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

                                    Form 10-K

|X|   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
      OF 1934 for the fiscal year ended December 31, 2005

|_|   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 Dairy, Inc.
                              --------------------
             (Exact name of registrant as specified in its charter)


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


                      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)

Registrant's telephone number, including area code: 011-0452-4312688

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

       Title of each class             Name of each exchange on which registered
       ----------------------          -----------------------------------------
       Common Stock                    NYSE Archipelago Exchange (ArcaEx)

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

                                       N/A
                        ---------------------------------
                                (Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. |_| Yes |X| No

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. |_| Yes |X| No

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


                                       1
<PAGE>

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

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

Large accelerated filer [  ]  Accelerated filer [  ]  Non-accelerated filer [X ]

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

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter closing price: $29,020,324.


              APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. |_| Yes |_| No

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: the number of shares of the
registrant's common stock outstanding as of March 29, 2006 was 14,132,824
shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None


                                       2
<PAGE>

                                TABLE OF CONTENTS

PART I

Item 1.    Business                                                            4
Item 1A.   Risk Factors                                                       10
Item 1B.   Unresolved Staff Comments                                          13
Item 2.    Properties                                                         14
Item 3.    Legal Proceedings.                                                 14
Item 4.    Submission of Matters to a Vote of Security Holders.               14

PART II
Item 5.    Market for Registrant's Common Equity, Related Stockholder
           Matters and Issuer Purchases of Equity Securities                  15
Item 6.    Selected Financial Data.                                           17
Item 7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations.                                         17
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk.        23
Item 8.    Financial Statements and Supplementary Data.                       23
Item 9.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure.                                          23
Item 9A.   Controls and Procedures.                                           23
Item 9B.   Other Information.                                                 23

PART III
Item 10.   Directors and Executive Officers of the Registrant.                23
Item 11.   Executive Compensation.                                            24
Item 12.   Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters.                                   26
Item 13.   Certain Relationships and Related Transactions.                    27
Item 14.   Principal Accounting Fees and Services.                            28

PART IV
Item 15.   Exhibits, Financial Statement Schedules.                           29

Signatures

Exhibit Index


                                       3
<PAGE>

PART I

Item 1. 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 Dairy 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 marketing company for Feihe Dairy.

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

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

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

      2.    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.

Current Corporate Structure

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

                              American Dairy, Inc.
                   (formerly named "Lazarus Industries, Inc.)
                   ------------------------------------------
                                  Owns 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 Biotech-
 Biotechnology Scientific         Co., Limited           nology Scientific and
and Commercial Co. Limited                              Commercial Co. Limited
--------------------------     -------------------      ----------------------

Heilongjiang Feihe Dairy Co., Limited and Subsidiaries


                                       4
<PAGE>

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

      In 1982, Heilongjiang Zhaoguang Dairy 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).

      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.

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

      During April 2004, American Dairy 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 remaining 40% owner of Shanxi
Feihesantai is Licheng Shantia Technology Enterprises Limited, an unaffiliated
company. The business of Shanxi Feihesantai is the production and distribution
of walnut power and other walnut products.

During June 2005, American Dairy purchased a milk powder processing facility
from Nutricia Nutritionals Co. of Hei Long Jiang for $7,300,000 and its
inventory for $130,000. American Dairy also has acquired 19 milk collection
stations in this transaction.

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.


                                       5
<PAGE>

Milk Processing Facilities

      American Dairy has the following 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 plant buildings have approximately 4,500 square meters
of production space and has 720 square meters of office space, and is
approximately 14 years old. Sanhao Dairy has approximately 236 production and
packaging employees at this plant.

      American Dairy also has a milk powder processing plant 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 15 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. Feihe 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, 2005. This new plant was completed in
December 2005.

During 2005, American Dairy entered into an Asset Purchase Agreement with
Nutricia Nutritionals Co., Ltd. of Hei Long Jiang ("Nutritionals") in The
People's Republic of China (the "PRC"). Nutritionals is a wholly-owned
subsidiary of Royal Numico N.V., a public limited liability company organized in
the Netherlands. The Agreement provided that Feihe Dairy would acquire
substantially all of the assets of Nutritionals for $7,300,000 and its inventory
for $130,000. The assets are comprised primarily of the land use rights and
buildings of Nutritionals' milk powder plant in Hiilongjiang Province in the PRC
and all of its milk powder processing equipment at its plant. The Company also
acquired approximately 19 milk collection stations for the collection of raw
milk to supply the processing plant. This milk powder plant is capable of
processing approximately 8,100 tons of raw milk per month into approximately
1,620 tons of milk powder per month. The acquisition increased the production
capacity of American Dairy's milk powder operations by approximately 60%.

      The existing production facilities of American Dairy employ approximately
578 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.

      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.


                                       6
<PAGE>

      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.
Product Sales

      The following table reflects the sales of the five principal products of
American Dairy during the fiscal year ended December 31, 2005:

Walnut Powder Operations

      During April 2004, American Dairy 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.

      This plant was completed and began operations during October 2005.

<TABLE>
<CAPTION>
                                             2005                                           2004
                        -------------------------------------------    -------------------------------------------

Product name             Quantity (Kg)       Amount     % of sales      Quantity (Kg)       Amount     % of sales
---------------------   ---------------   -----------   -----------    ---------------   -----------   -----------
<S>                           <C>         <C>                   <C>          <C>         <C>                   <C>
Ca+Zn series(1)               4,722,624   $13,348,008            19%         4,719,669   $12,682,053            34%
CPP series(1)                 4,503,308   $24,700,822            35%         2,398,579   $12,609,205            34%
Soybean series(2)             1,781,052   $ 3,065,612            16%         2,199,445   $ 5,570,911            15%
Nucleotides series(1)         1,094,676   $11,017,136            10%           219,153   $ 2,418,618             6%
Rice cereal series(3)         2,664,230   $ 7,319,683             4%                 *   $         *
</TABLE>

===================
      (1)   Milk powder product
      (2)   Soybean powder products
      (3)   Rice products

Customers

      No customers of American Dairy equaled or exceeded 10% of its sales during
the years ended December 31, 2005, 2004 or 2003, except that one customer,
Heilongjiang Changxin Dairy, represented approximately 15% of sales during 2005.

      American Dairy distributed its products to over 25 provinces in China
during 2005. No province exceeded 10% of sales.

Research and Development

      American Dairy has six technicians engaged in research and development
activities. These technicians monitor quality control at the milk processing
plants of American Dairy 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:


                                       7
<PAGE>

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

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

Brand Development and Marketing

      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.

Soy Bean and Rice Cereal

      American Dairy also produces soy bean powder and rice cereal which
comprised 16% and 4% respectively of sales during the fiscal year ended December
31, 2005.

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.

----------
      American Dairy incurred advertising costs of $3,380,218 during fiscal
2005, and incurred advertising costs of $2,742,257 during fiscal 2004.


                                       8
<PAGE>

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.

      During April 2005, American Dairy issued a Series A Convertible Note for
$3,000,000 that bears interest at 6 1/2 % per annum which is convertible into
the common stock of American Dairy at $8.00 per share, and has a term of one
year. From June to August 2005, American Dairy issued two Series B Convertible
Notes for the total amount of $5,000,000 that bear interest at the rate of 7.5%
per annum which are convertible into the common stock of American Dairy at
$10.00 per share, and have a term of two years. The proceeds of the notes were
applied primarily to acquisitions, including the acquisition of the milk powder
plant and inventory from Nutricia Nutritionals Co., Ltd. of Hei Long Jiang.


                                       9
<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.

Item 1A. Risk Factors.

General

      Expansion Risks of New Plants and Ventures. 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.

      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.

      Risks of 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.


                                       10
<PAGE>

      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.

      Risks 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.

      Risks Regarding 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 believes that its farmers can increase 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.

      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 Risks. 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.


                                       11
<PAGE>

      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.

      Risks of 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.

      Risks of 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. 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.

      Risks of China Foreign Currecny Conversion Policies. 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 Renminbi 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.


                                       12
<PAGE>

      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.

      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.

      Dividends. Dividends paid to American Dairy, as the U.S. parent company,
would be subject to U.S. corporate income tax. American Dairy has not accrued
any tax liability associated with the possible payment of dividends to the U.S.
parent company.

