under the laws of The People's Republic of China
("China" or "PRC").

      The history of Feihe Dairy commenced in 1962 when its predecessor,
Heilongjiang Zhaoguang Hongguang Dairy Plant ("Hongguang Dairy Plan") was
established as a wholly owned State Enterprise, whose principal activities were
the production and distribution of powdered milk in China. Hongguang Dairy Plant
was located at Zhaoguang Livestock Farm of Zhaoguang Agro-Cultivated Bureau and
its production capability was five tons a day and its main sales territory was
Shangdong Province.

      In 1982, Heilongjiang Zhaoguang Dairy Plant ("Zhaoguang Dairy"), another
State Enterprise, was established at Zhaoguang Plantation near BeiAn City. In
1984, the two Dairy Plant, Hongguang Dairy and Zhaoguang Dairy, were merged into
Heilongjiang Zhaoguang Dairy Plant. The State continued to retain ownership of
the merged Heilongjiang Zhaoguang Dairy Plant and the merged production
capability increased to 20 tons a day.

      In 1997, the merged Heilongjiang Zhaoguang Dairy Plant was further
reorganized and changed its name to Heilongjiang Feihe Dairy Group Limited. In
February 2000, Heilongjiang Feihe Dairy Group Limited completed its registered
capital restructuring to become a private company with registered capital of
$845,411.

      In March 2001, the restructured Heilongjiang Feihe Dairy Group Limited
changed its name to its present name of Heilongjiang Feihe Dairy Co., Limited
and acquired all of the fixed assets (including land use rights, plant and
equipment and factory buildings) of Kedong Gongmu Dairy Plant. Feihe Dairy holds
99% (1% of the equity is held in trust by Fu Man Guo) of the registered equity
of Heilongjiang Sanhao Dairy Co., Limited ("Sanhao Dairy"), which is considered
to be a wholly owned subsidiary).

      In August 2001, Feihe Dairy's new production facilities in Kedong County
commenced production of milk powder.

                                       5
<PAGE>

      Sanhao Diary was incorporated in March 28, 2001 with registered capital of
$433,110. Feihe Dairy owns 99% of Sanhao Dairy and Fu Man Guo holds the
remaining 1% in trust for Feihe Dairy. Under a Sale and Purchase Agreement dated
February 6, 2001 between Feihe Dairy and Kedong County Economic Committee, Feihe
Dairy agreed to acquire all the fixed assets including land use rights from
Kedong Gongmu Dairy Plant at a consideration of $364,269. Following the
incorporation of Sanhao Dairy, Feihe Dairy, as its contribution towards the
registered capital, injected all the fixed assets from Kedong Gongmu Dairy
Plant, except for its land uses rights to 47,640 square meters of land, into
Sanhao Dairy, plus cash of $68,841.

      Pursuant to a Sale and Purchase Agreement dated January 3, 2003, between a
wholly owned subsidiary, Heilongjiang Feihe Dairy Co., Limited ("Feihe Dairy")
and BaiQuan County Economic Planning Council (the "Council"), Feihe Dairy agreed
to acquire all the fixed assets including the factory site, production
facilities, land use rights and buildings from BaiQuan County Dairy Factory at a
consideration of $700,483 (Rmb.5,800,000), which is payable in two installments
totaling $603,864 (Rmb.5.0 million) on or before March 31, 2003 and a final
installment of $96,618 (Rmb.800,000) is due on or before March 31, 2004. As of
December 31, 2003, Feihe Dairy had paid $338,164 (Rmb.2.8 million) of the
consideration to the Council. Pursuant to a supplemental agreement with the
Council on March 31, 2003, Feihe Dairy agreed to repay the balance of the
consideration of $362,318 (Rmb.3.0 million) as follows:

      On or before January 3, 2004             $  72,464
      On or before January 3, 2005                96,618
      On or before January 3, 2006                96,618
      On or before January 3, 2007                96,618
                                               ---------
                                               $ 362,318
                                               =========

Sources of Milk

      Under supply contracts with numerous small dairy farmers who have cattle
grazing rights and use rights to approximately 514,640 acres of land in Kedong
County in northeastern China, American Dairy has been able to receive supplies
of raw milk without having to make capital investments in farms and cattle.
Historically, the milk industry in China has been very fragmented and segmented
with most production being generated by farmers owning and milking one to ten
cows. Approximately 27% of this acreage is arable pasture land, and
approximately 30% is planted with beans and corn.

      The dairy farms under contract with American Dairy have approximately
11,000 milk cows as of December 31, 2003.

      This large scale dairy production has an annual production capability of
approximately 123,000 tons (112,000 metric tons).

Milk Processing Facilities

      American Dairy has a relatively new milk powder packaging plant called
Feihe Dairy in Kedong County in China that commenced milk processing production
in August 2001. This plant is located at 1st Qingxiang Street, Kedong County, in
the City of QiQiHaEr, in Heilongjiang Province, China. Feihe Dairy has
approximately 134 packaging employees at this plant. American Dairy has a milk
powder processing plant called Sanhao Dairy in Kedong County in the City of
QiQiHaEr, in Heilongjiang Province, China. Sanhao Dairy has approximately 236
production employees.

                                       6
<PAGE>

      American Dairy is planning to build an additional milk powder processing
plant in close proximity to its existing Sanhao Dairy plant in Kedong County.
American Dairy has acquired the land use rights to this location for $400,966.
American Dairy has entered into a construction contract to build the new plant
for $4,210,870 (Rmb.34,866,000), of which $71,810 (Rmb.594,589) has been paid as
of December 31, 2003. In anticipation of the completion of this new plant,
American Dairy has ordered new milk powder processing machines and equipment,
and has advanced $1,897,885 as of December 31, 2003 to suppliers.

      American Dairy also has a milk powder processing plant called BaiQuan
Dairy. BaiQuan Dairy has approximately 62 production employees.

      The existing production facilities employ approximately 432 total
production personnel.

      All aspects of production of American Dairy's products are based on
traditional practices designed to yield premium quality, wholesome and superior
tasting foods.

      The existing production facilities have a daily milk processing capability
of 35 tons of fresh milk, and have:

      1.    three production lines for processing bean-milk powders;

      2.    two production lines for processing liquid milk into powdered milk;
            and

      3.    one production line for processing milk Crowley bean, milk Crowley,
            and solid milk.

      The existing processing facilities are capable of producing approximately
123,000 tons (112,000 metric tons) of milk products per year.

      American Dairy has been informed that the Kedong County government intends
to invest approximately $12,000,000 into milk cow breeding operations to
increase the presently available number of milk cows from 11,000 to 30,000, and
such an increase in the number of milk cows is anticipated to increase daily
milk production from 30,000 tons to approximately 105,900 tons of fresh milk.

      Because of the consistent quality of the milk powder products of American
Dairy, it was awarded an ISO9002 quality Assurance Certificate in October 2000.
In accordance with the requirements of ISO9002, American Dairy established a
"Quality Assurance Handbook" that provides standardized requirements and
procedures regarding the purchase of raw milk, its milk processing systems,
storage and packaging standards, the distribution of its products, and employee
training.

      Milk Processing. American Dairy believes that through purchasing raw milk
locally and employing minimal processing techniques, it is able to preserve the

                                       7
<PAGE>

fresh taste of milk. American Dairy's dairy processes raw milk within 24 to 36
hours after milking. Most large regional dairies, it believes, process raw milk
which may be three to four days old. Milk processed by conventional farms for
sale to regional dairies is typically stored at the farm for a minimum of two
days, commonly spends a full day in transit to the dairy facility, and is only
processed the following day. American Dairy's milk is not homogenized. During
homogenization, pressurized milk is forced through openings smaller than the
size of the fat globules present in milk, breaking them into smaller particles.
Thus treated, the milk fat remains suspended and does not separate out in the
form of cream. American Dairy believes that this process adversely affects the
taste and feel of milk. In addition, American Dairy's milk is pasteurized at the
lowest temperatures allowed by law to avoid imparting a cooked flavor to the
milk. When the milk is clarified and the butterfat removed to yield cream and
skim milk, a process of cold separation is used, rather than the more commonly
employed hot separation which it believes adversely affects the favor of the
milk.

      Dairy Product Processing. American Dairy's products are made in small
batches using minimal processing techniques to maintain freshness and allow
maximum flavor and nutrition retention. They are made with wholesome
ingredients. No chemicals or additives are employed. Because they are produced
locally, our dairy products arrive to consumers in American Dairy's marketing
area sooner after production than most other dairy products. To assure product
quality, the beginning of each production run is sampled for flavor, aroma,
texture and appearance. In addition, inspectors conduct spot-checks for bacteria
and butterfat content in its products, as well as sanitary conditions in its
facilities.

Research and Development

      American Diary has six technicians engaged in research and development
activities. These technicians monitor quality control at the milk processing
plants of American Diary to ensure that the processing, packaging and
distribution of the milk products result in high quality premium milk products
that are safe and healthy for its customers. These technicians also pursue
methods and techniques to improve the taste and quality of its milk products and
to evaluate new milk products for further production based upon changes in
consumer tastes, trends and the introduction of competitive products by other
milk producers.

Growth Strategy

      General. American Dairy believes that its products enjoy a reputation
among those people who are familiar with its milk powder products for being high
quality products. American Dairy believes that this reputation has spread
principally by word-of-mouth and also as a result of favorable press coverage.
American Dairy has also increased its marketing efforts through national
television. Pursuant to its marketing plan, American Dairy will seek to build
upon the reputation of its products and create strong brand identities, making
its products more widely recognizable.

      American Dairy will seek to extend the distribution of its products to
contiguous markets with high population concentrations. If American Dairy can
successfully implement its growth strategy, American Dairy will also seek to
enter other markets through joint ventures, licensing or other arrangements with
local dairy farms which it believes would benefit significantly from selling
their raw milk to newly established local dairies that will produce and sell
American Dairy brand milk powder products and soybean products in their local
markets. The key elements of American Dairy's growth strategy to reach its goal,
include:

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<PAGE>

      *     emphasizing local production and distribution. Its marketing efforts
            will continue to emphasize the local production and distribution of
            its products, which begins with purchasing raw milk from local
            farmers, resulting in premium quality milk powder products.

      *     increasing regional and national television advertising to better
            establish the "Feihe" brand name and increase the scope of its
            market area.

Brand Development and Marketing

      Brand Identity. American Diary's marketing will emphasize the local
production and national distribution of its products, which begins with local
dairy herds and results in premium quality products to a national market. It
believes that its story adds legitimacy to its marketing claim that it produces
farm fresh products and helps to instill confidence in consumers as to the
purity and wholesomeness of its products.

      American Dairy also seeks to convey its story through the packaging it
uses for its products. Its products have also received marketing benefits from a
considerable volume of favorable press and other publications of mass
circulation which has rated its products highly.

      American Dairy's marketing and promotional efforts will include:

      *     Redesigning packaging of non-fluid products to promote a premium
            quality image.

      *     Refining and targeting its message, which to date has largely been
            the product of work-of-mouth and product reviews.

      *     Developing trade material, including four-color trade sell sheets
            and brochures.

      *     Further distinguishing its products from other dairy products.

      *     Expanding retail advertising, including print advertising televised
            advertising and focused public relations.

                                       9
<PAGE>

Competition

      General. The food business is highly competitive and, therefore, American
Dairy faces substantial competition in connection with the marketing and sale of
its milk powder products and soybean products. Its products are positioned as
premium products and, accordingly, are generally priced higher than certain
similar competitive products. American Dairy believes that the principal
competitive factors in marketing its products are quality, taste, freshness,
price and product recognition. While American Dairy believes that it competes
favorably in terms of quality, taste and freshness, its products are more
expensive and less well known than certain other established brands. Its premium
products may also be considered in competition with non-premium quality dairy
products for discretionary food dollars.

Government Regulation

      American Dairy is regulated under national and county laws in China. The
following information summarizes certain aspects of those regulations applicable
to American Dairy and is qualified in its entirety by reference to all
particular statutory or regulatory provisions.

      Regulations at the national, province and county levels are subject to
change. To date, compliance with governmental regulations has not had a material
impact on American Dairy's level of capital expenditures, earnings or
competitive position, but, because of the evolving nature of such regulations,
management is unable to predict the impact such regulation may have in the
foreseeable future.

      As a manufacturer and distributor of food products, American Dairy is
subject to regulations of China's Agricultural Ministry. This regulatory scheme
governs the manufacture (including composition and ingredients), labeling,
packaging and safety of food. It also regulates manufacturing practices,
including quality assurance programs, for foods through its current good
manufacturing practices regulations, and specifies the standards of identity for
certain foods, including the products sold by American Dairy, and prescribes the
format and content of many of the products sold by American Dairy, prescribes
the format and content of certain nutrition information required to appear on
food products labels and approves and regulates claims of health benefits of
food products.

      In addition, China's Agricultural Ministry authorizes regulatory activity
necessary to prevent the introduction, transmission or spread of communicable
diseases. These regulations require, for example, pasteurization of milk and
milk products. American Dairy and its products are also subject to province and
county regulations through such measures as the licensing of dairy manufacturing
facilities, enforcement of standards for its products, inspection of its
facilities and regulation of its trade practices in connection with the sale of
dairy products.

Properties

      American Dairy's principal executive offices are presently located at 1st
Qingxiang Street, Kedong County, Heilongjiang Province 164800, China. The
executive office building is located on the same property as its Sanhao Dairy's
milk processing facilities. Although American Dairy owns the building and the
equipment, its land rights are based upon long-term land-use rights.

      American Dairy presently operates three milk powder processing plants and
various warehouses in northern China, known as Feihe Dairy, Sanhao Dairy and
BaiQuan Dairy.

                                       10
<PAGE>

      There is no private ownership of land in the PRC; all land ownership is
held by the government of the PRC, its agencies and collectives. Land use rights
are obtained from the government for periods ranging from 50 to 70 years, and
are typically renewable. Land use rights can be transferred upon approval by the
land administrative authorities of the PRC (State Land Administration Bureau)
upon payment of the required land transfer fees.

Borrowing Policies

      American Dairy may borrow at competitive rates of interest. Borrowed funds
will not be used for dividends to the shareholders.

      The precise amount, if any, borrowed by American Dairy will depend in part
upon the availability of financing, and prevailing interest rates and other loan
costs. There is no assurance that such financing, if any, will be available to
American Dairy in the amounts desired or on terms considered reasonable by the
Board of Directors.

