UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 FORM 10-Q (Mark One) x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE OF 1934 For the
quarterly period ended December 31, 2009 or o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE OF 1934 For the transition period from _______ to
_________ Commission file number: 000-30311 GOLD HORSE INTERNATIONAL, INC.(Exact name of registrant as specified in its charter)  Florida

22-3719165(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)No. 31 Tongdao South Road, Hohhot, Inner
  Mongolia, China(Address of principal executive offices)

(Zip Code)  86 (471) 339 7999(Registrants telephone number, including area code)N/A(Former name, former address and former fiscal year, if changed since
  last report) Indicated by
check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  x No o Indicate by
check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company: Large
  accelerated filer
o
Accelerated
  filer
oNon-accelerated
  filer
o
Smaller
  reporting company
þ Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act) Yes  o No   x Indicate the
number of shares outstanding of each of the issuers classes of common equity,
as of the latest practicable date: 69,569,204 shares at February 11, 2010.   GOLD HORSE INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTERLY PERIOD ENDED DECEMBER 31, 2009

INDEX


PagePART I -
 FINANCIAL INFORMATIONItem 1.
 Financial
 Statements.Condensed
 Consolidated Balance SheetsAs of December 31, 2009 (Unaudited) and
 June 30, 2009 (Audited)
 
 3Condensed
 Consolidated Statements of Operations and Comprehensive Income (Loss)
 (Unaudited)For the Three and Six Months Ended December
 31, 2009 and 2008
 
 4Condensed
 Consolidated Statements of Cash Flows (Unaudited)For the Six Months Ended December 31, 2009
 and 2008
 
 5Notes to
 Condensed Consolidated Financial Statements
 
 6Item 2.
 Managements
 Discussion and Analysis of Financial Condition and Results of Operations
 
 33Item 3.
 Quantitative and Qualitative Disclosures About Market Risk
 
 48Item 4T.
 Controls and
 Procedures
 
 49PART II -
 OTHER INFORMATIONItem 1.
 Legal
 Proceedings
 
 50Item 1A.
 Risk Factors
 
 50Item 2.
 Unregistered
 Sales of Equity Securities and Use of Proceeds
 
 50Item 3.
 Defaults
 Upon Senior Securities
 
 51Item 4.
 Submission
 of Matters to a Vote of Security Holders
 
 52Item 5.
 Other
 Information
 
 52Item 6.
 Exhibits
 
 52CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION

This
report contains forward-looking statements. These forward-looking statements
are subject to known and unknown risks, uncertainties and other factors which
may cause actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These forward-looking statements
were based on various factors and were derived utilizing numerous assumptions
and other factors that could cause our actual results to differ materially from
those in the forward-looking statements. These factors include, but are not
limited to, the amount of funds owed us by the Jin Ma Companies, our ability to
satisfy our repayment obligations under our 14% secured convertible debentures,
the enforceability of our contractual arrangements with the Jin Ma Companies,
the risk of doing business in the Peoples Republic of China (PRC), our
ability to implement our strategic initiatives, our access to sufficient
capital, the impact of reduced availability of bank loans in China on the Jin
Ma Companies operations, our ability to satisfy our obligations as they become
due, economic, political and market conditions and fluctuations, government and
industry regulation, Chinese and global competition, and other factors. Most of
these factors are difficult to predict accurately and are generally beyond our
control.

You
should consider the areas of risk described in connection with any
forward-looking statements that may be made in our report as filed with the
SEC. Readers are cautioned not to place undue reliance on these forward-looking
statements and readers should carefully review this quarterly report and our
annual report on Form 10-K for the year ended June 30, 2009, including the
risks described in Item 1A. - Risk Factors, in their entirety. Except for our
ongoing obligations to disclose material information under the Federal
securities laws, we undertake no obligation to release publicly any revisions
to any forward-looking statements, to report events or to report the occurrence
of unanticipated events. These forward-looking statements speak only as of the
date of this quarterly report, and you should not rely on these statements
without also considering the risks and uncertainties associated with these
statements and our business.

2

OTHER PERTINENT INFORMATION

Our
web site is www.goldhorseinternational.com. The information which appears on
our web site is not part of this report.

Our
business is conducted in China, using RMB, the currency of China, and our financial
statements are presented in United States dollars. In this report, we refer to
assets, obligations, commitments and liabilities in our financial statements in
United States dollars. These dollar references are based on the exchange rate
of RMB to United States dollars, determined as of a specific date. Changes in
the exchange rate will affect the amount of our obligations and the value of
our assets in terms of United States dollars which may result in an increase or
decrease in the amount of our obligations (expressed in dollars) and the value
of our assets, including accounts receivable (expressed in dollars).

Unless
specifically set forth to the contrary, when used in this prospectus the terms:


 Gold Horse
 International, the Company, we, us, ours, and similar terms refers to
 Gold Horse International, Inc., a Florida corporation,
 Gold Horse
 Nevada refers to Gold Horse International, Inc., a Nevada corporation and
 wholly-owned subsidiary of Gold Horse International,
 Global
 Rise refers to Global Rise International, Limited, a Cayman Islands
 corporation and wholly-owned subsidiary of Gold Horse Nevada,
 IMTD
 refers to Inner Mongolia (Cayman) Technology & Development Ltd., a
 Chinese company and wholly-owned subsidiary of Global Rise,
 Jin Ma Real
 Estate refers to Inner Mongolia Jin Ma Real Estate Development Co., Ltd., a
 Chinese company,
 Jin Ma
 Construction refers to Inner Mongolia Jin Ma Construction Co., Ltd., a
 Chinese company,
 Jin Ma
 Hotel refers to Inner Mongolia Jin Ma Hotel Co., Ltd., a Chinese company,
 Jin Ma
 Companies collectively refers to Jin Ma Real Estate, Jin Ma Construction and
 Jin Ma Hotel, and
 PRC or
 China refers to the Peoples Republic of China.2(a)

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIESCONSOLIDATED BALANCE SHEETS

December 31,
 2009
 
 June 30,
 2009(Unaudited)
 
 (Audited)ASSETSCash and cash equivalents
 
 $
 441,055
 
 $
 112,134Accounts receivable, net
 
 
 12,472,069
 
 
 11,943,996Note receivable on sales type
 lease - current portion
 
 
 167,775
 
 
 157,923Inventories, net
 
 
 77,648
 
 
 27,838Advances to suppliers
 
 
 274,860
 
 
 200,570Other receivable, net
 
 
 22,530
 
 
 1,197,705Due from related parties
 
 
 
 
 
 33,283Cost and estimated earnings
 in excess of billings
 
 
 10,090
 
 
 16,539Construction in progress -
 current portion
 
 
 4,871,915
 
 
 3,286,722Prepaid land use rights for
 resale
 
 
 2,418,067
 
 
 4,041,090Total
 Current Assets
 
 
 20,756,009
 
 

 21,017,800Property and equipment, net
 
 
 8,924,237
 
 
 9,383,982Construction in progress -
 non-current portion
 
 
 8,446,715
 
 
 7,273,392Note receivable on sales type
 lease - non-current portion
 
 
 8,496,156
 
 
 8,654,311Total Assets
 
 $
 46,623,117
 
 $
 46,329,485LIABILITIES
 AND STOCKHOLDERS EQUITYCurrent Liabilities:Convertible debt, net
 
 $
 502,777
 
 $
 Loans payable - current
 portion
 
 
 4,315,509
 
 
 4,420,290Accounts payable
 
 
 5,706,625
 
 
 7,966,488Due to related parties
 
 
 1,170,701
 
 
 Accrued expenses
 
 
 940,696
 
 
 1,251,843Taxes payable
 
 
 227,055
 
 
 1,678,084Advances from customers
 
 
 2,868,650
 
 
 246,191Billings in excess of costs
 and estimated earnings
 
 
 57,971
 
 
 37,498Total
 Current Liabilities
 
 
 15,789,984
 
 
 15,600,394Loans payable - net of
 current portion
 
 
 343,708
 
 
 379,850Total
 Liabilities
 
 
 16,133,692
 
 
 15,980,244Commitments (Note 18)
 
 
 
 
 
 Stockholders Equity:Preferred stock ($.0001 par value; 20,000,000 shares
authorized; none
 issued and outstanding)
 
 
 
 
 
 Common stock ($.0001 par value; 300,000,000 shares
authorized;
 62,780,592 and 52,668,603 shares issued and outstanding at December 31, 2009
 and June 30, 2009, respectively)
 
 
 6,278
 
 
 5,266Non-controlling interest in variable interest
entities
 
 
 6,095,314
 
 
 6,095,314Additional paid-in capital
 
 
 7,888,353
 
 
 6,878,166Statutory reserve
 
 
 2,165,210
 
 
 2,040,899Retained earnings
 
 
 11,837,655
 
 
 12,866,842Other comprehensive income
 
 
 2,496,615
 
 
 2,462,754Total
 Stockholders Equity
 
 
 30,489,425
 
 
 30,349,241Total
 Liabilities and Stockholders Equity
 
 $
 46,623,117
 
 $
 46,329,485See accompanying notes to unaudited consolidated financial statements

3

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended
 December 31,
 
 For the Six Months Ended
 December 31,2009
 
 2008
 
 2009
 
 2008(Unaudited)
 
 (Unaudited)
 
 (Unaudited)
 
 (Unaudited)NET REVENUESConstruction
 
 $
 4,405,892
 
 $
 11,894,829
 
 $
 9,596,012
 
 $
 40,273,271Hotel
 
 
 734,809
 
 
 858,378
 
 
 1,512,829
 
 
 1,687,464Real estate
 
 
 158,981
 
 
 149,490
 
 
 158,981
 
 
 382,190Total
 Revenues
 
 
 5,299,682
 
 
 12,902,697
 
 
 11,267,822
 
 
 42,342,925COST Of REVENUESConstruction
 
 
 3,878,214
 
 
 10,207,643
 
 
 8,329,680
 
 
 34,590,647Hotel
 
 
 494,312
 
 
 475,448
 
 
 1,008,859
 
 
 921,535Real estate
 
 
 167,050
 
 
 157,087
 
 
 167,050
 
 
 300,303Total Cost
 of Revenues
 
 
 4,539,576
 
 
 10,840,178
 
 
 9,505,589
 
 
 35,812,485GROSS PROFIT
 
 
 760,106
 
 
 2,062,519
 
 
 1,762,233
 
 
 6,530,440OPERATING EXPENSES:Hotel operating expenses
 
 
 76,586
 
 
 16,659
 
 
 103,359
 
 
 32,290Bad debt recovery
 
 
 (97,564
 )
 
 (11,285
 )
 
 (105,555
 )
 
 (193,901
 )Salaries and employee
 benefits
 
 
 198,349
 
 
 150,307
 
 
 392,435
 
 
 301,848Depreciation and amortization
 
 
 191,532
 
 
 209,654
 
 
 385,121
 
 
 438,257Gain on sale of land use
 rights
 
 
 (167
 )
 
 
 
 
 (449,473
 )
 
 Selling, general and
 administrative
 
 
 102,611
 
 
 87,151
 
 
 252,563
 
 
 294,479Total
 Operating Expenses
 
 
 471,347
 
 
 452,486
 
 
 578,450
 
 
 872,973INCOME FROM OPERATIONS
 
 
 288,759
 
 
 1,610,033
 
 
 1,183,783
 
 
 5,657,467OTHER INCOME (EXPENSES):Other income (expense)
 
 
 (27
 )
 
 2,086
 
 
 46
 
 
 2,378Interest income
 
 
 543,092
 
 
 551,373
 
 
 543,149
 
 
 552,318Interest expense
 
 
 (745,695
 )
 
 (671,835
 )
 
 (2,317,076
 )
 
 (1,336,226
 )Total Other
 Expenses
 
 
 (202,630
 )
 
 (118,376
 )
 
 (1,773,881
 )
 
 (781,530
 )(LOSS) INCOME BEFORE PROVISION FOR INCOME TAX
 
 
 86,129
 
 
 1,491,657
 
 
 (590,098
 )
 
 4,875,937PROVISION FOR INCOME TAXES
 
 
 79,632
 
 
 500,236
 
 
 314,778
 
 
 1,500,742NET (LOSS) INCOME
 
 $
 6,497
 
 $
 991,421
 
 $
 (904,876
 )
 $
 3,375,195COMPREHENSIVE (LOSS) INCOME:Net (loss) income
 
 $
 6,497
 
 $
 991,421
 
 $
 (904,876
 )
 $
 3,375,195OTHER COMPREHENSIVE INCOME:Unrealized foreign currency
 translation gain
 
 
 1,715
 
 
 9,130
 
 
 33,860
 
 
 63,724COMPREHENSIVE (LOSS) INCOME
 
 $
 8,212
 
 $
 1,000,551
 
 $
 (871,016
 )
 $
 3,438,919NET (LOSS) INCOME PER COMMON SHARE:Basic
 
 $
 0.00
 
 $
 0.02
 
 $
 (0.02
 )
 $
 0.06Diluted
 
 $
 0.00
 
 $
 0.02
 
 $
 (0.02
 )
 $
 0.06WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:Basic
 
 
 61,760,108
 
 
 52,625,473
 
 
 57,891,042
 
 
 52,585,038Diluted
 
 
 69,301,768
 
 
 58,971,403
 
 
 57,891,042
 
 
 58,930,968

See accompanying notes to unaudited consolidated financial statements.

4

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH
FLOWS


For the Six Months Ended
 December 31,2009
 
 2008(Unaudited)
 
 (Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
 
 $
 (904,876
 )
 $
 3,375,195Adjustments to reconcile net (loss) income to net cash
used in operating activities:Depreciation
 
 
 385,121
 
 
 438,257Stock-based compensation
 
 
 57,500
 
 
 Common stock issued for interest
 
 
 19,085
 
 
 Rent expense associated with prepaid land use
rights
 
 
 
 
 
 1,786Bad debt recovery
 
 
 (105,555
 )
 
 (193,901
 )Interest expense from amortization of debt
discount
 
 
 1,931,611
 
 
 818,625Amortization of debt issuance costs
 
 
 
 
 
 76,740Recognition of unearned gain
 
 
 
 
 
 (51,735
 )Gain on sale of land use right
 
 
 (449,472
 )
 
 Changes in assets and liabilities:Accounts receivable
 
 
 (409,136
 )
 
 (3,847,036
 )Note receivable
 
 
 158,067
 
 
 200,378Inventories
 
 
 (49,770
 )
 
 15,417Other receivables
 
 
 1,176,271
 
 
 40,119Advance to suppliers
 
 
 (74,053
 )
 
 (2,038
 )Costs and estimated earnings in excess of
billings
 
 
 6,466
 
 
 217,038Real estate held for sale
 
 
 
 
 
 125,412Construction in progress
 
 
 (2,746,228
 )
 
 (9,486,120
 )Refundable performance deposit
 
 
 
 
 
 145,920Accounts payable and accrued expenses
 
 
 (2,310,257
 )
 
 4,283,475Taxes payable
 
 
 (1,452,604
 )
 
 (1,382,271
 )Advances from customers
 
 
 2,621,660
 
 
 2,038Billings in excess of costs and estimated
earnings
 
 
 20,428
 
 
 27,804NET CASH USED IN OPERATING ACTIVITIES
 
 
 (2,125,742
 )
 
 (5,194,897
 )CASH FLOWS FROM INVESTING ACTIVITIES:Repayment of amounts due from related
party
 
 
 
 
 
 1,661,601Proceeds from sale of land use right
 
 
 2,193,441
 
 
 Proceeds from return of deposit on prepaid land use
rights
 
 
 
 
 
 2,028,288Purchase of property and equipment
 
 
 (31,820
 )
 
 (17,384
 )NET CASH PROVIDED BY INVESTING ACTIVITIES
 
 
 2,161,621
 
 
 3,672,505CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of loans payable
 
 
 (146,229
 )
 
 Proceeds from advances from related party
 
 
 1,203,780
 
 
 Proceeds from sale of common stock
 
 
 
 
 
 124,000Repayment of convertible debt
 
 
 (764,050
 )
 
 NET CASH PROVIDED BY FINANCING ACTIVITIES
 
 
 293,501
 
 
 124,000EFFECT OF EXCHANGE RATE ON CASH
 
 
 (459
 )
 
 10,389NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
 
 
 328,921
 
 
 (1,388,003
 )CASH & CASH EQUIVALENTS - beginning of period
 
 
 112,134
 
 
 1,637,986CASH & CASH EQUIVALENTS - end of the period
 
 $
 441,055
 
 $
 249,983SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for:Interest
 
 $
 391,669
 
 $
 193,043Income taxes
 
 $
 1,389,002
 
 $
 2,308,429Non-cash investing and financing activities:Common stock issued for accrued
compensation
 
 $
 248,000
 
 $
 Common stock issued for conversion of convertible
debt
 
 $
 664,784
 
 $
 Common stock issued for accrued interest
 
 $
 21,830
 
 $
 

See accompanying notes to unaudited consolidated financial statements.

