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

                                   Form 10-KSB

         |X|    ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                OF THE SECURITIES AND EXCHANGE ACT OF 1934
                for the fiscal year ended December 31, 2004

         |_|    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)



                 C-16 Shin Chen International Building, No. 10,
                      Jiu-shen Road, Zho Yan Chu, Beijing
                         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                    Name of each exchange on which registered
-------------------                    -----------------------------------------
        N/A                                               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: $37,416,223

<PAGE>

      The  aggregate  market  value of  voting  and  non-voting  equity  held by
non-affiliates  of the registrant as of December 31, 2004:  Common stock,  $.001
par value: $20,254,458

      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 25, 2005: 13,556,354 shares.

      Documents incorporated by reference: None

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


                                       2
<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<S>                                                                                                       <C>
PART I

Item 1.  Description of Business....................................................................... 4
Item 2.  Description of Property.......................................................................17
Item 3.  Legal Proceedings.............................................................................18
Item 4.  Submission of Matters to a Vote of Security Holders...........................................18

PART II

Item 5.  Market for Common Equity, Related Stockholder Matters and Small Business Issuer
         Purchaser of Equity Securities................................................................18
Item 6.  Management's Discussion and Analysis or Plan of Operations....................................20
Item 7.  Financial Statements..........................................................................24
Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........24
Item 8A. Controls and Procedures.......................................................................24
Item 8B. Other Information ............................................................................24

PART III

Item 9.  Directors and Executive Officers of the Registrant............................................25
Item 10. Executive Compensation........................................................................26
Item 11. Security Ownership of Certain Beneficial Owners and Management
         and Related Stockholder Matters...............................................................28
Item 12. Certain Relationships and Related Transactions................................................30
Item 13. Exhibits .....................................................................................30
Item 14. Principal Accountant Fees and Services........................................................32

Financial Statements...................................................................................F-1

Signatures.............................................................................................33

Exhibit Index..........................................................................................
</TABLE>


                                       3
<PAGE>

                                     PART I

Item 1.   Description of Business.

General

      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 three
wholly-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,  and has a  subsidiary  Beijing  Feihe  Biotechnology  Scientific  and
Commercial Co., which is the markeitng company for Feihe Diary.

      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.

Current Corporate Structure

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


                                       4
<PAGE>

                   ------------------------------------------
                              American Dairy, Inc.
                   (formerly named "Lazarus Industries, Inc.)
                   ------------------------------------------

                                  0wns 100% of

                   ------------------------------------------
                        American Flying Crane Corporation
                   ------------------------------------------

                                  Owns 100% of

                   ------------------------------------------
                     Heilongjiang Feihe Dairy Co., Limited
                   ------------------------------------------

    Owns 60% of                   Owns 100% of                Owns 100% of

------------------------       --------------------     ------------------------
Shanxi Feihesantai             BaiQuan Feihe Dairy      Beijing Feihe
Biotechnology Scientific       Co., Limited             Biotechnology Scientific
and Commercial Co.,                                     and Commercial Co.,
Limited                                                 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  Plants  ("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
Plants 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 Plants ("Zhaoguang Dairy"),  another
State  Enterprise,  was established at Zhaoguang  Plantation near BeiAn City. In
1984,Hongguang  Dairy Plants and Zhaoguang  Dairy were merged into  Heilongjiang
Zhaoguang Dairy Plants.  The State  continued to retain  ownership of the merged
Heilongjiang Zhaoguang Dairy Plants.

      In 1997,  the merged  Heilongjiang  Zhaoguang  Dairy  Plants were  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
$894,226.

      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,  plants and
equipment and factory  buildings)  of Kedong  Gongmu Dairy  Plants.  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).


                                       5
<PAGE>

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

      Sanhao Dairy was incorporated in March 28, 2001 with registered capital of
$433,110.  Feihe  Dairy  owned  99% of  Sanhao  Dairy  and Fu Man Guo  held  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  Plants 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
Plants,  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
Feihe Dairy Co. 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
                                                   ========

      During 2004,  American  Dairy merged Sanhao Dairy into BaiQuan Feihe Dairy
Co., Limited and consolidated their operations.

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
13,000  producing milk cows as of December 31, 2004.  American  Dairy  presently
purchases approximately 130 tons of raw milk daily.


                                       6
<PAGE>

      American Dairy has been informed that the Kedong County government intends
to invest in additional  milk cow breeding  operations to increase the presently
available number of mature milk cows from 13,000 to 30,000 during 2005, and such
an increase  in the number of milk cows is  anticipated  to increase  daily milk
production from approximately 130 tons to approximately 400 tons of fresh milk.

Milk Processing Facilities

      American  Dairy   presently  has  two  principal   operating  milk  powder
production and packaging plants.

      American Dairy has a milk powder  processing  plant called Sanhao Dairy in
Kedong County in the City of QiQiHaEr, in Heilongjiang Province, China. American
Dairy acquired this plant in March 2001 for $461,632.  The land is approximately
47,640 square meters. The plants building has approximately  4,500 square meters
of  production  space  and  has  720  square  meters  of  office  space,  and is
approximately  13 years old. Sanhao Dairy has  approximately  236 production and
packaging employees at this plant.

      American  Dairy also has a milk powder  processing  plants called  BaiQuan
Dairy.  American  Dairy  acquired  this  plant in  January  2003  for  $700,483.
Additional land was  subsequently  acquired for $293,450 in March 2004. The land
is  approximately  40,000 square meters.  The plant  building has  approximately
5,458  square  meters of  production  space and has 800 square  meters of office
space, and is  approximately  14 years old.  BaiQuan Dairy has  approximately 62
production and packaging employees.

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

      American  Dairy began  building an additional  new milk powder  processing
plant during 2004 in close proximity to its Sanhao Dairy plant in Kedong County.
American  Dairy  acquired  the land use rights to this  location  for  $400,966.
American Dairy entered into a  construction  contract to build the new plant for
$4,210,870 (Rmb.34,866,000).  American Dairy has incurred construction costs and
has ordered new milk powder processing  machines and equipment from suppliers at
a cost of $10,757,620 through December 31, 2004.

      The existing production  facilities of American Dairy 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 two existing and operating  production  facilities  of American  Dairy
have a daily milk  processing  capability  of 150 tons of fresh  milk.  American
Dairy has:

      1.    production lines for processing liquid milk into powdered milk;

      2.    production lines for processing bean-milk powders; and

      3.    production lines for processing milk Crowley bean, milk Crowley, and
            solid milk.


                                       7
<PAGE>

      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
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.


                                       8
<PAGE>


Customers

      No customers of American Dairy equaled or exceeded 10% of its sales during
the years ended December 31, 2004 or 2003.

      American  Dairy  distributed  its products to 25 provinces in China during
2004. No province exceeded 10% of sales, except the Beijing area which comprised
24.8% of the sales of American Dairy.

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

      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:

      *     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.


                                       9
<PAGE>

Brand Development and Marketing

      Brand  Identity.  American  Dairy'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  continue to
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.

Competition

      The food and  beverage  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.

Walnut Powder Operations

      During April 2004, the Company  established a 60% owned subsidiary  called
Shanxi Feihesantai Biotechnology Scientific and Commercial Co., Limited ("Shanxi
Feihesantai"),  a limited liability company registered in Shanxi Province in The
People's Republic of China. The business of Shanxi Feihesantai is the production
and distribution of walnut powder and other walnut products.  Shanxi Feihesantai
was organized with $402,174 in registered capital.


                                       10
<PAGE>

      Shanxi  Feihesantai is currently  building a walnut powder  production and
distribution  facility.  The total  expenditures  for the  construction  of this
facility as of December  31, 2004,  were  $3,963,121.  It is expected  that this
plant will be completed and begin operations during 2005.

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.

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.


                                       11
<PAGE>

      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
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.


                                       12
<PAGE>

      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 130 tons of raw milk per year. American Dairy
believes  that it  currently  has  the  capacity,  based  on an  assumed  mix of
products,  to manufacture dairy products at a rate which utilizes  approximately
450 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 162,000
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
2004.  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.


                                       13
<PAGE>

      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
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.


                                       14
<PAGE>

      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,
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.


                                       15
<PAGE>

      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
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.


                                       16
<PAGE>

      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,
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.

Item 2. Description of Property

      The principal  executives of American  Dairy are located at C-16 Shin Chen
International  Building,  No. 10,  Jiu- shen  Road,  Zho Yan Chu,  Beijing,  The
People's  Republic of China. The building was acquired during 2003 at a purchase
price of $1,200,861.