      Loan agreements may require that American Dairy maintain certain reserves
or compensating balances and may impose other obligations on American Dairy.
Moreover, since a significant proportion of American Dairy's revenues may be
reserved for repayment of debt, the use of financing may reduce the cash that
might otherwise be available for dividends until the debt has been repaid and
may reduce total cash flow for a significant period.

      American Dairy may, under appropriate circumstances, attempt to cause
American Dairy to borrow funds at fixed interest rates. However, American Dairy
may borrow funds at rates that vary with a "prime" or "base" rate, particularly
on an interim basis or when interest rates are believed to be trending downward.
A rise in the indexed rate may increase borrowing costs and reduce the amount of
its income and cash available for distribution. In past years, the prime rates
charged by major banks have fluctuated significantly; as a result, the precise
amount of interest that American Dairy might be charged cannot be predicted with
any certainty.

Risk Factors

      Expansion Risks. American Dairy anticipates that its proposed expansion of
its milk processing plants may include the construction of new or additional
facilities. American Dairy's cost estimates and projected completion dates for
construction of new production facilities may change significantly as the
projects progress. In addition, American Dairy's projects will entail
significant construction risks, including shortages of materials or skilled
labor, unforeseen environmental or engineering problems, weather interferences
and unanticipated cost increases, any of which could have a material adverse
effect on the projects and could delay their scheduled openings. A delay in
scheduled openings will delay American Dairy's receipt of increased sales
revenues.

      New Projects. The projects of American Dairy to finance, develop, and
expand its milk processing facilities will be subject to the many risks inherent
in the rapid expansion of a high growth business enterprise, including
unanticipated design, construction, regulatory and operating problems, and the
significant risks commonly associated with implementing a marketing strategy in

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changing and expanding markets. There can be no assurance that any of these
projects will become operational within the estimated time frames and projected
budgets at the time American Dairy enters into a particular agreement, or at
all. In addition, American Dairy may develop projects as joint ventures in an
effort to reduce its financial commitment to individual projects. There can be
no assurance that the significant expenditures required to expand its milk
processing plants will ultimately result in the establishment of increased
profitable operations.

      When American Dairy's future expansion projects become operational,
American Dairy will be required to add and train personnel, expand its
management information systems and control expenses. If American Dairy does not
successfully address American Dairy's increased management needs or American
Dairy otherwise is unable to manage its growth effectively, American Dairy's
operating results could be materially and adversely affected.

      Uncertainty of Market Acceptance. American Dairy is currently selling its
products principally in northern China. Achieving market acceptance for American
Dairy's products, particularly in new markets, will require substantial
marketing efforts and the expenditure of significant funds. There is substantial
risk that any new markets may not accept or be as receptive to American Dairy's
products. Market acceptance of American Dairy's current and proposed products
will depend, in large part, upon the ability of American Dairy to inform
potential customers that the distinctive characteristics of its products make
them superior to competitive products and justify their pricing. There can be no
assurance that American Dairy's current and proposed products will be accepted
by consumers or that any of American Dairy's current or proposed products will
be able to compete effectively against other premium or non-premium dairy
products. Lack of market acceptance of American Dairy's products would have a
material adverse effect on American Dairy.

      Changing Consumer Preferences. As is the case with other companies
marketing dairy products, American Dairy is subject to changing consumer
preferences and nutritional and health-related concerns. American Dairy believes
that minimal processing and the absence of preservatives, additives, artificial
sweeteners or artificial flavorings increases the attractiveness of its products
to consumers. American Dairy's business could be affected by certain consumer
concerns about dairy products, such as the fat, cholesterol, calorie, sodium,
lactose content or contamination of such products. There is a significant
percentage of customers in China who are lactose intolerant, and may therefore
prefer other beverages. American Dairy could become subject to increased
competition from companies whose products or marketing strategies address these
consumer concerns more effectively.

      Effect of Adverse Medical Research Relating to Milk and Demand for Milk.
Periodically, medical and other studies are released and announcements by
medical and other groups are made which raise concerns over the healthfulness of
cow's milk in the human diet. To date, American Dairy does not believe that any
such studies have had a material effect on milk consumption rates in China.
However, a study may be published or an announcement made concerning the
healthfulness of cow's milk which may result in a decrease in demand for dairy
products in China.

      Production Capacity. There is no assurance that American Dairy will be
able to increase its production capacity to a level sufficient to meet
anticipated increased demand for its products associated with its marketing and
promotional efforts. American Dairy currently manufactures dairy products at a
rate which utilizes approximately 123,000 tons of raw milk per year. American
Dairy believes that it currently has the capacity, based on an assumed mix of

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<PAGE>

products, to manufacture dairy products at a rate which utilizes approximately
1,531 tons of raw milk per week. American Dairy plans to purchase equipment and
make improvements to its dairy plants which, it believes, should increase its
capacity to manufacture products to a rate which utilizes approximately 5,404
tons of raw milk per week. There is no assurance, however, that American Dairy's
contemplated improvements to its dairy plants will increase production capacity
to the level anticipated or that production can be increased at a rate
sufficient to meet anticipated increased demand for its products. There can be
no assurance, further, that the product mix which American Dairy anticipates
achieving and, therefore, which it has used in determining the equipment
requirements of its dairy processing plants will prove to be accurate, making
uncertain the future capacity of its dairy plant. Failure to meet possible
increased demand for its products, on a timely basis, could have a material
adverse effect on American Dairy's business, operations and finances.

      Impact of Growth on Quality of Dairy Products. American Dairy's products
are manufactured in small batches with milk from the farms of local farmers.
American Dairy believes that the small batch production methods it employs and
the quality of the raw milk it uses contribute to the quality of its dairy
products. There can be no assurance that the quality of American Dairy's dairy
products will be maintained at increased levels of production. Increased
production levels may cause American Dairy to modify its current manufacturing
methods and will necessitate the use of milk from other additional sources. A
decline in the quality of American Dairy's products could have a material
adverse effect on American Dairy's business, operations and finances.

      Sales Force. American Dairy has hired additional sales personnel during
2003. There is no assurance that hiring these additional sales people will
result in increased sales. American Dairy anticipates using independent dairy
distributors to sell and distribute its products in new contiguous expansion
markets, including Beijing. American Dairy cannot predict whether it will be
able to obtain and maintain satisfactory sales and distribution arrangements and
the failure to do so could have a material adverse effect on its business,
operations and finances.

      Limited Delivery Capacity; Delays in Delivery of Products. If sales
increase, there is no assurance that American Dairy will be able to deliver
increased product volumes on a timely and efficient basis. Further, there can be
no assurance that American Dairy will be able to deliver its products "fresh" to
customers on a consistent basis, especially with increased product volumes, and
a failure to do so could have a material adverse effect on its business,
operations and finances.

      Supply of Raw Milk. The raw milk used in our products is supplied to
American Dairy by numerous local farms under output contracts. American Dairy's
farmers are currently producing 30 tons of milk per day. American Dairy believes
that its farmers can more than double their production of raw milk. American
Dairy further believes, however, that this supply may not be sufficient to meet
increased demand for its products associated with its proposed marketing
efforts. American Dairy believes that the supply of raw milk from its farmers
should satisfy its requirements for raw milk for at least the next 12 months.
Though American Dairy believes that additional raw milk is available locally, if
needed, there is no assurance that American Dairy will be able to enter into
arrangements with the producers of such milk on terms acceptable to American
Dairy, if at all. An inadequate supply of raw milk will have a material adverse
effect on its business, operations and finances.

      Possible Volatility of Raw Milk Costs. The current 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

                                       13
<PAGE>

dairy policy could increase the risk of price volatility in the dairy industry.
There can be no assurance that a significant volatility in milk prices will not
occur or that any such volatility would not have a material adverse effect on
its business, operations and finances.

      Geographic Concentration; Fluctuations in Regional Economic Conditions.
Nearly all of American Dairy's sales are concentrated in the northern area of
China. Accordingly, American Dairy is susceptible to fluctuations in its
business caused by adverse economic conditions in this region. American Dairy's
products are priced higher than non-premium quality dairy products. Although
American Dairy believes that the quality, freshness, flavor and absence of
artificial ingredients in its products compensate for this price differential,
there can be no assurance that consumers will be willing to pay more for such
products in unfavorable economic conditions, or at all. Difficult economic
conditions in other geographic areas into which American Dairy may expand may
also adversely affect its business, operations and finances.

      Dependence on Executives. American Dairy is highly dependent on the
services of Leng You-Bin and Liu Hua, and the loss of their services would have
a material adverse impact on the operations of American Dairy. They have been
primarily responsible for the development of American Dairy and the development
and marketing of its products. American Dairy has not applied for key-man life
insurance on the lives of these executives, but may do so in the future.

      Competition. The milk business is highly competitive and, therefore,
American Dairy faces substantial competition in connection with the marketing
and sale of its products. In general, milk products are price sensitive and
affected by many factors beyond the control of American Dairy, including changes
in consumer tastes, fluctuating commodity prices and changes in supply due to
weather, production, feed costs and natural disasters. American Dairy's products
compete with other premium quality dairy brands as well as less expensive,
non-premium brands. American Dairy's milk faces competition from non-premium
milk producers distributing milk in its marketing area; other milk producers
packaging their milk in glass bottles, and other special packaging, which serve
portions of its marketing area. Most of American Dairy's competitors are well
established, have greater financial, marketing, personnel and other resources,
have been in business for longer periods of time than American Dairy, and have
products that have gained wide customer acceptance in the marketplace. The
largest competitors of American Dairy are state-owned dairies owned by the
government of China. Large foreign milk companies have also entered the milk
industry in China. The greater financial resources of such competitors will
permit them to procure retail store shelf space and to implement extensive
marketing and promotional programs, both generally and in direct response to
advertising claims by American Dairy. The milk industry is also characterized by
the frequent introduction of new products, accompanied by substantial
promotional campaigns. There can be no assurance that American Dairy will be
able to compete successfully or that competitors will not develop products which
will have superior qualities or which will gain wider market acceptance than its
products.

      Consolidation of Dairy Industry. American Dairy established its dairy
plants at a time when local dairies were being consolidated into large dairies
due to the market and the efficiencies of larger operations. This consolidation
trend is continuing and the forces responsible for it, including increased
efficiencies and economies of scale that are present in large regional dairies,
may put American Dairy at a competitive disadvantage.

      Lack of Property and General Liability Insurance. American Dairy and its
subsidiaries are self-insured, and they do not carry any property insurance,

                                       14
<PAGE>

general liability insurance, or any other insurance that covers the risks of
their business operations. As a result, any material loss or damage to its
properties or other assets, or personal injuries arising from its business
operations would have a material adverse affect on its financial condition and
operations.

      Potential Product Liability Associated with Food Products. American Dairy
faces the risk of liability in connection with the sale and consumption of milk
products and soybean products should the consumption of such products cause
injury, illness or death. Such risks may be particularly great in a company
undergoing rapid and significant growth. American Dairy currently maintains no
product liability insurance. There can be no assurance that any insurance will
be sufficient to cover potential claims or that the level of such coverage to be
acquired and maintained by American Dairy will be available in the future at a
reasonable cost. A partially or completely uninsured successful claim against
American Dairy could have a material adverse effect on American Dairy.

      Government Regulation. American Dairy is subject to extensive regulation
by China's Agricultural Ministry, and by other county and local authorities in
jurisdictions in which its products are processed or sold, regarding the
processing, packaging, storage, distribution and labeling of its products.
Applicable laws and regulations governing its products may include nutritional
labeling and serving size requirements. American Dairy was awarded the ISO 9002
Quality Assurance Certificate in October 2000 and is in compliance with the ISO
9002 requirements with respect to its production processes. American Dairy's
processing facilities and products are subject to periodic inspection by
national, county and local authorities. American Dairy believes that it is
currently in substantial compliance with all material governmental laws and
regulations and maintains all material permits and licenses relating to its
operations. Nevertheless, there can be no assurance that American Dairy will
continue to be in substantial compliance with current laws and regulations, or
whether American Dairy will be able to comply with any future laws and
regulations. To the extent that new regulations are adopted, American Dairy will
be required to conform its activities in order to comply with such regulations.
Failure by American Dairy to comply with applicable laws and regulations could
subject American Dairy to civil remedies, including fines, injunctions, recalls
or seizures, as well as potential criminal sanctions, which could have a
material adverse effect on its business, operations and finances.

      Doing Business in China. Doing business in China involves various risks
including internal and international political risks, evolving national economic
policies as well as financial accounting standards, expropriation and the
potential for a reversal in economic conditions. Since the late 1970s, the
government of the PRC has been reforming the Chinese economic system. These
reforms have resulted in significant economic growth and social progress.
Although we believe that economic reform and the macroeconomic policies and
measures adopted by the current Chinese government will continue to have a
positive effect on economic development in China and that we will continue to
benefit from such policies and measures. These policies and measure may from
time to time be modified or revised. Adverse changes in economic policies of the
Chinese government or in the laws and regulations, if any, could have a material
adverse effect on the overall economic growth of China, and could adversely
affect our business operations.

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

      We rely on the Chinese government's foreign currency conversion policies,
which may change at any time, in regard to our currency exchange needs. We

                                       15
<PAGE>

receive substantially all of our revenues in Renminbi, which is not freely
convertible into other foreign currencies. In China, the government has control
over Rennminbi reserves through, among other things, direct regulation of the
conversion or Renminbi into other foreign currencies and restrictions on foreign
imports. Although foreign currencies which are required for "current account"
transactions can be bought freely at authorized Chinese banks, the proper
procedural requirements prescribed by Chinese law must be met. At the same time,
Chinese companies are also required to sell their foreign exchange earnings to
authorized Chinese banks and the purchase of foreign currencies for capital
account transactions still requires prior approval of the Chinese government.
This type of heavy regulation by the Chinese government of foreign currency
exchange restricts certain of our business operations and a change in any of
these government policies, or any other, could further negatively impact our
operations.

      Fluctuations in the exchange rate between the Chinese currency and the
United States dollar could adversely affect our operating results.