      No Bank Deposit Insurance. American Dairy maintains certain bank accounts
in China that are not insured and are not protected by FDIC insurance or other
insurance. As of December 31, 2005, American Dairy held $206,000 of cash
balances in the United States of which $106,000 was in excess of five insurance
limits.

      Risks of 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 Risks. 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 1B. Unresolved Staff Comments.

      Not applicable.


                                       13
<PAGE>

Item 2. Properties

      The principal executives of American Dairy are located at C-16 Shin Chen
International Building, No. 10, Jui-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 milk powder processing plants and also
rice, soy beans and walnut processing facilities, and various warehouses in
northern China, known as Feihe Dairy, Sanhao Dairy and BaiQuan Dairy.

      American Dairy has been in the process of constructing a new milk powder
production facility in Kedong County, Heilongjiang Province in The People's
Republic of China which was completed in December 2005. As of December 31, 2005,
American Dairy has expended approximately $14,000,000 in construction and
equipment costs plant.

      American Dairy has been in the process of completing the construction of a
new plant in Shenyang in northeast China to product walnut powder, a new product
of American Dairy. As of December 31, 2005, American Dairy has expended
approximately $3,374,000 in construction costs. This facility was completed in
December 2005.

      During 2005, American Dairy entered into an Asset Purchase Agreement with
Nutricia Nutritionals Co., Ltd. of Hei Long Jiang ("Nutritionals") in The
People's Republic of China ("PRC"). Nutritionals is a wholly-owned subsidiary of
Royal Numico N.V., a public limited liability company organized in the
Netherlands. The Agreement provided that American Dairy would acquire
substantially all of the assets of Nutritionals for $7,300,000 and its inventory
for $130,000. The assets are comprised primarily of the land use rights and
buildings of Nutritionals' milk powder plant in Heilongjiang Province in the PRC
and all of its milk powder processing equipment at its plant. American Dairy
also acquired approximately 19 milk collection stations for the collection of
raw milk to supply the processing plant.

      In January 2006, American Dairy entered into an Agreement with the
government of Gannan County in Heilongjiang Province, PRC, to build a new milk
processing plant. Under the terms of the Agreement, American Dairy will receive
the rights to approximately 3,000,000 square feet of land, tax incentives, and
subsidiaries for the construction of the new building. In addition, American
Dairy will receive exclusive processing and distribution rights to the locally
subsidized milk production. The government will also subsidize local farmers for
the initial costs of acquiring up to 200,000 milk cows to increase the local
production of milk.

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

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


                                       14
<PAGE>

                                     PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
        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, 2005, there were 14,132,824 shares of
Common Stock issued and outstanding that were held by 461 stockholders of
record.

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 is Progressive
Transfer Company, 1981 E. Murray Road, Suite 100, Salt Lake City, 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 (former trading symbol ADIY) of American
Dairy until April 18, 2005 (reflecting inter-dealer prices without retail
mark-up, mark-down or commission and may not represent actual transactions), and
reflects closing sale prices of the Common Stock of American Dairy on the NYSE
Archipelago Exchange (ArcaEx) (present trading symbol ADY) from April 18, 2005
through December 31, 2005.


                                       15
<PAGE>

                                High Closing       Low Closing
                                  Bid Prices       Bid Prices
                                -------------     -------------
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
---------------
Year Ended December 31, 2005:
1st Quarter                     $        5.00     $        4.35
2nd Quarter (2)                 $        6.90     $        5.35
3rd Quarter                     $        8.35     $        6.30
4th Quarter                     $        8.00     $        5.25
-----------------------
(1)      On May 7, 2003, the Company had a one-for-nineteen (1-for-19) reverse
         stock split of its outstanding Common Stock.

(2)      On April 18, 2005, the Common Stock of American Dairy ceased trading on
         the NASD Electronic Bulletin Board over-the-counter market (OTC-BB),
         and trading of its Common Stock commenced on the NYSE Archipelago
         Exchange (ArcaEx).

      The closing sales price of the Common Stock of American Dairy on the NYSE
Archipelago Exchange (ArcaEx) on March 29, 2006 was $12.00 per share.

      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, 2005, stock optino and warrant awards have been
made under the Plan as follows:

                           Number of securities to    Weighted-average
                           be issued upon exercise    exercise price of
                           of outstanding options,    outstanding warrants
                           warrants and rights        and rights
                           -----------------------    ---------------------
                                               (a)                       (b)
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-


                                       16
<PAGE>

      Sale of Unregistered Securities. During the three months ended December
31, 2005, 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, 2005, warrants to purchase
114,285 shares of restricted common stock of American Dairy were exercised for
$200,000, in reliance upon Section 4(2) under the Securities Act of 1933.

ITEM 6. SELECTED FINANCIAL DATA

      The following table sets forth selected consolidated financial data of the
Company for the years ended December 31, 2005, 2004, and 2003. The data are
derived from our audited consolidated financial statements revised to reflect
the reclassification of certain items. The table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements, including the notes,
appearing in elsewhere in this report.

<TABLE>
<CAPTION>
                                         Year Ended       Year Ended        Year Ended
                                        December 31,      December 31,      December 31,
                                           2005               2004              2003
                                      ---------------   ---------------   ---------------
<S>                                   <C>               <C>               <C>
Revenues                              $    68,024,000   $    37,416,000   $    26,636,000
Cost of goods sold                    $    38,716,000   $    18,007,000   $    15,733,000
Distribution expenses                 $    16,743,000   $    13,486,000   $     7,899,000
General and administrative            $     2,483,000   $     1,313,000   $     1,670,000
Depreciation                          $       161,000   $        55,000   $       131,000
Other income                          $     2,221,000   $     1,489,000   $     1,197,000
Gain on disposal of assets            $         9,000   $         1,000   $            --
Interest expense                      $       523,000   $        49,000   $        25,000
Net income                            $    11,630,000   $     6,258,000   $     2,037,000
Other comprehensive income            $       605,000   $            --   $            --
Total comprehensive income            $    12,235,000   $     6,258,000   $     2,037,000
Basic net income per share            $           .83   $           .52   $           .19
Weighted average basic shares
outstanding                                13,931,000        12,077,000        10,536,000
Diluted net income per common share   $           .74   $           .47   $           .19
Weighted average diluted shares
outstanding                                16,057,000        13,456,000        10,536,000
</TABLE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
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 salability 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 collectibility 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.


                                       17
<PAGE>

RESULTS OF OPERATIONS

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

                                            2005            2004           2003
Revenues                            $ 68,024,000    $ 37,416,000   $ 26,636,000
Cost of good sold                   $ 38,716,000    $ 18,007,000   $ 15,733,000
Distribution expense                $ 16,743,000    $ 13,486,000   $  7,899,000
General and administrative expense  $  2,483,000    $  1,313,000   $  1,670,000
Depreciation                        $    161,000    $     55,000   $    131,000
Other income                        $  2,221,000    $  1,489,000   $  1,197,000
Gain on disposal of assets          $      9,000    $      1,000   $         --
Interest expense                    $   (523,000)   $    (49,000)  $    (25,000)
Net Income                          $ 11,630,000    $  6,528,000   $  2,036,000

Comparison of Years Ended December 31, 2005 and 2004

      Net income increased by 86% from $6,258,000 in 2004 to $11,630,000 for
2005. This increase in net income is attributable primarily to the following
factors: (1) an 82% increase in sales; (2) a 49% increase in other income,
offset in part by (i) a 17% decrease in gross profit margins from 52% in 2004 to
43% in 2005; (ii) a 24% increase in distribution expenses, (iii) an 89% increase
in general and administrative expenses, and (iv) a 959% increase in interest
expense.