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

      American  Dairy  is in the  process  of  constructing  a new  milk  powder
production  facility in Kedong  County,  Heilongjiang  Province in The  People's
Republic of China which is expected to be completed  during 2005. As of December
31, 2004, American Dairy has expended  $10,757,620 in construction and equipment
costs.

      American Dairy is in the process of completing the  construction  of a new
plant in Shenyang in northeast China to produce walnut powder,  a new product of
American Dairy. As of December 31, 2004,  American Dairy has expended $3,963,121
in  construction  costs.  It is expected this facility will be completed  during
2005.

      There is no private ownership of land in the PRC and 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 40 to 50 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.


                                       17
<PAGE>

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

      None

                                     PART II

Item 5. Market for Common Equity, Related Shareholder Matters and Small Business
        Issuer Purchases of Equity Securities

      General

      American Dairy is authorized to issue  50,000,000  shares of Common Stock,
      $.001 par value per share.  At December  31, 2004,  there were  13,556,354
      shares  of  Common  Stock  issued  and  outstanding  that were held by 299
      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 suck
      stockholders.  Holders of Common Stock are  entitled to receive  dividends
      out of  assets  legally  available  therefore  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 Common Stock 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.  America Dairy has not yet formulated
      a future dividend  policy in the event  restrictions on its ability to pay
      dividends are created.

      Transfer Agent and Registrar

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

      Market for Common Stock.

      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 for the periods indicated  (reflecting  inter-dealer  prices without
      retail  mark-up,  mark-down or  commission  and may not  represent  actual
      transactions).

                                                 High Closing     Low Closing
                                                 Bid Prices (1)   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
----------------------
Year Ended December 31, 2004
         1st Quarter ....................           $2.00             $2.00
         2nd Quarter (1)  ...............           $3.00             $2.00
         3rd Quarter ....................           $3.90             $2.50
         4th Quarter ....................           $5.02             $3.30
----------------------

(1)   On May 7, 2003,  the Company  had a  one-for-nineteen  (1-for-19)  reverse
      stock split of its Common Stock.


                                       18
<PAGE>

      The closing sales price of the Common Stock of American Dairy on March 28,
2005 was $4.60 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) 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.

      Compensation  Plan.   American  Dairy  has  a  2003  Incentive  Plan  that
authorizes the issuance of up to 3,000,000  shares of its Common Stock for stock
options,  SAR's and stock  bonuses to its  directors,  officers,  employees  and
consultants. As of December 31, 2004, no awards have been made under the Plan.

<TABLE>
<CAPTION>
                                                                                              Number of securities
                                                                                               remaining available
                                                                                               for future issuance
                              Number of securities to             Weighted-average                under equity
                              be issued upon exercise            exercise price of             compensation plans
                              of outstanding options,           outstanding warrants          (excluding securities
                              warrants and rights                    and rights              reflected in column a)
                              -------------------                    ----------              ----------------------
                                      (a)                              (b)                             (c)
<S>                                   <C>                              <C>                         <C>
Equity compensation
plans approved by
security holders                      -0-                               -0-                        3,000,000

Equity compensation
plans not approved by
security holders                      None                              None                         None

Total                                 -0-                               -0-                        3,000,000
</TABLE>

      Sale of  Unregistered  Securities.  During the three months ended December
31, 2004,  American Dairy sold shares of its  restricted  Common Stock that were
not registered under the Securities Act of 1933, as described below:

      During the three months  ended  December  31,  2004,  American  Dairy sold
1,025,147  shares of Common Stock and warrants to purchase  1,025,147  shares of
Common  Stock at $2.25  per  share to 42  investors  at $2.25  per  share in the
aggregate amount of $2,306,581,  in reliance upon Rule 506 of Regulation D under
the Securities Act of 1933, as amended.  In connection  with this offering,  the
underwriters  were  issued  warrants to purchase  237,591  shares of  restricted
Common Stock at $1.50 per share for a term of three years.

      During the three months  ended  December  31,  2004,  American  Dairy sold
571,429 shares of its Common Stock and a warrant to purchase Common Stock to one
institutional  investor  for  $2,000,000,  in reliance  upon Section 4(2) of the
Securities Act of 1933. The underwriter was issued a warrant to purchase 114,286
shares of Common  Stock at $2.70 per share for a term of three  years  regarding
this placement.


                                       19
<PAGE>

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

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 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, 2004 and 2003

      The following  table sets forth certain  operating  information  regarding
American Dairy,Inc., including its subsidiaries.

                                         Year Ended             Year Ended
                                      December 31, 2004      December 31, 2003
                                      -----------------      -----------------

      Revenues                            $37,416,223          $26,635,832
      Cost of goods sold                  $18,006,918          $15,732,640
      Distribution expenses               $13,486,232          $ 7,899,265
      General and administrative          $ 1,313,358          $ 1,699,435
      Depreciation                        $    54,419          $   131,302
      Other Income                        $ 1,489,767          $ 1,196,939
      Gain on disposal of assets          $       693          $      --
      Interest expense                    $    49,353          $    24,809
      Net Income                          $ 6,258,380          $ 2,036,807


                                       20
<PAGE>

      Net income  increased by 207% from  $2,036,807 in 2003 to  $6,258,380  for
2004.  This  increase in net income is  attributable  primarily to the following
factors: (1) a 40% increase in sales; (2) a 35% increase in gross profit margins
from  41% in  2003  to 52% in  2004;  and  (3) a 70%  increase  in  distribution
expenses,  offset in part by: (i) a 21%  decrease in general and  administrative
expenses, and (ii) a $600,134 decrease in enterprise income tax expense.

      Revenues.  Revenues  increased by $10,780,391  or 40% from  $26,635,832 in
2003 to $37,416,223 in 2004. This increase was due primarily to expanding market
areas and  adding  new value  added  products.  Increase  in sales is due to the
following factors:

      *     Increased  popularity of "Feihi" brand of mainland  China  following
            the  successful  advertising  campaigns  in the  previous  year  and
            extensive networks of Agencies in 25 provinces;

      *     Demands boosted by improved and high quality ingredients for several
            products  such as  Ca+Zn  CPP  series  and  nucleotides  series  and
            families or markets mostly accepted these products;

      *     Increase in overall  sales  quantity by  2,975,862  kilograms or 28%
            year-on-year to 13,478,645 kilograms for the year ended December 31,
            2004  compared  to  the  same  corresponding  period  of  10,502,782
            kilograms in 2003; and

      *     The dairy milk  industry  scandal in China in 2003 and the resulting
            strict  control  over  dairy   producers   (quality  and  ingredient
            contains) drove many unscrupulous  diary producers and their tainted
            dairy products out of the market.  Consumers  concentrated  on dairy
            products  produced by such reputable dairy producers as Feihe Dairy.
            Increase in sales  quantities  of several  high profit  margin major
            products such as:

            *     Milk powder with Ca+Zn  totaling  4,719,669  kilograms  (2003:
                  3,718,421 kilograms) by 26.9% year-on-year;

            *     CPP  services  totaling  2,398,578  kilograms  (2003:  785,483
                  kilograms) by 205% year-on-year; and

            *     Nucleotides  series totaling 219,152  kilograms in 2004 (2003:
                  27,155 kilograms) by 707% year-on-year.


                                       21
<PAGE>

      Cost of Goods Sold.  Cost of goods sold  increased 14% or $2,274,278  from
$15,732,640 in 2003 to $18,006,918 in 2004.  This increase is due primarily to a
28% increase in sales volume offset in part by a 38%  improvement  in unit gross
profit  margins from $1.04  kilogram in 2003 to $1.44 per kilogram in 2004.  The
improved  gross  profit  margins  were due to  increases  in sales of high gross
profit product and improved  manufacturing  efficiencies  which were obtained as
new  processing  facilities  came on line during the year,  offset in part by an
overall 10% increase in the cost of raw materials.

      Distribution  Expenses.  Distribution expenses for the year ended December
31,  2004 were  $13,486,232,  an increase  of  $5,586,967  or 71% from the prior
year's  distribution  expenses  of  $7,899,265.  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, 2004 were $1,313,358,  a decrease of $356,077 or
21% from the prior year's general and administrative expenses of $1,669,435. The
principal reason for the decrease was a reduction in consulting fees incurred at
the parent company level from 2003 to 2004.

      Depreciation Expense. Depreciation expense for the year ended December 31,
2004 was $54,419 and  $206,875,  respectively,  for the year ended  December 31,
2004,  an  increase of $129,992  from the prior  years  depreciation  expense of
$131,302  which was  included in operating  and  administrative  expenses.  This
increase is due  primarily  to  substantial  additions of  buildings,  plant and
machinery in Feihe Dairy and BaiQuan Feihe during 2004.