5

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

NOTE 1  ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Gold Horse
International, Inc. (the Company, we, us, our) was incorporated on
March 21, 2000 under the laws of the State of New Jersey under its former name
Segway III. Prior to June 29, 2007, the Company was a development stage
company attempting to implement its business plan to become a fully integrated
online provider that links the supply and demand sides of the ground trucking
industry. In November 2007, the Company filed a Certificate of Domestication in
the State of Florida whereby the Company domesticated as a Florida corporation
under the name Gold Horse International, Inc.

On June 29,
2007, the Company executed a Share Exchange Agreement (Share Exchange
Agreement) with Gold Horse International, Inc. (Gold Horse Nevada), a Nevada
corporation, whereby the Company acquired all of the outstanding common stock
of Gold Horse Nevada in exchange for newly-issued stock of the Company to Gold
Horse Nevada shareholders. Gold Horse Nevada was incorporated on August 14,
2006 in the State of Nevada.

Under the
Share Exchange Agreement, on June 29, 2007, the Company issued 48,500,000
shares of its common stock to the Gold Horse Nevada Stockholders and their
assignees in exchange for 100% of the common stock of Gold Horse International.
Additionally, the Companys prior President, CEO and sole
director, cancelled 9,655,050 of the Companys common stock he owned
immediately prior to the closing. After giving effect to the cancellation of
shares, the Company had a total of 1,500,002 shares of common stock outstanding
immediately prior to Closing. After the Closing, the Company had a total of
50,000,002 shares of common stock outstanding, with the Gold Horse Nevada
Stockholders and their assignees owning 97% of the total issued and outstanding
shares of the Companys common stock.

Gold Horse
Nevada became a wholly-owned subsidiary of the Company and Gold Horse Nevadas
former shareholders own the majority of the Companys voting stock.

Gold Horse
Nevada owns 100% of Global Rise International, Limited (Global Rise), a
Cayman Islands corporation incorporated on May 9, 2007. Through Global Rise,
Gold Horse Nevada operates, controls and beneficially owns the construction,
hotel and real estate development businesses in China under a series of
contractual arrangements (the Contractual Arrangements) with Inner Mongolia
Jin Ma Real Estate Development Co., Ltd. (Jin Ma Real Estate), Inner Mongolia
Jin Ma Construction Co., Ltd. (Jin Ma Construction) and Inner Mongolia Jin Ma
Hotel Co., Ltd. (Jin Ma Hotel), (collectively referred to as the Jin Ma
Companies). Other than the Contractual Arrangements with the Jin Ma Companies,
the Company, Gold Horse Nevada or Global Rise has no business or operations.
The Contractual Arrangements are discussed below.

On October 10,
2007, the Company established Inner Mongolia (Cayman) Technology &
Development Ltd. (IMTD), a wholly-foreign owned enterprise incorporated in
the PRC and wholly-owned subsidiary of Global Rise,

The relationship among the
above companies as follows:

(FLOW CHART)

6

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

NOTE 1  ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

As a result of
these Contractual Arrangements, the acquisition of Gold Horse Nevada and the
Jin Ma Companies by the Company was accounted for as a reverse merger because
on a post-merger basis, the former shareholders of Gold Horse Nevada held a
majority of the outstanding common stock of the Company on a voting and
fully-diluted basis. As a result, Gold Horse Nevada is deemed to be the
acquirer for accounting purposes. Accordingly, the consolidated financial
statement data presented are those of the Jin Ma Companies for all periods
prior to the Companys acquisition of Gold Horse Nevada on June 29, 2007, and
the financial statements of the consolidated companies from the acquisition
date forward.

PRC law
currently places certain limitations on foreign ownership of Chinese companies.
To comply with these foreign ownership restrictions, the Company, through its
wholly-owned subsidiary, Global Rise, operates its business in China through
the Jin Ma Companies, each of which is a limited liability company
headquartered in Hohhot, the capital city of the Autonomous Region of Inner
Mongolia in China, and organized under PRC laws. Each of the Jin Ma Companies
has the relevant licenses and approvals necessary to operate the Companys
businesses in China and none of them is exposed to liabilities incurred by the
other party. Global Rise has Contractual Arrangements with each of the Jin Ma
Companies and their shareholders (collectively the Jin Ma Companies
Shareholders) pursuant to which Global Rise provides business consulting and
other general business operation services to the Jin Ma Companies. Through
these Contractual Arrangements, Global Rise also has the ability to control the
daily operations and financial affairs of the Jin Ma Companies, appoint each of
their senior executives and approve all matters requiring shareholder approval.
As a result of these Contractual Arrangements, which enable Global Rise to
control the Jin Ma Companies, the Company is considered the primary beneficiary
of the Jin Ma Companies. Accordingly, the Company consolidates the Jin Ma
Companies results, assets and liabilities in its financial statements

The
Contractual Arrangements are comprised of a series of agreements, including a
Consulting Services Agreement and an Operating Agreement, through which Global
Rise has the right to advise, consult, manage and operate each of the Jin Ma
Companies, and collect and own all of their respective net profits.
Additionally, under a Shareholders Voting Rights Proxy Agreement, the Jin Ma Companies
Shareholders have vested their voting control over the Jin Ma Companies to
Global Rise. In order to further reinforce the Companys rights to control and
operate the Jin Ma Companies, these companies and their shareholders have
granted Global Rise, under an Option Agreement, the exclusive right and option
to acquire all of their equity interests in the Jin Ma Companies or,
alternatively, all of the assets of the Jin Ma Companies. Further the Jin Ma
Companies Shareholders have pledged all of their rights, titles and interests
in the Jin Ma Companies to Global Rise under an Equity Pledge Agreement.

Gold Horse
Nevada entered into the Contractual Arrangements with each of the Jin Ma
Companies and their respective shareholders on August 31, 2006. On June 29,
2007, concurrently with the closing of the Share Exchange Transaction, the
Contractual Arrangements were amended and restated by and among Gold Horse
Nevada and Global Rise, the Companys wholly-owned subsidiaries, and the
Company on the one hand, and each of the Jin Ma Companies and their respective
shareholders on the other hand, pursuant to which the Company was
made a party to the Contractual Arrangements.

Inner Mongolia Jin Ma Construction Company
Ltd.

Jin Ma
Construction is an engineering and construction company that offers general
contracting, construction management and building design services primarily in
Hohhot City, the Autonomous Region of Inner Mongolia in China. In
operation since 1980, Jin Ma Construction was formally registered as a limited
liability company in Hohhot City in March 2002.

Inner Mongolia Jin Ma Real Estate Development
Co. Ltd.

Jin Ma Real
Estate, established in 1999, was formally registered as a limited liability
company in Hohhot City in February 2004.Jin Ma Real Estate develops residential and commercial properties
in the competitive and growing real estate market in Hohhot.

Inner Mongolia Jin Ma Hotel Co. Ltd.

Jin Ma Hotel
was founded in 1999 and formally registered in April 2004 as a limited
liability company in Hohhot City. Jin Ma Hotel presently owns, operates and
manages the Inner Mongolia Jin Ma Hotel (the Hotel), a 22-room full service
hotel with a restaurant and banquet facilities situated in Hohhot City
approximately 15 kilometers from the Hohhot Baita Airport.

7

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

NOTE 1  ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Inner Mongolia (Cayman) Technology &
Development Ltd.

IMTD, a wholly
foreign owned enterprise incorporated in PRC, provides administrative support
services to the Jin Ma Companies.

Basis
of presentation

Management
acknowledges its responsibility for the preparation of the accompanying interim
condensed consolidated financial statements which reflect all adjustments,
consisting of normal recurring adjustments, considered necessary in its opinion
for a fair statement of its condensed consolidated financial position and the
results of its operations for the interim period presented. These condensed
consolidated financial statements should be read in conjunction with the
summary of significant accounting policies and notes to condensed consolidated
financial statements included in the Companys Form 10-K annual report for the
year ended June 30, 2009.

The
accompanying consolidated financial statements include the accounts of Gold
Horse International, Inc. and its wholly owned subsidiaries, Gold Horse Nevada,
Global Rise and Inner Mongolia (Cayman) Technology and Development, Ltd., and its variable interest entities Jin Ma
Construction, Jin Ma Hotel and Jin Ma Real Estate. All significant
inter-company accounts and transactions have been eliminated in consolidation.

The Jin Ma Companies are considered variable interest entities (VIE),
and the Company is the primary beneficiary. The Companys relationships
with the Jin Ma Companies and their shareholders are governed by a series of
contractual arrangements between Gold Horse Nevada, Global Rise, and each of
the Jin Ma Companies, which are the operating companies of the Company in the
PRC. Under PRC laws, each of IMTD, Jin Ma Construction, Jin Ma Real Estate and
Jin Ma Hotel is an independent legal person and none of them is exposed to
liabilities incurred by the other parties. On June 29, 2007, the Company
entered into the following contractual arrangements with each of the Jin Ma
Companies:

Consulting Services
Agreements. Pursuant to the exclusive Consulting
Services Agreements with each of the Jin Ma Companies, the Company, through its
subsidiary, Global Rise, exclusively provides to the Jin Ma Companies general
business operations services and consulting services as well as general
business operation advice and strategic planning (the Services). Each of the
Jin Ma Companies shall pay a quarterly consulting service fees in Renminbi
(RMB) to Global Rise that is equal to all of its net profit for such quarter.

Operating
Agreements. Pursuant
to the Operating Agreements with the Jin Ma Companies and their respective
shareholders, Global Rise provides guidance and instructions on the Jin Ma
Companies daily operations, financial management and employment issues. The
Jin Ma Companies Shareholders must designate the candidates recommended by
Global Rise as their representatives on each of the Jin Ma Companies board of
directors. Global Rise has the right to appoint senior executives of the Jin Ma
Companies. In addition, Global Rise agreed to guarantee the Jin Ma Companies
performance under any agreements or arrangements relating to the Jin Ma
Companies business arrangements with any third party. Each of the Jin Ma
Companies, in return, agrees to pledge its accounts receivable and all of its
assets to Global Rise. Moreover, each of the Jin Ma Companies agrees that without
Global Rises prior consent, it will not engage in any transactions that could
materially affect its assets, liabilities, rights or operations, including,
without limitation, incurrence or assumption of any indebtedness, sale or
purchase of any assets or rights, incurrence of any encumbrance on any of its
assets or intellectual property rights in favor of a third party or transfer of
any agreements relating to its business operation to any third party. The term
of this agreement is ten (10) years and may be extended only upon our written
confirmation prior to the expiration of this agreement, with the extended term
to be mutually agreed upon by the parties.

Equity Pledge
Agreements.Under
the Equity Pledge Agreements, the shareholders of the Jin Ma Companies pledged
all of their equity interests in the Jin Ma Companies to Global Rise to
guarantee the Jin Ma Companies performance of their obligations under the
exclusive consulting services agreements. If the Jin Ma Companies or its
shareholders breach their respective contractual obligations, Global Rise, as
pledgee, will be entitled to certain rights, including the right to sell the
pledged equity interests. The shareholders of the Jin Ma Companies also agreed
that upon occurrence of any event of default, Global Rise shall be granted an
exclusive, irrevocable power of attorney to take actions in the place and stead
of the shareholders of the Jin Ma Companies to carry out the security
provisions of the equity pledge agreement and take any action and execute any
instrument that Global Rise may deem necessary or advisable to accomplish the
purposes of the equity pledge agreement. The shareholders of the Jin Ma
Companies agreed not to dispose of the pledged equity interests or take any
actions that would prejudice our interest. The equity pledge agreement will
expire two (2) years after the Jin Ma Companies obligations under the
exclusive consulting services agreements have been fulfilled.

8

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Option
Agreements.Under
the Option Agreements, the shareholders of the Jin Ma Companies irrevocably
granted us or our designee an exclusive option to purchase, to the extent
permitted under PRC law, all or part of the equity interests in the Jin Ma
Companies for the cost of the initial contributions to the registered capital
or the minimum amount of consideration permitted by applicable PRC law. Global
Rise, or its designee, has sole discretion to decide when to exercise the
option, whether in part or in full. The term of this agreement is ten (10)
years and may be extended prior to its expiration by written agreement of the
parties.

Proxy
Agreements. Pursuant to the Proxy Agreements, the
shareholders of the Jin Ma Companies agreed to irrevocably grant a person to be
designated by Global Rise with the right to exercise their voting rights and
their other rights, in accordance with applicable laws and their respective
Article of Association, including but not limited to the rights to sell or
transfer all or any of their equity interests of the Jin Ma Companies, and
appoint and vote for the directors and chairman as the authorized
representative of the shareholders of the Jin Ma Companies.

The accounts of the Jin Ma Companies are consolidated in the
accompanying financial statements pursuant to the Financial Accounting
Standards Board Accounting Standard Codification (ASC) Topic 810 related to the
consolidation of variable interest entities. As a VIE, the Jin Ma Companies
sales are included in the Companys total revenues, its income from operations
is consolidated with the Companys, and the Companys net income includes all
of the Jin Ma Companies net income. The Company does not have any
non-controlling interests and accordingly, did not subtract any net income in
calculating the net income attributable to the Company. Because of the
contractual arrangements, the Company had a pecuniary interest in the Jin Ma
Companies that require consolidation of the Companys and the Jin Ma Companies
financial statements.

Use of estimates

The preparation of financial
statements in conformity with U.S. generally accepted accounting principles
(GAAP) requires management to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly, actual results could
differ from those estimates. Significant estimates for the six months ended
December 31, 2009 and 2008 include the allowance for doubtful accounts, the
useful life of property and equipment and intangible assets, assumptions used
in assessing impairment of long-term assets and valuation of deferred tax
assets, costs and estimated earnings in excess of billings and billings in
excess of costs and estimated earnings, and the calculation of the value of any
beneficial conversion feature and warrants related to convertible debt.

Fair value of financial instruments

The Company
adopted ASC Topic 820, Fair Value Measurements and Disclosures. ASC Topic 820
clarifies the definition of fair value, prescribes methods for measuring fair
value, and establishes a fair value hierarchy to classify the inputs used in
measuring fair value as follows:

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

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

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

The carrying
amounts reported in the balance sheets for cash, accounts receivable, loans
payable, accounts payable and accrued expenses, customer advances, and amounts
due from related parties approximate their fair market value based on the
short-term maturity of these instruments. The Company did not identify any
assets or liabilities that are required to be presented on the consolidated
balance sheets at fair value in accordance with ASC Topic 820.