      Revenues. Revenues increased by $30,608,000 or 82% from $37,416,000 in
2004 to $68,024,000 in 2005. 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 3,732,107 kilograms or 28%
      year-on-year to 17,210,752 kilograms for the year ended December 31, 2005
      compared to the same corresponding period of 13,478,645 kilograms in 2004;
      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 Dairy 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 4,722,624 kilograms (2004: 4,719,669
         kilograms) by 0.06% year-on-year;

      *  CPP services totaling 4,503,308 kilograms (2004: 2,398,579 kilograms)
         by 88% year-on-year; and

      *  Nucleotides series totaling 1,094,676 kilograms in 2005 (2004: 219,152
         kilograms) by 400% year-on-year; and

                                       18
<PAGE>

      Cost of Goods Sold. Cost of goods sold increased 115% or $20,709,000 from
$18,007,000 in 2004 to $38,716,000 in 2005. This increase is due to the
following factors (1) a 28% increase in sales volumes (2) a 49% increase in
direct materials cost per kilogram from $1.35 in 2004 to $2.00 in 2005 (3) a 25%
increase per kilogram in direct labor cost from $.04 in 2004 to $.05 in 2005,
and (4) a 120% increase in manufacturing overhead from $.05 per kilogram in 2004
to $.11 per kilogram in 2005. The increase in direct materials cost is due
primarily to the increased use of nutritional supplements used primarily in
higher end products. The increase in labor and overhead cost is attributable to
the new production facilities coming on line which were not yet operating a
capacity.

      Distribution Expenses. Distribution expenses for the year ended December
31, 2005 were $16,743,000, an increase of $3,257,000 or 24% from the prior
year's distribution expenses of $13,486,000. The principal reasons for the
increase were substantial increases in advertising expense, promotional
expenses, 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, 2005 were $2,483,000, an increase of $1,170,000
or 89% from the prior year's general and administrative expenses of $1,313,000.
The principal reason for the increase was mainly due to increases in
depreciation expenses, education expenses, entertainment, office expenses, union
expenses, transportation expenses, bad debts, and staff salaries, as well as an
increase in expense for consulting services incurred at the parent company
level.

      Depreciation Expense. Depreciation expense for the year ended December 31,
2005 was $161,000 and $839,000, for general and administrative and cost of goods
sold depreciation, respectively, resulting in increases of $106,000 and
$632,000, respectively, compared to the year ended December 31, 2004, which
reflected general and administrative and cost of goods sold depreciation of
$55,000 and $207,000, respectively. This increase is due primarily to
substantial additions of buildings, plant and machinery in Feihe Dairy and
Shanxi Feihe during 2005.

      Interest Expense. Interest expense for the year ended December 31, 2005
was $523,000 as compared to $49,000 for the prior year. This increase was due
primarily to interest accrued on convertible notes issued in 2005, as well as
increases in exchange loss and interest expense arising from new short-term
loans.

      Income Taxes. Income tax benefit decreased by $262,000 from $262,000 of
benefit in 2004 to $-0- in 2005. This was due primarily to reversal of a 2003
tax actual on BiaQuan Dairy which was waived by the taxing authorities in 2004.

Comparison of Years Ended December 31, 2004 and 2003

      Net income increased by 207% from $2,036,000 in 2003 to $6,258,000 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 $10,780,000 or 40% from $26,636,000 in
2003 to $37,416,000 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 "Feihe" brand of mainland China following
            the successful advertising campaigns in the previous year and
            extensive networks of Agencies in 25 provinces;

--------
      Other Income. Other income which consist primarily of VAT tax rebates
provided by the provinces as an economic incentive, increased by $732,000 or 49%
from $1,489,000 in 2004 to $2,221,000 in 2005 due primarily to increased sales
volumes.


                                       19
<PAGE>

      *     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 Dairy 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.

      Cost of Goods Sold. Cost of goods sold increased 14% or $2,274,000 from
$15,733,000 in 2003 to $18,007,000 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 $13,486,000, an increase of $5,587,000 or 71% from the prior
year's distribution expenses of $7,899,000. 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 $1,313,000, a decrease of $357,000 or
21% from the prior year's general and administrative expenses of $1,670,000. 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 $55,000 and $207,000, respectively, for the year ended December 31,
2004, an increase of $131,000 from the prior years depreciation expense of
$131,000 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.

      Interest Expense. Interest expense for the year ended December 31, 2004
was $49,000 as compared to only $25,000 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.

-------
      Other Income. Other income which consist primarily of VAT tax rebates
provided by the provinces as an economic incentive, increased by $292,000 or 24%
from $1,197,000 in 2003 to $1,489,000 in 2004 due primarily to increased sales
volumes.


                                       20
<PAGE>

      Income Taxes. Income tax expense decreased by $601,000 from $339,000 of
expense in 2003 to $262,000 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, 2005 was $7,927,000 compared with net cash flows
provided by operating activities of $16,539,000 for the year ended December 31,
2004. This decrease in cash flows from operating activities was attributable
primarily to an increase in accounts receivable of $5,176,000, and an increase
in inventory of $4,580,000.

      Sale of Stock - During the fiscal year ended December 31, 2005, American
Dairy realized $750,000 from the purchase of its Common Stock by warrant holders
pursuant to the exercise of such warrants.

      Working Capital - At December 31, 2005, the Company had a negative working
capital of $(1,926,000).

      CONTRACTUAL OBLIGATIONS - As of December 31, 2005, the Company had the
following contractual obligations:

<TABLE>
<CAPTION>
                                                         Payments due by period
                             ---------------------------------------------------------------
                                           Less than      1-3          3-5        More than
Contractual obligations         Total       1 year       years        years       5 years
-----------------------      ----------   ----------   ----------   ----------   ----------
<S>                          <C>          <C>          <C>          <C>          <C>
Long-term debt obligations   $5,646,000   $  102,000   $5,184,000   $  184,000   $  176,000

Purchase obligation for         604,000      604,000           --           --           --
building acquisition

Purchase obligations for        273,000        6,000       12,000       12,000      243,000
land use rights

Purchase obligations for      3,429,000    3,429,000           --           --           --
advertising contracts
                             ----------   ----------   ----------   ----------   ----------

Total                        $9,952,000   $4,141,000   $5,196,000   $  196,000   $  419,000
                             ==========   ==========   ==========   ==========   ==========
</TABLE>


Critical Accounting Policies

      Certain amounts included in or affecting our consolidated financial
statements and related disclosures must be estimated, requiring us to make
certain assumptions with respect to values or conditions that cannot be known
with certainty at the time the financial statements are prepared. These
estimates and assumptions affect the amounts we report for assets and
liabilities and our disclosure of contingent assets and liabilities at the date
of our financial statements. We routinely evaluate these estimates, utilizing
historical experience, consultation with experts and other methods we consider
reasonable in the particular circumstances. Nevertheless, actual results may
differ significantly from our estimates. Any effects on our business, financial
position or results of operations resulting from revisions to these estimates
are recorded in the period in which the facts that give rise to the revision
become known.


                                       21
<PAGE>

      In preparing our consolidated financial statements and related
disclosures, we must use estimates in determining the economic useful lives of
our assets, the fair values used to determine possible asset impairment charges,
provisions for uncollectible accounts receivable, exposures under contractual
indemnifications and various other recorded or disclosed amounts. However, we
believe that certain accounting policies are of more significance in our
consolidated financial statement preparation process than others, which policies
are discussed following. See also Note 3 to the consolidated financial
statements for a summary of our significant accounting policies.

      Estimates of Allowances for Bad Debts - The Company must periodically
review its trade and other receivables to determine if all are collectible or
whether an allowance is required for possible uncollectible balances.

      Estimate of the useful lives of property and equipment - The Company must
estimate the useful lives and proper salvage values of property and equipment.
The Company must also review it property and equipment for possible impairment
or obsolescence.

      Inventory - The Company must determine whether it has any obsolete or
impaired inventory.

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.

      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.


                                       22
<PAGE>

      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.

      SFAS No. 152 "Accounting for Real Estate Time Sharing Transactions", SFAS
No. 153 "Exchange of Nonmonetary Assets", SFAS No. 154 "Accounting for Changes
and Error Corrections", SFAS No. 155 "Accounting for Certain Hybrid Financing
Instruments", and SFAS No. 156 "Accounting for Servicing of Final Assets" were
recently issued but have no current applicability to the Company and have no
effect on the consolidated financial statements.

* Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      All of the operations of American Dairy are conducted in The People's
Republic of China (the "PRC"), and the Renminbi is the national currency in
which its operations are conducted. American Dairy has not utilized any
derivative financial instruments or any other financial instruments, nor does it
utilize any derivative commodity instruments in its operations, nor any similar
market sensitive instruments.

      The exchange rate between the Renminbi and the U.S. dollar is subject to
the PRC foreign currency conversion policies which may change at any time. The
exchange rate at December 31, 2005, was 8.11 Renminbi to 1 U.S. dollar, and the
exchange rate is currently permitted to float within a very limited range. See
Item 1A - Risks of Doing Business in China.