      Other  Income.  Other  income which  consist  primarily of VAT tax rebates
provided by the provinces as an economic incentive, increased by $292,828 or 24%
from  $1,196,939 in 2003 to $1,489,767 in 2004 due primarily to increased  sales
volumes.

      Interest  Expense.  Interest  expense for the year ended December 31, 2004
was $49,353 as compared to only  $24,809 for the prior year.  This  increase was
due primarily to increases in exchange loss and interest  expenses  arising from
short-term  loans repaid in 2004 and a bank loan to finance the  acquisition  of
the Beijing office.

      Income  Taxes.  Income tax expense  decreased by $600,134 from $338,513 of
expense  in 2003 to  $261,621  of  income  tax  benefit  in  2004.  This was due
primarily  to  reversal  of prior  year's tax actual on BiaQuan  Dairy which was
waived by the taxing authorities in 2004.

Liquidity  and  Capital  Resources

      Operating Activities.  Net cash flows provided by operating activities for
the year ended  December 31, 2004 was  $16,358,496  compared with net cash flows
provided by operating  activities of $6,036,761  for the year ended December 31,
2003.  This increase in cash flows from operating  activities  was  attributable
primarily to net income of  $6,258,380,  and augmented by a decrease in accounts
receivable  of  $537,762,  increases  of  $2,533,031  in  accounts  payable  and
$4,826,778 in deferred  income,  decreases in advances to suppliers of $322,559,
inventories in the amount of $32,073, and tax refunds due of $522,562.


                                       22
<PAGE>

      Sale of Stock.  During the fiscal year ended  December 31, 2004,  American
Dairy realized  $4,672,906 from the sale of its restricted  Common Stock made in
reliance upon Rule 506 of Regulation D,  Regulation S and Section 4(2) under the
Securities Act of 1933, as amended.

      Working Capital - At December 31, 2004, the Company had a negative working
capital of $(6,797,709).

      Contract  Obligations  - As of  December  31,  2004,  the  Company had the
following contractual obligations:

<TABLE>
<CAPTION>
Contractual                                    Less than          One to             Four to             After Five
Obligation                 Total               one year           Three Years        Five Years          Years

<S>                        <C>                <C>                 <C>                <C>                 <C>
Notes Payable              $   957,561        $  359,686          $ 183,032          $ 179,952           $ 234,891

Commitments on con-
struction in prograss        2,241,174         2,241,174                 --                 --                  --

Obligations to
purchase land                1,120,772         1,120,772                 --                 --                  --
and building

Commitments for
advertising                  1,652,556         1,652,556                 --                 --                  --

Operating lease
comittments                    269,872             2,542             11,816             11,816             243,698
                           -----------        ----------          ---------          ---------           ---------
         Totals            $ 6,241,935        $5,376,730          $ 194,848          $ 191,768           $ 478,589
                           ===========        ==========          =========          =========           =========
</TABLE>

New  Accounting  Pronouncements

      In April 2003,  the FASB issued SFAS No. 149,  "Amendment of Statement 133
on Derivative  Instruments and Hedging  Activities (SFAS 149)".  SFAS 149 amends
and clarifies certain derivative  instruments  embedded in other contracts,  and
for  hedging  activities  under  SFAS 133.  SFAS 149 is  effective  for  certain
contracts  entered  into or  modified by the Company  after June 30,  2003.  The
adoption of SFAS 149 had no impact on the Company's financial position,  results
of operations, or cash flows.

      In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for  Instruments
with Characteristics of Both Debt and Equity" (SFAS 150). Statement 150 requires
liability classification for three types of instruments: 1) Mandatory redeemable
shares that obligate the company to deliver cash or other assets to shareholders
on fixed or determinable dates; 2) Freestanding  written put options and forward
purchase  contracts  on a  company's  own shares  that  obligate  the company to
deliver cash or other assets,  and 3) Contracts that obligate a company to issue
its own shares in amounts that are  unrelated  to, or inversely  related to, the
value of the shares.  The  adoption  of SFAS 150 had no impact on the  Company's
financial position, results of operations, or cash flows.

      In  November  2004,  the FASB issued  SFAS No. 151  "Inventory  Costs - an
amendment of ARB No. 43,  Chapter 4".  Statement  No. 151 requires  that certain
abnormal costs associated with the  manufacturing,  freight,  and handling costs
associated  with  inventory  be charged to current  operations  in the period in
which they are incurred. The adoption of SFAS 151 had no impact on the Company's
financial position, results of operations, or cash flows.


                                       23
<PAGE>

      In December 2004, the FASB issued a revision of SFAS No. 123  "Share-Based
Payment".   The  statement   establishes   standards  for  the   accounting  for
transactions in which an entity  exchanges its equity  investments for goods and
services.  It also addresses  transactions in which an entity incurs liabilities
in  exchange  for  goods or  services  that are  based on the fair  value of the
entity's  equity  instruments  or that may be settled by the  issuance  of those
equity  instruments.  The statement does not change the accounting  guidance for
share-based payments with parties other than employees.

      The  statement  requires a public  entity to measure  the cost of employee
service  received in exchange  for an award of equity  instruments  based on the
grant-date fair value of the award (with limited  exception).  That cost will be
recognized  over the period  during  which an  employee  is  required to provide
service in exchange for the award (usually the vesting period).  A public entity
will initially measure the cost of employee services received in exchange for an
award of liability instrument based on its current fair value; the fair value of
that award will be remeasured  subsequently  at each  reporting date through the
settlement date.  Changes in fair value during the requisite service period will
be recognized as compensation over that period.

      The  grant-date  for fair value of  employee  share  options  and  similar
instruments  will be estimated  using option-  pricing  models  adjusted for the
unique characteristics of these instruments.

      The statement is effective for the quarter  beginning  January 1, 2006.

      In December  2004,  the FASB issued SFAS No. 153 "Exchanges of Nonmonetary
Assets-amendment  of APB Opinion No. 29". Statement 153 eliminates the exception
to fair value for exchanges of similar  productive assets and replaces it with a
general  exception  for  exchange  transactions  that  do  not  have  commercial
substance,   defined  as  transactions  that  are  not  expected  to  result  in
significant changes in the cash flows of the reporting entity. This statement is
effective for exchanges of nonmonetary assets occurring after June 15, 2005.

Item 7.  Financial Statements

      The  consolidated  financial  statements of American  Dairy for its fiscal
year ended December 31, 2004 are provided with this Form 10-KSB.

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.

Item 8A.  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, 2004,  have  concluded that as of
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.


                                       24
<PAGE>

      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 8B. Other Information

Not applicable.

                                    PART III

Item 9. Directors and Executive Officers of the Registrant

      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.

<TABLE>
<CAPTION>
           Name                     Age                Position
           ----                     ---                --------
<S>                                 <C>      <C>
        Leng You-Bin                35       Chairman, Chief Executive Officer and President

        Liu Hua                     32       Chief Financial Officer, Secretary, Treasurer and
                                             Director

        Liu Sheng-Hui               34       Director

        Hui-Lan Lee                 55       Director

        Dr. Kevil L. Tseng          41       Director

        Kirk G. Downing             51       Director
</TABLE>

      Leng You-Bin has been the Chairman,  Chief Executive  Officer,  President,
and General  Manager of American Dairy since May 7, 2003. 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 Plants, 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 has been the Chief Financial Officer,  Secretary,  Treasurer and a
director of American Dairy since May 7, 2003, 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.


                                       25
<PAGE>

      Liu Sheng-Hui has been a director of American  Dairy since May 7, 2003. He
is responsible for the overall financial planning and management of Feihe Dairy.
He joined Feihe Dairy in 1992. He has held his current  position  since 1998. He
graduated from  Northeast  Agriculture  University  with a Bachelor of Economics
degree in Economic Management in 1992.

      Hui-Lan  Lee (also  known as "Tracy  Lee") has been a director of American
Dairy since May 7, 2003. She has been the 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.

      Dr. Tseng became a director of American  Dairy on February 21, 2005.  From
May 1997 to the present,  he has been an advanced  analyst with Boeing Aerospace
engaged in technology development.  From January 1994 to May 1997, Dr. Tseng was
an Assistant Professor at Purdue University.  From October 1991 to January 1994,
he was a Research  Fellow at the  University  of Michigan.  He graduated in 1985
from Tamkang University majoring in aerospace technology. Dr. Tseng received his
M.S.E.  degree  in 1990 and his Ph.D  degree  in 1991  from  the  University  of
Michigan.  He received a M.B.A.  degree in  management in 2002 from the Marshall
School of Business of the University of Southern California.