      The functional currency of our operations in China is "Renminbi". Results
of our operations are translated at average exchange rates into United States
dollars for purposes of reporting results. As a result, fluctuations in exchange
rates may adversely affect our expenses and results of operations as well as the
value of our assets and liabilities. Fluctuations may adversely affect the
comparability of period-to-period results. Although we may use hedging
techniques in the future (which we currently do not use), we may not be able to
eliminate the effects of currency fluctuations. Thus, exchange rate fluctuations
could have a material adverse impact on our operating results and stock prices.

      As a company based in China, our shareholders may have greater difficulty
in obtaining information about us on a timely basis than would shareholders of a
U.S.-based company. Our operations will continue to be conducted in China and
shareholders may have difficulty in obtaining information about us from sources
other than us. Information available from newspapers, trade journals, or local,
regional or national regulatory agencies such as issuance of construction
permits, contract awards for development projects, etc. will not be readily
available to shareholders. Shareholders will be dependent upon our management
for reports of our progress, development, activities and expenditure of
proceeds.

      In order for the China subsidiaries of American Dairy to pay dividends to
American Dairy, a conversion of Renminbi into US dollars is required. Under
current Chinese law, the conversion of Renminbi into foreign currency generally
requires government consent. Government authorities may impose restrictions that
could have a negative impact in the future on the conversion process and upon
the ability of American Dairy to meet its cash needs, and to pay dividends to
its shareholders. However, the subsidiaries of American Dairy are presently
classified as a wholly owned foreign enterprise ("WOFE") in the PRC that have
verifiable foreign investment in the PRC, funding having been made through an
official PRC banking channel. Because the subsidiaries of American Dairy qualify
for treatment as a WOFE, the subsidiaries can declare dividends and their funds
can be repatriated to American Dairy in the United States under current laws and
regulations in the PRC.

      Limited Trademark Protection. American Dairy has obtained trademark
registrations for the use of its tradename "Feihe", which has been registered
with the Trademark Bureau of the State Administration for Industry and Commerce
with respect to its milk products. American Dairy believes its trademark is
important to the establishment of consumer recognition of its products. However,

                                       16
<PAGE>

there can be no assurance as to the breadth or degree of protection that the
trademarks may offer American Dairy, that American Dairy will have the financial
resources to defend the trademarks against any infringement, or that such
defense will be successful. Moreover, any events or conditions that negatively
impact its trademarks could have a material adverse effect on its business,
operations and finances.

      Proprietary Knowledge and Absence of Patent Protection. American Dairy has
no patents covering its products or production processes and expects to rely
principally on know-how and the confidentiality of its formulae and production
processes for its products and its flavoring formulae in producing a competitive
product line. There is no assurance that any of these factors can be maintained
or that they will afford American Dairy a meaningful competitive advantage.

      Note: In addition to such risks, businesses are often subject to risks not
foreseen or fully appreciated by management. In reviewing this Form 10-KSB, the
reader should keep in mind that other possible risks may exist.

Item 2. Description of Property

      American Dairy's principal executive offices are located at 1st Qingxiang
Street, Kedong County, Heilongjiang Province 164800, in The People's Republic of
China. Although American Dairy owns the building and the equipment, its land
rights are based upon long-term land use rights granted by the government of
China

      American Dairy intends to move its principal executive offices to Beijing
in the PRC during 2004, including the establishment of new warehouse facilities
and marketing offices comprised of approximately 25,000 square feet. American
Dairy has entered into a Sale and Purchase Agreement dated September 28, 2003,
to purchase land use rights to a property in Beijing for these new offices and
facilities for $1,200,861. American Dairy has made three installment payments
totaling $481,055 during 2003, and intends to finance the remaining balance of
the purchase price of $719,806 through a bank mortgage loan.

Item 3. Legal Proceedings

      From time to time, American Dairy may become involved in various claims
and lawsuits incidental to its business. There are presently no material legal
proceedings pending or threatened against American Dairy.

      American Dairy is not a party to any material litigation, and there are no
material outstanding claims against American Dairy or its assets.

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

      On May 7, 2003, the stockholders of American Dairy held a special meeting
by written consent of a majority of its stockholders (approximately 66% of the
outstanding shares of Common Stock). The shareholders approved:

      1. an amendment to the Articles of Incorporation of American Dairy to
change its corporate name to "American Dairy, Inc.";

      2. a one-for-nineteen (1-for-19) reverse split of the Common Stock of
American Dairy; and

                                       17
<PAGE>

      3. the establishment of its 2003 Stock Incentive Plan covering 3,000,000
shares of Common Stock for its key employees, including officers and employees,
directors and consultants.

                                     PART II

Item 5. Market for Common Equity and Other Shareholder Matters

      American Dairy is authorized to issue 50,000,000 shares of Common Stock,
$.001 par value per share. At December 31, 2003, there were 11,750,970 shares of
Common Stock issued and outstanding that were held by 260 stockholders of
record.

      The Common Stock of American Dairy is traded on the NASD Electronic
Bulletin Board over-the-counter market (OTC-BB), and is quoted under the symbol
"ADIY".

Common Stock

      Holders of Common Stock are entitled to one vote for each share held on
all matters voted upon by stockholders, including the election of directors. The
holders of Common Stock have no preemptive rights to purchase or subscribe for
any stock of American Dairy now or hereafter authorized or for securities
convertible into such stock. All of the outstanding shares of Common Stock are
fully paid and nonassessable. Upon any liquidation of American Dairy, the
holders of Common Stock are entitled to share ratably in assets available for
distribution to such stockholders. Holders of Common Stock are entitled to
receive dividends out of assets legally available therefor at such times and in
such amounts as the Board of Directors may from time to time determine.

      Shareholders are not entitled to cumulative voting rights, and
accordingly, the holders of a majority of the voting power of the shares voting
for the election of directors can elect the entire class of directors to be
elected each year if they choose to do so and, in that event, the holders of the
remaining shares will not be able to elect any person as a director of such
class.

Dividend Restrictions

      The terms of the instruments governing the future indebtedness of American
Dairy may contain restrictions on the payment of dividends and the making of
distributions on its capital stock (other than stock dividends) and the purchase
or redemption of outstanding capital stock of American Dairy. By reason of these
restrictions, American Dairy may be unable to pay dividends on its Common Stock
for some period in the future, which cannot presently be estimated.

      American Dairy has not declared or paid any dividends on its Common Stock
and presently does not presently expect to declare or pay any such dividends in
the foreseeable future. American Dairy has not yet formulated a future dividend
policy in the event restrictions on its ability to pay dividends are created.

                                       18
<PAGE>

Transfer Agent and Registrar

      The transfer agent and registrar for American Dairy is Interwest Stock
Transfer Co., 1981 E. Murray Road, #100, Halladay, Utah 84117-5148; telephone
(801)  272-9294.

Market Price

      The following table sets forth the range of high and low closing bid
prices per share of the Common Stock (trading symbol ADIY) of American Dairy as
reported by Pink Sheets, L.L.C. for the periods indicated (reflecting
inter-dealer prices without retail mark-up, mark-down or commission and may not
represent actual transactions) on the NASD Electronic Bulletin Board
over-the-counter market.

                                 High  Closing     Low  Closing
                                Bid Prices (1)(2)  Bid Prices (1)
                                -----------------  --------------
Year  Ended  December 31, 2002
     1st  Quarter                     $   0.05     $   0.04
     2nd  Quarter                     $   0.06     $   0.03
     3rd  Quarter                     $   0.06     $   0.05
     4th  Quarter                     $   0.08     $   0.06

Year  Ended  December 31, 2003
     1st  Quarter                     $   0.11     $   0.05
     2nd  Quarter(1)                  $   2.00(2)  $   0.01
     3rd  Quarter                     $   1.30     $   0.10
     4th  Quarter                     $   3.00     $   1.30

(1) On May 7, 2003, American Dairy had a one-for-nineteen (1-for-19) reverse
stock split of its Common Stock.
(2) The closing bid price of the Common Stock of American Dairy on March 29,
2004 was $2.00 per share.

      If the trading price of American Dairy's Common Stock is below $5.00 per
share, the Common Stock is considered to be "penny stocks" that are subject to
rules promulgated by the Securities and Exchange Commission (Rule 15-1 through
15g-9) under the Securities Exchange Act of 1934. These rules impose significant
requirements on brokers under these circumstances, including: (a)

                                       19
<PAGE>

delivering to customers the Commission's standardized risk disclosure document;
(b) providing customers with current bid and ask prices; (c) disclosing to
customers the broker-dealer's and sales representatives compensation; and (d)
providing to customers monthly account statements.

Stock Option, SAR and Stock Bonus Plan

      Effective May 7, 2003, the shareholders of American Dairy adopted and
approved its 2003 Incentive Stock Plan (the "Plan") which reserved 3,000,000
shares of Common Stock for issuance under the Plan. The Plan allows us to issue
awards of incentive non-qualified stock options, stock appreciation rights, and
stock bonuses to directors, officers, employees and consultants of American
Dairy which may be subject to restrictions. As of December 31, 2003, American
Dairy had not granted any stock options, stock appreciation rights or stock
bonuses under the Plan.

Sale of Unregistered Securities

      During December 2003, American Dairy issued 500,000 shares of restricted
Common Stock at $2.00 per share to residents and citizens of The People's
Republic of China and private investors in reliance upon Rule 506 of Regulation
D and Regulation S under the Securities Act of 1933.

      On August 28, 2003, American Dairy issued warrants to purchase 1,142,856
shares of its Common Stock to American Eastern Securities, Inc. and Belmont
Capital Group Limited that are exercisable for $1.75 per share for a term of
three years.

Item 6. Management's Discussion and Analysis or Plan of Operations

Forward Looking Statements

      This Form 10-KSB annual report of American Dairy contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may", "will", "expect",
"plans", "intends", "anticipate", "believe", "estimate" and "continue" or
similar words. You should read statements that contain these words carefully
because they discuss its future expectations, contain projections of its future
results of operations or of its financial condition or state other
"forward-looking" information. American Dairy believes that it is important to
communicate its future expectations to its investors. However, there may be
events in the future that American Dairy is not able to accurately predict or
control. This Form 10-KSB provides examples of risks, uncertainties and events
that may cause American Dairy's actual results to differ materially from the
expectations American Dairy describes in its forward-looking statements. You
should be aware that the occurrence of the events described as risk factors and
elsewhere in this Form 10-KSB could have a material adverse effect on its
business, operating results and financial condition.

Significant Accounting Estimates and Policies

      The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to

                                       20
<PAGE>

make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates including the
allowance for doubtful accounts, the saleability and recoverability of
inventory, income taxes and contingencies. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form our basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

      We must make estimates of the collectability of accounts receivable. We
analyze historical write-offs, changes in our internal credit policies and
customer concentrations when evaluating the adequacy of our allowance for
doubtful accounts. Differences may result in the amount and timing of expenses
for any period if we make different judgments or use difference estimates.

      As part of the process of preparing our consolidated financial statements,
we are required to estimate our income taxes. This process involves estimating
our current tax exposure together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities. We must then assess
the likelihood that our deferred tax assets will be recovered from future
taxable income, and, to the extent we believe that recovery is not likely, we
must establish a valuation allowance. To the extent that we establish a
valuation allowance or increase this allowance in a period, we must include a
tax provision or reduce our tax benefit in the statements of operations. We use
our judgment to determine our provision or benefit for income taxes, deferred
tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets. We believe, based on a number of factors including
historical operating losses, that we will not realize the future benefits of a
significant portion of our net deferred tax assets and we have accordingly
provided a full valuation allowance against our deferred tax assets. However,
various factors may cause those assumptions to change in the near term.

      We cannot predict what future laws and regulations might be passed that
could have a material effect on our results of operations. We assess the impact
of significant changes in laws and regulations on a regular basis and update the
assumptions and estimates used to prepare our financial statements when we deem
it necessary.

Comparison of Years Ended December 31, 2003 and 2002

      The following table sets forth certain operating information regarding
American Dairy, including its subsidiaries. The 2002 numbers include the pro
forma activities of American Flying Crane Corporation (formerly called "American
Dairy Holdings Inc.") prior to its reverse merger with American Dairy during
2003:

                                    Year  Ended        Year  Ended
                                 December 31, 2003  December 31, 2002
                                 -----------------  -----------------
     Revenues                       $ 26,635,832       $ 12,172,815
     Cost  of  goods  sold          $ 15,732,640       $  7,915,998
     Distribution  expenses         $  7,899,265       $  3,271,864
     General  and  administrative   $  1,669,435       $    764,798
     Depreciation                   $    131,302       $      2,613
     Other  Income                  $  1,196,939       $    132,010
     Interest  expense              $     24,809       $      2,882
     Net  Income                    $  2,036,807       $    344,177


                                       21
<PAGE>

      Net income increased by 492% from $344,177 in 2002 to $2,036,807 for 2003.
This increase in net income is attributable primarily to the following factors:
(1) a 119% increase in sales; (2) a 6% increase in gross profit margins from 35%
in 2002 to 41% in 2003; and (3) a 141% increase in distribution expenses, offset
in part by: (i) a 118% increase in general and administrative expenses, and (ii)
a $333,020 increase in enterprise income tax expense.

      Revenues. Revenues increased by $14,463,017 or 119% from $12,172,815 in
2002 to $26,635,832 in 2003. This increase was due primarily to expanding market
areas and adding new value added products. Unit sales prices remained constant
during the year.

      Cost of Goods Sold. Cost of goods sold increased 99% or $7,816,642 from
$7,915,998 in 2002 to $15,732,640 in 2003. This increase is due primarily to a
119% increase in sales volume offset in part by a 6% improvement in gross profit
margins from 35% in 2002 to 41% in 2003. The improved gross profit margins were
due in part to an overall 17% decrease in the cost of raw materials combined
with improved manufacturing efficiencies which were obtained as new processing
facilities came on line during the year.

      Distribution Expenses. Distribution expenses for the year ended December
31, 2003 were $7,899,265, an increase of $4,627,401 or 141% from the prior
year's distribution expenses of $3,271,864. The principal reasons for the
increase were substantial increases in advertising expense, distribution
salaries, and transportation expense which were incurred to expand market areas.

      General and Administrative Expenses. General and administrative expenses
for the year ended December 31, 2003 were $1,669,435, an increase of $904,687 or
118% from the prior year's general and administrative expenses of $764,798. The
principal reasons for the increase was $228,000 in consulting fees incurred at
the parent company level during 2003.