* Item 8. Financial Statements and Supplementary Data

Please see the accompanying Financial Statements attached hereto beginning on
page F-1.
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS
AMERICAN DAIRY, INC.


We have audited the accompanying consolidated balance sheets of American Dairy,
Inc. and subsidiaries (the "Company") as of December 31, 2005 and 2004 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2005. 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 audits.

We conducted our audits 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. The Company is not required, nor
have we been engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit 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, 2005 and 2004 and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.


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


Oklahoma City, Oklahoma
March 12, 2006


                                      F-1
<PAGE>

                               AMERICAN DAIRY INC.
                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2005 AND 2004

<TABLE>
<CAPTION>
                                     ASSETS
                                                                                     2005          2004
                                                                                 -----------   -----------
<S>                                                                              <C>           <C>
Current assets:
     Cash                                                                        $12,958,000   $ 6,645,000
     Accounts receivable
         Trade-net of allowance for bad debts of $309,461 and $0, respectively     4,133,000       671,000
         Employees                                                                   488,000       267,000
         Other                                                                     1,517,000       333,000
     Commercial note receivable - secured                                               --         218,000
     Inventories                                                                   9,622,000     5,042,000
     Prepaid expenses                                                                875,000       565,000
     Advances to suppliers                                                         1,216,000       308,000
     Other tax refundable                                                            501,000        37,000
                                                                                 -----------   -----------

              Total current assets                                                31,310,000    14,086,000
                                                                                 -----------   -----------

Property and equipment:
     Fixed assets, net of accumulated depreciation                                34,686,000     9,027,000
     Construction in progress                                                      3,374,000    14,721,000
                                                                                 -----------   -----------

                                                                                  38,060,000    23,748,000
                                                                                 -----------   -----------

Total assets                                                                     $69,370,000   $37,834,000
                                                                                 ===========   ===========
</TABLE>

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


                                      F-2
<PAGE>

                               AMERICAN DAIRY INC.
                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2005 AND 2004

<TABLE>
<CAPTION>
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                       2005           2004
                                                                    -----------   -----------
<S>                                                                 <C>           <C>
Current liabilities:
     Accounts payable and accrued expenses                          $11,855,000   $ 9,034,000
     Current portion of long term debt                                  102,000       118,000
     Advances from related parties                                      933,000     1,142,000
     Advances from employees                                            948,000       654,000
     Deferred income                                                 12,074,000     9,694,000
     Short-term notes and loans payable                               7,324,000       242,000
                                                                    -----------   -----------

         Total current liabilities                                   33,236,000    20,884,000
                                                                    -----------   -----------

Long term debt, net of current portion shown above                    5,543,000       598,000
                                                                    -----------   -----------

Minority interest                                                       494,000       180,000
                                                                    -----------   -----------

Stockholders' equity:
     Common stock, $.001 par value; 50,000,000 shares authorized;
         14,132,824 and 13,556,356 shares issued and
         outstanding at December 31, 2005 and 2004, respectively         14,000        14,000
     Additional paid-in capital                                       9,209,000     7,519,000
     Retained earnings                                               20,269,000     8,639,000
     Accumulated other comprehensive income                             605,000          --
                                                                    -----------   -----------

         Total stockholders' equity                                  30,097,000    16,172,000
                                                                    -----------   -----------

Total liabilities and stockholders' equity                          $69,370,000   $37,834,000
                                                                    ===========   ===========
</TABLE>

     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, 2005, 2004, AND 2003

<TABLE>
<CAPTION>
                                                    2005            2004            2003
                                                ------------    ------------    ------------
<S>                                             <C>             <C>             <C>
SALES                                           $ 68,024,000    $ 37,416,000    $ 26,636,000
COST OF GOODS SOLD                                38,716,000      18,007,000      15,733,000
                                                ------------    ------------    ------------

      Gross Profit                                29,308,000      19,409,000      10,903,000
                                                ------------    ------------    ------------

OPERATING AND ADMINISTRATIVE
EXPENSES:
      Distribution expenses                       16,743,000      13,486,000       7,899,000
      General and administrative expenses          2,483,000       1,313,000       1,670,000
      Depreciation                                   161,000          55,000         131,000
                                                ------------    ------------    ------------

                                                  19,387,000      14,854,000       9,700,000
                                                ------------    ------------    ------------

      Income from operations                       9,921,000       4,555,000       1,203,000
                                                ------------    ------------    ------------

OTHER INCOME (EXPENSE):
      Other income (expenses)                      2,221,000       1,489,000       1,197,000
      Gain on disposal of assets                       9,000           1,000            --
      Interest and finance costs                    (523,000)        (49,000)        (25,000)
                                                ------------    ------------    ------------

                                                   1,707,000       1,441,000       1,172,000
                                                ------------    ------------    ------------

MINORITY INTEREST                                      2,000            --              --
                                                ------------    ------------    ------------

INCOME BEFORE INCOME TAXES                        11,630,000       5,996,000       2,375,000

(PROVISION FOR) BENEFIT FROM
INCOME TAXES                                            --           262,000        (339,000)
                                                ------------    ------------    ------------

NET INCOME                                        11,630,000       6,258,000       2,036,000

Other comprehensive income:
      Foreign currency translation adjustment        605,000            --              --
                                                ------------    ------------    ------------

TOTAL COMPREHENSIVE INCOME                      $ 12,235,000    $  6,258,000    $  2,036,000
                                                ============    ============    ============

BASIC NET INCOME PER COMMON SHARE               $       0.83    $       0.52    $       0.19
                                                ============    ============    ============

WEIGHTED AVERAGE BASIC SHARES OUTSTANDING         13,931,000      12,077,000      10,536,000
                                                ============    ============    ============

DILUTED NET INCOME PER COMMON SHARE             $       0.74    $       0.47    $       0.19
                                                ============    ============    ============

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING       16,057,000      13,456,000      10,536,000
                                                ============    ============    ============
</TABLE>

     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, 2005, 2004, AND 2003

<TABLE>
<CAPTION>
                                               Common Stock
                                         -----------------------                              Accumulated
                                            Number       $0.001     Additional                     Other
                                              of          par        Paid-In        Retained   Comprehensive
                                            Shares       Value       Capital        Earnings       Income          Totals
                                         ------------  ---------   -----------    -----------  --------------   ------------
<S>                                      <C>           <C>         <C>            <C>          <C>              <C>
Balance, December 31, 2002                  9,650,000   $  9,000   $   (10,000)   $   345,000  $       --       $    344,000

Recapitalization                              135,530       --           4,000           --            --              4,000

Share issued for consulting and
  syndication services                        240,000       --         270,000           --            --            270,000

Share issued in exchange for
 conversion of shareholder loans              933,155      1,000     1,865,000           --            --          1,866,000

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

Less offering costs                              --         --        (401,000)          --            --           (401,000)

Net income for the year ended
  December 31, 2003                              --         --            --        2,036,000          --          2,036,000
                                         ------------  ---------   -----------    -----------  ------------     ------------

Balance, December 31, 2003                 11,750,970     11,000     3,227,000      2,381,000          --          5,619,000

Shares issued for services                     46,000       --          97,000           --            --             97,000

Stock issued for cash                       1,759,384      3,000     4,672,000           --            --          4,675,000

Less offering costs                              --         --        (477,000)          --            --           (477,000)

Net income for the year ended
 December 31, 2004                               --         --            --        6,258,000          --          6,258,000
                                         ------------  ---------   -----------    -----------  ------------     ------------

Balance, December 31, 2004                 13,556,354     14,000     7,519,000      8,639,000          --         16,172,000

 Stock issued for cash                        428,570       --         750,000           --            --            750,000

 Stock issued for services                    147,900       --         940,000           --            --            940,000

 COMPREHENSIVE INCOME:

 Foreign currency translation adjustments        --         --            --             --         605,000          605,000

Net income for the year ended
December 31, 2005                                --         --            --       11,630,000          --         11,630,000
                                         ------------  ---------   -----------    -----------  ------------     ------------

Balance, December 31, 2005                 14,132,824  $  14,000   $ 9,209,000    $20,269,000  $    605,000     $ 30,097,000
                                         ============  =========   ===========    ===========  ============     ============
</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, 2005, 2004 AND 2003