      Mr. Downing became a director of American Dairy on February 21, 2005. From
December  1980  to the  present,  he has  been  practicing  law in Los  Angeles,
California.  From  January  1989 to June  1997,  Mr.  Downing  also  engaged  in
ranching,  farming,  logging and property development.  Mr. Downing received his
B.A. degree in liberal arts from Portland State  University in 1976. He received
his Juris Doctorate degree in 1980 from Loyola Law School.

Item 10. Executive Compensation

      The officers and directors of American Diary received  compensation during
the three fiscal years ended December 31, 2004, as follows:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                          ANNUAL  COMPENSATION                          LONG  TERM  COMPENSATION
                                         ----------------------                         AWARDS           PAYOUTS
                                                                                    -------------------------------
                                                                OTHER        RESTRICTED  SECURITIES                 ALL
NAME AND                                                        ANNUAL         STOCK     UNDERLYING    LTIP        OTHER
PRINCIPAL             FISCAL       SALARY        BONUS       COMPENSATION      AWARDS     OPTIONS     PAYOUTS   COMPESATION
POSITION               YEAR         ($)           ($)            ($)            ($)       SARS (#)      ($)         ($)
---------------------------------------------------------------------------------------------------------------------------
<S>                    <C>         <C>           <C>            <C>            <C>         <C>        <C>         <C>
Leng You-Bin, Chief    2004        $  -0-        $ -0-          $ -0-          $ -0-       $ -0-      $ -0-       $ -0-
Executive Officer      2003        $6,884        $ -0-          $ -0-          $ -0-       $ -0-      $ -0-       $ -0-
and President
---------------------------------------------------------------------------------------------------------------------------
Jack Gertino           2004        $  -0-        $ -0-          $ -0-          $ -0-       $ -0-      $ -0-       $ -0-
FORMER Chief           2003        $6,884        $ -0-          $ -0-          $ -0-       $ -0-      $ -0-       $ -0-
Executive Officer      2002        $  -0-        $ -0-          $ -0-          $ -0-       $ -0-      $ -0-       $ -0-
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       26
<PAGE>

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

Board Compensation

      American Dairy plans to provide its  non-management  directors,  if any, a
competitive  directors'  compensation  package comparable to programs offered by
similarly situated corporations.

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.

Incentive Stock Plan

      Effective  April 1, 2003,  American  Dairy  adopted and  approved its 2003
Incentive  Stock Plan (the "Plan")  which  reserves  3,000,000  shares of 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 to  employees as of
December 31, 2004.

      Mr. Leng  You-Bin and Mr. Liu Hua are the  members of the  Committee  that
administers the Plan.

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, 2004,  all such filing
requirements applicable to its officers,  directors and 10% owners of its Common
Stock were complied with.

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 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.


                                       27
<PAGE>

      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 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  that  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.

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.

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

      The  following  table  sets  forth  certain  information   concerning  the
beneficial ownership of American Dairy's shares of Common Stock 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, 2004.


                                       28
<PAGE>

<TABLE>
<CAPTION>
                                                                    Percentage
                                                   Number of      of Outstanding
          Name and Address                         Shares(1)          Shares
          ----------------                         ---------          ------
<S>                                                <C>                <C>
Leng You-Bin (4).....................              8,869,635          65.4%
C-16 Shin Chen International Bldg.
No. 10, Jiu-shen Road
Zho Yan Chu
Beijing
The People's Republic of China

Liu Hua..............................                  7,000          0.05%
C-16 Shin Chen International Bldg.
No. 10, Jiu-shen Road
Zho Yan Chu
Beijing
The People's Republic of China

Hui-Lan Lee..........................                  7,000          0.05%
232 Alabama Street
San Gabriel, California 91775

Liu Sheng-Hui........................                269,576          1.99%
C-16 Shin Chen International Bldg.
No. 10, Jiu-shen Road
Zho Yan Chu
Beijing
The People's Republic of China

Belmont Capital Group Limited                        863,357(2)        6.1%
Suite A-C, 20/F Neich Tower
128 Gloucester Road, Wanchai
Hong Kong

Pike Capital Partners LP.............                821,429           6.1%
275 Madison Avenue
Suite 418
New York, NY 10016

All executive officers and directors               9,153,211          67.5%
as a group (4 persons)
</TABLE>

----------
(1)   They have sole voting and  dispositive  power with respect to their shares
      of Common Stock of American Dairy.

(2)   Includes  warrants  to  purchase  571,428  shares of the  Common  Stock of
      American Dairy.


                                       29
<PAGE>

Item 12. Certain Relationships and Related Transactions

      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  Heilongjiang  Feihe Dairy Co.,  Limited under the
terms of a Stock Exchange Agreement.

      Effective May 7, 2003,  American  Dairy  acquired  100% of American  Dairy
Holdings,  Inc.  ("ADH")  in a stock-  for-stock  exchange.  ADH 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  of  ADH,  American  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 933,156 shares of the Common Stock of American Dairy.

      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 compesation,
and 240,000 shares of post-split  Common Stock. In addition,  American Dairy has
greed 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.

     American  Dairy 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 May 2003 in
connection with a consulting agreement entered into with existing  shareholders,
including  Jack  Gertino,  then a director  and the Chief  Executive  Officer of
American  Dairy.  This  stock was valued at  $270,000  for  financial  reporting
purposes.  The consulting  agreement is to cover a period of one year commencing
May 7, 2003. For financial reporting purposes $228,011 was charged to consulting
fee  expense in 2003 with the  balance of  $113,989  being  treated as a prepaid
expense at December 31, 2003.

      During the  fiscal  years  ended  December  31,  2003 and 2004,  Mr.  Leng
You-Bin,  the  Chairman  of the Board and Chief  Executive  Officer of  American
Dairy, made advances to American Dairy in the amount of $846,228 and $1,133,822,
respectively. These advances were unsecured and did not bear interest.

Item 13. Exhibits

      (a)   Reports on Form 8-K

            American  Dairy filed a Form 8-K current  report  dated  October 16,
            2004, regarding the closing of a Regulation D Common Stock offering,
            and the move of its principal executive offices to Beijing, China.

            American  Dairy filed a Form 8-K current  report  dated  December 6,
            2004,  regarding  the closing of a private  placement  of its Common
            Stock to an institutional investor.


                                       30
<PAGE>

      (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
         Agreement                      Amendment  to Stock  Exchange  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
         Incorporation                  Amendment  to Articles of  Incorporation
                                        of  American  Dairy dated May 6, 2003 is
                                        incorporated   herein  by  reference  to
                                        Exhibit   3.2  to  the  Form  10-KSB  of
                                        American Dairy for its fiscal year ended
                                        December 31, 2003.

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                           2003 Stock Incentive Plan.

14.      Code of Ethics                 Code of Business Conduct and Ethics


                                       31
<PAGE>

Item 14. Principal Accountant Fees and Services

      Fees paid to principal accountants are as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Name                              Audit Fees            Audit Related Fees       Tax Fees             All Other Fees
--------------------------------------------------------------------------------------------------------------------
<S>                               <C>                   <C>                      <C>                  <C>
Weinberg & Company, P.A.
for fiscal year ended
December 31, 2003                 $23,513               $11,045                  $ -0-                $ -0-
December 31, 2004                 $ 8,044               $ -0-                    $ -0-                $ -0-
--------------------------------------------------------------------------------------------------------------------
Murrell, Hall, McIntosh &
Co., PLLP
for fiscal year ended
December 31, 2003                 $3,770                $ -0-                    $ -0-                $ -0-
December 31, 2004                 $19,000               $1,250                   $5,000               $ -0-
--------------------------------------------------------------------------------------------------------------------
</TABLE>

      As of December 31,  2004,  American  Dairy had not  established  an audit
committee of the Board of Directors, and the entire Board of Directors performed
the duties of an audit committee. The Board of Directors evaluated the scope and
cost of the audit for its fiscal year ended December 31, 2004 before its auditor
rendered its audit and non-audit services.


                                       32
<PAGE>

                                   SIGNATURES

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

March 30, 2005              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.