Cash and cash equivalents

For purposes
of the consolidated statements of cash flows, the Company considers all highly
liquid instruments purchased with a maturity of three months or less and money
market accounts to be cash equivalents. The Company maintains cash and cash
equivalents with various financial institutions mainly in the PRC and the
United States. Balances in the United States are insured up to $250,000 at each
bank. Balances in banks in the PRC are uninsured.

9

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

NOTE 1  ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Concentrations
of credit risk

The Companys operations are
carried out in the PRC. Accordingly, the Companys business, financial
condition and results of operations may be influenced by the political,
economic and legal environment in the PRC, and by the general state of the
PRCs economy. The Companys operations in the PRC are subject to specific
considerations and significant risks not typically associated with companies in
North America. The Companys results may be adversely affected by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.

Financial instruments which
potentially subject the Company to concentrations of credit risk consist
principally of cash and trade accounts receivable. Substantially all of the
Companys cash is maintained with state-owned banks within the Peoples
Republic of China of which no deposits are covered by insurance. The Company
has not experienced any losses in such accounts and believes it is not exposed
to any risks on its cash in bank accounts. A significant portion of the
Companys sales are credit sales which are primarily to customers whose ability
to pay is dependent upon the industry economics prevailing in these areas; however,
concentrations of credit risk with respect to trade accounts receivables is
limited due to generally short payment terms. The Company also performs ongoing
credit evaluations of its customers to help further reduce credit risk.

At December 31, 2009 and
June 30, 2009, the Companys cash and cash equivalents by geographic area were
as follows:

December 31, 2009
 
 June 30, 2009(Unaudited)
 
 (Audited)Country:United States
 
 $
 1,749
 
 
 0.4
 %
 $
 39,956
 
 
 35.6
 %China
 
 
 439,306
 
 
 99.6
 %
 
 72,178
 
 
 64.4
 %Total cash and cash equivalents
 
 $
 441,055
 
 
 100.0
 %
 $
 112,134
 
 
 100.0
 %Accounts
and other receivables

The Company has a policy of
reserving for uncollectible accounts based on its best estimate of the amount
of probable credit losses in its existing accounts receivable. The Company
periodically reviews its accounts receivable and other receivables to determine
whether an allowance is necessary based on an analysis of past due accounts and
other factors that may indicate that the realization of an account may be in
doubt. Account balances deemed to be uncollectible are charged to the allowance
after all means of collection have been exhausted and the potential for recovery
is considered remote. At December 31, 2009 and June 30, 2009, the Company has
established, based on a review of its outstanding accounts receivable balances,
an allowance for doubtful accounts in the amount of $898,158 and $1,002,621,
respectively, on its total accounts receivable.

Other receivables amounts
were primarily related to advances made to various vendors and other parties in
the normal course of business and the allowance was established when those
parties deemed to be unlikely to repay the amounts. At December 31, 2009 and
June 30, 2009, the Company has established, based on a review of its
outstanding other receivable balances, an allowance for doubtful accounts in
the amount of $144,134 and $143,974, respectively. At such time as management
exhausts all collection efforts, the other receivable balance will be netted
against the allowance account. The activities in the allowance for doubtful
accounts for accounts receivable and other receivables for the six months ended
December 31, 2009 are as follows:

Allowance
 for
 doubtful
 accounts for
 accounts
 receivable
 
 Allowance
 for
 doubtful
 accounts for
 other
 receivable
 
 TotalBalance  June 30, 2009 (Audited)
 
 $
 1,002,621
 
 $
 143,974
 
 $
 1,146,595Reduction in allowance
 
 
 (105,576
 )
 
 
 
 
 (105,576
 )Foreign currency translation adjustments
 
 
 1,113
 
 
 160
 
 
 1,273Balance  December 31, 2009
(Unaudited)
 
 $
 898,158
 
 $
 144,134
 
 $
 1,042,29210

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

NOTE 1  ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Inventories

Inventories, consisting of
consumable goods related to the Companys hotel operations are stated at the
lower of cost or market utilizing the first-in, first-out method.

Prepaid
land use rights for resale

Prepaid land use rights for
resale are accounted for at the lower of cost or market. These are considered
as current assets and free of amortization as management considers these can be
sold within a year from the date of balance sheet.

Advances
to suppliers

The Company advances to
certain vendors for purchase of construction materials and services. The
advances to suppliers are interest free and unsecured. The advances to
suppliers amounted to $274,860 and $200,570 at December 31, 2009 and June 30,
2009, respectively.

Property
and equipment

Property and equipment are
carried at cost and are depreciated on a straight-line basis over the estimated
useful lives of the assets. The cost of repairs and maintenance is expensed as
incurred; major replacements and improvements are capitalized. When assets are
retired or disposed of, the cost and accumulated depreciation are removed from
the accounts, and any resulting gains or losses are included in income in the
year of disposition. The Company examines the possibility of decreases in the
value of fixed assets when events or changes in circumstances reflect the fact
that their recorded value may not be recoverable.

Real
estate held for sale

The Company capitalizes as
real estate held for sale the direct construction and development costs,
property taxes, interest incurred on costs related to land under development
and other related costs (i.e. engineering, surveying, landscaping, etc.) until
the property reaches its intended use. At December 31, 2009 and June 30, 2009,
the Company did not have any real estate held for sale.

Construction
in process

Properties currently under
development are accounted for as construction-in-process.
Construction-in-process is recorded at acquisition cost, including land use
rights cost, development expenditure, professional fees and the interest
expenses 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 an appropriate
asset. Construction in progress is valued at the lower of cost or market.
Management evaluates the market value of its properties on a periodic basis for
impairment. As of December 31, 2009 and June 30, 2009, construction in process
amounted to $13,318,630 and $10,560,114, respectively.

Impairment
of long-lived assets

In accordance with ASC Topic
360, the Company periodically reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of the assets may not be fully recoverable. The Company recognizes an
impairment loss when the sum of expected undiscounted future cash flows is less
than the carrying amount of the asset. The amount of impairment is measured as
the difference between the assets estimated fair value and its book value. The
Company did not consider it necessary to record any impairment charges during
the six months ended December 31, 2009 and 2008.

Income
taxes

The Company is governed by
the Income Tax Law of the Peoples Republic of China and the United States. The
Company utilizes ASC Topic 740, Accounting for Income Taxes, which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each period end based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. At December 31, 2009 and June 30, 2009, there were no
significant book and tax basis differences.

11

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

NOTE 1  ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income
taxes (continued)

Pursuant to the PRC Income
Tax Laws, the Company is subject to income tax at a statutory rate of 25%.

Under ASC Topic 740, the
evaluation of a tax position is a two-step process. The first step is to
determine whether it is more likely than not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is
to measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50% likelihood of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the
more-likely-than-not criteria should be de-recognized in the first subsequent
financial reporting period in which the threshold is no longer met. ASC Topic
740 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosures, and transition. The
adoption had no effect on the Companys consolidated financial statements.

Advances
from customers

Advances from customers at
December 31, 2009 and June 30, 2009 of $2,868,650 and $246,191, respectively,
consist of prepayments from third party customers to the Company for construction
and real estate transactions to ensure sufficient funds are available to
complete the real estate and construction projects. The Company will recognize
the advances as revenue upon transfer of title to the buyer, in compliance with
its revenue recognition policy.

Net
income (loss) per common share

Net income (loss) per common
share is calculated in accordance with the ASC Topic 260. Basic net income
(loss) per common share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the
period. Diluted net income per common share is computed by dividing net income
by the weighted average number of shares of common stock, common stock
equivalents and potentially dilutive securities outstanding during each period.
Potentially dilutive common shares consist of the common shares issuable upon
the conversion of convertible debt (using the if-converted method) and common
stock warrants. For the six months ended December 31, 2009, common stock
equivalents were excluded from the computation of diluted shares outstanding as
they would have had an anti-dilutive impact. In period where the Company has a
net loss, all dilutive securities are excluded.

The following table presents
a reconciliation of basic and diluted net income per common share:

Three
 Months Ended December 31,
 
 Six
 Months Ended December 31,2009
 
 2008
 
 2009
 
 2008Net (loss) income used for basic and diluted net
income per common
 share
 
 $
 6,497
 
 $
 991,421
 
 $
 (904,876
 )
 $
 3,375,195Weighted average common shares outstanding 
basic
 
 
 61,760,108
 
 
 52,625,473
 
 
 57,891,042
 
 
 52,585,038Effect of dilutive securities:Unexercised warrants
 
 
 
 
 
 
 
 
 
 
 
 Convertible debentures
 
 
 7,541,660
 
 
 6,345,930
 
 
 
 
 
 6,345,930Weighted average common shares outstanding
diluted
 
 
 69,301,768
 
 
 58,971,403
 
 
 57,891,042
 
 
 58,930,968Net (loss) income per common share
basic
 
 $
 0.00
 
 $
 0.02
 
 $
 (0.02
 )
 $
 0.06Net (loss) income per common share
diluted
 
 $
 0.00
 
 $
 0.02
 
 $
 (0.02
 )
 $
 0.0612

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

NOTE 1  ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Net
income (loss) per common share (continued)

The Companys aggregate
common stock equivalents at December 31, 2009 and 2008 include the following:

December
 31, 2009
 
 December
 31, 2008Warrants
 10,028,023
 
 10,028,023Convertible debentures
 7,541,660
 
 6,345,930Total
 17,569,683
 
 16,373,953Revenue
recognition

The Company follows the
guidance of ASC Topic 605 and Topic 360 for revenue recognition. In general,
the Company records revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price
to the customer is fixed or determinable, and collectability is reasonably
assured. The following policies reflect specific criteria for the various
revenues streams of the Company:

Real estate sales which
primarily involve the sale of multi-family units and community environments are
reported in accordance with ASC Topic 360. Generally, profits from the sale of
development properties, less 5% business tax, are recognized by the full
accrual method when the sale is consummated. A sale is not considered
consummated until (1) the parties are bound by the terms of a contract, (2) all
consideration has been exchanged, (3) any permanent financing of which the
seller is responsible has been arranged, (4) all conditions precedent to
closing have been performed, (5) the seller does not have substantial
continuing involvement with the property, and (6) the usual risks and rewards
of ownership have been transferred to the buyer.

In November 2007, Jin Ma
Real Estate entered into an agreement to construct new dormitories for the
Inner Mongolia Electrical Vocational Technical School (Vocational School).
Pursuant to the terms of the agreement, Jin Ma Real Estate constructed the
buildings and, upon completion, pursuant to a sales-type capital lease, leased
the buildings to the Vocational School and will receive payments for a period
of 26 years at an amount of 4,800,000 RMB or approximately $700,000 per annum.

In November 2008, Jin Ma
Real Estate completed the construction. In December 2008 and October 2009, Jin
Ma Real Estate received the first and second payment of 4,800,000 RMB,
respectively. In accordance with ASC Topic 360, the gain was deferred because
the minimum initial investment by the buyer was less than the required 20%
initial investment expressed as a percentage of the sales value (ASC Topic
360). Therefore the gain is recognized into income as payments are received
using the installment method. The installment method apportions each cash
receipt and principal payment by the buyer between cost recovered and profit.
The apportionment is in the same ratio as total cost and total profit bear to
the sales value. Accordingly, revenue and cost of sales is recognized based on
this apportionment, and the Company recognized imputed interest income on the
accompanying consolidated statements of income as summarized below. Since the
agreement did not have a stated interest rate, the Company used an imputed
interest rate of interest of 6.12% and is reflecting payments due under the
agreement as a note receivable on the accompanying balance sheets. The property
sold had a sales value of 61,691,138 RMB (approximately $9,000,000). The
initial deferred gain on the sale of the property was approximately $51,800 of
which for the six months ended December 31, 2009 and 2008, $914 and $859 was
recognized pursuant to the installment method and is reflected in the
accompanying statements of operations as follows:

For
 the six months ended
 December 31, 2009
 
 For
 the six months ended
 December 31, 2008Revenues
 
 $
 158,981
 
 $
 149,495Cost of sales
 
 
 158,067
 
 
 148,636Gross profit recognized
 
 $
 914
 
 $
 859As of December 31, 2009, the
remaining deferred gain of $50,080 is reflected as a discount of notes
receivable in the accompanying balance sheet. The recorded imputed interest
discount will be realized as the balances due are collected. In the event of
early liquidation, interest is recognized on the simple interest method.
Principal and the related imputed interest are receivable annually at
approximately $700,000 per year.

Revenue from the performance
of general contracting, construction management and design-building services is
recognized upon completion of the service.

13

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

NOTE 1  ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue
recognition (continued)

In accounting for long-term
engineering and construction-type contracts, the Company follows the provisions
of ASC Topic 605. The Company recognizes revenues using the percentage of
completion method of accounting by relating contract costs incurred to date to
the total estimated costs at completion. Contract price and cost estimates are
reviewed periodically as work progresses and adjustments proportionate to the
percentage of completion are reflected in contract revenues and gross profit in
the reporting period when such estimates are revised. This method of revenue
recognition requires the Company to prepare estimates of costs to complete contracts
in progress. In making such estimates, judgments are required to evaluate
contingencies such as potential variances in schedule, the cost of materials
and labor, and productivity; and the impact of change orders, liability claims,
contract disputes, and achievement of contractual performance standards which
may result in revisions to costs and income and are recognized in the period in
which the revisions are determined. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.

The asset, costs and
estimated earnings in excess of billings, represents revenues recognized in
excess of amounts billed. The liability, billings in excess of costs and
estimated earnings, represents billings in excess of revenues recognized.

Revenue primarily derived
from hotel operations, including the rental of rooms and food and beverage
sales, is recognized when rooms are occupied and services have been rendered.

Foreign
currency translation and comprehensive income

The reporting currency of
the Company is the U.S. dollar. The functional currency of the Company is the
local currency, the RMB. The financial statements of the Company are translated
into United States dollars in accordance with ASC Topic 830. Results of
operations and cash flows are translated at average exchange rates during the
period, assets and liabilities are translated at the unified exchange rate at
the end of the period, and equity is translated at historical exchange rates.
Translation adjustments resulting from the process of translating the local
currency financial statements into U.S. dollars are included in determining
comprehensive income. The cumulative translation adjustment and effect of
exchange rate changes on cash for the six months ended December 31, 2009 and
2008 amounted to $(459) and $10,389, respectively. Transaction gains and losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred. All of the Companys revenue transactions are
transacted in the functional currency. The Company does not enter any material
transaction in foreign currencies and accordingly, transaction gains or losses
have not had, and are not expected to have, a material effect on the results of
operations of the Company.

Asset and liability accounts
at December 31, 2009 and June 30, 2009 were translated at 6.8372 RMB to $1.00
USD and at 6.8448 RMB to $1.00 USD, respectively. Equity accounts were stated
at their historical rate. The average translation rates applied to income
statements for the six months ended December 31, 2009 and 2008 were 6.83857 RMB
and 6.85307 RMB to $1.00 USD, respectively. In accordance with ASC Topic 230,
cash flows from the Companys operations are calculated based upon the local
currencies using the average translation rate. As a result, amounts related to
assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheets.

Stock-based
compensation

The Company accounts for
stock options issued to employees in accordance with ASC Topic 718. ASC Topic
718 requires companies to recognize in the statement of operations the grant-date
fair value of stock options and other equity based compensation issued to
employees. There were no options outstanding as of December 31, 2009 and 2008.
The Company accounts for non-employee share-based awards in accordance with ASC
Topic 505-50.