<TABLE>
<CAPTION>
                                                                    2005            2004            2003
                                                                ------------    ------------    ------------
<S>                                                             <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                        11,630,000       6,258,000    $  2,037,000
Adjustments to reconcile net income to operating activities -
       Depreciation                                                1,001,000         262,000         131,000
       Provision for doubtful accounts                               310,000          84,000         426,000
       Compensation expense for stock issued                         940,000          97,000         180,000
       Gain on disposal of assets                                     (9,000)         (1,000)           --
Changes in assets and liabilites:
(Increase) decrease in -
       Accounts and notes receivable                              (5,176,000)        538,000       1,681,000
       Inventories                                                (4,580,000)         32,000      (3,086,000)
       Prepaid expenses                                             (310,000)        673,000         (11,000)
       Advances to suppliers                                        (909,000)        322,000        (630,000)
       Other tax refundable                                         (464,000)        522,000        (458,000)
Increase (decrease) in -
       Accounts payable and accrued expenses                       3,115,000       2,533,000       3,532,000
       Deferred income                                             2,379,000       4,827,000       2,071,000
       Tax payable                                                      --           212,000         164,000
                                                                ------------    ------------    ------------

Net cash provided by  operating activities                         7,927,000      16,359,000       6,037,000
                                                                ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
       Purchase of fixed assets                                  (15,327,000)     (5,241,000)     (3,672,000)
       Payments received on note receivable                          217,000            --              --
       Disposal of assets                                             24,000          33,000          88,000
       Cash received in merger and recapitalization                     --              --            18,000
       Deposit on land, building and equipment                          --           418,000        (418,000)
       Contributions by minority interest                            313,000         180,000            --
       Construction in progress                                         --       (12,686,000)     (2,035,000)
                                                                ------------    ------------    ------------

Net cash used in investing activities                            (14,773,000)    (17,294,000)     (6,019,000)
                                                                ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
       Proceeds from short-term debt                               8,549,000       1,660,000         483,000
       Proceeds from long-term debt                                5,000,000            --              --
       Repayments of short-term debt                              (1,466,000)     (1,186,000)           --
       Repayments of long-term debt                                  (70,000)           --              --
       (Repayment of) advance from shareholder                      (209,000)        233,000         (53,000)
       Sale of common stock and capital contribution                 750,000       4,673,000       1,500,000
       Payment of offering costs                                        --          (477,000)       (396,000)
       Purchase obligation (repayment)                                  --          (362,000)        363,000
                                                                ------------    ------------    ------------

Net cash provided by financing activities                         12,554,000       4,541,000       1,897,000
                                                                ------------    ------------    ------------

Effect of exchange rate change on cash and cash equivalents          605,000            --              --

NET INCREASE IN CASH AND EQUIVALENTS                               5,708,000       3,604,000       1,915,000

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                     6,645,000       3,041,000       1,126,000
                                                                ------------    ------------    ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                        $ 12,958,000    $  6,645,000    $  3,041,000
                                                                ============    ============    ============
</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, 2005, 2004, AND 2003
                                   (Continued)

<TABLE>
<CAPTION>
                                                                    2005            2004            2003
                                                                ------------    ------------    ------------

<S>                                                             <C>             <C>             <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
       Interest paid, net of capitalized amounts                $    139,000    $     37,000    $     20,000
                                                                ============    ============    ============

       Income taxes paid                                        $       --      $       --      $    339,000
                                                                ============    ============    ============
</TABLE>

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

During the years ended December 31, 2005, 2004, and 2003, the Company issued for
services rendered 147,900, 46,000, and 240,000 common shares, valued at
$940,240, $96,600, and $270,000, respectively.

During 2005, $11,347,000 of construction costs were transferred from
construction in progress to fixed assets.

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, 2005


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.

      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 ("BaiQuan Dairy") and
      Heilongjiang Sanhao Dairy Co., Limited ("Sanhao Dairy") which was
      liquidated into BaiQuan 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 (Shanxi) formed to develop and operating a walnut
      processing plant.

      Currently, the principal core activity of AFC is investment holdings,
      while the principal core activities of Feihe Dairy, Sanhao Dairy and
      BiaQuan Dairy are manufacturing and distribution of dairy products under
      the Feihe trademarks. The principal core activity of Shanxi is the
      production and distribution of walnut powder. Shanxi commenced operations
      in October 2005. The subsidiaries' principal country of operations is the
      People's Republic of China ("PRC").

      Included in the consolidated financial statements are the following
      subsidiaries:

      o     American Flying Crane Corporation
      o     Heilongjiang Feihe 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

2.    BASIS OF PREPARATION OF FINANCIAL STATEMENTS

      The Company's consolidated financial statements include the accounts of
      American Dairy, Inc., its wholly-owned subsidiaries, AFC, Feihe Dairy,
      Beijing Feihe, and BaiQuan Feihe and its 60% owned subsidiary, Shanxi
      Feihe. 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.


                                      F-8
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


      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.

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.

      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.

      PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
      Expenditures for major additions and improvements are capitalized, and
      minor replacements, maintenance, and repairs are charged to expense as
      incurred. When property and equipment are retired or otherwise disposed
      of, the cost and accumulated depreciation are removed from the accounts
      and any resulting gain or loss is included in the results of operations
      for the respective period. Depreciation is provided over the estimated
      useful lives of the related assets using the straight-line method less
      anticipated salvage values of 10% for financial statement purposes. Land
      use rights are being amortized on a straight-line basis over the term of
      the use agreement. The estimated useful lives for significant property and
      equipment categories are as follows:


                                      F-9
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


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

      The Company reviews the carrying value of property, plant, and equipment
      for impairment whenever events and circumstances indicate that the
      carrying value of an asset may not be recoverable from the estimated
      future cash flows expected to result from its use and eventual
      disposition. In cases where undiscounted expected future cash flows are
      less than the carrying value, an impairment loss is recognized equal to an
      amount by which the carrying value exceeds the fair value of assets. The
      factors considered by management in performing this assessment include
      current operating results, trends and prospects, the manner in which the
      property is used, and the effects of obsolescence, demand, competition,
      and other economic factors. Based on this assessment there was no
      impairment at December 31, 2005 or for the three years then ended.

      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. During 2005, one customer represented 15% of sales. No customer
      represented over 10% of sales in 2004 and 2003.

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

      Other income includes compensation received from the State Bureau as
      incentive to relocate from the previous factory premises, value added tax
      rebates, profit from the sales of raw materials to third parties and write
      back of long outstanding trade payables.

      FOREIGN CURRENCIES - The Company's principal country of operations is in
      The People's Republic of China. The financial position and results of
      operations of the Company are determined using the local currency
      ("Renminbi" or "Yuan") as the functional currency. The results of
      operations denominated in foreign currency are translated at the average
      rate of exchange during the reporting period. Assets and liabilities
      denominated in foreign currencies at the balance sheet date are translated
      at the market rate of exchange ruling at that date. The registered equity
      capital denominated in the functional currency is translated at the
      historical rate of exchange at the time of capital contribution. All
      translation adjustments resulting from the translation of the financial
      statements into the reporting currency ("US Dollars") are dealt with as an
      exchange fluctuation reserve in shareholders' equity.


                                      F-10
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005

      Historically the local currency's exchange rate had been tied to the US
      Dollar at a rate of approximately 8.28 Yuan per US Dollar. Effective July
      21, 2005 the Yuan was revalued to an effective exchange rate of
      approximately 8.11 Yuan per US Dollar. Subsequent to the revaluation the
      Yuan has been allowed to float within a specified range. As of December
      31, 2005 the exchange rate was 8.11 Yuan per US Dollar.

      TAXATION - Deferred tax assets and liabilities are recognized for the
      future tax consequences attributable to differences between the financial
      statement carrying amounts of existing assets and liabilities and their
      respective tax bases. Deferred tax assets, including tax loss and credit
      carryforwards, and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. The effect on
      deferred tax assets and liabilities of a change in tax rates is recognized
      in income in the period that includes the enactment date. Deferred income
      tax expense represents the change during the period in the deferred tax
      assets and deferred tax liabilities. The components of the deferred tax
      assets and liabilities are individually classified as current and
      non-current based on their characteristics. Deferred tax assets are
      reduced by a valuation allowance when, in the opinion of management, it is
      more likely that not that some portion or all of the deferred tax assets
      will not be realized.