March 30, 2005              By:      /s/ Leng You-Bin
                            -----------------------------------
                            Leng You-Bin, Director, Chief
                            Executive Officer and President

March 30, 2005              By:      /s/ Liu Hua
                            -----------------------------------
                            Liu Hua, Director, Chief Financial
                            Officer, Principal Accounting and
                            Financial Officer, Secretary and Treasurer

March 30, 2005              By:      /s/ Liu Sheng-Hui
                            -----------------------------------
                            Liu Sheng-Hui, Director

March 30, 2005              By:      /s/ Hui-Lan Lee
                            -----------------------------------
                            Hui-Lan Lee, Director

March 30, 2005              By:      /s/ Kevin L. Tseng
                            -----------------------------------
                            Dr. Kevin L. Tseng

March 30, 2005              By:      /s/ Kirk G. Downing
                            -----------------------------------
                            KIrk G. Downing, Director

Supplemental  Information to be Furnished with Reports filed Pursuant to Section
15(d) of the Exchange Act by Non-Reporting Issuers

      The  registrant  is  a  reporting  issuer  under  the  Exchange  Act  and,
therefore, this section is not applicable.


                                       33
<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, 2004 and the related
consolidated  statements of operations,  stockholders' equity and cash flows for
each the two years in the period ended  December 31,  2004.  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
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  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
financial  statement  presentation.  We  believe  that  our  audits  provide  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, 2004 and the results of their operations and
cash flows for each of the two years in the period ended  December 31, 2004,  in
conformity with U.S. generally accepted accounting principles.

/s/  Murrell, Hall, McIntosh & Co., PLLP

Oklahoma City, Oklahoma
January 31, 2005


                                      F-1
<PAGE>

                               AMERICAN DAIRY INC.
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2004

                                     ASSETS

Current assets:
      Cash                                                           $ 6,645,197
      Accounts receivable
          Trade                                                          670,580
          Other                                                          600,219
      Commercial note receivable - unsecured                             217,391
      Inventories                                                      5,042,398
      Prepaid expenses                                                   565,069
      Advances to suppliers                                              307,667
      Other tax refundable                                                37,381
                                                                     -----------

               Total current assets                                   14,085,902
                                                                     -----------

Property and equipment:
      Fixed assets, net of accumulated depreciation                    9,027,394
      Construction-in-progress                                        14,720,742
                                                                     -----------

                                                                      23,748,136

Other assets:
      Goodwill                                                             7,000
                                                                     -----------


Total assets                                                         $37,841,038
                                                                     ===========

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


                                      F-2
<PAGE>

                               AMERICAN DAIRY INC.
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2004

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued expenses                             $ 9,033,956
   Current portion of long-term debt                                     118,140
   Advances from related parties, net                                  1,141,581
   Advances from employees                                               653,865
   Deferred income                                                     9,694,523
   Short-term loan - unsecured                                           241,546
                                                                     -----------

        Total current liabilities                                     20,883,611
                                                                     -----------

Long-term debt, net of current portion shown above                       597,875
                                                                     -----------

Minority interest                                                        180,458
                                                                     -----------

Stockholders' equity:
   Common stock, $.001 par value; 50,000,000 shares
   authorized; 13,556,354 issued and outstanding                          13,556
   Additional paid-in capital                                          7,526,174
   Retained earnings                                                   8,639,364
                                                                     -----------

        Total stockholders' equity                                    16,179,094
                                                                     -----------

Total liabilities and stockholders' equity                           $37,841,038
                                                                     ===========

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


                                      F-3
<PAGE>

                               AMERICAN DAIRY INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

                                                     2004              2003
                                                 ------------      ------------

SALES                                            $ 37,416,223      $ 26,635,832
COST OF GOODS SOLD                                 18,006,918        15,732,640
                                                 ------------      ------------

       Gross Profit                                19,409,305        10,903,192
                                                 ------------      ------------

OPERATING AND ADMINISTRATIVE
EXPENSES:
       Distribution expenses                       13,486,232         7,899,265
       General and administrative expenses          1,313,358         1,669,435
       Depreciation                                    54,419           131,302
                                                 ------------      ------------

                                                   14,854,009         9,700,002
                                                 ------------      ------------

       Income from operations                       4,555,296         1,203,190
                                                 ------------      ------------

OTHER INCOME (EXPENSE):
       Other income (expenses)                      1,489,767         1,196,939
       Gain on disposal of assets                         693              --
       Interest and finance costs                     (49,353)          (24,809)
                                                 ------------      ------------

                                                    1,441,107         1,172,130
                                                 ------------      ------------

MINORITY INTEREST IN SHANXI LOSS                          356              --
                                                 ------------      ------------

INCOME BEFORE INCOME TAXES                          5,996,759         2,375,320

(PROVISION FOR) BENEFIT FROM
INCOME TAXES                                          261,621          (338,513)
                                                 ------------      ------------

NET INCOME                                       $  6,258,380      $  2,036,807
                                                 ============      ============

BASIC NET INCOME PER COMMON SHARE                $       0.52      $       0.19
                                                 ============      ============

WEIGHTED AVERAGE BASIC SHARES OUTSTANDING          12,077,085        10,535,964
                                                 ============      ============

DILUTED NET INCOME PER COMMON SHARE              $       0.47      $       0.19
                                                 ============      ============

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING        13,455,700        10,535,964
                                                 ============      ============

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


                                      F-4
<PAGE>

                              AMERICAN DAIRY, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

<TABLE>
<CAPTION>
                                                   Common Stock
                                           ----------------------------------
                                            Number            $0.001           Additional
                                              of                par              Paid-In             Retained
                                            Shares             Value             Capital             Earnings            Totals
                                        ------------       ------------       ------------        ------------       ------------
<S>                                        <C>             <C>                <C>                 <C>                <C>
Balance, December 31, 2002                 9,650,000       $      9,650       $     (9,649)       $    344,177       $    344,178

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

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

Share 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                             --                 --             (400,547)               --             (400,547)

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

Shares issued for services                    46,000                 46             96,554                --               96,600

Stock issued for cash                      1,759,384              1,759          4,671,147                --            4,672,906

Less offering costs                             --                 --             (476,825)               --             (476,825)

Net income for the year ended
 December 31, 2004                              --                 --                 --             6,258,380          6,258,380
                                        ------------       ------------       ------------        ------------       ------------

Balance, December 31, 2004                13,556,354       $     13,556       $  7,526,174        $  8,639,364       $ 16,179,094
                                        ============       ============       ============        ============       ============
</TABLE>

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


                                      F-5
<PAGE>

                               AMERICAN DAIRY INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

<TABLE>
<CAPTION>
                                                                        2004                2003
                                                                    ------------        ------------
<S>                                                                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                          $  6,258,380        $  2,036,807
Adjustments to reconcile net income to operating activities -
       Depreciation                                                      261,294             131,302
       Provision for doubtful accounts                                    83,677             426,124
       Consulting fees                                                        --             179,982
       Compensation expense for stock issued                              96,600                  --
       Gain on disposal of assets                                           (693)                 --
Changes in assets and liabilites:
(Increase) decrease in -
       Accounts and notes receivable                                     537,762           1,681,220
       Inventories                                                        32,073          (3,086,370)
       Prepaid expenses                                                  672,711             (11,472)
       Advances to suppliers                                             322,559            (630,226)
       Other tax refundable                                              522,563            (457,811)
Increase (decrease) in -
       Accounts payable and accrued expenses                           2,533,031           3,531,577
       Deferred income                                                 4,826,778           2,071,175
       Tax payable                                                       211,761             164,453
                                                                    ------------        ------------

Net cash provided by  operating activities                            16,358,496           6,036,761
                                                                    ------------        ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
       Purchase of fixed assets                                       (5,241,177)         (3,671,926)
       Disposal of assets                                                 33,816              87,974
       Cash received in merger and recapitalization                           --              17,906
       Deposit on land, building and equipment                           417,678            (417,678)
       Minority interest                                                 180,458                  --
       Construction in progress                                      (12,685,851)         (2,034,891)
                                                                    ------------        ------------

Net cash used in investing activities                                (17,295,076)         (6,018,615)
                                                                    ------------        ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
       Loan proceeds                                                   1,660,194             483,092
       Loan repayments                                                (1,185,726)                 --
       (Repayment of) advance from shareholder                           232,946             (52,515)
       Proceeds from sale of common stock                              4,672,906           1,500,000
       Payment of offering costs                                        (476,825)           (396,264)
       Purchase obligation (repayment)                                  (362,318)            362,318
                                                                    ------------        ------------

Net cash provided by financing activities                              4,541,177           1,896,631
                                                                    ------------        ------------

NET INCREASE IN CASH AND EQUIVALENTS                                   3,604,597           1,914,777

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                         3,040,600           1,125,823
                                                                    ------------        ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                            $  6,645,197        $  3,040,600
                                                                    ============        ============
</TABLE>

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


                                      F-6
<PAGE>

                               AMERICAN DAIRY INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
                                  (Continued)

<TABLE>
<CAPTION>
                                                                        2004                2003
                                                                    ------------        ------------
<S>                                                                 <C>                 <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
       Interest paid, net of capitalized amounts                    $     37,076        $     19,630
                                                                    ============        ============

       Income taxes paid                                            $         --        $    338,513
                                                                    ============        ============
</TABLE>

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

During the year ended December 31, 2004, the Company issued 46,000 shares of its
common stock valued at $96,600 for consulting services.