Advertising

Advertising is expensed as
incurred. Advertising expenses for the six months ended December 31, 2009 and
2008 were not material.

14

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

NOTE 1  ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Accumulated
other comprehensive income

The Company follows ASC
Topic 220 to recognize the elements of comprehensive income. Comprehensive
income is comprised of net income and all changes to the statements of
stockholders equity, except those due to investments by stockholders, changes
in paid-in capital and distributions to stockholders. For the Company,
comprehensive income for the six months ended December 31, 2009 and 2008
included net income and foreign currency translation adjustments.

Segment
reporting

ASC Topic 280 requires use
of the management approach model for segment reporting. The management
approach model is based on the way a companys management organizes segments
within the company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure, management structure, or any other manner in which management
disaggregates a company. During the six months ended December 31, 2009 and
2008, the Company operated in three reportable business segments - (1) the
Construction segment (2) Hotel segment and (3) Real estate development segment
(Refer to Note 14).

Recent
accounting pronouncements

The Company adopted FASB ASC
815-10-65 (formerly SFAS 161, Disclosures about Derivative Instruments and
Hedging Activities), which amends and expands previously existing guidance on
derivative instruments to require tabular disclosure of the fair value of
derivative instruments and their gains and losses., This ASC also requires
disclosure regarding the credit-risk related contingent features in derivative
agreements, counterparty credit risk, and strategies and objectives for using
derivative instruments. The adoption of this ASC did not have a material impact
on the Companys Condensed Consolidated Financial Statements.

The Company adopted FASB ASC
810-10-65 (formerly SFAS 160, Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51), which amends previously
issued guidance to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which
is sometimes referred to as minority interest, is an ownership interest in the
consolidated entity that should be reported as equity. Among other
requirements, this Statement requires that the consolidated net income
attributable to the parent and the noncontrolling interest be clearly
identified and presented on the face of the consolidated income statement. The
adoption of the provisions in this ASC did not have a material impact on the
Companys Condensed Consolidated Financial Statements.

The Company adopted FASB ASC
825-10-65 (formerly FASB Staff Position (FSP) No. FAS 107-1 and Accounting
Principles Board 28-1, Interim Disclosures about Fair Value of Financial
Instruments), which amends previous guidance to require disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. The adoption of FASB ASC
825-10-65 did not have a material impact on the Companys Condensed
Consolidated Financial Statements.

In June 2009, FASB
established Accounting Standards Codification (Codification) as the single
source of authoritative accounting principles recognized by the FASB in the
preparation of financial statements in conformity with the GAAP. The
Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification will become non-authoritative. The Codification is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. Adoption of the Codification did not have a material
impact on the Companys results of operations or financial position.

In June 2009, FASB updated
the accounting standards related to the consolidation of variable interest
entities (VIEs). The standard amends current consolidation guidance and
requires additional disclosures about an enterprises involvement in VIEs. The
standard shall be effective as of the beginning of each reporting entitys
first annual reporting period that begins after November 15, 2009, for interim
periods within the first annual reporting period, and for interim and annual
reporting periods thereafter. Earlier application is prohibited. The Company
does not expect the adoption to have a material impact on the Companys results
of operations or financial position.

15

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

NOTE 1  ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent
accounting pronouncements (continued)

In May 2009, FASB issued FAS
No. 165, Subsequent Events, which was subsequently codified within ASC 855,
Subsequent Events. The standard establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. An entity should
apply the requirements of ASC 855 to interim or annual financial periods ending
after June 15, 2009. Adoption of this standard does not have a material impact
on the Companys results of operations or financial position.

In April 2009, the FASB
updated the accounting standards to provide guidance on estimating the fair
value of a financial asset or liability when the trade volume and level of
activity for the asset or liability have significantly decreased relative to
historical levels. The standard requires entities to disclose the inputs and
valuation techniques used to measure fair value and any changes in valuation
inputs or techniques. In addition, debt and equity securities as defined by
GAAP shall be disclosed by major category. This standard is effective for
interim and annual reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009, and is to be
applied prospectively. The adoption did not have a material effect on the
Companys results of operations and financial condition.

In April 2009, the FASB
updated the accounting standards for the recognition and presentation of
other-than-temporary impairments. The standard amends existing guidance on
other-than-temporary impairments for debt securities and requires that the
credit portion of other-than-temporary impairments be recorded in earnings and
the noncredit portion of losses be recorded in other comprehensive income. The
standard requires separate presentation of both the credit and noncredit
portions of other-than-temporary impairments on the financial statements and
additional disclosures. This standard is effective for interim and annual
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. At the date of adoption, the portion of
previously recognized other-than-temporary impairments that represent the
noncredit related loss component shall be recognized as a cumulative effect of
adoption with an adjustment to the opening balance of retained earnings with a
corresponding adjustment to accumulated other comprehensive income (loss). The
adaption of this standard did not have a material effect on the preparation of
the Companys consolidated financial statements.

In August 2009, the FASB
updated the accounting standards to provide additional guidance on estimating
the fair value of a liability in a hypothetical transaction where the liability
is transferred to a market participant. The standard is effective for the first
reporting period, including interim periods, beginning after issuance. The
Company does not expect the adoption to have a material effect on its
consolidated results of operations and financial condition.

In October 2009, the FASB
concurrently issued the following ASC Updates:

1. ASU No. 2009-14 - Software (Topic 985): Certain Revenue Arrangements
That Include Software Elements(formerly EITF Issue No. 09-3) .This standard removes tangible products
from the scope of software revenue recognition guidance and also provides
guidance on determining whether software deliverables in an arrangement that
includes a tangible product, such as embedded software, are within the scope of
the software revenue guidance.

 ASU No. 2009-13 - Revenue Recognition (Topic 605): Multiple-Deliverable
Revenue Arrangements(formerly EITF Issue No. 08-1). This standard
modifies the revenue recognition guidance for arrangements that involve the
delivery of multiple elements, such as product, software, services or support,
to a customer at different times as part of a single revenue generating
transaction. This standard provides principles and application guidance to
determine whether multiple deliverables exist, how the individual deliverables
should be separated and how to allocate the revenue in the arrangement among
those separate deliverables. The standard also expands the disclosure
requirements for multiple deliverable revenue arrangements.

These Accounting Standards
Updates should be applied on a prospective basis for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June
15, 2010, with earlier application permitted. Alternatively, an entity can
elect to adopt these standards on a retrospective basis, but both these
standards must be adopted in the same period using the same transition method.
The Company expects to apply this standard on a prospective basis for revenue
arrangements entered into or materially modified beginning July 1, 2011. The
Company is currently evaluating the potential impact these standards may have
on its financial position and results of operations.

16

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

NOTE 1  ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Subsequent
Events

For purposes of determining
whether a post-balance sheet event should be evaluated to determine whether it
has an effect on the financial statements for the period ending December 31,
2009, subsequent events were evaluated by the Company as of February 11, 2010,
the date on which the consolidated financial statements at and for the six
months ended December 31, 2009, were available to be issued.

Reclassifications

Certain prior period amounts
have been reclassified to conform to the current period presentation. These
reclassifications have no impact on previously reported financial position,
results of operations or cash flows.

NOTE 2  NOTE RECEIVABLE,
NET

Note receivable, which was
attributable to the leasing of the Vocational School pursuant to a sales-type
capital lease (see Note 1), is accounted for using the installment method of
accounting as well as original note value. In accordance with ASC Topic 360, a
gain was deferred on notes not meeting the minimum initial 20% investment by
the buyer expressed as a percentage of the sales value (See Note 1). Management
believes that the note receivable is fully collectable. Therefore, no allowance
for doubtful accounts is deemed to be required. At December 31, 2009 and June
30, 2009, note receivable, net consisted of the following:

December
 31, 2009
 
 June
 30, 2009(Unaudited)
 
 (Audited)Note receivable  gross
 
 $
 16,849,003
 
 $
 17,531,557Less: discount on note receivable
 
 
 (8,134,992
 )
 
 (8,668,385
 )Less: deferred gain on sale
 
 
 (50,080
 )
 
 (50,938
 )8,663,931
 
 
 8,812,234Note receivable  current portion,
net
 
 
 (167,775
 )
 
 (157,923
 )Note receivable  long-term, net
 
 $
 8,496,156
 
 $
 8,654,311NOTE 3 - INVENTORIES

At December 31, 2009 and
June 30, 2009, inventories consisted of the following:

December
 31, 2009
 
 June
 30, 2009(Unaudited)
 
 (Audited)Consumable goods
 
 $
 77,648
 
 $
 27,838$
 77,648
 
 $
 27,838NOTE 4  PREPAID LAND USE
RIGHTS FOR RESALE

As of December 31, 2009 and
June 30, 2009, the following prepaid land use rights are for resale:

Lower
 of cost or marketDecember
 31, 2009
 (Unaudited)
 
 June
 30, 2009
 (Audited)Parcel A
 
 $
 
 
 $
 1,625,708Parcel B
 
 
 2,418,067
 
 
 2,415,382Total
 
 $
 2,418,067
 
 $
 4,041,090On August 15, 2009, an
agreement has been entered whereby the Company sold parcel A for approximately
$2.2 million (RMB 15 million). The sale amount has been fully received by the
Company by the end of October 2009. For the six months ended December 31, 2009,
the Company recognized a gain from the sale of land use rights of $449,473 and
we did not have any corresponding activity in the comparable period of fiscal
2008. The purchaser of parcel A does not have any rescission rights to us.

17

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

NOTE 4  PREPAID LAND USE
RIGHTS FOR RESALE (Continued)

The Company has not received
land use right certificate or county government approval on the land of Parcel
B. This delay is common in China. However, if ever the approval and land use
right certificate cannot be obtained in the future, the Companys legal title
on use right on the parcel of land would be doubtful.

NOTE 5  COSTS AND
ESTIMATED EARNINGS IN EXCESS OF BILLINGS

Costs and estimated earnings
in excess of billings at December 31, 2009 and June 30, 2009 consisted of:

December
 31,2009
 (Unaudited)
 
 June
 30, 2009
 (Audited)Costs incurred on uncompleted contracts
 
 $
 26,421,781
 
 $
 18,495,062Estimated earnings
 
 
 6,079,481
 
 
 4,265,50732,501,262
 
 
 22,760,569Less: billings to date
 
 
 (32,549,143
 )
 
 (22,781,528
 )$
 (47,881
 )
 $
 (20,959
 )Amounts are included in the
accompanying consolidated balance sheets under the following captions:

December
 31, 2009
 (Unaudited)
 
 June
 30, 2009
 (Audited)Costs and estimated earnings in excess of
billings
 
 $
 10,090
 
 $
 16,539Billings in excess of costs and estimated
earnings
 
 
 (57,971
 )
 
 (37,498
 )$
 (47,881
 )
 $
 (20,959
 )NOTE 6  PROPERTY AND
EQUIPMENT

At December 31, 2009 and
June 30, 2009, property and equipment consist of the following:

Useful
 Life
 
 December
 31, 2009
 (Unaudited)
 
 June
 30, 2009
 (Audited)Office equipment
 
 
 5-8
 Years
 
 $
 576,701
 
 $
 576,543Machinery equipment
 
 
 5-15
 Years
 
 
 7,020,330
 
 
 7,038,804Vehicles
 
 
 10
 Years
 
 
 478,049
 
 
 418,977Building and building
 improvements
 
 
 20
  40 Years
 
 
 4,074,357
 
 
 4,348,87212,149,437
 
 
 12,383,196Less: accumulated
 depreciation
 
 
 
 
 
 (3,225,200
 )
 
 (2,999,214
 )$
 8,924,237
 
 $
 9,383,982Depreciation of property and
equipment is provided using the straight-line method. For the six months ended
December 31, 2009 and 2008, depreciation expense amounted to $385,121 and
$438,257, respectively.

NOTE 7  CONSTRUCTION IN
PROGRESS

At December 31, 2009 and
June 30, 2009, construction in progress represents prepaid land use right and
buildings built specifically for the Inner Mongolia Chemistry College of
$8,446,715 and $7,273,392, respectively, and the Procuratorate Housing Estates
(located in Yuquan District, Hohhot city, Inner Mongolia) of $4,871,915 and
$3,286,722, respectively.

18

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

NOTE 7  CONSTRUCTION IN
PROGRESS (continued)

On September 29, 2009, Jin
Ma Real Estate and Inner Mongolia Chemistry College entered an agreement for
the construction of student apartments for the Inner Mongolia Chemistry College
situated in Inner Mongolia University City, a compound where many higher
education institutions are located. Jin Ma Construction began developing the
51,037 square-meter project in July 2008 and completed the construction in
October 2009. Jin Ma Real Estate will lease the buildings to the college for a
period of 20 years. The annual lease payment will be approximately RMB 10
million (approximately $1.5 million) for 5 years (from January 1, 2010 to
December 31, 2014) and the annual lease payment will be approximately RMB 7.5
million (approximately $1.1 million) for 15 years (from January 1, 2015 to
December 31, 2029). As of January 20, 2010, Jin Ma Real Estate has already
received the initial annual installment from Inner Mongolia Chemistry College
of approximately $1,500,000 which will be recognized as revenue in our third
quarter of fiscal 2010 in accordance with Jin Ma Real Estates revenue recognition
policies.

NOTE 8  ACCRUED EXPENSES

At December 31, 2009 and
June 30, 2009, accrued expenses consist of the following:

December
 31, 2009
 (Unaudited)
 
 June
 30, 2009
 (Audited)Accrued interest and liquidated damages
payable
 
 $
 762,488
 
 $
 809,078Accrued payroll and employees benefit
 
 
 175,699
 
 
 363,843Other
 
 
 2,509
 
 
 78,922$
 940,696
 
 $
 1,251,843NOTE 9  INCOME TAXES

The Company accounts for
income taxes under ASC Topic 740. ASC Topic 740 requires the recognition of
deferred tax assets and liabilities for both the expected impact of differences
between the financial statements and the tax basis of assets and liabilities,
and for the expected future tax benefit to be derived from tax losses and tax
credit carryforwards. ASC Topic 740 additionally requires the establishment of
a valuation allowance to reflect the likelihood of realization of deferred tax
assets. Realization of deferred tax assets, including those related to the U.S.
net operating loss carryforwards, are dependent upon future earnings, if any,
of which the timing and amount are uncertain. Accordingly, the net deferred tax
asset related to the U.S. net operating loss carryforward has been fully offset
by a valuation allowance. The Company is governed by the Income Tax Law of the
Peoples Republic of China and the United States.

The operations of the
Company are in China and are governed by the Income Tax Law of the Peoples
Republic of China and local income tax laws (the PRC Income Tax Law). The
Company is subject to income tax at a rate of 25%.

On December 31, 2009 and
June 30, 2009, taxes payable are as follows:

December
 31, 2009
 (Unaudited)
 
 June
 30, 2009
 (Audited)Income taxes payable
 
 $
 44,047
 
 $
 1,117,244Other taxes payable
 
 
 183,008
 
 
 560,840Total
 
 $
 227,055
 
 $
 1,678,08419

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2009

NOTE 10  LOANS PAYABLE

Loans payable consisted of
the following at December 31, 2009 and June 30, 2009:

December
 31, 2009
 (Unaudited)
 
 June
 30, 2009
 (Audited)Loans from various credit unions, due on June 5, 2010 with variable
 annual interest adjustable every 12 months, at The Peoples Bank of China
 base loan rate + 75% of base loan rate (5.4% at December 31, 2009) and
 secured by the assets of Jin Ma Hotel.
 
 $
 2,925,174
 
 $
 2,921,927Loans from various unrelated parties, due in January 2010 with annual
 interest of 14.4% and unsecured and repaid in January 2010.
 