      A provision has not been made at December 31, 2005 for U.S. or additional
      foreign withholding taxes on approximately $25,224,000 of undistributed
      earnings of foreign subsidiaries because it is the present intention of
      management to reinvest the undistributed earnings indefinitely in foreign
      operations. Generally, such earnings become subject to U.S. tax upon the
      remittance of dividends and under certain other circumstances. It is not
      practicable to estimate the amount of deferred tax liability on such
      undistributed earnings.

      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
      commenced in 2003 and will expire in 2009.

      Value added tax

      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.


                                      F-11
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


      During 2003, 2004, and 2005, 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 through the employment the Company
      provides at its production facilities. These refunds which amounted to
      $1,502,127, $1,144,060 and $942,907 for the fiscal years ended December
      31, 2005, 2004, and 2003 respectively are reflected in other income on the
      financial statements.

      PRODUCT DISPLAY FEES - The Company has entered into a number of agreements
      with the resellers of its products, whereby the Company pays the reseller
      an agreed upon amount to display its products. As prescribed by the
      Emerging Issues Task Force Issue 01-09: Accounting for Consideration Given
      by a Vendor to a Customer, the Company has reduced sales by the amounts
      paid under these agreements. For the years ended December 31, 2005 and
      2004 these totaled $1,800,000 and $1,922,000 respectively.

      ADVERTISING COSTS - Advertising costs are charged to operations when
      incurred. Advertising expense totaled $3,394,000, $2,753,000, and
      $1,633,000 during the years ended December 31, 2005, 2004, and 2003,
      respectively.

      SHIPPING AND HANDLING COSTS - The Company's shipping and handling costs
      are included in cost of sales for all periods presented.

      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 are exempted from
      contribution 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, 2005 because of the relatively short-term
      maturity of these instruments.

      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.

      RECLASSIFICATIONS - Certain reclassifications have been made to the prior
      years' financial statements to conform to the current year presentation.
      These reclassifications had no effect on previously reported results of
      operations or retained earnings.


                                      F-12
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


      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.

      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.

      SFAS No. 152 "Accounting for Real Estate Time Sharing Transactions", SFAS
      No. 153 "Exchange of Nonmonetary Assets", SFAS No. 154 "Accounting for
      Changes and Error Corrections", SFAS No. 155 "Accounting for Certain
      Hybrid Financing Instruments", and SFAS No. 156 "Accounting for Servicing
      of Financial Assets" were recently issued but have no current
      applicability to the Company and have no effect on the consolidated
      financial statements.


                                      F-13
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


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. As of December 31, 2005
      the Company held $206,000 of cash balances within the United States of
      which $106,000 was in excess of FDIC insurance limits.

      Geographic Concentration; Fluctuations in Regional Economic Conditions.
      Nearly all of American Dairy's sales are concentrated in China.
      Accordingly, American Dairy is susceptible to fluctuations in its business
      caused by adverse economic conditions in this country. 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 People's 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.    INVENTORIES

      Inventories consist of the following as of December 31, 2005 and 2004:

                                                   2005          2004
                                                ----------    ----------
         Raw and partially processed materials  $3,215,000    $4,073,000
         Finished goods                          6,407,000       969,000
                                                ----------    ----------

                                                $9,622,000    $5,042,000
                                                ==========    ==========

6.    TAX REFUNDABLE

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

7.    TRANSACTIONS WITH RELATED PARTIES

      As of December 31, 2005 and 2004 the Company had the following balances
      due to its officers and directors:

         Name                                      2005         2004
         -----------------------------          ----------   -----------
         Leng You-bin                           $  858,000   $1,134,000
         Other officers and directors               75,000        8,000
                                                ----------   -----------

                                                $  933,000   $1,142,000
                                                ==========   ===========

      These balances are non-interest bearing and due on demand.


                                      F-14
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


8.    FIXED ASSETS

      During 2005, the Company completed the acquisition of the assets and
      operations of Nutricia Nutritionals Co., Limited for a total consideration
      of $7,430,000, of which $130,000 was allocated to inventory and the
      balance of $7,300,000 was allocated to buildings and equipment. This
      acquisition consisted of a production plant and milk collection centers
      located in Yushutun and Angangxi Districts.

      Fixed assets consist of the following as of December 31, 2005 and 2004:

                                                   2005                2004
                                               ------------        ------------
          Buildings                            $ 19,352,000        $  4,858,000
          Plant and machineries                  15,513,000           3,932,000
          Motor vehicles                            787,000             292,000
          Computers and equipment                   392,000             299,000
                                               ------------        ------------
                                                 36,044,000           9,381,000
          Less: Accumulated depreciation         (1,358,000)           (354,000)
                                               ------------        ------------

                                               $ 34,686,000        $  9,027,000
                                               ============        ============

      Depreciation expense totaled $1,001,000, $261,000, and $131,000,
      respectively, for the years ended December 31, 2005, 2004, and 2003 of
      which $840,000, $206,000, and $0 were included as a component of cost of
      goods in the respective periods.

9.    CONSTRUCTION-IN-PROGRESS

      The Company had two major construction projects under construction at
      December 31, 2005 and 2004 as detailed below:

                                                   2005                2004
                                               ------------        ------------
          Feihe Dairy processing facilities    $  2,868,000        $ 10,758,000
          Shanxi walnut processing facility         506,000           3,963,000
                                               ------------        ------------

                                               $  3,374,000        $ 14,721,000
                                               ============        ============

10.   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.

11.   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.


                                      F-15
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


12.   NOTES PAYABLE

      Short term notes and loans payable consist of the following as of December
      31, 2005 and 2004:

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

Note payable to a bank, bearing interest at 6.696% per
 annum, secured by plant and machinery, payable in
 monthly installments                                    $3,082,000   $     --

Series A convertible note, bearing interest at 6.5% per
 Annum, due on April 26, 2006, convertible to common      3,000,000         --
 stock at a conversion price of $8.00 per share

Unsecured, non-interest bearing obligation to an
 unrelated company, repayable upon demand                   995,000         --

Unsecured, non-interest bearing obligation to county
 finance department, with no fixed repayment terms          247,000      242,000
                                                         ----------   ----------

                                                         $7,324,000   $  242,000
                                                         ==========   ==========


13.   LONG-TERM DEBT

      Long-term debt consists of the following as of December 31, 2005 and 2004:

<TABLE>
<CAPTION>
                                                                             2005           2004
                                                                          -----------    -----------
<S>                                                                       <C>            <C>
Series B convertible notes, bearing interest at 7.5%
 per annum, payments $2,500,000 due on June 30, 2007                      $ 5,000,000    $      --
 and August 14, 2007, convertible to common stock at
 a conversion price of $10.00 per share

Note payable to a bank, bearing interest at 5.76% per annum, secured by
 plant and machinery, payable in 96
 monthly installments                                                         635,000        685,000

Note payable to a finance company, secured by a vehicle
 payable in 60 monthly installments                                            10,000         31,000

                                                                          -----------    -----------
                                                                            5,645,000        716,000

Less: current portion of long-term debt                                      (102,000)      (118,000)
                                                                          -----------    -----------

                                                                          $ 5,543,000    $   598,000
                                                                          ===========    ===========
</TABLE>

      Principal payments due by year for the next five years and thereafter on
      these notes are as follows:

         Fiscal year ended December 31,                         Amount
         ------------------------------------------------     ----------
         2006                                                 $  102,000
         2007                                                  5,092,000
         2008                                                     92,000
         2009                                                     92,000
         2010                                                     92,000
         Thereafter                                              175,000
                                                              ----------

                                                              $5,645,000
                                                              ==========


                                      F-16
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


14.   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, 2005 and 2004, the Company owned 60% of Shanxi's registered
      capital stock.

15.   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 $228,000 was charged to consulting fee
      expense in 2003 with the balance of $114,000 being treated as a prepaid
      expense at December 31, 2003.

      A shareholder converted advances to the Company in the amount of
      $1,866,000 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 $374,000 were treated as reductions in additional paid-in capital
      for financial reporting purposes.

      During 2004, the Company had stock transactions detailed below:

      The Company issued 46,000 shares of its restricted common stock valued at
      $97,000 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 $4,673,000. Offering and syndication costs totaling $477,000 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 $862,000. 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.