During the year ended December 31, 2004, the Company issued 523,305  warrants to
underwriters as additional  consideration for funds raised in private placements
during the year.  The  exercise  price on these  warrants  ranged from $1.50 per
share to $2.70 per share and all had a three year life. The fair market value at
the date of  issuance of these  warrants  totalled  $862,245.  The effect of the
issuance  is to  increase  additional  paid in  capital by the fair value of the
warrants issued with an offset to additional paid in capital in the same amount,
since offering costs are treated as reductions in additional paid in capital.

During 2004,  the net assets of Sanhao Dairy were  transferred to Feihe Dairy by
way of distribution to members effective July 1, 2004.

               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, 2004

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

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  Flying  Crane
     Corporation  ("AFC"),  a Delaware  corporation.  As a result,  AFC 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 AFC 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 AFC  being  the  purchaser  and  American  Dairy  being  the
     purchased  entity.  This  purchase  resulted  in the  creation of $7,000 in
     goodwill.

     AFC was  incorporated  on January 15,  2002 in  Delaware,  with  50,000,000
     authorized  shares of common  stock at a par value of $0.0001 per share and
     10,000 of which authorized shares are currently issued and outstanding. AFC
     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  BaiQuan  Feihe  Dairy  Co.   Limited   ("BiaQuan   Dairy")  and
     Heilongjiang  Sanhao Dairy Co.,  Limited  ("Sanhao Dairy") which was merged
     into BiaQuan  Dairy during 2004, , and 95% of Beijing  Feihe  Biotechnology
     Scientific and Commercial Co., Limited  ("Beijing Feihe") with the other 5%
     being held in trust for the  Company.  AFC also owns 60% of the  registered
     capital of Shanxi Feihesantai  Biotechnology Scientific and Commercial Co.,
     Limited  ("Shanx"i)  formed to  develop  and  operate  a walnut  processing
     plant..

     Currently, the principal core activity of AFC is investment holdings, while
     the  principal  core  activities  of Feihe  Dairy  and  BiaQuan  Dairy  are
     manufacturing and distribution of milk powder products and soybean products
     under the Feihe  trademarks.  The principal  core activity of Shanxi is the
     production and distribution of walnut powder.  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.  During  2004,  Sanhao
     Dairy was liquidated into BaiQuan Dairy.



                                                                               8
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

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

      Feihe  Dairy's  subsidiary  Beijing  Feihe  Biotechnology  Scientific  and
      Commercial Co., Limited  ("Beijing Feihe") was registered on June 8, 2004,
      in The  People's  Republic of China as a limited  liability  Company  with
      registered  share capital of  $1,207,729  (Rmb  10,000,000)  and a defined
      period of existence of 20 years to June 7, 2024.

      AFC's 60% owned subsidiary Shanxi Feihesantai Biotechnology Scientific and
      Commercial Co., Limited  ("Shanxi") was registered in Shanxi Province,  in
      the People's  Republic of China ("PRC") as a limited  liability company on
      April 15, 2004, with a registered capital of $402,174  (Rmb.3,330,000) and
      a defined  period of  existence  of 15 years to April 15,  2019.  Shanxi's
      remaining 40% of registered  capital of $402,174  (Rmb.3,330,000) is owned
      by Licheng Shantai Technology Enterprises Co., Limited.

      Included  in the  consolidated  financial  statements  are  the  following
      subsidiaries:

     o    American Flying Crane Corporation

     o    Heilongjiang Feihe Dairy Co., Limited

     o    Heilongjiang Sanhao Dairy Co., Limited

     o    BaiQuan Feihe Dairy Co., Limited

     o    Beijing Feihe Biotechnology Scientific and Commercial Co., Limited

     o    Shanxi  Feihesantai   Biotechnology  Scientific  and  Commercial  Co.,
          Limited

      As of December  31,  2004,  Feihe  Dairy had a new milk powder  production
      facility,  Feihe  Industrial  Park,  under  construction.  Construction is
      expected to be complete  during the first  quarter of 2005.  Additionally,
      Shanxi's  principal  walnut  powder  production  facility  was still under
      construction  at  December  31,  2004,  with  completion  of the  facility
      expected by the end of 2005.

2.   BASIS OF PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS

     The Company's  consolidated  financial  statements  include the accounts of
     American  Dairy,  Inc., its  wholly-owned  subsidiaries,  AFC, Feihe Dairy,
     Sanhao Dairy, and BaiQuan Dairy and its 60% owned subsidiary,  Shanxi.  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 May 7, 2003 are those of American
     Flying Crane Corporation.


                                                                               9
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

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

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The following is a summary of significant accounting policies:

     Consolidation  policy  - All  significant  inter-company  transactions  and
     balances within the Company are eliminated on 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, 2004, no
     provision for doubtful accounts was considered necessary.

     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.

     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
     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                         33 years
           Plant and machinery               20 years
           Motor vehicles                     9 years
           Computers and equipment            5 years


                                                                              10
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

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

     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  compensation  received from the State Bureau as an
     incentive to relocate from the previous factory  premises,  profit from the
     sales of raw materials to third parties and write down 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 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
     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.


                                                                              11
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

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

     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.

     During  2003 and  2004,  the  Kendong  County  Government  had a policy  of
     refunding  amounts  equal to 50% of the value added tax paid as an economic
     incentive to support the local  economy.  These refunds  which  amounted to
     $1,144,060  and $942,907  for the fiscal years ended  December 31, 2004 and
     2003  respectively  are included in tax  incentives and other income on the
     financial statements.

     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 $2,742,257 and $1,627,458 in 2004
     and 2003, respectively.

     Retirement  benefit  cost -  According  to The  People's  Republic of China
     regulations on pension,  a company  contributes  to a defined  contribution
     retirement plan organized by municipal  government in the province in which
     the Company was  registered  and all  qualified  employees  are eligible to
     participate in the plan. Contributions to the plan 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  such as Feihe Dairy are exempted
     from contributions to the retirement plan.

     Fair  value of  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, 2004 because of the  relatively  short-term  maturity of
     these instruments.

     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 The People's
     Republic of China.


                                                                              12
<PAGE>

     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  amounts of revenues and expenses
     during  the  reporting  period.  Actual  results  could  differ  from those
     estimates.

     Recent accounting  pronouncements - In April 2003, the FASB issued SFAS No.
     149,  "Amendment  of Statement 133 on  Derivative  Instruments  and Hedging
     Activities (SFAS 149)".  SFAS 149 amends and clarifies  certain  derivative
     instruments  embedded in other contracts,  and for hedging activities under
     SFAS 133.  SFAS 149 is  effective  for certain  contracts  entered  into or
     modified by the Company  after June 30, 2003.  The adoption of SFAS 149 had
     no impact on the Company's  financial position,  results of operations,  or
     cash flows.

     In May 2003, the FASB issued SFAS No. 150, "Accounting for Instruments with
     Characteristics of Both Debt and Equity" (SFAS 150). Statement 150 requires
     liability  classification  for three  types of  instruments:  1)  mandatory
     redeemable shares that obligate the company to deliver cash or other assets
     to shareholders on fixed or determinable dates; 2) freestanding written put
     options  and forward  purchase  contracts  on a  company's  own shares that
     obligate the company to deliver cash or other assets, and 3) contracts that
     obligate a company to issue its own  shares in amounts  that are  unrelated
     to, or inversely related to, the value of the shares.  The adoption of SFAS
     150  had  no  impact  on  the  Company's  financial  position,  results  of
     operations, or cash flows.

     In  November  2004,  the FASB  issued  SFAS No. 151  "Inventory  Costs - an
     amendment  of ARB No. 43,  Chapter  4".  Statement  No. 151  requires  that
     certain  abnormal costs  associated with the  manufacturing,  freight,  and
     handling costs  associated with inventory be charged to current  operations
     in the period in which they are  incurred.  The adoption of SFAS 151 had no
     impact on the Company's financial position,  results of operations, or cash
     flows.