      Depreciation Expense. Depreciation expense for the year ended December 31,
2003 was $131,302, an increase of $128,689 from the prior year's depreciation
expense of $2,613. This increase is due primarily to property additions during
2003.

                                       22
<PAGE>

      Interest Expense. Interest expense for the year ended December 31, 2003
was $24,809 as compared to only $2,882 for the prior year. This increase was due
primarily to interest incurred on loans made from banks and financial
institutions during 2003 to finance the BaiQuan Dairy acquisition and
operations.

      Income Taxes. Income tax expense increased by $333,020 from $5,493 in 2002
to $338,513 in 2003.

Liquidity and Capital Resources

      Operating Activities. Net cash flows provided by operating activities for
the year ended December 31, 2003 was $6,131,568 compared with combined pro forma
net cash flows provided by operating activities of $1,204,368 for the year ended
December 31, 2002. This increase in cash flows from operating activities was
attributable primarily to net income of $2,036,807, and augmented by a decrease
in accounts receivable of $1,776,027, increases of $3,531,577 in accounts
payable and $2,071,175 in deferred income and offset in part by increases in
advances to suppliers of $630,226, inventories in the amount of $3,086,370, and
tax refunds due of $457,811.

      Sale of Stock. During the fiscal year ended December 31, 2003, American
Dairy realized $1,500,000 from the sale of its restricted Common Stock made in
reliance upon Rule 506 of Regulation D and Regulation S under the Securities Act
of 1933, as amended. During 2003, American Dairy reduced debt in the amount of
$1,866,311 by canceling such debt in exchange for issuing 933,155 shares of
its restricted Common Stock.

      Working Capital - At December 31, 2003, the Company had a negative working
capital of $(622,315).

      Contract Obligations - As of December 31, 2003, the Company had the
following contractual obligations:
<TABLE>
<CAPTION>

Contractual                                 Less than        One to        Four to       After Five
Obligations                      Total       one year      Three Years    Five Years       Years
                                 -----       --------      -----------    ----------       -----
<S>                          <C>            <C>            <C>            <C>            <C>
Notes Payable                $  483,092     $  483,092     $       --     $       --     $       --

Purchase obligation on
land and building               362,318         72,464        289,854             --             --

Lease obligations               279,092          6,697         16,880         11,960        243,555

Commitments on
construction in progress      2,241,174      2,241,174             --             --             --

Obligation to purchase
land and building               719,809        719,809             --             --             --

Commitments for
Advertising                   1,657,556      1,657,556             --             --             --
                             ----------     ----------     ----------     ----------     ----------
Totals                       $5,743,041     $5,180,792     $  306,734     $   11,960     $  243,555
                             ==========     ==========     ==========     ==========     ==========
</TABLE>

                                       23
<PAGE>

Restrictions on Transfer of Funds from China

     Under current law in the PRC, a conversion of Renminbi into U.S. dollars or
other foreign currency usually requires the consent of the government of the
PRC. These restrictions could have a negative impact in the future on the
conversion process, and cause restrictions on the ability of American Dairy to
meet its cash needs and on its ability to pay dividends to its stockholders in
the future. However, under current law in the PRC, the subsidiaries of American
Dairy in the PRC are qualified as a "wholly owned foreign enterprise" ("WOFE"),
which permits such subsidiaries to convert Renminbi into U.S. dollars and to
repatriate such funds to American Dairy in the United States.

New Accounting Pronouncements

      In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, Accounting for Obligations Associated
with the Retirement of Long-Lived Assets (SFAS 143). In April and June 2002, the
Financial Accounting Standards Board issued Standard No. 145, Reporting Gains
and Losses from Extinguishment of Debt (SFAS 145), and Standard No. 146,
Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). In
December 2002, the Financial Accounting Standards Board issued Standard No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure (SFAS 148).
SFAS 143 establishes accounting standards for the recognition and measurement of
an asset retirement obligation and its associated asset retirement cost. It also
provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS 143 is effective in fiscal years
beginning after June 15, 2002, with early adoption permitted. The provisions of
SFAS 143 do not have a material impact on our consolidated results of operations
and financial position. We adopted SFAS 143 effective January 1, 2003.

      SFAS 145 rescinds No.4, Reporting Gains and Losses from Extinguishment of
Debt, SFAS No. 44, Accounting for Intangible Assets of Motor Carriers and SFAS
No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements. SFAS
145 amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency
between the required accounting for sale-leaseback transactions. SFAS 145 is
effective in fiscal years beginning after May 15, 2002, with early adoption
permitted. The provisions of SFAS 145 do not have a material impact on our
consolidated results of operations and financial position. We adopted SFAS 145
effective January 1, 2003.

      SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities
addresses the accounting and reporting for costs associated with exit or
disposal activities. SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.

                                       24
<PAGE>

Previously, under Emerging Issues Task Force (ETIF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Insured in a Restructuring), a liability for
an exit cost was recognized at the date of an entity's commitment to an exit
plan. Under SFAS 146, an entity's commitment to a plan, by itself, does not
create a present obligation to others that meets the definition of a liability.
Therefore, SFAS 146 eliminates the definition of exit costs in Issue 94-3. SFAS
146 also establishes that fair value is the objective for initial measurement of
the liability. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early adoption
permitted. The provisions of SFAS 146 do not have a material impact on our
consolidated results of operations and financial position. We adopted SFAS 146
effective January 1, 2003.

      SFAS 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, amends No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used in reported financial results. SFAS 148, paragraphs 2(a) - 2(e), are
effective for financial statements for fiscal years ending after December 15,
2002. SFAS 148, paragraph 2(f), and the amendment to APB Opinion No. 28, Interim
Financial Reporting, shall be effective for financial reports containing
condensed financial statements for interim periods beginning after December 15,
2002. Earlier adoption is permitted.

      We adopted the disclosure provisions of SFAS 148 effective December 31,
2002. As permitted under SFAS 148, we continue to apply the recognition
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, in
determining our compensation expense.

Item 7. Financial Statements

      Financial statements include the consolidated balance sheet as of December
31, 2003, the consolidated statements of operations, shareholders' equity and
cash flows for the year ended December 31, 2003. Also included are statements of
operations, shareholders' equity and cash flows for the year ended December 31,
2002, along with pro-forma adjustments to include the activities of Feihe Dairy
during the year ended December 31, 2002.

                                       25
<PAGE>

                              AMERICAN DAIRY, INC.

                        CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2003

<PAGE>

                              AMERICAN DAIRY, INC.

                               TABLE OF CONTENTS

                                                                            Page
                                                                            ----

Independent Auditors' Report                                                 F-1

Consolidated Balance Sheet                                                   F-2

Consolidated Statements of Operations                                        F-4

Consolidated Statements of Stockholders' Equity                              F-5

Consolidated Statements of Cash Flows                                        F-6

Notes to the Consolidated Financial Statements                               F-8

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS
AMERICAN DAIRY, INC.


We have audited the accompanying consolidated balance sheet of American Dairy,
Inc. and subsidiaries (the "Company") as of December 31, 2003 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 2003. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with standards of the Public Company
Accouting Overshight 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that
our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Dairy, Inc.
and subsidiaries as of December 31, 2003 and the results of their operations and
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.


/s/Murrell, Hall, McIntosh & Co., PLLP
MURRELL, HALL, MCINTOSH & CO., PLLP

Oklahoma City, Oklahoma
February 28, 2004


                                      F-1
<PAGE>


                              AMERICAN DAIRY, INC.
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2003

                                     ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                   $  3,040,600
  Accounts receivable trade, net of allowance
    for  doubtful  accounts  of $ 445,237                        1,733,525
  Accounts receivable -- employees and other                       138,182
  Note receivable -- secured                                       237,923
  Advances to suppliers                                            630,226
  Inventories                                                    5,074,471
  Prepaid expenses                                               1,237,780
  Refundable taxes                                                 559,944
                                                              ------------
      Total  current  assets                                    12,652,651
                                                              ------------

PROPERTY  AND  EQUIPMENT:

  Land and building                                              1,452,401
  Plant and machinery                                            2,493,123
  Transportation equipment                                         278,236
  Computer equipment                                                22,221
                                                              ------------
                                                                 4,245,981
  Accumulated depreciation                                        (165,348)
                                                              ------------
                                                                 4,080,633
  Construction in progress                                       2,034,891
                                                              ------------
                                                                 6,115,524
                                                              ------------
OTHER  ASSETS
  Goodwill                                                           7,000
  Deposits on land, building, and equipment                        417,678
                                                              ------------
                                                                   424,678
                                                              ------------
      Total Assets                                            $ 19,192,853
                                                              ============

                 See accompanying summary of accounting policies
                       and notes to financial statements.

                                      F-2
<PAGE>

                              AMERICAN DAIRY, INC.
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2003

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT  LIABILITIES:
  Accounts  payable                                            $ 6,198,169
  Current portion of purchase obligation                            72,464
  Notes  payable                                                   483,092
  Deferred  revenue                                              4,867,745
  Advances  from  employees                                        537,560
  Amount  due  to  shareholder                                     846,229
  Taxes  payable                                                   269,707
                                                               -----------
      Total  current  liabilities                               13,274,966
                                                               -----------

PURCHASE OBLIGATION, net of current portion shown above            289,854
                                                               -----------
STOCKHOLDERS'  EQUITY:
  Common  stock, $0.001 par value 50,000,000 shares
    authorized; 11,750,970 shares issued                            11,751
    Additional paid-in capital                                   3,235,298
  Retained  Earnings                                             2,380,984
                                                               -----------
      Total  stockholders'  equity                               5,628,033
                                                               -----------
      Total  Liabilities  and  Stockholders'  Equity           $19,192,853
                                                               ===========

                 See accompanying summary of accounting policies
                       and notes to financial statements.

                                      F-3
<PAGE>

                              AMERICAN DAIRY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                 FOR THE YEAR ENDED DECEMBER 31,
                                                    2003              2002
                                                    ----              ----
SALES                                           $ 26,635,832      $ 12,172,815

COST  OF  GOODS  SOLD                             15,732,640         7,915,998
                                                ------------      ------------
     Gross  Profit                                10,903,192         4,256,817
                                                ------------      ------------
OPERATING AND ADMINISTRATIVE EXPENSES:
  Distribution  expenses                           7,899,265         3,271,864
  General and administrative expenses              1,669,435           764,798
  Depreciation                                       131,302             2,613
                                                ------------      ------------
                                                   9,700,002         4,039,275
                                                ------------      ------------
INCOME  FROM  OPERATIONS                           1,203,190           217,542
                                                ------------      ------------
OTHER  INCOME  (EXPENSES):
  Tax  incentives  and  other  income              1,196,939           135,010
  Interest  expense                                  (24,809)           (2,882)
                                                ------------      ------------
                                                   1,172,130           132,128
                                                ------------      ------------
INCOME  BEFORE  INCOME  TAXES                      2,375,320           349,670

INCOME  TAXES:
  Current  tax  expense - Foreign                    338,513             5,493
                                                ------------      ------------
NET  INCOME                                     $  2,036,807      $    344,177
                                                ============      ============

BASIC  EARNINGS  PER  SHARE                     $       0.19      $       0.04
                                                ============      ============
DILUTED EARNINGS PER SHARE                      $       0.19      $       0.04
                                                ============      ============
AVERAGE  COMMON  AND  COMMON
  EQUIVALENT  SHARES  OUTSTANDING                 10,535,964         9,650,000
                                                ============      ============

                 See accompanying summary of accounting policies
                       and notes to financial statements.

                                      F-4
<PAGE>

                              AMERICAN DAIRY, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
<TABLE>
<CAPTION>
                                              Common Stock
                                       Number           $0.001      Additional                         Total
                                        Of               par         Paid-In         Retained          Shareholders'
                                      Shares            Value        Capital         Earnings          Equity
                                      ------            -----        -------         --------          ------
<S>                                 <C>           <C>             <C>              <C>             <C>
Balance,  December 31, 2001         9,650,000     $     9,650     $   (35,794)     $        --     $   (26,144)

Net income  for  the  year
  ended December 31, 2002                  --              --              --          344,177         344,177
                                  -----------     -----------     -----------      -----------     -----------

Balance,  December 31, 2002         9,650,000           9,650         (35,794)         344,177         318,033

Recapitalization                      135,530             135          11,148               --          11,283

Shares issued for
  consulting  services                240,000             240         269,760               --         270,000

Shares issued in exchange for
  conversion  of  shareholder
  loans                               933,155             933       1,865,379               --       1,866,312

Stock  issued  for  cash              792,285             793       1,499,207               --       1,500,000

Less  offering  costs  other
  syndication  costs                       --              --        (374,402)              --        (374,402)

Net  income  for  the year
  ended December 31, 2003                  --              --              --        2,036,807       2,036,807
                                  -----------     -----------     -----------      -----------     -----------
Balance, December 31, 2003         11,750,970     $    11,751     $ 3,235,298      $ 2,380,984     $ 5,628,033
                                  ===========     ===========     ===========      ===========     ===========
</TABLE>
                 See accompanying summary of accounting policies
                       and notes to financial statements.