 
 1,034,927
 
 
 1,033,777Loans from various unrelated parties, due in December 2009 with
 annual interest of 14.4% and unsecured and repaid in January 2010.
 
 
 114,082
 
 
 113,955Loans from various unrelated parties, due in August 2009 with annual
 interest of 14.4% and unsecured and repaid in September 2009.
 
 
 
 
 
 146,096Loans from various unrelated parties, due in January 2010 with annual
 interest of 18% and unsecured and repaid in January 2010.
 
 
 58,503
 
 
 58,439Loans from various unrelated parties, due in September 2010 with
 annual interest of 18% and unsecured
 
 
 36,565
 
 
 36,524Loans from various unrelated parties, due in April 2012 with annual
 interest of 18% and unsecured
 
 
 190,136
 
 
 189,925Loans from various unrelated parties, due in August 2011 with annual
 interest of 18% and unsecured
 
 
 36,565
 
 
 36,524Loans from various unrelated parties, due in September 2012 with
 annual interest of 18% and unsecured
 
 
 117,007
 
 
 116,877Loan from one unrelated individual, due in March 2010 with annual
 interest of 24% and unsecured
 
 
 146,258
 
 
 146,096Total loans payable
 
 
 4,659,217
 
 
 4,800,140Less : current portion
 
 
 (4,315,509
 )
 
 (4,420,290
 )Long term liability
 
 $
 343,708
 
 $
 379,850For the six months ended
December 31, 2009 and 2008, interest expense related to these loans amounted to
$339,937 and $325,494, respectively. At December 31, 2009, future maturities of
long-term debt are as follows:

Period ended December 31:2010 (current liability)
 
 $
 4,315,5092011
 
 $
 36,5652012
 
 $
 307,14320

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2009

NOTE 11  RELATED PARTY
TRANSACTIONS

Due from related parties

From time to time, the
Company advanced funds to companies related through common ownership for
working capital purposes. These advances are non interest bearing, unsecured
and payable on demand. At December 31, 2009 and June 30, 2009, due from related
parties was due from the following:

Name
 
 Relationship
 
 December
 31, 
 2009
 (Unaudited)
 
 June
 30, 
 2009
 (Audited)Inner Mongolia Jin Ma
 Group Ltd and its subsidiaries
 
 
 Owned
 by Yang Liankuan
 
 $
 
 
 $
 33,283Due to related parties

From time to time, companies
related through common ownership advanced funds to the Company for working
capital purposes. These advances are non interest bearing, unsecured and
payable on demand. At December 31, 2009 and June 30, 2009, due to related
parties consisted of the following:

Name
 
 Relationship
 
 December
 31, 
 2009
 (Unaudited)
 
 June
 30, 
 2009
 (Audited)Inner Mongolia Jin Ma
 Group Ltd and its subsidiaries
 
 
 Owned
 by Yang Liankuan
 
 $
 1,170,701
 
 $
 NOTE 12  CONVERTIBLE
DEBT

On November 30, 2007, the
Company entered into a Securities Purchase Agreement pursuant to which the
Company agreed to sell an aggregate of $3,275,000 principal amount 10% Secured
Convertible Debentures to seven accredited investors and to issue those investors
common stock purchase warrants to purchase an aggregate of 9,520,349 shares of
the Companys common stock in a private transaction exempt from registration
under the Securities Act of 1933 in reliance on the exemptions provided by
Section 4(2) and Rule 506 of Regulation D of that act.

Under the terms of the
Securities Purchase Agreement, on the first closing which occurred on November
30, 2007, the Company issued $2,183,000 principal amount 10% Secured
Convertible Debentures to the purchasers together with the common stock
purchase warrants to purchase an aggregate of 9,520,349 shares of the Companys
common stock. The Company paid Next Generation Equity Research, LLC (Next), a
broker dealer and member of FINRA, a commission of $174,640 and issued Next
common stock purchase warrants to purchase an aggregate of 507,674 shares of
the Companys common stock at $0.50 per share. Additionally, the Company
reimbursed one of the investors $30,000 to defer its legal fees in connection
with the financing. The Company used the balance of the proceeds for general
working capital.

Within five days following
the effectiveness of the registration statement described below, a second
closing was suppose to occur and the Company was to issue the remaining
$1,092,000 principal amount 10% Secured Convertible Debentures to the
purchasers. Although the registration statement was declared effective on
August 12, 2008, the Company has not received and will not receive any funds
from the second closing.

The debentures, aggregating
$2,183,000, which prior to March 31, 2009 accrued interest at 10% per annum,
were due on March 31, 2009. The Company failed to repay the debentures on the
due date. During May 2009, the Company entered into negotiations with the
debenture holders to restructure the payment terms and reached an
understanding, subject to the execution of definitive documents, to extend the
due date of the debentures and cure the default. On May 18, 2009, the Company
and the debenture holders signed a Debenture and Warrant Amendment Agreement
(the Amendment Agreement) and an Amended and Restated 14% Secured Convertible
Debenture (the Exchanged Debentures). The Jin Ma Companies, however, had been
unable to consummate this restructure due to delays caused by Chinas State
Administration of Foreign Exchange (SAFE), the agency that the Jin Ma
Companies must get approval from to wire the funds to the debenture holders. On
June 30, 2009, the Company and the debenture holders executed an Amendment to
the Amendment Agreement effectively consummating the Amendment Agreement and
issuing the Exchanged Debentures thereby ceasing any written or non-written
declarations of an event of default under its Securities Purchase Agreement and
the related 10% secured convertible debentures and any process to foreclose
upon the pledged shares in accordance with the terms of the pledge agreement
executed in connection Securities Purchase Agreement.

21

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2009

NOTE 12  CONVERTIBLE
DEBT (continued)

The rights and obligations
of the debenture holders and of the Company with respect to the Amended
Agreement and Amended Exchanged Debentures and any securities underlying such
securities are identical in all respects to the rights and obligations of the
debenture holders and of the Company with respect to the debentures and the
underlying shares issued and issuable pursuant to the original Securities
Purchase Agreements executed on November 30, 2007, except for the following
amended terms:


 The Exchanged Debenture
 was revised and the debenture principal repayment schedule is as follows:Repayment Date
 
 
 Principal
 Amount DueJuly 24, 2009 (1)
 
 $
 327,450September 30, 2009 (2)
 
 
 436,600December 31, 2009 (3)
 
 
 1,091,500March 31, 2010
 
 
 327,450Total
 
 $
 2,183,000(1)
 Amount was paid on July
 23, 2009 along with required interest payment of $55,030.(2)
 The principal amount was
 paid on September 30, 2009 along with required cash portion interest payment
 of $101,350. The Company did not pay the outstanding amount by December 31,
 2009. During the six months ended December 31, 2009, the Company issued
 6,647,840 shares of its common stock in connection with the conversion of
 $664,784 of convertible debt and during January 2010, the Company issued
 1,250,000 of its common stock in connection with the conversion of $125,000
 of convertible debt. As of the date of this report, the Company has not paid
 the remaining December 31, 2009 installment in the amount of $301,176. The
 Jin Ma Companies intend to send us the necessary funds to repay all remaining
 outstanding convertible debt balances and all interest due prior to March 31,
 2010. However, there can be no assurance that we will receive the funds. While
 the Company is in default under the Amended Exchanged Debentures for failing
 to make the December 31, 2009 payments, the Company has not received any
 notices of default from the debenture holders and does not expect to pay any
 further liquidated penalties and as discussed elsewhere, has accrued all
 liquidated penalties due pursuant to the Exchange Debentures.(3)
 Pursuant to the repayment
 schedule, unless the Exchanged Debenture is paid in full on or before
 December 31, 2009, the March 31, 2010 Monthly Redemption Amount will include
 a premium equal to 10% of the principal amount of the Exchanged Debenture
 outstanding immediately prior to the consummation of the Amendment Agreement
 amounting to $218,300. As of June 30, 2009, the Company had accrued this
 penalty of $218,300 which is included in accrued expenses on the accompanying
 balance sheets. Since certain debenture holders were repaid or converted
 their debt into the Companys common shares prior to December 31, 2009, the
 Company reduced accrued expenses by $49,867, which reduced interest expense
 by $49,967. At December 31, 2009 and June 30, 2009, accrued liquidated
 penalties, which are included in accrued expenses on the accompanying balance
 sheets amounted to $168,333 and $218,300, respectively.
 The conversion price in
 effect on any outstanding principal balance was lowered from a conversion
 rate of $0.344 per share to $0.10 per share.
 The exercise price per
 share of common stock for the original 10,028,023 warrants issued pursuant to
 the Securities Purchase Agreement dated November 30, 2007 and to the
 placement agent was lowered from $0.50 to $0.10.
 Subject to certain terms
 and conditions therein, as a result of the changes made to Rule 144
 promulgated under the Securities Act of 1933, as amended which were effective
 February 15, 2008, the Companys obligations, pursuant to the Registration
 Rights Agreement , by and among the Company and each of the debenture
 holders, to maintain a registration statement register the shares of common
 stock issuable upon conversion and/or cashless exercise of the Exchanged
 Debentures and the warrants (collectively, the 144 Eligible Securities),
 were waived, so long as (a) the Company is in compliance with the current
 public information requirement under Rule 144 and (b) the debenture holder
 may sell the 144 Eligible Securities without any restriction or limitation
 under Rule 144 or other applicable exemption as of that date.
 the warrants may also be
 exercised at such time by means of a cashless exercise in which the holder
 shall be entitled to receive a certificate for the number of warrant shares
 equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:(A) = the VWAP on the
 Trading Day immediately preceding the date of such election;(B) = the Exercise Price
 of the warrant, as adjusted; and(X) = the number of
 Warrant Shares issuable upon exercise of the warrant in accordance with the
 terms of the warrant by means of a cash exercise rather than a cashless
 exercise.22

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2009

NOTE 12  CONVERTIBLE
DEBT (continued)


 The Company will pay
 interest to the debenture holders on the aggregate unconverted and then
 outstanding principal amount of the Exchanged Debenture at the rate of 14%
 per annum, payable on each amount then being converted), and on the Maturity
 Date (each such date, in cash or, as to 28.6% of the applicable interest
 amount on such Interest Payment Date only (i.e., 4% per annum), at the
 Companys option, in shares of common stock at the Interest Conversion Rate
 provided, however, that payment in shares of common stock may only occur if
 (i) all of the Equity Conditions, as defined, have been met (unless waived by
 the holder in writing) during the 20 Trading Days immediately prior to the
 applicable Interest Payment Date (the Interest Notice Period) and through
 and including the date such shares of common stock are actually issued to the
 holder, (ii) the Company shall have given the holder notice in accordance
 with the notice requirements and (iii) as to such Interest Payment Date,
 prior to such Interest Notice Period (but not more than 5 Trading Days prior
 to the commencement of such Interest Notice Period), the Company shall have
 delivered to the debenture holders account with The Depository Trust Company
 a number of shares of common stock to be applied against such Interest Share
 Amount equal to the quotient of (x) the applicable Interest Share Amount
 divided by (y) the then Conversion Price.
 The debenture holders
 waived any liquidated damages that were due pursuant to Securities Purchase
 Agreements dated November 30, 2007.The rights and obligations
of the debenture holders and of the Company with respect to the debentures and
the underlying shares issued and issuable pursuant to the original Securities
Purchase Agreements executed on November 30, 2007 are as follows:


 The conversion price of
 the debentures and the exercise price of the warrants are subject to the
 proportional adjustment in the event of a stock splits, stock dividends,
 recapitalizations or similar corporate events. Both the conversion price of
 the debentures and the number of shares issuable upon conversion of the
 debentures as well as the exercise price of the warrants and the number of
 shares issuable upon the exercise of the warrants is subject to adjustment if
 the Company should issue shares of common stock or other securities
 convertible or exercisable into shares of common stock or otherwise reprice
 any existing conversion or exercise prices to a price less than the then
 current conversion and/or exercise prices.
 The debentures are not
 convertible and the warrants are not exercisable to the extent that (i) the
 number of shares of our common stock beneficially owned by the holder and
 (ii) the number of shares of our common stock issuable upon the conversion of
 the debentures and/or the exercise of the warrants would result in the
 beneficial ownership by holder of more than 4.99% of our then outstanding common
 stock. This ownership limitation can be increased to 9.99% by the holder upon
 61 days notice to the Company.
 The Company agreed that so
 long as the debentures remain outstanding, unless the Company receives the
 prior written consent of the holders of at least 85% of the outstanding
 principal amount of the debentures, the Company agreed that it will not:
 incur additional
 indebtedness, subject to certain exceptions,
 incur any liens on any of
 our property or assets,
 repurchase any of its
 common stock, subject to certain exceptions,
 amend its charter
 documents in a manner that would be adverse to the debenture holders,
 So long as the debentures
 are outstanding, should the Company issue any common stock or common stock
 equivalent, the Company granted the purchasers a right of first refusal
 whereby each purchaser in this offering has the right to participate in such
 subsequent financing up to an amount equal to 100% of such subsequent
 financing upon the same terms and conditions of that financing. If the
 Company undertakes such a financing while the debentures remain outstanding,
 other than an underwritten offering, the holders are entitled to exchange the
 debentures on a dollar for dollar basis for any securities which the Company
 may issue in the subsequent financing. The Company also agreed that so long
 as the purchasers own any of the securities sold or to be issued in the
 transaction, the Company will not enter into any agreement which would
 involve a variable rate transaction, which includes floating conversion
 prices, conversion prices with reset mechanisms or equity lines of credit
 among others.Pursuant to the Securities
Purchase Agreement, if the Company should default on the debentures, the
holders have the right to immediately accelerate the maturity date of the
principal amount of the debentures as well as any accrued but unpaid interest
and if such amount is not satisfied within five days the interest rate on the
debentures increases to 18%. Events of default include customary clauses such
as failure to make payments when required, failure to observe any covenant
contained in the debentures, a default under any other document executed in
connection with the transaction, bankruptcy or default under any other
obligation greater than $150,000. In addition, an event of default would occur
if the Companys common stock should no longer be quoted on the OTC Bulletin
Board, if the Company were a party to a change of control transaction involving
in excess of 33% of its assets or if the registration statement described below
is not declared effective within 180 days after the first closing date, among
other provisions.

23

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2009

NOTE 12  CONVERTIBLE
DEBT (continued)


 In conjunction with the
 transaction, Mr. Liankuan Yang and Yang Yang and Ms. Runlan Ma, officers and
 directors of the Company, pledged an aggregate of 19,000,000 shares of the
 Companys common stock owned by them as additional security for the Companys
 obligations under the transaction. Mr. Liankuan Yang, Ms. Yang Yang and Ms.
 Runlan Ma have also entered into lock-up agreements whereby they are agreed
 not to offer or sell any shares of the Companys common stock owned by them
 until the 180th trading day after the effective date of the registration
 statement described elsewhere herein.
 The 9,520,349 common stock
 purchase warrants issued pursuant to the Securities Purchase Agreement are
 exercisable for five years from the date of issuance at an initial exercise
 price of $0.50 per share, subject to adjustment and adjusted to $0.10 per share
 as discussed above. The Company is permitted to call the warrants on 30
 trading days prior notice at $0.001 per warrant at any time after the
 effective date of the registration statement covering the shares underlying
 the warrants when, (i) the VWAP (as defined in the warrant) for each of 20
 consecutive trading days beginning with the effective date of the
 registration statement exceeds $1.50, (ii) the average daily volume for
 during this period exceeds 500,000 shares of common stock per trading day and
 (iii) the holder is not in possession of any information that constitutes, or
 might constitute, material non-public information which was provided by the
 Company to the holder.The Company granted the
purchasers certain piggy-back registration rights. In addition, the Company had
agreed to file a registration statement with the Securities and Exchange
Commission registering the shares of common stock underlying the $3,275,000
principal amount debentures and the warrants so as to permit the public resale
thereof within 45 days from the first closing date. The Company was subject to
the payment to the holders liquidated damages if it fails to file the
registration statement within 45 days from the date of the Securities Purchase
Agreement, or if the registration statement is not declared effective within
120 days from the date of the Securities Purchase Agreement (or 150 days if the
staff of the SEC reviews the filing), or if all the securities are not
registered by April 30, 2008 as well as certain other events. The liquidated
damages, which are payable in cash, were calculated at 1.5% of the aggregate
purchase price paid by each holder for every 30 day period, with a maximum of
18% of the aggregate purchase price. If the Company fails to pay all or any portion
of these liquidated damages, they accrue interest at 18% per annum. The Company
filed its registration on January 23, 2008. The registration statement was
declared effective on August 11, 2008.