     In December 2004,  the FASB issued a revision of SFAS No. 123  "Share-Based
     Payment".  The  statement  establishes  standards  for the  accounting  for
     transactions in which an entity exchanges its equity  investments for goods
     and  services.  It also  addresses  transactions  in which an entity incurs
     liabilities  in exchange  for goods or services  that are based on the fair
     value of the  entity's  equity  instruments  or that may be  settled by the
     issuance of those equity  instruments.  The  statement  does not change the
     accounting  guidance  for  share-based  payments  with  parties  other than
     employees.

     The  statement  requires a public  entity to measure  the cost of  employee
     service  received in exchange for an award of equity  instruments  based on
     the grant-date fair value of the award (with limited exception).  That cost
     will be recognized  over the period during which an employee is required to
     provide service in exchange for the award (usually the vesting  period).  A
     public entity will initially measure the cost of employee services received
     in exchange for an award of liability  instrument based on its current fair
     value; the fair value of that award will be remeasured subsequently at each
     reporting  date through the settlement  date.  Changes in fair value during
     the requisite  service period will be recognized as compensation  over that
     period.


                                                                              13
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

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

     The  grant-date  for fair  value of  employee  share  options  and  similar
     instruments will be estimated using option-pricing  models adjusted for the
     unique characteristics of these instruments.

     The statement is effective for the quarter beginning January 1, 2006.

     In December  2004,  the FASB issued SFAS No. 153  "Exchanges of Nonmonetary
     Assets-amendment  of APB Opinion  No. 29".  Statement  153  eliminates  the
     exception  to fair value for  exchanges  of similar  productive  assets and
     replaces it with a general exception for exchange  transactions that do not
     have commercial substance, defined as transactions that are not expected to
     result in  significant  changes in the cash flows of the reporting  entity.
     This statement is effective for exchanges of nonmonetary  assets  occurring
     after June 15, 2005.

     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 insurance.

     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.

     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 insurance coverage of any kind.

5.   NOTES RECEIVABLE - UNSECURED

     As of December  31,  2004,  the Company held  commercial  notes  receivable
     totaling  $217,391  that were  issued or  endorsed  by a third  party.  The
     commercial  notes are drawn  against  various  banks with varying  maturity
     periods of one month to one and one-half months.

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


                                                                              14
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

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

6.   INVENTORIES

     Inventories consist of the following as of December 31, 2004:

     Raw and partially processed materials          $4,072,999
     Finished goods                                    969,399
                                                    ----------
                                                    $5,042,398
                                                    ==========

7.   TAX REFUNDABLE

     Tax  refundable  represents  valued-added  tax  refundable  from the  local
     governments in The People's Republic of China.

8.   TRANSACTIONS WITH RELATED PARTIES

     As of December 31, 2004 the Company had the  following  balances due to its
     officers and directors:

                                                     December 31
                                                     -----------
     Name                                        2004                2003
     ----                                        ----                ----
     Leng You-bin                          $1,133,822          $  846,228
     Other officers and directors               7,759                --
                                           ----------          ----------
                                           $1,141,581          $  846,228
                                           ==========          ==========

9.   FIXED ASSETS

                                              December 31
                                              -----------
                                                 2004
                                                 ----

     Buildings                               $ 4,857,971
     Plant and machineries                     3,931,651
     Motor vehicles                              292,372
     Computers and equipment                     298,787
                                             -----------
                                               9,380,781
     Less: Accumulated depreciation             (353,387)
                                             -----------
                                             $ 9,027,394
                                             ===========

     Following the full  settlements of short-term  borrowings from a bank and a
     financial  institution  during the year ended  December 31,  2004,  BaiQuan
     Dairy's buildings,  computer and equipment, plant and machineries and motor
     vehicles,   which  were   previously   pledged  to  secure  the  short-term
     borrowings, were released.


                                                                              15
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

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

10.  CONSTRUCTION-IN-PROGRESS

     The Company had two major construction projects in progress at December 31,
     2004 as detailed below:

                                                            December 31
                                                            -----------
                                                               2004
                                                               ----

     Feihe Dairy milk powder processing facilities          $10,757,621
     Shanxi walnut processing facility                        3,963,121
                                                            -----------
     Total                                                  $14,720,742
                                                            ===========

     Pursuant to the Sale and Purchase  Agreement (the  "Agreement")  dated July
     25, 2003,  the Company  purchased  from Kedong  County Beibei Food Industry
     ([chinese  characters])  (the  "Vendor")  the land use rights  and  factory
     adjacent  to  Company's  existing  factory  in  Kedong  County  at a  total
     consideration of $400,966  (Rmb.3,320,000)  for the purpose of constructing
     new  production  factory  facilities to increase  production  capacity.  In
     accordance  with an appraisal  report  issued by An Luan  Certified  Public
     Accountants in QiQiHaEr City, the land use right and factory were evaluated
     at $1,003,623 (Rmb.8,310,000).

     Under the terms and  conditions  of the  Agreement,  Feihe Dairy  agreed to
     settle the consideration in full within one year commencing within one year
     (by July 24, 2004)  commencing from the date of the Agreement or the Vendor
     has the option to  request/demand  the issuance of 200,000 shares of common
     stock of American  Dairy,  Inc. at the option price of $2 per share as full
     and final settlement of the consideration of $400,000 (Rmb. 3,312,000).  As
     of December 31,  2004,  the Vendor has demanded the issuance of the 200,000
     shares of common stock as full and final  settlement  and $400,000 has been
     accrued in the accompanying financial statements accordingly.

     Pursuant to a Construction  Contract dated July 25, 2003 with  Heilongjiang
     Cultivation  Co.,  Limited for the  construction of new production  factory
     facilities in Kedong County,  Heilongjiang  Province at the contract sum of
     $4,210,870 (Rmb.34,866,000), the construction of the new production factory
     facilities was supposed to be completed by September 1, 2004. The Directors
     expect  that the  construction  of the new  production  factory  facilities
     including  refurbishment,  decoration and  installation of production plant
     and machineries  will be completed  during the first quarter of 2005. As of
     December 31, 2004, the Company has paid  $5,036,965  (Rmb.41,706,070)  as a
     result of  overruns  and  additional  requirements  by the  Company.  Total
     expenditures  for the  construction of this facility  through  December 31,
     2004, were $10,757,621.

     Construction-in-progress  also  includes  construction  of the  new  walnut
     powder  production  and  distribution  facility of the  Company's 60% owned
     subsidiary,  Shanxi.  Total  expenditures  for  the  construction  of  this
     facility through December 31, 2004, were $3,963,121.

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.


                                                                              16
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

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

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  which are  included in accounts  payable on the December 31,
     2004 financial statements consist of the following:

     Value added tax                                        $ 481,483
     City construction tax and education surcharge                425
     Others                                                      (410)
                                                            ---------
                                                            $ 481,499
                                                            =========

14.  NOTES PAYABLE

     As of December 31, 2004, the Company had the following notes payable:

          Bank                                        $ 684,771
          County finance department                     241,546
          Finance company                                31,244
                                                      ---------

                                                        957,561
          Short-term loan                              (241,546)
          Current portion of notes payable             (118,140)
                                                      ---------

          Long-term portion of notes payable          $ 597,875
                                                      =========

     The bank loan is secured,  bears  interest at 5.76% per annum with  monthly
     principal  payments of $7,498 plus interest  until  September 30, 2012. The
     loan is guaranteed by a vendor of the Company.

     The county finance department loan is unsecured,  bears no interest and has
     no fixed terms of repayment.

     Notes payable to banks ($483,092 at December 31, 2003) bearing  interest at
     rates ranging from 6.9035% and 5.7525% per annum,  were fully repaid during
     2004.  The  collateral  (buildings  and plant  and  machinery)  pledged  as
     security for these loans has been released by the banks.

     Principal  balances  due  by year  of the  Company's  long-term  debt as of
     December 31, 2004 are as follows:

         Year Ended December 31,            Amount
         -----------------------            ------

                 2005                      $118,140
                 2006                        93,056
                 2007                        89,976
                 2008                        89,976
                 2009                        89,976
                 Thereafter                 234,891
                                           --------
                 Total                     $716,015
                                           ========


                                                                              17
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

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

      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  totalling  $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.  This  liability  has  been  accrued  on the
      Company's financial statements at December 31, 2004.

15.  MINORITY INTEREST

      Minority interest  represents the  proportionate  share (40%) of equity of
      Shanxi  Feihesantai  Biotechnology  Scientific and Commercial Co., Limited
      (Shanxi) owned by Licheng Shantai Technology  Enterprises Co., Limited. At
      December 31, 2004,  the Company owned 60% of Shanxi's  registered  capital
      stock.  Shanxi  was  registered  as a  limited  liability  company  in The
      People's Republic of China on April 15, 2004, with a registered capital of
      $402,174  (Rmb.3,330,000) and a defined period of existence of 15 years to
      April 15, 2019.