                                      F-5
<PAGE>

                              AMERICAN DAIRY, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

                                                        2003             2002
                                                        ----             ----
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                       $ 2,036,807      $   344,177
  Adjustments  to  reconcile  net
    income to operating  activities -
    Depreciation                                       131,302           21,764
    Provision for doubtful accounts                    426,124          124,585
    Consulting fees                                    179,982               --
    Gain on disposal of fixed assets                        --             (802)
    Changes in assets and liabilities:
      (Increase)  decrease  in                              --
        Accounts receivable                          1,776,027       (1,151,631)
        Advances to suppliers                         (630,226)              --
        Inventories                                 (3,086,370)        (751,725)
        Prepaid expenses                               (11,472)        (648,849)
        Refundable taxes                              (457,811)        (102,133)
        Amounts due to/from directors                       --          583,073
      Increase  (decrease)  in                              --
        Accounts payable and accrued
          Liabilities                                3,531,577          287,225
        Deferred income                              2,071,175        2,617,771
        Taxes payable                                  164,453         (113,364)
                                                   -----------      -----------
  Net  cash  provided  by  (used  in)
    operating activities                             6,131,568        1,210,091
                                                   -----------      -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Cash acquired during merger                           17,906               --
  Sales proceeds on disposal of
    fixed assets                                            --           10,870
  Deposits on land, buildings
    and equipment                                     (417,678)              --
  Purchases of property
    and equipment                                   (3,671,926)         (93,568)
  Purchase of business, net of
    cash acquired                                           --           42,248
  Disposal of assets                                    87,974               --
  Investment in construction in
    progress                                        (2,034,891)              --
  Issuance of note receivable -
    secured                                            (94,807)        (143,116)
                                                   -----------      -----------
  Net cash used in investing activities             (6,113,422)        (183,566)
                                                   -----------      -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Issuance of common stock for cash                  1,500,000               --
  Payment of syndication costs
    and other                                         (396,264)
  Proceeds from notes payable                          483,092               --
  Proceeds advanced from a shareholder                      --          102,093
  Purchase obligation                                  362,318
  Repayment of advances from
    a shareholder                                      (52,515)          (2,795)
                                                   -----------      -----------
  Net cash provided by
    financing activities                             1,896,631           99,298
                                                   -----------      -----------
NET INCREASE (DECREASE) IN CASH
  AND  CASH EQUIVALENTS                              1,914,777        1,125,823

CASH  AND  CASH  EQUIVALENTS,
  BEGINNING OF PERIOD                                1,125,823               --
                                                   -----------      -----------
CASH  AND  CASH  EQUIVALENTS,
  END OF PERIOD                                    $ 3,040,600      $ 1,125,823
                                                   ===========      ===========
SUPPLEMENTAL  DISCLOSURES  OF
  CASH  FLOW  INFORMATION:
  Interest paid, net of capitalized
    amounts                                        $    19,630      $        --
                                                   ===========      ===========
  Income taxes paid                                $   338,513      $     5,493
                                                   ===========      ===========


                                      F-6
<PAGE>

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: During
the year ended December 31, 2003, the Company converted loans from a shareholder
totaling $1,866,311 into 933,155 shares of common stock.

During the year ended December 31, 2003, the Company issued 240,000 shares of
its common stock valued at $270,000 for consulting services.

During the year ended December 31, 2003 the Company issued 1,142,856 warrants to
underwriters as additional consideration for funds raised in private placements
during the year. The exercise price of these warrants was $1.75, and the
warrants had a three year life. The fair market value of these warrants at the
date of issuance was $64,651. The effect of this issue was to increase
additional paid-in capital by the fair value of the warrants issued with an
offsetting reduction of additional paid-in capital in the same amount since
offering costs are treated as reductions of additional paid-in capital.

During the period ended December 31, 2002, the Company assigned a note payable
in the amount of $142,888 to a director of the Company.

During the year ended December 31, 2002, the director settled advances from
employees and staff guarantee fund, included in accounts payable, of $251,319
and $63,853, respectively, on behalf of Feihe Dairy.

                See accompanying summary of accounting policies
                       and notes to financial statements.

                                       F-7
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003

1.    Description of business

      Organizational structure

      American Dairy, Inc. ("American Dairy" or the "Company") was incorporated
in the State of Utah on December 31, 1985, originally with the name of Gaslight,
Inc. It was inactive until March 30, 1988 when it changed its corporate name to
Lazarus Industries, Inc. and engaged in the business of manufacturing and
marketing medical devices. This line of business was discontinued in 1991, and
it became a non-operating public company shell. During 2003, the Company changed
its name to American Dairy, Inc.

      Effective May 7, 2003, American Dairy completed the acquisition of 100% of
the issued and outstanding capital stock of American Dairy Holdings, Inc.
("ADH"), a Delaware corporation. As a result, ADH became a wholly owned
subsidiary of American Dairy.

      In preparation for this acquisition, which was treated as a reverse merger
for financial reporting purposes, American Dairy completed a 1 to 19 reverse
stock split reducing the number of shares of common stock outstanding from
7,485,147 to 394,168. In addition, American Dairy shareholders canceled 258,638
shares reducing the number of shares outstanding at the acquisition date to
135,530 shares.

      American Dairy purchased all of the outstanding capital stock of ADH from
its shareholders in exchange for 9,650,000 shares of restricted common stock.
This acquisition was treated as a purchase for financial reporting purposes with
ADH being the purchaser and American Dairy being the purchased entity. This
purchase resulted in the creation of $7,000 in goodwill.

      ADH was incorporated on January 15, 2002 in Delaware, with 50,000,000
authorized shares of common stock at a par value of $0.001 per share and 10,000
of which authorized shares are currently issued and outstanding. ADH owns 100%
of the registered capital of Heilongjiang Feihe Dairy Co., Limited ("Feihe
Dairy") and Feihe Dairy in turn owns 100% of the registered shares of
Heilongjiang Sanhao Dairy Co., Limited ("Sanhao Dairy") and BaiQuan Feihe Dairy
Co. Limited ("BiaQuan Dairy").

      Currently, the principal core activity of ADH is investment holdings,
while the principal core activities of Feihe Dairy, Sanhao Dairy and BiaQuan
Dairy are manufacturing and distribution of dairy products under the Feihe

     trademarks. The subsidiaries' principal country of operations is the
People's Republic of China ("PRC").

      Heilongjiang Feihe Dairy Co. Limited ("Feihe Dairy") was registered in
Heilongjiang Province, in the People's Republic of China ("PRC") as a limited
liability company on August 21, 1996 with a registered capital of $894,226 (Rmb.
7,404,193). Feihe Dairy's wholly-owned subsidiaries, Heilongjiang Sanhao Dairy
Co. Limited ("Sanhao Dairy") was registered in Heilongjiang Province in the
People's Republic of China as a limited liability company on March 28, 2001 with
registered capital of $433,110 (Rmb.3,586,150) and a defined period of existence
of four years to February 28, 2005 and BaiQuan Feihe Dairy Co. Limited ("BaiQuan
Dairy") were registered on September 16, 2002 with a registered capital of
$120,773 (Rmb.1,000,000) and a defined period of existence of one year to
September 15, 2003. Upon an application by the Company, BaiQuan Dairy's defined
period of existence was extended for a further period of three years to October
20, 2006.

      Included in the consolidated financial statements are the following
subsidiaries:

                                      F-8
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003

      As of December 31, 2003, Feihe Dairy had a new production facility, Feihe
Industrial Park, under construction. Construction is expected to complete by
September 1, 2004.

2. Basis of preparation of financial statements

      The Company's consolidated financial statements include the accounts of
American Dairy, Inc. and its wholly owned subsidiaries, ADH, Feihe Dairy, Sanhao
Dairy, and BaiQuan Dairy. The consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America. The consolidated financial statements are prepared using the historical
cost convention. This basis of accounting differs from that used in the
preparation of the Company's statutory financial statements which are prepared
in accordance with generally accepted accounting principles and the relevant
financial regulations applicable to enterprises in the PRC.

      On May 7, 2003, American Dairy, Inc. acquired all of the outstanding
common stock of American Flying Crane Corporation. For accounting purposes, the
acquisition has been treated as a recapitalization of American Flying Crane
Corporation with American Flying Crane Corporation as the acquirer. The
historical financial statements prior to Mary 7, 2003 are those of American
Flying Crane Corporation.

      The following table reflects the unaudited pro forma condensed statements
of operations and cash flows for the year ended December 31, 2002 as if the
acquisition had taken place on January 1, 2002:

                   Pro-Forma Condensed Statement of Operations
                      For the Year Ended December 31, 2002

       Sales                                               $12,172,815
       Cost of sales                                         7,915,998
                                                           -----------
       Gross profit                                          4,256,817

       Operating and administrative
         Expenses                                            4,058,293
       Other (income) expense                                 (132,226)
                                                           -----------
       Net income before taxes                                 330,750
       Income taxes expense                                      5,493
                                                           -----------
       Net Income                                          $   325,257
                                                           ===========
       Earnings per share                                  $       .03
                                                           ===========
       Pro Forma common
         Share outstanding                                   9,785,530
                                                           ===========


                                      F-9
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003

2. Basis of preparation of financial statements (continued)

                   Pro-Forma Condensed Statement of Operations
                      For the Year Ended December 31, 2002

       Cash flows from operating activities:               $ 1,204,368
       Cash flows (used in) investing activities              (183,566)
       Cash flows from financing activities                     99,298
                                                           -----------
         Net increase in cash                                1,120,100

         Cash - beginning                                       23,629
                                                           -----------
       Cash - End of period                                $ 1,143,729
                                                           ===========

3. Summary of significant accounting policies

      The following is a summary of significant accounting policies:

      Consolidation -

Generally accepted accounting principles require the consolidation of controlled
or wholly owned subsidiaries. The Company's consolidated financial statements
include the following consolidated subsidiaries:

     -  American  Dairy  Holdings,  Inc.
     -  Heilongjiang  Feihe  Dairy  Co.,  Limited
     -  Heilongjiang  Sanhao  Dairy  Co.,  Limited
     -  BaiQuan  Feihe  Dairy  Co.,  Limited.

All significant inter-company transactions and balances are eliminated in
consolidation.

      Cash and equivalents - The Company considers all highly liquid debt
instruments purchased with maturity period of three months or less to be cash
equivalents. The carrying amounts reported in the accompanying consolidated
balance sheet for cash and cash equivalents approximate their fair value.

      Accounts receivable - Provision is made against accounts receivable to the
extent which they are considered to be doubtful. Accounts receivable in the
balance sheet is stated net of such provision. As of December 31, 2003,
provision for doubtful accounts totaled $445,237.

      Inventories - Inventories comprise raw materials, consumables and goods
held for resale and are stated at the lower of cost or market value. Cost is
calculated using the weighted average method and includes any overhead costs
incurred in bringing the inventories to their present location and condition.
Inventory is valued at the lower of historical cost or fair market value.

      Market value represents the estimated selling price in the ordinary course
of business less the estimated costs necessary to complete the sale.

      Construction-in-progress - All facilities purchased for installation,
self-made or subcontracted are accounted for as construction-in-progress.

      Construction-in-progress is recorded at acquisition cost, including cost
of facilities, installation expenses and the interest capitalized during the
course of construction for the purpose of financing the project. Upon completion
and readiness for use of the project, the cost of construction-in-progress is to
be transferred to fixed assets.

      Long-lived assets and depreciation - The Company recognizes impairment
losses on long-lived assets used in operations when impairment indicators

                                      F-10
<PAGE>

are present and the undiscounted cash flows estimated to be generated by these
assets are less than their carrying values. Long-lived assets held for disposal
are valued at the lower of carrying amount or fair value less cost to sell.

      The cost of property, plant and equipment less anticipated salvage values
of 10% is being depreciated on a straight-line basis over the estimated useful
lives of the related assets. Land use rights are being amortized on a
straight-line basis over the term of the use agreement. Estimated useful lives
used for computing depreciation are as follows:

          Buildings                    30  years
          Plant  and  machinery        18  years
          Motor  vehicles               8  years
          Computers  and  equipment     5  years

      Deferred Revenues - Revenue from the sale of goods or services is
recognized when goods are delivered or services are rendered. Receipts in
advance for goods to be delivered or services to be rendered in the subsequent
year are carried forward as deferred revenue.

      Revenue recognition - Revenue from the sale of goods is recognized on the
transfer of risks and rewards of ownership, which generally coincides with the
time when the goods are delivered to customers and the title has passed.

      Interest income is recognized when earned, taking into account the
principal amounts outstanding and the interest rates applicable.

      Sundry income includes compensations received from the State Bureau as
incentive to relocate from the previous factory premises, profit from the sales
of raw materials to third parties and write back of long outstanding trade
payables.

      Foreign currencies - The financial position and results of operations of
the Company are determined using the local currency ("Renminbi" or "Yuan") as
the functional currency. Foreign currency transactions during the year are
converted at the average rate of exchange during the reporting period. Monetary
assets and liabilities denominated in foreign currencies at the balance sheet
date are translated at the market rate of exchange ruling at that date. All
exchange differences are dealt with in the statements of operation. The
Company's principal country of operations is in The People's Republic of China.

      The registered equity capital and fixed assets denominated in the
functional currency are translated at the historical rate of exchange at the
time of capital contribution and purchases of fixed assets and exchange
differences arising from translating equity capital, reserves and fixed assets
at the exchange rate ruling at the balance sheet date are dealt with as an
exchange fluctuation reserve in shareholders' equity.

      Taxation - Taxation on overseas profits has been calculated on the
estimated assessable profits for the year at the rates of taxation prevailing in
the country in which the Company operates.

      Provision for the PRC income tax is calculated at the prevailing rate
based on the estimated assessable profits less available tax relief for losses
brought forward.

      Enterprise income tax

      Under the Provisional Regulations of the PRC Concerning Income Tax on
Enterprises promulgated by the State Council and which came into effect on


                                      F-11
<PAGE>


                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003

      January 1, 1994, income tax is payable by enterprises at a rate of 33% of
their taxable income. Preferential tax treatment may, however, be granted
pursuant to any law or regulations from time to time promulgated by the State
Council.

      Enterprise income tax ("EIT") is provided on the basis of the statutory
profit for financial reporting purposes, adjusted for income and expense items,
which are not assessable or deductible for income tax purposes. Under the
Business Promotion Policy Concerning Income Tax on Foreign Enterprises
promulgated by the QiQiHaEr City Municipal Government, foreign owned enterprises
registered in QiQiHaEr City are entitled to a tax holiday of seven years for
full EIT exemption as though the EIT has been paid during the tax holiday
periods. The preferential tax treatment will commence when the Company commences
to generate assessable income after all accumulated tax losses have been
deducted from the assessable income.

      Value added tax

      The Provisional Regulations of the PRC Concerning Value Added Tax
promulgated by the State Council came into effect on January 1, 1994. Under
these regulations and the Implementing Rules of the Provisional Regulations of
the PRC Concerning Value Added Tax, value added tax is imposed on goods sold in
or imported into the PRC and on processing, repair and replacement services
provided within the PRC.

      Value added tax payable in the PRC is charged on an aggregated basis at a
rate of 13% or 17% (depending on the type of goods involved) on the full price
collected for the goods sold or, in the case of taxable services provided, at a
rate of 17% on the charges for the taxable services provided, but excluding, in
respect of both goods and services, any amount paid in respect of value added
tax included in the price or charges, and less any deductible value added tax
already paid by the taxpayer on purchases of goods and services in the same
financial year.