Accounting treatment related to convertible debt and related
warrants

a) Initial convertible
debt and related warrants

In fiscal 2008, the Company
evaluated whether or not the convertible debt contained embedded conversion
options, which meet the definition of a derivatives under ASC Topic 815. The
Company concluded that since the 14% secured convertible debenture had a fixed
redemption price of $0.344, the convertible debenture was not a derivative
instrument. The Company analyzed this provision under ASC Topic 815 and
therefore it qualified as equity under ASC Topic 815. Derivative financial
instruments, as defined in ASC Topic 815 consist of financial instruments or
other contracts that contain all three of the following characteristics: i) the
financial instrument has a notional amount and one or more underlying, e.g.
interest rate, security price or other variable, ii) require no initial net
investment and iii) permits net settlement. Derivative financial instruments
may be free-standing or embedded in other financial instruments. ASC Topic 815
defines net settlement. In order for the net settlement requirement to be met,
the contract must meet one of the three tests listed in ASC Topic 815.

Since there is no net
settlement provision in the contract and no market mechanism that facilitates
net settlement that would cause the contract to meet the certain criteria in
ASC Topic 815, the Company analyzed ASC Topic 815 which provides that a
contract that requires delivery of the assets associated with the underlying
has the characteristic of net settlement if those assets are readily convertible to cash.

An asset (whether financial
or nonfinancial) can be considered to be readily
convertible to cash, as that phrase is used in paragraph 9(c), only
if the net amount of cash that would be received from a sale of the asset in an
active market is either equal to or not significantly less than the amount an
entity would typically have received under a net settlement provision

At the time of the November
2007 private placement, there was no market for the Companys common stock.

24

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2009

NOTE 12  CONVERTIBLE
DEBT (continued)

On November 30, 2007,
pursuant to the Securities Purchase Agreement, the Company issued to the
investors warrants to purchase 9,520,349 shares of common stock of the Company.
On that date there were approximately 52,544,000 shares of common stock
outstanding. Thus, the warrants, at the time of issuance, represented more than
18% of the outstanding common stock.

Since (i) the number of
shares issuable upon exercise of the warrants, (ii) the relationship between
the number of warrants and the outstanding common stock, (iii) the lack of an
active market in the stock, (iii) the fact that the common stock is not listed
on an exchange, (iv) the fact that the underlying common stock was not
registered with the Securities and Exchange Commission, and (v) the fact that
relatively modest sales would have a depressing effect on the market price of
the common stock demonstrate that the net settlement test is not met and the
warrants are not considered a derivative instrument..

The Warrants have a term of
5 years after the issue date of November 30, 2007. The warrants were treated as
a discount on the secured notes and were valued at $887,768 and were amortized
over the original 16-month note term. Additionally, the convertible notes were
considered to have an embedded beneficial conversion feature (BCF) because the
effective conversion price was less than the fair value of the Companys common
stock. The convertible notes were fully convertible at the issuance date,
therefore the portion of proceeds allocated to the convertible notes of
$1,295,233 was determined to be the value of the beneficial conversion feature
and was recorded as a debt discount and was amortized over the original
16-months note term.

b) Amended convertible
debt and related warrants

In connection with the
amendment of the Securities Purchase Agreements and related agreements, management
considered ASC Topic 470 and related interpretations.

Under ASC Topic 470, the
Company concluded that the Amended Agreements were not a troubled debt
restructure since there are no concessions by the note holders because they
have in effect received new notes with new or better conversion terms, an
increased interest rate, and a reduction of the warrant exercise price. The
effective interest rate has increased due to the various changes discussed
above.

Therefore, the Company
reviewed ASC Topic 470 which is for modifications of debt instruments other
than a troubled debt restructure. Under ASC Topic 470, the changes in cash
flows were measured as follows:

Change in present value
 (PV) of principal
 
 $
 0Change in PV of interest
 
 $
 0Change in fair value of
 embedded conversion option
 
 $
 2,204,480If the change in cash flows
are greater than 10% or if change in embedded conversion option is greater than
10% of the debt ($2,183,000 *10% = $218,300) then it is treated as a
substantial modification of terms and a debt extinguishment under paragraph ASC
Topic 860. The change in the embedded conversion option result in a greater
than 10% change in the PV of the notes and as such management believes this
restructuring should be accounted for as an extinguishment of debt, plus a
re-issuance of new debt with new warrants and a new beneficial conversion
feature. Pursuant to ASC Topic 470, the debtor should recognize a debt discount
and additional paid-in capital for the change in fair value of the embedded
conversion options and not consider a BCF only if it is determined that this is
not a debt extinguishment. Accordingly, the Company determined that this was a
debt extinguishment and accounted for the transaction as though the old debt
was extinguished (amortize all discounts and issue costs) and then account for
the Amended Agreements as though new debt was issued (record new discounts for
warrants and the BCF).

In accordance with ASC Topic
470, the amended convertible notes were considered to have a BCF because the
effective conversion price was less than the fair value of the Companys common
stock. This convertible notes were fully convertible at the issuance date,
therefore the portion of proceeds allocated to the convertible notes of $1,302,947
was determined to be the value of the beneficial conversion feature and was
recorded as a debt discount and will be amortized over the 9-months amended
note term.

Pursuant to the terms of the
amended warrants, the Purchasers are entitled to purchase up to 9,520,349
shares of common stock of the Company at an amended exercise price of $0.10 per
share. The amended warrants have a term of 5 years after the issue date of
November 30, 2007. These warrants were treated as a discount on the convertible
notes and were valued at $880,053 and will be amortized over the 9-month
amended note term. The fair market value of each stock warrant was estimated on
the date of grant using the Black-Scholes option-pricing model in accordance
with ASC Topic 718 using the following weighted-average assumptions: expected
dividend yield 0%; risk-free interest rate of 1.2%; volatility of 328% and an
expected term of four years.

25

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2009

NOTE 12  CONVERTIBLE
DEBT (continued)

The amortization of debt
discounts for the six months ended December 31, 2009 and 2008 was $1,931,611
and $818,625, respectively, which has been included in interest expense on the
accompanying consolidated statement of operations. The balance of the debt
discount is $251,389 and $409,312, respectively, at December 31, 2009 and 2008
which will be amortized over the remaining term of the debenture.

Cash on deposit in China is
subject to the regulations of the PRC which restricts the transfer of cash from
that country, except under certain specific circumstances. The Company has been
advised by Mr. Yang that these currency laws have served to hinder the Jin Ma
Companies. The source of the funds for these repayments will be the repayment
to the Company by the Jin Ma Companies of a portion of the amounts owed the
Company.

Since the Company defaulted
on its December 31, 2009 installment payment pursuant to the amended
agreements, the Company will begin to accrue interest at 18% per annum. As a
result of the pledge of shares of the Companys common stock by the Companys
principals to the debenture holders, should the debenture holders foreclose
upon its collateral, a controlling interest in the Company may be obtained by
the debenture holders.

The convertible debenture
liability is as follows at December 31, 2009 and June 30, 2009:

December
 31, 2009
 (Unaudited)
 
 June
 30, 2009
 (Audited)Convertible debentures payable
 
 $
 754,166
 
 $
 2,183,000Less: unamortized discount on debentures
 
 
 (251,389
 )
 
 (2,183,000
 )Convertible debentures, net
 
 $
 502,777
 
 $
 NOTE 13  STOCKHOLDERS
EQUITY

Common
stock

On September 10, 2009, the
Company issued 3,055,000 shares of its common stock to officers and directors
of the Company for services rendered by them. The shares were valued at $0.10
per share based on the fair value on the date of grant. In connection with the
issuance of these shares, the Company reduced accrued expenses by $248,000 and
recorded stock-based compensation of $57,500.

During the period from July
1, 2009 to December 31, 2009, the Company issued 6,647,840 shares of its common
stock in connection with the conversion of $664,784 of convertible debt.

On September 30, 2009 and
October 13, 2009, the Company issued 409,149 shares of its common stock to
various debenture holders to pay off outstanding accrued interest payable of
$21,830 and for interest expense of $19,085. The shares were valued at $0.10
per share based on the fair value on the grant date. In connection with the
issuance of these shares, for the six months ended December 31, 2009, the
Company reduced interest payable by $21,830 and recorded interest expense of
$19,085.

Warrants

Stock warrants activities
for the six months ended December 31, 2009 are summarized as follows:

Number
 of 
 Warrants
 
 Weighted
 Average 
 Exercise PriceBalance at June 30, 2009 (Audited)
 
 
 10,028,023
 
 $
 0.10Granted
 
 
 
 
 
 Exercised
 
 
 
 
 
 Forfeited
 
 
 
 
 
 Balance at December 31, 2009 (Unaudited)
 
 
 10,028,023
 
 $
 0.10Warrants exercisable at December 31, 2009
 
 
 10,028,023
 
 $
 0.1026

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2009

NOTE 13  STOCKHOLDERS
EQUITY (continued)

The following table
summarizes the Companys stock warrants outstanding at December 31, 2009:

Warrants
 Outstanding
 
 Warrants
 ExercisableRange
 of 
 Exercise 
 Price
 
 Number
 
 Outstanding at 
 December 31, 
 2009
 
 Weighted
 
 Average 
 Remaining 
 Contractual 
 Life
 
 Weighted
 
 Average 
 Exercise 
 Price
 
 Number
 
 Exercisable at 
 December 31, 
 2009
 
 Weighted
 
 Average 
 Exercise 
 Price$              
                   0.10
 
 
 10,028,023
 
 
 2.92
 Years
 
 $
 0.10
 
 
 10,028,023
 
 $
 0.10NOTE 14 SEGMENT
INFORMATION

ASC Topic 280 requires use
of the management approach model for segment reporting. The management
approach model is based on the way a companys management organizes segments
within the company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure, management structure, or any other manner in which management
disaggregates a company. During the six months ended December 31, 2009 and
2008, the Company operated in three reportable business segments - (1) the
Construction segment (2) Hotel segment and (3) Real estate development segment.
The Companys reportable segments are strategic business units that offer
different products. The Companys reportable segments, although integral to the success of
the others, offer distinctly different products and services and require
different types of management focus. As such, these segments are managed
separately.

Condensed information with
respect to these reportable business segments for the three and six months
ended December 31, 2009 and 2008 is as follows:

For
 the three months ended 
 December 31,
 
 For
 the six months ended 
 December 31,2009
 
 2008
 
 2009
 
 2008Revenues:Construction
 
 $
 4,405,892
 
 $
 11,894,829
 
 $
 9,596,012
 
 $
 40,273,271Real Estate
 
 
 158,981
 
 
 149,490
 
 
 158,981
 
 
 382,190Hotel
 
 
 734,809
 
 
 858,378
 
 
 1,512,829
 
 
 1,687,4645,299,682
 
 
 12,902,697
 
 
 11,267,822
 
 
 42,342,925Depreciation:Construction
 
 
 112,937
 
 
 123,829
 
 
 227,990
 
 
 257,566Real Estate
 
 
 10,029
 
 
 12,957
 
 
 20,051
 
 
 25,564Hotel
 
 
 68,566
 
 
 72,868
 
 
 137,080
 
 
 155,127191,532
 
 
 209,654
 
 
 385,121
 
 
 438,257Interest expense:Construction
 
 
 167,740
 
 
 163,816
 
 
 339,937
 
 
 325,494Other
 
 
 577,955
 
 
 508,019
 
 
 1,977,139
 
 
 1,010,732745,695
 
 
 671,835
 
 
 2,317,076
 
 
 1,336,226Net (loss) income:Construction
 
 
 186,776
 
 
 1,021,621
 
 
 789,606
 
 
 3,872,035Real Estate
 
 
 428,590
 
 
 344,838
 
 
 324,800
 
 
 293,795Hotel
 
 
 54,204
 
 
 171,617
 
 
 121,200
 
 
 312,912Other (a)
 
 
 (663,073
 )
 
 (546,655
 )
 
 (2,140,482
 )
 
 (1,103,547
 )$
 6,497
 
 $
 991,421
 
 $
 (904,876
 )
 $
 3,375,19527

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2009

NOTE 14 SEGMENT
INFORMATION (continued)

December
 31,
 2009
 
 June
 30,
 2009Identifiable
 long-lived tangible assets at December 31, 2009 and June 30, 2009:Construction
 
 $
 6,482,775
 
 $
 6,819,609Real Estate
 
 
 365,565
 
 
 353,825Hotel
 
 
 2,075,897
 
 
 2,210,548$
 8,924,237
 
 $
 9,383,982(a)
 The Company does not
 allocate its general and administrative expenses of its US activities to its
 reportable segments, because these activities are managed at a corporate
 level.NOTE 15  STATUTORY
RESERVES

The Company is required to
make appropriations to reserve funds, comprising the statutory surplus reserve,
statutory public welfare fund and discretionary surplus reserve, based on
after-tax net income determined in accordance with generally accepted
accounting principles of the PRC (the PRC GAAP). Appropriation to the
statutory surplus reserve should be at least 10% of the after tax net income
determined in accordance with the PRC GAAP until the reserve is equal to 50% of
the entities registered capital or members equity. Appropriations to the
statutory public welfare fund are at a minimum of 5% of the after tax net
income determined in accordance with PRC GAAP. Commencing on January 1, 2006,
the new PRC regulations waived the requirement for appropriating retained
earnings to a welfare fund. In accordance with the Chinese Company Law, the
Company allocated 10% of income after taxes to the statutory surplus reserve
for the six months ended December 31, 2009 and 2008. For the six months ended
December 31, 2009, statutory surplus reserve activity was as follows:

Statutory
 Surplus ReserveBalance  June 30, 2009
 (Audited)
 
 $
 2,040,899Addition to statutory
 reserves
 
 
 124,311Balance  December 31,
 2009 (Unaudited)
 
 $
 2,165,210NOTE 16  MAJOR CUSTOMERS
AND VENDORS

The nature of the Companys
construction segment is that at any given time, the Company will have a
concentration of significant customer depending upon the number and scope of
construction projects. These significant customers may not be the same from
period to period depending upon the percentage of completion of the specific
projects. For the six months ended December 31, 2009, three construction
projects accounted for 78.3% of the Companys total revenues. For the six
months ended December 31, 2008, three construction projects accounted for 84.3%
of the Companys total revenues. Major customers are summarized as follows:

Project Name
 
 For
 the Six Months 
 Ended December 31,2009
 
 %
 
 For
 the Six Months 
 Ended December 31, 2008
 
 %Riverbank Garden Community (Buildings 5 to 8 and Phase II)
 
 
 
 
 
 0.0
 
 
 10,661,001
 
 
 25.2Tian Fu Garden residential project (Phase I and II)
 
 
 
 
 
 0.0
 
 
 16,722,886
 
 
 39.5Ai Bo Garden
 residential apartment project
 
 
 
 
 
 0.0
 
 
 8,282,437
 
 
 19.6Lanyu Garden No. 3 residential apartment project
 
 
 3,439,335
 
 
 30.5
 %
 
 
 
 
 0.0Fu Xing Bath Center project
 
 
 3,054,560
 
 
 27.1
 %
 
 
 
 
 0.0Jianhe Garden residential project
 
 
 2,333,235
 
 
 20.7
 %
 
 
 
 
 0.028

GOLD
HORSE INTERNATIONAL, INC. AND SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2009

NOTE 16  MAJOR
CUSTOMERS AND VENDORS (continued)

At December 31,
2009, the Company had $7,840,342 of accounts receivable due from its major
customers. At December 31, 2008, the Company had $8,343,649 of accounts
receivable due from its major customers. Any disruption in the relationships
between the Companys construction segment and one or more of these customers,
or any significant variance in the magnitude or the timing of construction projects
from any one of these customers, may result in decreases in our results of
operations, liquidity and cash flows.