                                      F-17
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


      During 2005, the Company had stock transactions detailed below:

      The Company issued 98,900 shares of unrestricted common stock valued at
      $643,000 to Chinese employees of Feihe Dairy for bonuses, issued pursuant
      to a Form S-8 registration statement.

      The Company issued 428,570 shares of its common stock pursuant to the
      exercise of warrants at $1.75 each for a total consideration paid of
      $750,000.

      The Company issued 47,000 shares of restricted common stock valued at
      $286,000 for bonuses to directors and to others for consulting services.

      The Company issued 2,000 share of unrestricted common stock valued at
      $11,000 for consulting services, issued pursuant to a Form S-8
      registration statement.

16.   INCOME TAX

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

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                         2005           2004           2003
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Computed  expected  tax  expense                      $ 4,418,000    $ 2,369,000    $   903,000

Increases (reductions) in taxes result from:

Add  back  effect  of  U.S.  losses                       686,000        245,000        277,000

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                              (492,000)      (430,000)      (155,000)

BaiQuan Dairy 2003 tax liability waived by province          --         (262,000)          --

Foreign  income  subject  to  foreign
  tax holiday but not expected to be
  subject  to  U.S.  tax  in  foreseeable
  future                                               (4,612,000)    (2,184,000)      (686,000)
                                                      -----------    -----------    -----------
Actual  income tax expense (benefit)                  $      --      $  (262,000)   $   339,000
                                                      ===========    ===========    ===========
</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:


                                      F-18
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


                                 Year Ended December 31,
                             -------------------------------
                                2005      2004      2003
                             ---------  ---------  ---------
     Sanhao  Dairy           $    --        --     $  77,000
     BaiQuan  Dairy               --     (262,000)   262,000
                             ---------  ---------  ---------
       Total                 $    --    $(262,000) $ 339,000
                             =========  ========== =========

      The tax holiday resulted in tax savings as follows:


                                           Year Ended December 31,
                                ==========================================
                                    2005           2004           2003
                                ==========================================

Approximate tax savings         $4,612,000     $ 2,455,000     $   685,000

Benefit per share

   Basic                        $     0.33     $      0.20     $      0.07

   Diluted                      $     0.30     $      0.18     $      0.07


      The Company has a U.S net operating loss carryforward of approximately
      $2,914,000 which will begin expiring in 2022. For financial reporting
      purposes the deferred tax asset of $1,137,000 associated with this loss
      carryforward is fully reserved as of December 31, 2005.

      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.

17.   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 No. 128 requires a reconciliation of the
      numerator and denominator of the basic and diluted earnings per shares
      (EPS) computations. The effects of outstanding warrants to purchase common
      stock at December 31, 2005, were not included in the calculation of
      diluted earnings per share as their effect was anti-dilutive. The
      following reconciles the components of the EPS computation:


                                      F-19
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


                                           Income         Shares    Per Share
                                         (Numerator)  (Denominator)   Amount
                                         -----------  ------------- ---------

For the year ended
December 31, 2005

Basic EPS income available to Common
shareholders                             $11,629,000    13,931,006   $   .83

Effect of dilutive securities:

Warrants issued                                 --       1,643,533   $   .08

Convertible notes                            304,000       482,534   $   .01

Diluted EPS income available to Common   $11,933,000    16,057,073   $   .74
shareholders

For the year ended
December 31, 2004

Basic EPS income available to Common     $ 6,258,000    12,077,085   $   .52
shareholders

Effect of dilutive securities:

Warrants issued                                          1,378,615   $   .05

Diluted EPS income available to Common   $ 6,258,000    13,455,700   $   .47
shareholders


For the year ended
December 31, 2003

Basic EPS income available to Common
shareholders                             $ 2,037,000    10,535,964   $   .19

Effect of dilutive securities:

Warrants issued                                               --        --

Diluted EPS income available to Common   $ 2,037,000    10,535,964   $   .19
shareholders


      During the year ended December 31, 2005, the Company issued Series A and
      Series B Convertible Notes (See Notes 14 and 15). These notes allow the
      holder to convert each note to common stock of the Company at any time
      during the term of the note.


                                      F-20
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


18.   STOCK OPTIONS AND WARRANTS

      Effective May 7, 2003, the Company adopted and approved its 2003 Incentive
      Stock Plan (the "Plan") which reserved 3,000,000 shares of Common Stock
      for issuance under the Plan. The Plan allows the Company to issue awards
      of incentive non-qualified stock options, stock appreciation rights, and
      stock bonuses to directors, officers, employees and consultants of the
      Company which may be subject to restrictions. The Company applies APB 25
      and related interpretations in accounting for its plan. Compensation for
      services that a corporation receives under APB 25 through stock-based
      compensation plans should be measured by the quoted market price of the
      stock at the measurement date less the amount, if any, that the individual
      is required to pay. Compensation expense of $940,000 and $97,000 was
      recorded during the years ended December 31, 2005 and 2004, respectively,
      related to the Plan.

      As of December 31, 2005, the Company had 2,539,832 warrants outstanding at
      an average exercise price of $2.23 per warrant for one share each of the
      Company's common stock. The warrants will expire three years from the
      issuance date, with 714,286 expiring in 2006 and the balance of 1,825,546
      expiring in 2007. During the year ended December 31, 2005, 428,570
      warrants were exercised for $1.75 per share, resulting in proceeds of
      $750,000 to the Company.

      Information with respect to outstanding warrants to service providers is
      as follows:


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

Outstanding warrants at beginning of year    2,968,402    $   2.16
Warrants granted                                  --          --
Exercised                                     (428,570)       1.75
Expired                                           --          --
                                            ----------    --------
Outstanding warrants at the end of year      2,539,832    $   2.23
                                            ==========    ========


          Warrants Outstanding                        Warrants Exercisable
     ---------------------------------             -----------------------------
        Shares              Average      Average    Shares             Average
     Outstanding           Remaining    Exercise  Outstanding          Exercise
       12/31/05           Life (Years)   Price     12/31/05             Price
     -----------          ------------  --------  -----------          --------
       2,539,832             2.5          $2.23    2,539,832            $2.23
     ===========          ============  ========  ===========          ========

19.   COMMITMENTS

      As of December 31, 2005, the Company has future commitments to acquire a
      building of $604,000, to acquire land use rights totaling $273,000, and to
      pay future advertising costs totaling $3,429,000.


                                      F-21
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


      As of December 31, 2005, there were no minimum future rental payments
      under non-cancelable operating leases having remaining terms in excess of
      one year.

      Rent expense incurred during the years ended December 31, 2005, 2004, and
      2003 totaled $63,000, $23,000 and $6,000, respectively.

      In accordance with the terms and conditions of a Sale and Purchase
      Agreement dated February 23, 2005 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 $1,009,000 of which three installments totaling $404,000
      have been paid as of December 31, 2005.

      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
      $401,000. At the Company's option the liability could be settled through
      payment of cash consideration or through the issuance of 200,000 shares of
      its common stock. This option had not expired as of December 31, 2005. The
      Company accrued the liability during the year ended December 31, 2004. As
      of December 31, 2005 the Company had not settled the commitment.

20.   SUBSEQUENT EVENTS

      In January 2006 the Company signed an agreement with the government of
      Gannan County, in Heilongjiang Province in The People's Republic of China
      to build a new milk processing plant. Under the terms of the agreement the
      Company will receive land, tax incentives, and subsidies as well as
      certain exclusive distribution and milk processing rights within the local
      market.