      Deferred taxes - Deferred taxes are accounted for at the current tax rate
in respect of timing differences between profit as computed for taxation
purposes and profit as stated in the accounts to the extent that a liability or
asset is expected to be payable or receivable in the foreseeable future.

      Advertising costs - Advertising costs, except for costs associated with
direct-response advertising, are charged to operations when incurred. The costs
of direct-response advertising are capitalized and amortized over the period
during which future benefits are expected to be received. Advertising expenses
of the Company were $1,627,458 and $246,864 in 2003 and 2002, respectively.

      Retirement benefit cost - According to the People's Republic of China
regulations on pension, a company contributes to a defined contribution
retirement scheme organized by municipal government in the province in which the
Company was registered and all qualified employees are eligible to participate
in the scheme. Contributions to the scheme are calculated at 20% of the
employees' salaries above a fixed threshold amount and the employees contribute
4% while the Company contributes the balance contribution of 16%. Wholly owned
foreign enterprises are exempted from contribution to the retirement scheme.

      Use of fair value in financial statements - The carrying amounts of
certain financial instruments, including cash, accounts receivable, note
receivable, other receivables, accounts payable, accrued expenses, advances from
staff, notes payable and other payables approximate their fair values as of
December 31, 2003 because of the relatively short-term maturity of these
instruments.

                                      F-12
<PAGE>

                              AMERICAN DAIRY, INC.
                   NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003

      Use of estimates - The preparation of financial statements in accordance
with generally accepted accounting principles require management to make
estimates and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and reported mounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

      Recent accounting pronouncements - In May 2003, the Financial Accounting
Standards Board issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity. This standard
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.

      In April 2003, the Financial Accounting Standards Board issued SFAS No.
149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This statement amends and clarifies financial accounting and
reporting for derivative instruments and for hedging actives under FASB No. 133
"Accounting for Derivative Instruments and Hedging Activities

      In December 2002, the Financial Accounting Standards Board issued SFAS No.
148 "Accounting for Stock-Based Compensation- Transition and Disclosure. This
statement amends SFAS No. 123 "Accounting for Stock Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.

      In October 2002, the Financial Accounting Standards Board issued SFAS No.
147 "Acquisition of Certain Financial Institutions.

      In June 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
SFAS No. 146 addresses significant issues regarding the recognition, measurement
and reporting of costs associated with exit and disposal activities, including
restructuring activities. SFAS No. 146 also addresses recognition of certain
costs related to terminating a contract that is not a capital lease, costs to
consolidate facilities, relocate employees and termination benefits provided to
employees that are involuntary terminated under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 was issued in June 2002.

      In April 2002, the FASB issued Statement of Financial Accounting Standard
No. 145, Rescission of FASB Statements No. 44, and No. 64, Amendment of FASB
Statement No. 13, and Technical Corrections, which updates, clarifies and
simplifies existing accounting pronouncements. SFAS No. 4, which required all
gains and losses from the extinguishment of debt to be aggregated and , if
material, classified as an extraordinary item, net of related tax effect was
rescinded, as a result, SFAS 64, which amended SFAS No. 4, was rescinded as it
was no longer necessary. SFAS No. 145 amended SFAS No. 13 to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions.

      In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes SFAS Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. This new statement also supersedes certain aspects of
the Accounting Principles Board Opinion (APB) No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment

                                      F-13
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003

      of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, with regard to reporting the effects of a disposal of a
segment of a business and will require expected future operating losses from
discontinued operations to be reported in discontinued operations in the period
incurred (rather than estimated as of the measurement date as was required by
APB No. 30). The Company adopted the provisions of FAS No. 144 during the fiscal
year ended December 31, 2001.

      Management believes adoption of these new statements will not have any
significant effect on the Company's financial condition or results of
operations.

4. Concentrations of business and credit risk

      The Company maintains certain bank accounts in the PRC which are not
protected by FDIC insurance or other similar insurance.

      The Company provides credit in the normal course of business.
Substantially all customers are located in The Peoples Republic of China. The
Company performs ongoing credit evaluations of its customers and maintains
allowances for doubtful accounts based on factors surrounding the credit risk of
specific customers, historical trends, and other information.

      The Company is self insured for all risks and carries no liability or
property coverage of any kind.

5. Notes receivable - secured

      As of December 31, 2003, the Company held commercial notes receivable
totaling $237,923 that were issued or endorsed by a third party. The commercial
notes are drawn against various banks with varying maturity periods of four and
five months.

      The commercial notes, which bear no interest and are receivable on
maturity, are endorsable to third parties.

6. Inventories

      Inventories consist of the following as of December 31, 2003:

Raw materials                                       $    1,435,816
Work-in-progress                                         1,467,760
Consumables, tooling and packaging                         367,888
Finished goods                                           1,803,007
                                                    --------------
                                                    $    5,074,471
                                                    ==============

7. Tax refundable

     Tax refundable represents valued-added tax refundable from the local
government.

                                      F-14
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003

8. Transactions with directors

                                                            Maximum
                                                          outstanding
                                     December 31,           balance    Security
Name                             2003          2002     during the year  held
----                             ----          ----     ---------------  ----
  Leng Youbin (Director)        $ 12,189     $ 10,690      $ 12,189      none
  Zhu  Tianlong  (Director)           --        8,364         8,364      none
  Wang  Yuehui  (Director)            --        7,866         7,866      none
  Ma Jinyan (Director)                --          121           121      none
  Piao  Longjun  (Director            --         (123)         (123)     none
  Lu Guang (Director)                 --       (2,909)       (2,909)     none
                                --------     --------
                                $ 12,189     $ 24,009
                                ========     ========

      The amounts due are unsecured, interest free and have no fixed repayment
terms. The amounts are advances to the directors are for business expenses to be
incurred on behalf of the Company.

9. Fixed assets

<TABLE>
<CAPTION>
                                                Plant and         Motor       Computers &
                                Buildings       machinery        vehicles      equipment           Total
                                ---------       ---------        --------      ---------           -----
<S>                           <C>             <C>              <C>             <C>             <C>
Cost:
At January 1, 2003            $   331,288     $   302,039      $    27,907     $     7,002     $   668,236
Additions                       1,121,113       2,285,265          250,329          15,219       3,671,926
Disposals                              --         (94,181)              --              --         (94,181)
                              -----------     -----------      -----------     -----------     -----------
At December 31, 2003            1,452,401       2,493,123          278,236          22,221       4,245,981
                              -----------     -----------      -----------     -----------     -----------
</TABLE>

      Accumulated depreciation:
<TABLE>
<CAPTION>
<S>                                <C>             <C>                 <C>             <C>          <C>
At  January 1, 2003                17,544          22,007              137             565          40,253
Charge for the year                28,358          94,915            5,243           2,786         131,302
Written back on disposals              --          (6,207)              --              --          (6,207)
                              -----------     -----------      -----------     -----------     -----------
At December 31, 2003               45,902         110,715            5,380           3,351         165,348
                              -----------     -----------      -----------     -----------     -----------
Net  book  value
at December 31, 2003          $ 1,406,499     $ 2,382,408      $   272,856     $    18,870     $ 4,080,633
                              ===========     ===========      ===========     ===========     ===========

</TABLE>


      As of December 31, 2003, net book values of buildings of $432,402 and
plant and machinery of $482,847 are pledged as security by a subsidiary,
Heilongjiang Sanhao Dairy Co., Limited to secure short-term loans extended by a
bank and a financial institution.

10. Construction-in-progress

                                      F-15
<PAGE>

                              AMERICAN DAIRY, INC.
                   NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003

     Balance  at  January  1,  2003      $            --
     Add/(less):
     Expenditures during the year              2,034,891
                                         ---------------
     Balance at December 31, 2003        $     2,034,891
                                         ===============

      Kedong County Beibei Food Industry agreed to sell a land use right
together with a factory at a total consideration of $400,966 (Rmb. 3,320,000) to
the Company's subsidiary Heilongjiang Feihe Diary Co., Limited . Based on an
appraisal report issued by An Luan Certified Public Accountants in QiQiHaEr
City, the land use right and factory were evaluated at Rmb. 8,310,000
($1,003,623).

      In accordance with the terms and conditions of the Sale and Purchase
Agreement (the "Agreement") dated July 25, 2003, the consideration is payable in
one lump sum on or before July 25, 2004. If Feihe Dairy is unable to repay the
consideration within one year from the date of the Agreement, it has agreed to
procure the issuance of 200,000 shares of Common Stock of its ultimate holding
company, American Dairy, Inc., at $2.00 per share in full and final settlement
of the consideration. This purchase is not reflected on the Company's financial
statements at December 31, 2003 as the transaction has not yet been finalized.

11. ADVANCES FROM EMPLOYEES

      Advances from employees represented temporary funding by employees to
finance a temporary working capital shortfall experienced by the Company. The
advances were unsecured, interest free and repayable within one year.

12. DEFERRED INCOME

      Receipts in advance represent advances from new customers and for which
goods have not been delivered as of the balance sheet date. Receipts in advance
for goods to be delivered or services to be rendered in the subsequent year are
carried forward as deferred revenue.

13. TAX PAYABLES

      Tax payables consist of the following as of December 31, 2003:

      Enterprise income tax                             $   261,621
      Value added tax                                           259
      City construction tax and education surcharge           7,827
                                                        -----------
                                                        $   269,707
                                                        ===========

14. NOTES PAYABLE

      As of December 31, 2003, the Company had the following short-term notes
payable:

                                                            2003

      Banks                                             $   362,319
      Financial institution                                 120,773
                                                        -----------
                                                        $   483,092
                                                        ===========

                                      F-16
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003

      As of December 31, 2003, notes payable to banks bear interest at rates
ranging from 6.9035% and 5.7525% per annum, respectively. The loans are secured
by the Company's buildings and plant and machinery. The December 31, 2003,
outstanding loan balance represents the maximum amount borrowed from banks at
any period during the fiscal year ended December 31, 2003.

15. PURCHASE OBLIGATION

      Pursuant to a Sale and Purchase Agreement dated January 3, 2003, between a
wholly owned subsidiary, Heilongjiang Feihe Dairy Co., Limited ("Feihe Dairy")
and BaiQuan County Economic Planning Council (the "Council"), Feihe Dairy agreed
to acquire all the fixed assets including the factory site, production
facilities, land use rights and buildings from BaiQuan County Dairy Factory at a
consideration of $700,482 (Rmb. 5,800,000), which is payable in two installments
of $603,864 (Rmb. 5.0 million) on or before March 31, 2003 and the second
installment of $96,618 (Rmb. 800,000) is due on or before March 31, 2004. As of
December 31, 2003, Feihe Dairy has paid $338,164 (Rmb. 2.8 million) of the
consideration to the Council. Pursuant to a supplemental agreement with the
Council on March 31, 2003, Feihe Dairy agreed to repay the balance of the
consideration of $362,318 (Rmb. 3.0 million) as follows:

               2004                            $  72,464
               2005                               96,618
               2006                               96,618
               2007                               96,618
                                               ---------
                                               $ 362,318
                                               =========

16. CAPITAL STOCK

      The Company has 50,000,000 shares of authorized Common Stock with a par
value of $.001 per share. During 2003, the Company had stock transactions as
detailed below:

      In anticipation of the merger with ADH, the Company affected a 1 for 19
reverse stock split, which decreased the number of shares of outstanding common
stock from 7,485,147 to 394,168. Then certain shareholders contributed 258,638
shares of common stock back to the Company further reducing the outstanding
shares to 135,530.

      The Company issued 9,640,000 shares of restricted common stock in exchange
for all of the outstanding capital stock of ADH.

      The Company also issued 240,000 shares of common stock and paid $60,000 in
cash plus the obligation to pay another $12,000 in cash in connection with a
consulting agreement entered into with existing shareholders. This stock was
valued at $420,000 for financial reporting purposes. The consulting agreement is
to cover a period of one year commencing May 7, 2003. For financial reporting
purposes $328,000 was charged to consulting fee expense in 2003 with the balance
of $164,000 being treated as a prepaid expense at December 31, 2003.

      A shareholder converted advances to the Company in the amount of
$1,866,311 into 933,155 shares of common stock.

      Additionally, a total of 792,285 shares of common stock were sold for a
total cash consideration of $1,500,000. Offering and syndication costs totaling
$374,402 were treated as reductions in additional paid-in capital for financial
reporting purposes.

                                      F-17
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003

      As of December 31, 2003, the Company had 11,750,970 of shares common stock
issued and outstanding.

17. STOCK OPTIONS AND WARRANTS

      Effective May 7, 2003, the Company adopted and approved its 2003 Incentive
Stock Plan (the "Plan") which reserved 3,000,000 shares of Common Stock for
issuance under the Plan. The Plan allows the Company to issue awards of
incentive non-qualified stock options, stock appreciation rights, and stock
bonuses to directors, officers, employees and consultants of the Company which
may be subject to restrictions. The Company applies APB 25 and related
interpretations in accounting for its plan. Compensation for services that a
corporation receives under APB 25 through stock-based compensation plans should
be measured by the quoted market price of the stock at the measurement date less
the amount, if any, that the individual is required to pay. No compensation
expense was recorded during the year ended December 31, 2003 related to its
stock option plan under APB 25. As of December 31, 2003, the Company had not
granted any incentive stock options, stock appreciation rights, or stock bonuses
under the plan.

During the year ended December 31, 2003 the Company issued 1,142,856 warrants to
underwriters as additional consideration for funds raised in private placements
during the year. The exercise price of these warrants was $1.75, and the
warrants had a three year life. The fair market value of these warrants at the
date of issuance was $64,651. The effect of this issue was to increase
additional paid-in capital by the fair value of the warrants issued with an
offsetting reduction of additional paid-in capital in the same amount since
offering costs are treated as reductions of additional paid-in capital.