The Company uses
five to seven subcontractors to perform its construction services and to
develop its real estate projects. Management is aware of similar subcontractors
that are available to perform construction services if required and management
has plans to engage their services if necessary.

NOTE 17  RESTRICTED
NET ASSETS

Schedule I of
Article 5-04 of Regulation S-X requires the condensed financial information of
registrant shall be filed when the restricted net assets of consolidated
subsidiaries exceed 25 percent of consolidated net assets as of the end of the
most recently completed fiscal year. For purposes of the above test, restricted
net assets of consolidated subsidiaries shall mean that amount of the
registrant's proportionate share of net assets of consolidated subsidiaries
(after intercompany eliminations) which as of the end of the most recent fiscal
year may not be transferred to the parent company by subsidiaries in the form
of loans, advances or cash dividends without the consent of a third party
(i.e., lender, regulatory agency, foreign government, etc.).

The condensed
parent company financial statements have been prepared in accordance with Rule
12-04, Schedule I of Regulation S-X as the restricted net assets of the
subsidiaries of Gold Horse International, Inc. exceed 25% of the consolidated
net assets of Gold Horse International, Inc. The ability of our Chinese
operating affiliates to pay dividends may be restricted due to the foreign
exchange control policies and availability of cash balances of the Chinese
operating subsidiaries. Because a significant portion of our operations and
revenues are conducted and generated in China, all of our revenues being earned
and currency received are denominated in Renminbi (RMB). RMB is subject to the
exchange control regulation in China, and, as a result, we may be unable to
distribute any dividends outside of China due to PRC exchange control
regulations that restrict our ability to convert RMB into US Dollars.

The following condensed parent company
financial statements have been prepared using the same accounting principles
and policies described in the notes to the consolidated financial statements,
with the only exception being that the parent company accounts for its
subsidiaries using the equity method. Refer to the consolidated financial
statements and notes presented above for additional information and disclosures
with respect to these financial statements.

29

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2009

NOTE 17  RESTRICTED NET
ASSETS

GOLD HORSE INTERNATIONAL, INC. 
CONSOLIDATED PARENT COMPANY BALANCE SHEETS

As of 
 December 31,2009
 
 As of 
 June 30,2009ASSETS
 
 
 (Unaudited)
 
 
 (Audited)Cash and cash equivalents
 
 $
 1,749
 
 $
 39,956Total Current Assets
 
 
 1,749
 
 
 39,956Investments in subsidiaries at equity
 
 
 30,183,734
 
 
 28,914,268Due from subsidiaries
 
 
 1,119,638
 
 
 2,042,142Total Assets
 
 $
 31,305,121
 
 $
 30,996,366LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Convertible debt, net
 
 $
 502,777
 
 $
 Accounts payable
 
 
 22,614
 
 
 221,825Accrued expenses
 
 
 290,305
 
 
 425,300Total Current Liabilities
 
 
 815,696
 
 
 647,125Stockholders' equity:Common stock ($.0001 par value;
300,000,000 shares authorized;
 62,780,592 and 52,668,603 shares issued and outstanding at December 31, 2009
 and June 30, 2009, respectively)
 
 
 6,278
 
 
 5,266Non-controlling interest in
variable interest entities
 
 
 6,095,314
 
 
 6,095,314Additional paid-in
capital
 
 
 7,888,353
 
 
 6,878,166Statutory reserve
 
 
 2,165,210
 
 
 2,040,899Retained earnings
 
 
 11,837,655
 
 
 12,866,842Other comprehensive
income
 
 
 2,496,615
 
 
 2,462,754Total Stockholders'
Equity
 
 
 30,489,425
 
 
 30,349,241Total Liabilities and Stockholders'
Equity
 
 $
 31,305,121
 
 $
 30,996,366GOLD HORSE INTERNATIONAL, INC. 
CONDENSED PARENT COMPANY STATEMENTS OF OPERATIONS

For the Six Months EndedDecember 31,2009
 
 2008(Unaudited)
 
 (Unaudited)REVENUES
 
 $
 
 
 $
 OPERATING EXPENSES:Salaries and employee
benefits
 
 
 140,374
 
 
 50,000General and
administrative
 
 
 22,969
 
 
 42,815Total Operating
Expenses
 
 
 163,343
 
 
 92,815LOSS FROM OPERATIONS
 
 
 (163,343
 )
 
 (92,815
 )OTHER EXPENSES:Interest expense
 
 
 (1,977,139
 )
 
 (1,010,732
 )Total Other
Expenses
 
 
 (1,977,139
 )
 
 (1,010,732
 )LOSS ATTRIBUTABLE TO PARENT ONLY
 
 
 (2,140,482
 )
 
 (1,103,547
 )EQUITY INCOME EARNINGS OF
SUBSIDIARIES
 
 
 1,235,606
 
 
 4,478,742NET (LOSS) INCOME
 
 $
 (904,876
 )
 $
 3,375,19530

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES NOTES 
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2009

NOTE
17  RESTRICTED NET ASSETS (Continued)

GOLD HORSE INTERNATIONAL, INC. 
CONSOLIDATED PARENT COMPANY STATEMENTS OF CASH FLOWS

For the Six Months EndedDecember 31,2009
 
 2008(Unaudited)
 
 (Unaudited)CASH
 FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
 
 $
 (904,876
 )
 $
 3,375,195Adjustments to reconcile net (loss)
income to net cash used in
 operating activities:Equity in earnings of
subsidiary
 
 
 (1,235,606
 )
 
 (4,478,742
 )Common stock issued for
services
 
 
 57,500
 
 
 Common stock issued for
interest
 
 
 19,085
 
 
 Interest expense from amortization
of debt discount
 
 
 1,931,611
 
 
 818,625Amortization of debt issuance
costs
 
 
 
 
 
 76,740Changes in assets and
 liabilities:Accounts payable
 
 
 (59,783
 )
 
 78,780Accrued expenses
 
 
 (4,592
 )
 
 5,305NET CASH USED IN OPERATING
 ACTIVITIES
 
 
 (196,661
 )
 
 (124,097
 )CASH
 FLOWS FROM INVESTING ACTIVITIES:Proceeds from
subsidiaries
 
 
 922,504
 
 
 50,000Investment in
subsidiaries
 
 
 
 
 
 (69,030
 )NET CASH PROVIDED BY (USED
 IN) INVESTING ACTIVITIES922,504
 
 
 (19,030
 )CASH
 FLOWS FROM FINANCING ACTIVITIES:Payment of convertible
debt
 
 
 (764,050
 )
 
 Proceeds from sale of common
stock
 
 
 
 
 
 124,000NET CASH (USED IN)
 PROVIDED BY FINANCING ACTIVITIES
 
 
 (764,050
 )
 
 124,000NET DECREASE IN CASH
 
 
 (38,207
 )
 
 (19,127
 )CASH - beginning of year
 
 
 39,956
 
 
 19,826CASH - end of period
 
 $
 1,749
 
 $
 699NOTE 18  COMMITMENTS

The Company did not have
significant capital and other commitments, or significant guarantees as of
December 31, 2009.

31

GOLD HORSE INTERNATIONAL, INC. AND
SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
December 31, 2009

NOTE 19  SUBSEQUENT
EVENT

During the period from
January 1, 2010 to February 10, 2010, the Company issued 1,250,000 shares of
its common stock in connection with the conversion of $125,000 of convertible
debt.

On January 5, 2010, the
Company issued 1,642,857 shares of its common stock to its chief executive
officer and its chief financial officer for services rendered by them. The
shares were valued at $0.07 per share based on the fair value on the date of
grant. In connection with the issuance of these shares, the Company recorded
stock-based compensation of $115,000.

On January 25, 2010, the
Company issued 148,003 shares of its common stock to a debenture holder to pay
off accrued and unpaid interest.

On January 25, 2010, the
Company issued 747,752 shares of its common stock to three debenture holders
upon the cashless exercise of 2,180,233 warrants.

On January 28, 2010, the
Company issued 3,000,000 shares of common stock to consultants for business
development services. The shares were valued at $0.12 per share based on the
fair value on the date of grant. In connection with the issuance of these
shares, the Company recorded stock-based consulting expense of $360,000.

32

ITEM 2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The
following discussion of our financial condition and results of operation should
be read in conjunction with the financial statements and the notes to those
statements that are included elsewhere in this report. Our discussion includes
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, We use words such as anticipate, estimate, plan, project,
continuing, ongoing, expect, believe, intend,
may, will,
should, could, and similar expressions to identify forward-looking
statements.

Overview

Neither
Gold Horse International nor its subsidiaries Gold Horse Nevada, Global Rise or
IMTD are engaged in any business or operations other than pursuant to the terms
of the various Contractual Arrangements with the Jin Ma Companies as described
elsewhere in this report. As such, we are completely dependent on the
Contractual Arrangements. We do not generate any revenues and have no assets.
Pursuant to the requirements of ASC Topic 810, under generally accepted
accounting principles the Jin Ma Companies which are deemed to be variable
interest entities (VIEs) we are required to consolidate the financial statements
of the Jin Ma Companies with our financial statements. Accordingly, and as
described elsewhere in this quarterly report, the assets and liabilities at
December 31, 2009 and June 30, 2009 and the results of operations for the three
and six months ended December 31, 2009 an 2008 are those of the Jin Ma
Companies. All of those assets and operations are located in the PRC and the
Contractual Arrangements are subject to enforcement under the laws of the PRC.
There are no assurances we will be able to enforce these agreements if
necessary. If we are unable to enforce any legal rights we may have under these
contracts or otherwise, our ability to continue as a going concern is in
jeopardy. In addition, the terms of these contracts expire in August 2016 and
there are no assurances these agreements will be renewed. If the Contractual
Arrangements are not renewed or are significantly modified, unless we have
expanded our business and operations, of which there are no assurances, we will
in all likelihood be forced to cease our operations.

For
the six months ended December 31, 2009, our overall net revenues decreased
73.4% from the six months ended December 31, 2008 as summarized below:

2009
 
 2008
 
 $
 Change
 (Decrease)
 
 %

 ChangeNET REVENUESConstruction
 
 $
 9,596,012
 
 $
 40,273,271
 
 $
 (30,677,259
 )
 
 76.2
 %Hotel
 
 
 1,512,829
 
 
 1,687,464
 
 
 (174,635
 )
 
 10.3
 %Real estate
 
 
 158,981
 
 
 382,190
 
 
 (223,209
 )
 
 58.4
 %Total Revenues
 
 $
 11,267,822
 
 $
 42,342,925
 
 $
 (31,075,103
 )
 
 73.4
 %At
December 31, 2009, Jin Ma Construction had three construction projects in
process; 1) the Fu Xing Bath Center Project which is approximately 89%
complete; 2) the Jianhe Garden Project which is approximately 8% complete and
3) the Tuzuoqi Low-Rent Housing Project which is approximately 6% complete. The
nature of Jin Ma Constructions business is that at any given time it will have
a concentration of significant customer depending upon the number and scope of
construction projects. These significant customers may not be the same from
period to period depending upon the percentage of completion of the specific
projects. Any disruption in the relationships between Jin Ma Construction and
one or more of these customers, or any significant variance in the magnitude or
the timing of construction projects from any one of these customers, may result
in decreases in our results of operations, liquidity and cash flows. In
addition, if Jin Ma Construction does not successfully manage its business so
that it has new projects ready to start as current projects are completed its
revenues will decline which will materially adversely impact our liquidity and
operations in future periods.

Jin
Ma Construction began construction of the Fu Xing Committee Bath Center project
in November 2008. This project contains one building with a construction area
of 46,054 square meters. We expect to complete this project in the third
quarter of fiscal 2010.

In
addition, Jin Ma Construction has secured two new construction work valued at
approximately RMB 301.8 million (approximately $44.2 million) with an expected
gross profit of RMB 60.3 million ($8.8 million).

1)
 Jin Ma Construction began
 construction of the Jianhe Garden Project residential apartment in November
 2009. Valued at approximately RMB 204.4 million (approximately $30.0
 million), this project contains ten buildings with a construction area of
 113,584 square meters. We expect to complete this project in December 2010
 with an estimated gross profit of approximately RMB 40.8 million
 (approximately $6.0 million).33

2)
 The Tuzuoqi (Chasuqi)
 Low-Rent Housing Project, valued at approximately RMB 97.4 million
 (approximately $14.2 million), contains three buildings with a construction
 area of 53,000 square meters. Jin Ma Construction began construction in
 November 2009 and expects to complete the project in June 2010 with an
 estimated gross profit of approximately RMB 19.5 million (approximately $2.9
 million).In
addition to the three uncompleted projects discussed above, Jin Ma Construction
is building the Procuratorate Housing Estates (Jian Guan) on behalf of Jin Ma
Real Estate. When completed, Procuratorate Housing will comprise of five
buildings containing 600 residential apartment units sitting on 60 acres. This
project is a joint effort with Jin Ma Construction, which will be serving as
the general contractor for the construction of this project. In May 2008, improvements
to the land began and the construction commenced in July 2009, as Jin Ma Real
Estate had completed the design and planning for this project. It is
anticipated to be completed in May 2010. Procuratorate Housing is located in
the Yu Quan District of Hohhot City and the project is being developed as in
cooperation with the local government of the Yu Quan district. As of December
31, 2009, the Jin Ma Companies have incurred construction costs of $4,871,915
which is reflected on the accompanying balance sheet as construction in
process, and has received advances from customers of approximately $2,055,500
which is reflected in advances from customers on the accompanying balance
sheet. As of the date of this report, Jin Ma Real Estate does not have a definitive
agreement with the local government of the Yu Quan district for this project
and accordingly, the Company has not recognized any revenues or expenses
related to this project since the terms have not been defined. Jin Ma Real
Estate is working with the local government of the Yu Quan district to finalize
the terms of this project.

As of the date of this
report, except for the Jianhe Garden Project and Tuzuoqi (Chasuqi) Low-Rent
Housing Project discussed above, Jin Ma Construction has not entered into any
new contracts to begin additional construction projects. Although the Company
is to bidding on several projects to perform construction services, there is no
assurance that Jin Ma Construction will secure these contracts. Accordingly, we
expect revenues from the Jin Ma Construction segment to be significantly less
than in prior periods since we are have less jobs in process and revenues will
increase to its prior levels at such time as Jin Ma Construction enters into
and begins new construction projects

In
the first half of fiscal 2009, Hohhot citys real estate investment amounted to
2.184 billion RMB (approximately $319 million), a decrease of 26.51% compare to
the same period last year and consisted of the following:


 Investment in commercial
 and residential building amounted to 1.67 billion RMB (approximately $244
 million), a decrease of26.95% compared to the same period last year which
 represents 76.47% of all real estate invested;
 Investment in affordable
 housing amounted to 219 million RMB (approximately $32 million), an increase
 of 30.36 % compared to the same period last year, which represents 10.03% of
 all real estate invested;
 Other real estate
 investment amounted to 295 million RMB (approximately $43 million), a
 decrease of 43.02% compared to the same period last year, which represents
 13.50% of all real estate invested.As
further discussed below, we believe that the increased reserve requirement will
not have any impact on our results of operations. Although our revenues have
decreased and there has been a decrease in investment in real estate investment
in Hohhot, Jin Ma Construction management believes that they will be able to
obtain new profitable project in the third and fourth quarter of fiscal 2010.