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 AFC,  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 AFC.

     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 $270,000 for financial  reporting  purposes.  The  consulting
     agreement  is to cover a period of one year  commencing  May 7,  2003.  For
     financial reporting purposes $228,011 was charged to consulting fee expense
     in 2003 with the balance of $113,989 being treated as a prepaid  expense at
     December 31, 2003.

     A shareholder converted advances to the Company in the amount of $1,866,312
     into 933,155 shares of restricted 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.

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


                                                                              18
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

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

     During 2004, the Company had stock transactions detailed below:

     The Company issued 46,000 shares of its  restricted  common stock valued at
     $96,600 for consulting services.

     In connection  with two private  placements,  the Company issued  1,759,384
     shares of restricted common stock purchased for total cash consideration of
     $4,672,906.  Offering and syndication  costs totaling $476,825 were treated
     as  reductions  in  additional  paid-in  capital  for  financial  reporting
     purposes. The Company also issued 1,825,546 warrants in connection with the
     private  placements,  1,302,241 of which went to the purchasers and 523,305
     went to the  underwriters as additional  consideration  for funds raised in
     the private  placements.  The exercise price of these warrants ranged from
     $1.50 to $3.80 and the warrants expire in three years. The 523,305 warrants
     issued to underwriters had a market value at the issuance date of $862,245.
     The effect of the issuance is to increase additional paid-in capital by the
     fair value of the  warrants  issued  with an offset to  additional  paid in
     capital in the same amount,  since offering costs are treated as reductions
     in additional paid-in capital.  No warrants were exercised  during the year
     ended December 31, 2004.

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.  As of December 31, 2004, the Company
     had not granted any incentive stock options,  stock appreciation rights, or
     stock bonuses under the Plan.

     As of December 31, 2004, the Company had 2,868,402 warrants  outstanding at
     an average  exercise  price of $2.40 per  warrant for one share each of the
     Company's  common  stock.  The  warrants  will expire  three years from the
     issuance date, with 1,042,856 expiring in 2006 and the balance of 1,825,546
     expiring  in 2007.  Information  with  respect to  outstanding  warrants to
     service providers is as follows:

                                                                         Average
                                                                        Exercise
                                                           Shares         Price
                                                           ------         -----

     Outstanding warrants at beginning of year          1,042,856         $1.75
     Warrants granted                                   1,825,546          2.42
     Exercised                                                 --            --
     Expired                                                   --            --
                                                        ---------         -----

     Outstanding warrants at the end of year            2,868,402         $2.15
                                                        =========         =====

<TABLE>
<CAPTION>
          Warrants Outstanding                                       Warrants Exercisable
     ---------------------------------                            -----------------------------
        Shares              Average             Average            Shares             Average
     Outstanding           Remaining           Exercise          Outstanding          Exercise
       12/31/04           Life (Years)          Price             12/31/04             Price
       --------           ------------          -----             --------             -----
<S>                          <C>                 <C>              <C>                  <C>
       2,868,402             2.5                 $2.15            2,868,402            $2..15
       =========             ===                 =====            =========            ======
</TABLE>


                                                                              19
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

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

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 at December 31,
     2003, were not included in the calculation of diluted earnings per share as
     their effect was anti-dilutive.

<TABLE>
<CAPTION>
                                                                                                           Per
                                                                   Income               Shares            Share
                                                                 (Numerator)         (Denominator)        Amount
                                                                 -----------         -------------        ------
<S>                                                               <C>                 <C>                 <C>
     For the Year Ended December 31, 2004:

     Basic EPS Income available to common shareholders            $6,258,380          12,077,085          $ .52

     Effect of Dilutive Securities                                        --           1,378,615             --
                                                                  ----------          ----------          -----
     Diluted EPS Income available to common shareholders          $6,258,380          13,455,700          $ .47
                                                                  ==========          ==========          =====

<CAPTION>
                                                                                                           Per
                                                                   Income               Shares            Share
                                                                 (Numerator)         (Denominator)        Amount
                                                                 -----------         -------------        ------
<S>                                                               <C>                 <C>                 <C>
     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
                                                                  ==========          ==========          =====
</TABLE>


                                                                              20
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

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

18.  Income Tax

     Pretax  income  (loss) for 2004 was  $6,616,708  from  foreign  sources and
     ($619,950) from U.S. sources.  Pretax income (loss) for 2003 was $3,103,046
     from foreign sources and ($727,726) from U.S. sources.

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

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                      2004                  2003
                                                                      ----                  ----
<S>                                                               <C>                   <C>
          Computed  expected  tax  expense                        $ 2,368,719           $   902,622

          Increases (reductions) in taxes result from:

          Add  back  effect  of  U.S.  losses                         244,880               276,535

          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                                (430,086)             (155,152)

          BaiQuan Dairy 2003 tax liability waived by province        (261,621)                   --

          Foreign  income  subject  to  foreign
            tax holiday but not expected to be
            subject  to  U.S.  tax  in  foreseeable
            future                                                 (2,183,513)             (685,492)
                                                                  -----------           -----------
          Actual  income tax expense (benefit)                    $  (261,621)          $   338,513
                                                                  ===========           ===========
</TABLE>

     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 2004 and 2003 were  accrued  (waived) by Sanhao Dairy and
     BaiQuan Dairy as follows:

                                Year Ended December 31,
                             -----------------------------
                                2004                2003
                             ---------           ---------
     Sanhao  Dairy           $    --             $  76,892
     BaiQuan  Dairy           (261,621)            261,621
                             ---------           ---------
       Total                 $(261,621)          $ 338,513
                             =========           =========

     The tax  holiday  resulted  in tax  savings of  $2,445,134  or $0.20  basic
     benefit per share in 2004 and  $685,492 or $.06 basic  benefit per share in
     2003.


                                                                              21
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

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

     The Company has a U.S net  operating  loss  carryforward  of  approximately
     $1,518,000  which will begin  expiring  in 2023.  For  financial  reporting
     purposes  the  deferred  tax asset of  $516,135  associated  with this loss
     carryforward is fully reserved as of December 31, 2004.

     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,  2004,  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, 2004 for each of
     the next five years and in the aggregate are:

     December 31, 2005          $  2,542
     December 31, 2006             5,908
     December 31, 2007             5,908
     December 31, 2008             5,908
     December 31, 2009             5,908
     Thereafter                  243,698
                                --------
                                $269,872
                                ========

     Rent  expense  incurred  during the years ended  December 31, 2004 and 2003
     totalled $22,536 and $5,967, respectively.

     In  accordance  with  the  terms  and  conditions  of a Sale  and  Purchase
     Agreement  dated February 23, 2004 between Feihe Dairy and a vendor for the
     sale and purchase of a land use right in Beijing,  in the People's Republic
     of China,  Feihe  Dairy  agreed to  acquire  the  commercial  property  for
     consideration  of $987,863 of which three  installments  totaling  $396,075
     have been paid as of December 31, 2004.


                                                                              22
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004

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

     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.  A liability in the amount of $400,996 has been accrued
     on the Company's  books at December 31, 2004,  however,  stock had not been
     issued in fulfilment of this obligation as of that date.

     In accordance with the terms and conditions of a Construction Contract (the
     "Contract")  dated October 2, 2004 between Feihe Dairy and Eastern Liaoning
     Construction  Co.,  Limited for the  construction of the steel frame of the
     new factory, the Company agreed to pay total construction costs of $724,638
     of which deposits totaling $241,546 have been paid as of December 31, 2004.
     The  balance of  $483,092  shall be settled  based on the  progress  of the
     construction.

     In accordance  with the terms and conditions of a Contract dated October 1,
     2004,  Feihe  Dairy  entered  into  a  Sales  and  Purchase  Contract  (the
     "Contract") with  Heilongjiang Da San Yuan Dairy Machinery Co., Limited for
     the  design,   manufacture  and   installation  of  production   plant  and
     machineries  at Feihe  Dairy for a  consideration  of  $7,234,300  of which
     $4,863,687 have been paid. The balance of $2,370,613 shall be settled based
     on the progress of the construction.


                                                                              23
<PAGE>

                           INDEX OF EXHIBITS ATTACHED

<TABLE>
<CAPTION>
Exhibit                                              Description
-------                                              -----------
<S>                                     <C>

10.1 2003 Stock Incentive Plan

14   Code of Business Conduct and Ethics

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

31.1 Certification of Leng You-Bin

31.2 Certification of Liu Hua

32.1 Certification of Leng You-Bin
        and Liu Hua
</TABLE>