      As of December 31, 2003, the Company had 1,142,856 warrants outstanding at
an exercise price of $1.75 per warrant for one share each of the Company's
common stock. The warrants will expire August 28, 2006. Information with respect
to outstanding warrants to service providers are as follows:

                                                     2003
                                                     Average
                                                     Exercise
                                                     Shares        Price
                                                     ------        -----
Outstanding  warrants  at  beginning  of  year            --     $     --
Warrants  granted                                  1,142,856         1.75
Exercised                                                 --           --
Expired                                                   --           --
                                                  ----------     --------
Outstanding  warrants  at  the  end  of  year      1,142,856     $   1.75
                                                  ==========     ========

  Warrants        Outstanding         Warrants      Exercisable
   Shares           Average           Average         Shares          Average
Outstanding        Remaining          Exercise      Outstanding       Exercise
  12/31/03        Life (Years)         Price          12/31/03         Price

 1,142,856            3.0             $  1.75        1,142,856        $  1.75


18. Earnings per Share

Statement of Financial Accounting Standards No. 128, Earnings Per Share,
requires presentation of basic and diluted earnings per share (EPS), as defined,
on the face of the statements of operations for all entities with complex
capital structures. SFAS 128 requires a reconciliation of the numerator and
denominator of the basic and diluted EPS computations. The effect of outstanding
warrants to purchase common stock were not included in the calculation of
diluted earnings per share as their effect was antidilutive.

                                                                       Per
                                         Income         Shares        Share
                                       (Numerator)   (Denominator)    Amount
                                       -----------   -------------    ------
For the Year Ended December 31, 2003:
Basic EPS Income available to
  common shareholders                  $2,036,807     10,535,964     $   0.19

Effect of Dilutive Securities                  --             --           --
                                       ----------     ----------     --------
Diluted EPS Income available to
  common shareholders                  $2,036,807     10,535,964     $   0.19
                                       ==========     ==========     ========

18. INCOME TAX

      Income tax expense is made up of the following components:

                                      F-18
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003

                                    Year Ended December 31, 2003
                                    ----------------------------
                             U.S.       Foreign        State
                           Federal        PRC         and local    Total
                           -------        ---         ---------    -----
Current  tax  expense     $     --     $338,513     $     --     $338,513

Deferred tax expense            --           --           --           --
                          --------     --------     --------     --------
                          $     --     $338,513     $     --     $338,513
                          ========     ========     ========     ========

                                    Year Ended December 31, 2002
                                    ----------------------------
                             U.S.       Foreign        State
                           Federal        PRC         and local    Total
                           -------        ---         ---------    -----
Current  tax expense     $      --     $  5,943     $     --     $  5,943

Deferred tax expense            --           --           --
                         ---------     --------     --------     --------
                         $      --     $  5,943     $     --     $  5,943
                         =========     ========     ========     ========

      Pretax income (loss) for 2003 was $3,103,046 from foreign sources and
($727,726) from U.S. sources. Pretax income (loss) for 2002 was $349,670 from
foreign sources and ($18,920) from U.S. sources.

      A reconciliations of tax at the statutory rates to the Company's effective
rate are as follows:

                                              Years  Ended  December  31,
                                                  2003           2002
                                                  ----           ----
Computed  expected  tax  expense              $ 902,622      $ 125,685

Increases  (reductions)  in  taxes
  result  from:

Add  back  effect  of  U.S.  losses             276,535          7,190

Foreign  income  subject  to  foreign
  income  tax  but  not  expected  to  be
  subject  to  U.S.  tax  in  foreseeable
  future - Adjustment  due  to  change
  in  effective  tax  rates                    (155,152)       (17,483)

Foreign  income  subject  to  foreign
  tax holiday but not expected to be
  subject  to  U.S.  tax  in  foreseeable
  future                                       (685,492)      (109,899)
                                              ---------      ---------

Actual  income tax expense                    $ 338,513      $   5,493
                                              =========      =========


                                      F-19
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003

      Under the Provisional Regulation of the PRC, income tax is payable by
enterprises at a rate of 33% of their taxable income. Feihe Dairy has been
granted a tax holiday of seven years for full enterprise income paid during that
period. This tax holiday will expire in April of 2009. The enterprise taxes paid
during 2003 and 2002 were paid by Sanhao Dairy and BaiQuan Dairy as follows:

                  Years  Ended  December  31,
                      2003        2002
                      ----        ----
Sanhao  Dairy      $ 76,892     $  5,493
BaiQuan  Dairy      261,621           --
                   --------     --------

  Total            $338,513     $  5,493
                   ========     ========

      The tax holiday resulted in tax savings of $685,492 or $.06 basic benefit
per share in 2003 and $109,899 or $.01 basic benefit per share in 2002.

      The Company has a U.S net operating loss carryforward of approximately
$214,000 which will begin expiring in 2023. For financial reporting purposes the
deferred tax asset of $81,320 associated with this loss carryforward is fully
reserved as of December 31, 2003.

      Although it is not anticipateD in the foreseeable future, should the
parent company receive dividends from its foreign subsidiaries, these dividends
would be fully taxable, subject to an offset for foreign taxes paid on these
earnings. The Company has not provided any accrual for any tax liabilities that
might be incurred for the receipt of dividends from its foreign subsidiaries.

19. COMMITMENTS

      As of December 31, 2003, the Company has future commitments for
construction-in-progress of $2,241,174, to acquire land and buildings totaling
$1,120,772, and to pay future advertising costs totaling $1,657,556.

      Minimum future rental payments under non-cancelable operating leases
having remaining terms in excess of one year as of December 31, 2003 for each of
the next five year and in the aggregate are:

          December 31, 2004                     $     6,697
          December 31, 2005                           5,064
          December 31, 2006                           5,908
          December 31, 2007                           5,908
          December 31, 2008                           5,908
          Thereafter                                249,607
                                                -----------
                                                $   279,092
                                                ===========

      Rent expense incurred during the years ended December 31, 2003 and 2002
totaled $5,967 and $5,967, respectively.

                                      F-20
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2003

      In accordance with the terms of a Sale and Purchase Agreement dated
September 28, 2003, the Company has agreed to purchase land use rights in
Beijing for a total consideration of $1,200,861 of which three installments
totaling $481,055 have been paid as of December 31, 2003. The balance of
$719,806 shall be settled through a mortgage loan expected to be arranged with a
bank.

      In accordance with the terms and conditions of a Sale and Purchase
Agreement dated July 25, 2003, the Company has agreed to acquire land use rights
and a factory in Kedong County for a total consideration of $400,966. If payment
is not made by July 24, 2004, the Company has agreed to issue 200,000 shares of
its common stock in full and final settlement of the consideration. This
transaction was not recorded on the Company's financial statements at December
31, 2003 as the transactions had not been finalized at that date.

                                      F-21
<PAGE>

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

      There have been no disagreements regarding accounting and financial
disclosure matters with the independent certified public accountants of American
Dairy.

      On August 5, 2003, HJ & Associates, L.L.C., the independent certified
public accountants and auditors of American Dairy, Inc. for fiscal 2002, were
dismissed by American Dairy from further audit services to it. The dismissal was
approved by the Board of Directors of American Dairy. For the two fiscal years
ended December 31, 2002, and the subsequent interim period ended March 31, 2003,
there were no disagreements between American Dairy and HJ & Associates, L.L.C.
on any matter of accounting principles of practice, financial statement
disclosure, or auditing scope or practices which if not resolved to the
satisfaction of HJ & Associates, L.L.C. would have caused disagreement in
connection with its reports. Effective August 5, 2003, American Dairy retained
Weinberg & Company, P.A., located at 6100 Glades Road, Suite 314, Boca Raton,
Florida 33434 as its independent auditor.

      On November 10, 2003, Weinberg & Company, P.A., the independent certified
public accountants and auditors of American Dairy, Inc. for fiscal 2003, were
dismissed by American Dairy from further services to American Dairy. The
dismissal was approved by the Board of Directors of American Dairy. During the
fiscal year ended December 31, 2003, and the interim period ended June 30, 2003,
there were no disagreements between American Dairy and Weinberg & Company, P.A.
on any matter of accounting principles of practice, financial statement
disclosure, or auditing scope or practices which if not resolved to the
satisfaction of Weinberg & Company, P.A. would have caused disagreement in
connection with its reports.

      Effective November 10, 2003, Murrell, Hall, McIntosh & Co., PLLP, located
at 2601 N.W. Expressway, Suite 800 East, Oklahoma City, Oklahoma 73112 was
engaged by American Dairy to audit the consolidated financial statements of
American Dairy for its fiscal year ending December 31, 2003, and the related
statements of income, stockholders' equity, and cash flows for the year then
ending.

                                    PART III

Item 9. Directors and Executive Officers

      Directors and Officers. The following table sets forth certain information
regarding the executive officers and directors of American Dairy. All officers
serve at the pleasure of the Board of Directors. Directors serve until the
election and qualification of their successors.

Name              Age       Position

Leng You-Bin      34        Director, Chairman of the Board, Chief Executive
                            Officer and President

Liu  Hua          31        Director,  Chief Financial Officer, Secretary and
                            Treasurer

Liu  Sheng-Hui    33        Director

Hui-Lan  Lee      54        Director

      The officers and directors of American Dairy were elected to their current
positions on May 7, 2003. The following information reflects the business
background and experience of each director and officer:

                                       26
<PAGE>

      Leng You-Bin is the Chairman, Chief Executive Officer, President, and
General Manager of American Dairy and Feihe Dairy. He is responsible for the
overall strategic planning, management and business development of Feihe Dairy.
Mr. Leng has been in the dairy industry for more than 13 years. He obtained his
Bachelor of Science degree in Food Engineering from Northeast Agriculture
University, China. From 1989 to 1997, Mr. Leng acted as technician, deputy
director and director of Zhaoguang Dairy Plant, the predecessor of Feihe Dairy.
From 1997 to 2000, Mr. Leng was the General Manager of Feihe Dairy. He became
the Chairman and General Manager in 2000. He has researched and patented the
"liver protection milk powder" (GanBao Milk Powder).

      Liu Hua is the Chief Financial Officer, Secretary, Treasurer and a
director of American Dairy, and has been the Financial Officer of Feihe Dairy
from November 2000 to the present. From June 1998 to November 2000, he was the
Chief Executive Officer of Shenzhen Cima Limited. From September 1993 to January
1996, he was the Chief Executive Officer of Zhengzhou Huacheng Limited. Mr. Liu
received a degree from Xian Traffic University in 1993.

      Liu Sheng-Hui is a director of American Dairy. He is responsible for the
overall financial planning and management of Feihe Dairy. He graduated from
Northeast Agriculture University with a Bachelor of Economics degree in Economic
Management in 1992. Mr. Liu has 10 years experience in the areas of finance and
accounting. He joined Feihe Dairy in 1992. He has held his current position
since 1998.

      Hui-Lan Lee (also known as "Tracy Lee") has been Assistant Vice
President-Taxation of Countrywide Home Loan, Inc. from April 2003 to the
present. She was the Tax Manager of Watson Pharmaceuticals, Inc. from October
26, 1996 to March 2003. From 1979 to 1996, Ms. Lee was employed by major fortune
500 companies including The Flying Tiger Line Inc. (a Tiger International
Company), Quotron Systems, Inc. (a subsidiary of the Citigroup, Inc.) and Lear
Siegler, Inc. in various management positions. Ms. Lee holds a Master of Science
degree in Taxation from Golden Gate University, and a Master of Business
Administration degree from Indiana University.

Consultants

      American Dairy intends to retain consultants to the extent necessary and
appropriate. American Dairy will not delegate its authority and responsibility
to make management decisions to consultants or any other persons, nor shall any
consultant have any discretionary authority or the authority to bind American
Dairy in any material respect.

      In connection with the closing of the Exchange Agreement with American
Dairy Holding, Inc. on May 7, 2003, American Dairy entered into a consulting
agreement (the "Consulting Agreement") with Danbury Properties, LLC, a Utah
limited liability company ("Danbury"), of which Jack M. Gertino, the former
President of American Dairy and James C. Lewis, a former director of American
Dairy, are members. During the one year period of Danbury's engagement, Danbury
has agreed to provide American Dairy with consulting services in the areas of
financial and management planning, financing assistance and capital formation.
In exchange for such services, Danbury will receive $60,000 in cash
compensation, and 240,000 restricted shares of Common Stock of American Dairy.
In addition, American Dairy agreed to pay the sum of $12,000 for the
cancellation of all outstanding options held by Messrs. Gertino and Lewis. For
financial reporting purposes, $228,011 of this consulting agreement was charged
to operations in 2003 with the balance of $113,989 treated as prepaid expense at
December 31, 2003.

      Item 10. Executive Compensation

      All executive officers, for services in all capacities to American Dairy,
received the following compensation during the fiscal year ended December 31,
2003.

                                       27
<PAGE>

Compensation of Executive Officers

      The officers and directors of American Diary received compensation during
its fiscal year ended December 31, 2003, as follows:

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                      ANNUAL COMPENSATION(1)(2)                 LONG TERM COMPENSATION
                                      -------------------------                 ----------------------
NAME  AND                                                     ANNUAL     RESTRICTED   SECURITIES                   ALL
PRINCIPAL               Fiscal                                COMPEN-      STOCK      UNDERLYING      LTIP        OTHER
POSITION                 Year       SALARY        BONUS       SATION       AWARDS     OPTIONS/SARs   PAYOUTS   COMPENSATION
--------                 ----       ------        -----       ------       ------     ------------   -------   ------------
<S>                      <C>        <C>          <C>          <C>          <C>          <C>          <C>          <C>
Jack  M.  Gertino        2003       $    0       $    0       $    0       $    0       $    0       $    0       $    0
former  Chief
Executive  Officer
and  President

Leng  You-Bin,           2003       $6,884       $    0       $    0       $    0       $    0       $    0       $    0
Director,  Chief
Executive  Officer
and  President
</TABLE>

(1) Personal benefits received by American Dairy's executive officers are valued
below the levels which would otherwise require disclosure under the rules of the
U.S. Securities and Exchange Commission.

(2) American Dairy does not currently provide any contingent or deferred forms
of compensation arrangements, annuities, pension or retirement benefits.

      American Dairy presently has no employment agreements with its officers or
key employees, but may enter into such agreements in the future.

      American Dairy presently has no employment agreements with its officers or
key employees, but may enter into such agreements in the future.

Benefit Plans

      American Dairy does not have any profit sharing plan or similar plans for
the benefit of its officers, directors or employees. However, American Dairy
reserves the right to establish any such plans in the future.

      American Dairy has contributed to a retirement plan organized by a
municipal government for the benefit of its eligible employees in China.
Contributions to the plan are calculated at 20% of the employees salaries above
a threshold amount and employees contribute 4% while American Dairy contributes
16%. However, as wholly owned foreign enterprises of American Dairy in the PRC,
Feihe Dairy, Sanhao Dairy and BaiQuan Dairy have been exempted from making
contributions under the plan.