21.   QUARTERLY FINANCIAL DATA (UNAUDITED)

      Summarized unaudited quarterly financial data for 2005 and 2004 are as
      follows:

<TABLE>
<CAPTION>
                                                     Quarters Ended
                                 -----------------------------------------------------
                                 December 31,  September 30,   June 30,     March 31,
                                    2005          2005           2005         2005
                                 -----------   -----------   -----------   -----------
<S>                              <C>           <C>           <C>           <C>
Sales                            $24,486,000   $14,274,000   $15,143,000   $14,121,000

Gross profit                       8,190,000     6,744,000     7,550,000     6,824,000

Net income                         3,995,000     2,179,000     2,823,000     2,633,000
Net earnings per common share:
     Basic                       $      0.27   $      0.16   $      0.21   $      0.19
     Dilutued                    $      0.25   $      0.14   $      0.18   $      0.17
</TABLE>


                                      F-22
<PAGE>

                              AMERICAN DAIRY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


<TABLE>
<CAPTION>
                                                     Quarters Ended
                                 -----------------------------------------------------
                                 December 31,  September 30,   June 30,     March 31,
                                    2004          2004           2004         2004
                                 -----------   -----------   -----------   -----------
<S>                              <C>           <C>           <C>           <C>
Total revenues                   $10,986,000   $ 8,662,000   $ 8,148,000   $ 9,620,000

Gross profit                       6,354,000     3,862,000   5,110,000      4,083,000

Net income                         2,378,000     1,245,000   1,445,000      1,190,000
Net earnings per common share:
     Basic                       $      0.20   $      0.10   $    0.12     $    0.10
     Diluted                     $      0.16   $      0.09   $    0.12     $    0.10
</TABLE>


                                      F-23
<PAGE>

* Item 9. 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 9A. Controls and Procedures

      Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and the Company's Principal financial officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in the Securities Exchange Act of 1943, 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
September 30, 2005, have concluded that as of the Evaluation Date that the
Company's disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company and the Company's
consolidated subsidiaries would be made known to them by others within those
entities, particularly during the period in which this report on 10-KSB was
being prepared.

      Changes in Internal Controls. There were no significant changes in the
Company's Internal controls or in other factors that could significantly affect
the Company'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 9B. Other Information


                                    PART III

Item 10. 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.

Name                    Age      Position
----                    ---      --------
Leng You-Bin            36       Chairman, Chief Executive
                                 Officer and President

Liu Hua                 33       Chief Financial Officer,
                                 Secretary, Treasurer,
                                 Director

Liu Sheng-Hui           35       Director

Hui-Lan Lee             56       Director

Dr. Kevil L. Tseng      42       Director

Kirk G. Downing         52       Director


                                       23
<PAGE>

      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.

      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 11. Executive Compensation

      The officers and directors of American Dairy received compensation during
the three fiscal years ended December 31, 2005, as follows:


                                       24
<PAGE>

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                      ANNUAL COMPENSATION                          LONG TERM COMPENSATION
                      ------------------------------------------------        AWARDS                       PAYOUTS
                                                                              ------------------------------------------------------

                                                                Other         RESTRICTED   SECURITIES                      All
NAME  AND             Fiscal                                   Annual         Stock        Uderlying        LTIP           Other
PRINCIPAL              Year      Salary         Bonus       Compensation      Awards      Options/SARs     Payouts      Compensation
POSITION
<S>                    <C>    <C>            <C>            <C>            <C>            <C>            <C>            <C>
Leng  You-Bin          2003   $      6,884   $          0   $          0   $          0   $          0   $          0   $          0
Director, Chief        2004   $          0   $          0   $          0   $          0   $          0   $          0   $          0
Executive Officer      2005   $      9,000   $          0   $          0   $     33,300   $          0   $          0   $          0
and  President

Jack  M.  Gertino      2003   $          0   $          0   $          0   $          0   $          0   $          0   $          0
former  Chief          2004   $          0   $          0   $          0   $          0   $          0   $          0   $          0
Executive  Officer     2005   $          0   $          0   $          0   $          0   $          0   $          0   $          0
and  President
</TABLE>


   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, 2005, all such filing
requirements applicable to its officers, directors and 10% owners of its Common
Stock were complied with.


                                       25
<PAGE>

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.

      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 12. 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, 2005.

                                                            Percentage of
                                             Number of      Outstanding
Name and Address                             Shares (1)     Shares
----------------                             -----------    -------------

Leng You-Bin (4)                               8,881,135            62.8%
C-16 Shin Chen International Bldg.
No. 10, Jiu-shen Road
Zho Yan Chu
Beijing


                                       26
<PAGE>

The People's Republic of China

Liu Hua                                           19,000            0.14%
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                                     11,500            0.08%
C-16 Shin Chen International Bldg.
No. 10, Jiu-shen Road
Zho Yan Chu
Beijing
The People's Republic of China

Kirk Downing                                      4,500             0.03%

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)

---------------------------------------
(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.

Item 13. 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 Dairy") 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
compensation, 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.


                                       27
<PAGE>

      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.

      As of December 31, 2005 and 2004 the Company had the following balances
due to its officers and directors:

Name                                                        2005         2004
---------------------------                              ----------   ----------
Leng You-bin                                             $  858,000   $1,134,000
Other officers and directors                                 75,000        8,000
                                                         ----------   ----------
                                                         $  933,000   $1,142,000
                                                         ==========   ==========

      These balances are non-interest bearing and due on demand.

Item 14. Principal Accountant Fees and Services

      Fees paid to principal accountants are as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Name                                  Audit Fees   Audit Related   Tax Fees          All Other Fees
                                                       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-
December 31, 2005                    $      -0-   $      -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-
December 31, 2005                    $   42,500   $    8,900     $     5,500         $           -0-
----------------------------------------------------------------------------------------------------
</TABLE>


                                       28
<PAGE>

      The Audit Committee of the Board of Directors evaluated the scope and cost
of the audit for its fiscal year ended December 31, 2005 before its auditor
rendered its audit and non-audit services.

Item 13. Exhibits

      (a)   Reports on Form 8-K None

      (b)   Exhibits

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
3.3 By-Laws                          Exhibit 3.2 to its Form 10-KSB/A of
                                     American Dairy, Inc. for its fiscal year
                                     ended December 31, 2003 filed on April
                                     11, 2004.
10. Material Contracts
                                     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.

10.1 Stock Exchange                  Stock Exchange Agreement dated January
        Agreement                    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.

10.2 Amendment to Stock              Agreement Amendment to Stock Exchange
        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.

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

10.4 Stock Incentive Plan            2003 Stock Incentive Plan is
                                     incorporated herein by reference to
                                     Exhibit 10 to American Dairy's Form S-8
                                     Registration statement filed on April 4,
                                     2005 (File No. 333-123932).

10.5 Shanxi Joint Venture            Joint Venture Agreement to organize
                                     Shanxi Feihesantai Biology Science and
                                     Technology Industry, Ltd. is
                                     incorporated herein by reference to
                                     Exhibit 10.1 to the Form 10-QSB of
                                     American Dairy for the three month
                                     period ended March 31, 2004.


10.6 Asset Purchase                  Asset Purchase Agreement dated May 20,
        Agreement                    2005, with Nutricia Nutritionals Co.,
                                     Ltd. of Hei Long Jiang (without all
                                     exhibits thereto) is incorporated herein
                                     by reference to the Form 8-K current
                                     report filed by American Dairy on May
                                     26, 2005.


                                       29
<PAGE>

10.7 Code of Ethics                  The Code of Ethics of American Dairy is
                                     incorporated herein by reference to
                                     Exhibit 14 to the Form 10-KSB of
                                     American Dairy for its fiscal year ended
                                     December 31, 2004.

21. Description of subsidiaries      Description of subsidiaries is incorporated
                                     herein by reference to Exhibit 21 to the
                                     Form S-1 registration statement of American
                                     Dairy (File No. 333-128075)

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


                                       30
<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 29, 2006              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 29, 2006                 /s/ Leng You-Bin
                            -----------------------------------
                            Leng You-Bin, Director, Chief
                            Executive Officer and President


March 29, 2006                 /s/ Liu Hua
                            -----------------------------------
                            Liu Hua, Director, Chief Financial
                            Officer, Principal Accounting and
                            Financial Officer, Secretary and Treasurer


March 29, 2006                /s/ Liu Sheng-Hui
                            -----------------------------------
                            Liu Sheng-Hui, Director


March 29, 2006               /s/ Hui-Lan Lee
                            -----------------------------------
                            Hui-Lan Lee, Director


March 29, 2006               /s/ Kevin L. Tseng
                            -----------------------------------
                            Kevin L. Tseng, Director


March 29, 2006               /s/ Kirk Downing
                            -----------------------------------
                            Kirk Downing


                                       31
<PAGE>

                           INDEX OF EXHIBITS ATTACHED

Exhibit        Description
-------        -----------

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

31.1           Certification of Leng You-Bin

31.2           Certification of Liu Hua

32             Certification of Leng You-Bin and Liu Hua


                                       32