Incentive Stock Plan

      Effective May 7, 2003, American Dairy adopted and approved its 2003
Incentive Stock Plan (the "Plan") which reserves 3,000,000 shares of its Common
Stock for issuance under the Plan. The Plan allows us to issue awards of
incentive or non-qualified stock options, stock appreciation rights, and stock
bonuses which may be subject to restrictions. No awards of stock options, stock
appreciation rights, or stock bonuses have been granted under the Plan as of
December 31, 2003.

                                       28
<PAGE>

Board Compensation

      Directors of American Dairy who do not serve as officers thereof are not
currently compensated by American Dairy for meeting attendance or otherwise, but
will be entitled to reimbursement for their travel expenses. American Dairy
plans to provide its non-management directors, if any, a competitive directors'
compensation package comparable to programs offered by similarly situated
corporations.

Limited Liability and Indemnification

      Section 16-10a-840 of the Utah Revised Business Corporation Act (the
"URBC") requires directors and officers to perform their duties in good faith
and with the care that an ordinary person would exercise under similar
circumstances in a manner reasonably believed to be in the best interest of the
corporation. A director or officer of a corporation is not liable to the
corporation, its shareholders or others for any action taken or any failure to
act as an officer or director unless he has breached or failed to perform his
duties as described above and the breach or failure to perform constitutes gross
negligence, wilful misconduct, or intentional infliction of harm on the
corporation or its shareholders.

      Section 16-10a-841 of the URBC provides that the articles of incorporation
of a Utah corporation may eliminate or limit the liability of a director to the
corporation or its shareholders for monetary damages, except for (I) a financial
benefit to which he is not entitled; (ii) an intentional infliction of harm;
(iii) unlawful distributions of the corporation constituting a violation of
Section 16-10a-842 of the URBC; or (iv) an intentional violation of criminal
law.

      Section 16-10a-902 of the URBC permits a Utah corporation to indemnify
directors made a party to a proceeding because he is or was a director if (I)
his conduct was in, or not opposed to, the corporation's best interest; and (ii)
he reasonably believed his conduct was in, or not opposed to, the corporation's
best interests; and (iii) in the case of a criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful. However, a Utah
corporation may not indemnify a director if he was adjudged liable to the
corporation, or if he was adjudged liable on the basis that he derived an
improper personal benefit; and such indemnification in any action brought by the
corporation is limited to reasonable expenses incurred in connection with the
proceedings.

      Article VI of the Articles of Incorporation and Article VIII of the
By-Laws of American Dairy provide for the indemnification of directors and
officers of American Dairy. Indemnification is mandatory regarding reasonable
expenses incurred in connection with proceedings or claims with respect to which
he has been successful.

      Officers, employees, fiduciaries and agents of a Utah corporation may be
entitled to indemnification to a greater extent than directors, if not
inconsistent with public policy, if provided for in the Articles of
Incorporation, By-Laws, the general or specific action of its board of directors
or contract.

                                       29
<PAGE>

Compliance with Section 16(a) of the Securities Exchange Act

      Section 16(a) of the Exchange Act requires American Dairy's executive
officers and directors, and persons who beneficially own more than ten percent
(10%) of its equity securities, to file reports of ownership and changes in
ownership with the U.S. Securities and Exchange Commission. Officers, directors
and greater than ten percent shareholders are required by SEC regulation to
furnish American Dairy with copies of all Section 16(a) forms they file.

      Based on its review of the copies of such forms received by it, American
Dairy believes that during the year ended December 31, 2003, all such filing
requirements applicable to its officers, directors and 10% owners of its Common
Stock were complied with.

Item 11. Security Ownership of Certain Beneficial Owners and Management

      The following table sets forth certain information concerning the
beneficial ownership of American Dairy's shares of Common Stock held by
directors and officers of American Dairy, and by each person known to American
Dairy to be a beneficial owner of five percent (5%) or more of its outstanding
Common Stock as of December 31, 2003.

                                                                 Percentage
                                             Number  of        of Total Shares
Name and Address                             Shares(1)           Outstanding
----------------                             ---------           -----------
Leng  You-Bin  (4)                           8,987,535             76.5%
1st  Qingziang  Street
Kedong  County
Heilongjiang Province
The People's Republic of China

Liu  Hua                                             0                0%
1st  Qingxiang  Street
Kedong  County
Heilongjiang  Province
The People's Republic of China

Hui-Lan  Lee                                         0                0%
232  Alabama  Street
San Gabriel, California 91775

Liu  Sheng-Hui                                 387,476              3.3%
1st  Qingxiang  Street
Kedong  County
Heilongjiang Province
The People's Republic of China

American  Eastern  Securities,  Inc.           654,475(2)           5.6%
865 S. Figueroa Street, Suite 3340 Los
Angeles,  California  90071

Belmont  Capital  Group  Limited               913,358(2)           7.8%
Suites  A-C  Neich  Tower
128  Gloucester  Road,  Wanchai
Hong  Kong,  China

All  executive  officers  and                 9,375,011            79.8%
directors  as  a  group

(4 persons)

(1) They have sole voting and dispositive power with respect to their shares of
Common Stock of American Dairy, except as otherwise indicated. (2) These shares
include warrants to purchase 571,428 shares of Common Stock of American Dairy at
$1.75 per share for a term of three years which shares are deemed to be
beneficially owned by the holder.

                                       30
<PAGE>

Item 12. Certain Relationships and Related Transactions

      In May 2003, American Dairy entered into a consulting agreement (the
"Consulting Agreement") with Danbury Properties, LLC, a Utah limited liability
company ("Danbury"), of which Jack M. Gertino, the former President and a
director of American Dairy, and James C. Lewis, a former director of American
Dairy, are members. During the one-year period of Danbury's engagement, Danbury
has agreed to provide to American Dairy consulting services in the areas of
financial and management planning, financing assistance and capital formation.
In exchange for such services, Danbury will receive $60,000 in cash
compensation, and 240,000 shares of post-split Common Stock. In addition,
American Dairy has agreed to pay the sum of $12,000 for the cancellation of all
outstanding options held by Messrs. Gertino and Lewis. This transaction cannot
be considered the result of arms' length negotiations.

                                       31
<PAGE>

      Effective May 7, 2003, Mr. Leng You-Bin and Mr. Liu Sheng-Hui, directors
and officers of American Dairy, received 8,129,032 shares and 387,476 shares,
respectively, of the Common Stock of American Dairy in exchange for all of their
registered capital stock of American Dairy Holdings, Inc. under the terms of a
stock exchange agreement.

      Effective May 7, 2003, American Dairy acquired 100% of American Flying
Crane Corporation (formerly "American Dairy Holdings, Inc.") ("AFC") in a
stock-for-stock exchange. AFC had previously acquired 100% of the ownership of
the registered capital of Heilongjiang Feihe Dairy Co., Limited ("Feihe Diary")
in February 2002 for $2,586,311 (U.S.) from the registered owners of Feihe
Dairy, owned primarily by Mr. Leng You-Bin who is the principal stockholder,
director, Chief Executive Officer and President of American Dairy. As a result
of this acquisition, AFC owed approximately $1,866,311 to Mr. Leng You-Bin after
approximately $700,000 having been paid to him by American Dairy. During June
200, American Dairy and Mr. Leng You-Bin agreed to cancel the remaining debt of
$1,866,311 in exchange for the issuance of 943,156 shares of the restricted
Common Stock of American Dairy.

Item 13. Exhibits and Reports on Form 8-K

      (a) Reports on Form 8-K

      On November 17, 2003, American Dairy filed a Form 8-K current report (Item
4 and Item 7) to report a change in its independent auditors to Murrell, Hall,
McIntosh & Co., P.L.L.P.

      (b) Exhibits

2.1     Stock Exchange Agreement          Stock Exchange Agreement dated January
                                          15, 2003, is  incorporated  herein  by
                                          reference to  Exhibit 2.1 to  American
                                          Dairy's  Form  8-K  current  report as
                                          filed with the Securities and Exchange
                                          Commission on January  21,  2003.

2.2     Amendment to Stock Exchange       Amendment to Stock  Exchange Agreement
        Agreement                         dated March 5,  2003  is  incorporated
                                          herein  by reference to Exhibit 2.2 of
                                          American  Dairy's  Form  8-K   current
                                          report  as  filed  with the Securities
                                          and Exchange Commission  on  March  5,
                                          2003.

3.1     Articles  of  Incorporation       Articles  of Incorporation of American
                                          Dairy,  as  amended,  are incorporated
                                          herein  by  reference  to  Exhibit 3.1
                                          to  its registration statement on Form
                                          10-SB,  as  filed  with the Securities
                                          and Exchange Commission  on  September
                                          16,  1999.

3.2     Amendment  to  Articles  of       Amendment to Articles of Incorporation
        Incorporation                     of American Dairy dated May 6, 2003.

                                       32
<PAGE>

3.3     By-Laws                           By-Laws    of    American    Dairy are
                                          incorporated  herein  by  reference to
                                          Exhibit 3.2    to   its   registration
                                          statement  on   Form 10-SB,  as  filed
                                          with  the  Securities   and   Exchange
                                          Commission on September 16, 1999.

10. Material Contracts

10.1    Consulting  Agreement             Consulting  Agreement  by  and between
                                          American   Dairy,   American   Dairy
                                          Holdings, Inc. and Danbury Properties,
                                          L.L.C.,  dated    March  28,  2003, is
                                          incorporated  herein  by  reference to
                                          Exhibit 10.3 to the Form 10-KSB annual
                                          report of Lazarus Industries, Inc. for
                                          its  fiscal  year  ended  December 31,
                                          2002.

10.2    Stock  Purchase Agreement         Stock  Purchase  Agreement dated March
                                          28,  2003,  by  and  between  American
                                          Dairy  and  American  Diary  Holdings,
                                          Inc.  and   certain   American  Dairy
                                          shareholders  is  incorporated  herein
                                          by reference to Exhibit 10.4  to  the
                                          Form 10-KSB annual report of Lazarus
                                          Industries, Inc. for its  fiscal  year
                                          ended  December  31,  2002.

16.1    Letter  on  change in             Letter of HJ & Associates, L.L.C.
        certifying accountant             dated August 6, 2003, is incorporated
                                          herein by reference to Exhibit 16
                                          to the Form 8-K current report
                                          of American Dairy filed on
                                          August 6, 2003.

16.2    Letter on change in certifying    Letter of Weinberg & Company, P.A.
        accountant                        dated November 13, 2003 is
                                          incorporated herein by reference to
                                          Exhibit 16 to the Form 8-K current
                                          report of American Dairy filed on
                                          November 17, 2003.

23.1    Consent  of  Murrell,  Hall,      Consent  of  Murrell,  Hall, McIntosh
        McIntosh                          &  Co.,  PLLP

Item 14. Controls and Procedures

     Evaluation of Disclosure Controls and Procedures. American Dairy's Chief
Executive Officer and American Dairy's principal financial officer, after
evaluating the effectiveness of American Dairy's disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934 Rule 13a-14(c)and
15d-14(c) as of a date within 90 days of the filing date of this report on Form
10-KSB for its fiscal year ended December 31, 2003, have concluded that as of

                                       33
<PAGE>

the Evaluation Date, American Dairy's disclosure controls and procedures were
adequate and effective to ensure that material information relating to American
Dairy and American Dairy's consolidated subsidiaries would be made known to them
by others within those entities, particularly during the period in which this
annual report on Form 10-KSB was being prepared.

      Changes in Internal Controls. There were no significant changes in
American Dairy's internal controls or in other factors that could significantly
affect American Dairy's disclosure controls and procedures subsequent to the
Evaluation Date, nor any significant deficiencies or material weaknesses in such
disclosure controls and procedures requiring corrective actions. As a result, no
corrective actions were taken.

Item 15. Principal Accountant Fees and Services

      Fees paid to principal accountants are as follows:

                                                                       All
HJ & Associates                                Audit       Tax         Other
for fiscal year ended          Audit Fees   Related Fees   Fees        Fees
---------------------          ----------   ------------   ----        ----
December 31, 2002              $ 3,524       $  ----      $----       $----
December 31, 2003              $  ----       $  ----      $----       $----

Weinberg & Company, P.A.
for  fiscal  year  ended
December 31, 2002              $  ----       $  ----      $----       $----
December 31, 2003              $23,513       $11,045      $----       $----

Murrell,  Hall,  McIntosh
for  fiscal  year  ended
December 31, 2002              $  ----       $  ----      $----       $----
December 31, 2003              $ 3,770       $  ----      $----       $----

                                       34
<PAGE>

                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
hereunto duly authorized.

April 1, 2004

                              AMERICAN DAIRY, INC.

                               By:/s/ Leng You-Bin

                          ----------------------------
                          Len You-Bin, Chief Executive
                             Officer, and President

                                 By:/s/ Liu Hua

                    -------------------------------------------
                        Liu Hua, Chief Financial Officer,
                    Principal Accounting and Financial Officer,
                                  and Treasurer

      In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

April  1,  2004

                               By:/s/ Leng You-Bin

                         ------------------------------
                          Leng You-Bin, Director, Chief
                         Executive Officer and President

                                 By:/s/ Liu Hua

                     ------------------------------------------
                        Liu Hua, Director, Chief Financial
                         Officer, Principal Accounting and
                     Financial Officer, Secretary and Treasurer

                              By:/s/ Liu Sheng-Hui

                             -----------------------
                             Liu Sheng-Hui, Director

                               By:/s/ Hui-Lan Lee

                              ---------------------
                              Hui-Lan Lee, Director

                                       35
<PAGE>

                           INDEX OF EXHIBITS ATTACHED

Exhibit  Description

3.2      Amendment to Articles of  Incorporation dated May 6, 2003.

21.      Subsidiaries  of American Dairy Description of the subsidiaries of
         American Dairy.

23.1     Consent of Murrell, Hall, McIntosh  & Co.,  PLLP
         Consent of Murrell, Hall, McIntosh & Co., PLLP, independent auditor

99.1     Certification of Leng You-Bin and  Liu Hua

99.2     Certification of Leng You-Bin

99.3     Certification of Liu Hua

                                       36