Critical Accounting Policies and Estimates

Our
discussion and analysis of our financial condition and results of operations
are 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, revenues and expenses, and related disclosure of contingent assets
and liabilities. We continually evaluate our estimates, including those related
to bad debts, inventories, recovery of long-lived assets, costs and estimated
earnings in excess of billings, billings in excess of costs and estimated
earnings, income taxes, and the valuation of equity transactions. We base our
estimates on historical experience and on various other assumptions that we
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Any future
changes to these estimates and assumptions could cause a material change to our
reported amounts of revenues, expenses, assets and liabilities. Actual results
may differ from these estimates under different assumptions or conditions. We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of the financial statements.

34

Principles
of consolidation

Pursuant
to ASC Topic 810, we are required to include in our consolidated financial
statements the financial statements of variable interest entities. FIN 46R
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss for the variable interest
entity or is entitled to receive a majority of the variable interest entitys
residual returns. Variable interest entities are those entities in which we,
through contractual arrangements, bear the risk of, and enjoy the rewards
normally associated with ownership of the entity, and therefore we are the
primary beneficiary of the entity.

The
Jin Ma Companies are considered VIEs, and we are the primary beneficiary. On
June 29, 2007, we entered into agreements with the Jin Ma Companies pursuant to
which we shall receive 100% of the Jin Ma Companies net income. In accordance
with these agreements, the Jin Ma Companies shall pay consulting fees equal to
100% of its net income to our wholly-owned subsidiary, Global Rise, and Global
Rise shall supply the technology and administrative services needed to service
the Jin Ma Companies.

The
accounts of the Jin Ma Companies are consolidated in the accompanying financial
statements pursuant to ASC Topic 810. As a VIE, the Jin Ma Companies sales are
included in our total sales, its income from operations is consolidated with
our, and our net income includes all of the Jin Ma Companies net income. We do
not have any non-controlling interest and accordingly, did not subtract any net
income in calculating the net income attributable to us. Because of the
contractual arrangements, we have pecuniary interest in the Jin Ma Companies
that require consolidation of the Jin Ma Companies financial statements with
our financial statements.

The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ materially from
these estimates under different assumptions and conditions. If actual results
significantly differ from managements estimates, our results of operations and
financial condition could be materially, adversely impacted. Accordingly,
actual results could differ from those estimates. Significant estimates in 2010
and 2009 include the allowance for doubtful accounts and the useful life of
property and equipment, costs and estimated earnings in excess of billings, and
billings in excess of costs and estimated earnings.

Accounts
and other receivables

We
have a policy of reserving for uncollectible accounts based on our best
estimate of the amount of probable credit losses in our existing accounts
receivable. We periodically review our accounts receivable and other
receivables to determine whether an allowance is necessary based on an analysis
of past due accounts and other factors that may indicate that the realization
of an account may be in doubt. Account balances deemed to be uncollectible are
charged to the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote.

Prior
to the time when the Jin Ma Companies financial statements were prepared in
accordance with U.S. generally accepted accounting policies, the Jin Ma
Companies did not record reserves for uncollectable accounts. Following the
Contractual Arrangements, in accordance with U.S. generally accepted accounting
policies we initially estimated reserves based solely upon the age of the
receivable as a historical basis by which the collectability could be
reasonably estimated did not exist. As a basis for accurately estimating the
likelihood of collection has been established, the Jin Ma Companies consider a
number of factors when determining reserves for uncollectable accounts. We
believe that we use a reasonably reliable methodology to estimate the
collectability of the Jin Ma Companies accounts receivable and other
receivables. We review our allowances for doubtful accounts on at least a
quarterly basis. We also consider whether the historical economic conditions
are comparable to current economic conditions. If the financial condition of
our customers or other parties that we have business relations with were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. We should become unable to reasonably
estimate the collectability of our receivables, our results of operations could
be negatively impacted. At December 31, 2009 and June 30, 2009, the Company has
established, based on a review of its outstanding accounts receivable balances,
an allowance for doubtful accounts in the amount of $898,158 and $1,002,621,
respectively, on its total accounts receivable.

Other
receivables amounts were primarily related to advances made to various vendor,
subcontractors, and other parties in the normal course of business and the
allowance was established when those parties deemed to be unlikely to repay the
amounts. At December 31, 2009 and June 30, 2009, the Company has established,
based on a review of its outstanding other receivable balances, an allowance
for doubtful accounts in the amount of $144,134 and $143,974, respectively.

Inventories

Inventories,
consisting of construction materials and consumable goods related to our
operations are stated at the lower of cost or market utilizing the first-in,
first-out method.

35

Real
estate held for sale

We
capitalize as real estate held for sale the direct construction and development
costs, property taxes, interest incurred on costs related to land under
development and other related costs (i.e. engineering, surveying, landscaping,
etc.) until the property reaches its intended use. At December 31, 2009 and
June 30, 2009, we did not have any real estate held for sale.

Advances
from customers

Advances
from customers at December 31, 2009 and June 30, 2009 of $2,868,650 and
$246,191, respectively, consist of prepayments from third party customers to
the Company for construction and real estate transactions to ensure sufficient
funds are available to complete the real estate and construction projects. The
Company will recognize the deposits as revenue upon transfer of title to the
buyer, in compliance with its revenue recognition policy.

Construction
in process

Properties
currently under development are accounted for as construction-in-process.
Construction-in-process is recorded at acquisition cost, including land use
rights cost, development expenditure, professional fees and the interest
expenses 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 an appropriate
asset such as real estate held for sale. Construction in progress is valued at
the lower of cost or market. Management evaluates the market value of its
properties on a periodic basis for impairment. As of December 31, 2009 and June
30, 2009, construction in process amounted to $13,318,630 and $10,560,114,
respectively.

Revenue
recognition

We
follow the guidance of ASC Topic 605 and Topic 360 for revenue recognition. In
general, we record revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price
to the customer is fixed or determinable, and collectability is reasonably
assured. The following policies reflect specific criteria for the various
revenues streams of the Company:

Real
estate sales which primarily involve the sale of multi-family units and
community environments are reported in accordance with the provisions of ASC
Topic 360. Generally, profits from the sale of development properties, less 5%
business tax, are recognized by the full accrual method when the sale is
consummated. A sale is not considered consummated until (1) the parties are bound
by the terms of a contract, (2) all consideration has been exchanged, (3) any
permanent financing of which the seller is responsible has been arranged, (4)
all conditions precedent to closing have been performed, (5) the seller does
not have substantial continuing involvement with the property, and (6) the
usual risks and rewards of ownership have been transferred to the buyer.

In
November 2007, Jin Ma Real Estate entered into an agreement to construct new
dormitories for the Inner Mongolia Electrical Vocational Technical School
(Vocational School). Pursuant to the terms of the agreement, Jin Ma Real
Estate constructed the buildings and, upon completion, pursuant to a sale-type
capital lease, leased the buildings to the Vocational School and will receive
payments for a period of 26 years at an amount of 4,800,000 RMB or
approximately $700,000 per annum. In November 2008, the Company completed the
construction. In October 2009, Jin Ma Real Estate received the second payment
of 4,800,000 RMB. Under U.S. generally accepted accounting principles, for
accounting purposes, we treat the transaction as a sales type capital lease and
record the amount which will be paid to us over the next 26 years as a note
receivable. As payments are made to us under this note receivable we reduce the
principal amount of note receivable due us and we will recognize interest
income using the effective interest method.

In
accordance with ASC Topic 360, any gain from sales-type capital lease was
deferred because the minimum initial investment by the buyer was less than the
required 20% initial investment expressed as a percentage of the sales value
(ASC Topic 360). Therefore the deferred gain will be recognized into income
using the installment method as payments are received. The installment method
apportions each cash receipt and principal payment by the buyer between cost
recovered and profit. The apportionment is in the same ratio as total cost and
total profit bear to the sales value. Accordingly, revenue and cost of sales is
recognized based on this apportionment and are presented on the income
statement. Since the agreement did not have a stated interest rate, the Company
used an imputed interest rate of interest of 6.12%. Principal and the related
imputed interest are receivable annually at approximately $700,000 per year. As
of December 31, 2009, the remaining deferred gain of $50,080 is reflected as a
reduction to the note receivable in the accompanying balance sheet. The
recorded imputed interest discount will be realized as the balances due are
collected. In the event of early liquidation, interest is recognized on the
simple interest method.

Revenue
from the performance of general contracting, construction management and
design-building services is recognized upon completion of the service.

36

Revenue
primarily derived from hotel operations, including the rental of rooms and food
and beverage sales, is recognized when rooms are occupied and services have
been rendered.

In
accounting for long-term engineering and construction-type contracts, we follow
the provisions of ASC Topic 605. The Company recognizes revenues using the
percentage of completion method of accounting by relating contract costs
incurred to date to the total estimated costs at completion. Contract price and
cost estimates are reviewed periodically as work progresses and adjustments
proportionate to the percentage of completion are reflected in contract
revenues and gross profit in the reporting period when such estimates are
revised. This method of revenue recognition requires the Company to prepare
estimates of costs to complete contracts in progress. In making such estimates,
judgments are required to evaluate contingencies such as potential variances in
schedule, the cost of materials and labor, and productivity; and the impact of
change orders, liability claims, contract disputes, and achievement of
contractual performance standards which may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. The asset, costs and estimated earnings in
excess of billings, represents revenues recognized in excess of amounts
billed. The liability, billings in excess of costs and estimated earnings,
represents billings in excess of revenues recognized.

Warranty
policy

In accordance with ASC Topic
450, the Company estimates its liabilities for construction defect, product
liability and related warranty claims based on the possible claim amounts
resulting from injury or damage caused by its construction defect and expected
material and labor costs to provide warranty replacement products. The methodology
used in determining the liability is based upon historical information and
experience. Based on historical experience, there possible clams made for
construction defects and the warranty service calls and any related labor
material costs have been minimal. As such, the warranty provision amounts for
the six months ended December 31, 2009 and 2008 were immaterial.

Recent Accounting Pronouncements

We
adopted FASB ASC 815-10-65 (formerly SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities), which amends and expands previously
existing guidance on derivative instruments to require tabular disclosure of
the fair value of derivative instruments and their gains and losses., This ASC
also requires disclosure regarding the credit-risk related contingent features
in derivative agreements, counterparty credit risk, and strategies and
objectives for using derivative instruments. The adoption of this ASC did not
have a material impact on our Condensed Consolidated Financial Statements.

During
2008, we adopted FASB ASC 820-10 (formerly FSP FAS 157-2, Effective Date of
FASB Statement 157), which deferred the provisions of previously issued fair
value guidance for nonfinancial assets and liabilities to the first fiscal period
beginning after November 15, 2008. Deferred nonfinancial assets and liabilities
include items such as goodwill and other nonamortizable intangibles. Effective
January 1, 2009, we adopted the fair value guidance for nonfinancial assets and
liabilities. The adoption of FASB ASC 820-10 did not have a material impact on
our Condensed Consolidated Financial Statements.

We
adopted FASB ASC 810-10-65 (formerly SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements  an amendment of ARB No. 51), which amends
previously issued guidance to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which
is sometimes referred to as minority interest, is an ownership interest in the
consolidated entity that should be reported as equity. Among other
requirements, this Statement requires that the consolidated net income
attributable to the parent and the noncontrolling interest be clearly
identified and presented on the face of the consolidated income statement. The
adoption of the provisions in this ASC did not have a material impact on our
Condensed Consolidated Financial Statements.

Effective
July 1, 2009, we adopted FASB ASC 825-10-65 (formerly FASB Staff Position
(FSP) No. FAS 107-1 and Accounting Principles Board 28-1, Interim
Disclosures about Fair Value of Financial Instruments), which amends previous
guidance to require disclosures about fair value of financial instruments for
interim reporting periods of publicly traded companies as well as in annual
financial statements. The adoption of FASB ASC 825-10-65 did not have a
material impact on our Condensed Consolidated Financial Statements.

In
June 2009, FASB established Accounting Standards Codification (Codification)
as the single source of authoritative accounting principles recognized by the
FASB in the preparation of financial statements in conformity with the GAAP.
The Codification will supersede all then-existing non-SEC accounting and
reporting standards. All other non-grandfathered non-SEC accounting literature
not included in the Codification will become non-authoritative. The
Codification is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. Adoption of the Codification
did not have a material impact on the Companys results of operations or
financial position.

37

In
June 2009, FASB updated the accounting standards related to the consolidation
of variable interest entities (VIEs). The standard amends current
consolidation guidance and requires additional disclosures about an
enterprises involvement in VIEs. The standard shall be effective as of the
beginning of each reporting entitys first annual reporting period that begins
after November 15, 2009, for interim periods within the first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. The Company does not expect the adoption to have a
material impact on the Companys results of operations or financial position.

In
May 2009, FASB issued FAS No. 165, Subsequent Events, which was subsequently
codified within ASC 855, Subsequent Events. The standard establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. An entity should apply the requirements of ASC 855 to interim or
annual financial periods ending after June 15, 2009. Adoption of this standard
does not have a material impact on the Companys results of operations or
financial position.

In
April 2009, the FASB updated the accounting standards to provide guidance on
estimating the fair value of a financial asset or liability when the trade
volume and level of activity for the asset or liability have significantly
decreased relative to historical levels. The standard requires entities to
disclose the inputs and valuation techniques used to measure fair value and any
changes in valuation inputs or techniques. In addition, debt and equity
securities as defined by GAAP shall be disclosed by major category. This
standard is effective for interim and annual reporting periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15,
2009, and is to be applied prospectively. The adoption did not have a material
effect on the Company's results of operations and financial condition.

In
April 2009, the FASB updated the accounting standards for the recognition and
presentation of other-than-temporary impairments. The standard amends existing
guidance on other-than-temporary impairments for debt securities and requires
that the credit portion of other-than-temporary impairments be recorded in
earnings and the noncredit portion of losses be recorded in other comprehensive
income. The standard requires separate presentation of both the credit and
noncredit portions of other-than-temporary impairments on the financial
statements and additional disclosures. This standard is effective for interim
and annual reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. At the date of adoption, the
portion of previously recognized other-than-temporary impairments that
represent the noncredit related loss component shall be recognized as a
cumulative effect of adoption with an adjustment to the opening balance of
retained earnings with a corresponding adjustment to accumulated other
comprehensive income (loss). The adaption of this standard did not have a
material effect on the preparation of the Companys consolidated financial
statements.

In
August 2009, the FASB updated the accounting standards to provide additional
guidance on estimating the fair value of a liability in a hypothetical
transaction where the liability is transferred to a market participant. The
standard is effective for the first reporting period, including interim
periods, beginning after issuance. The Company does not expect the adoption to
have a material effect on its consolidated results of operations and financial
condition.

In October 2009, the FASB
concurrently issued the following ASC Updates:

        ASU No. 2009-14 - Software (Topic 985): Certain Revenue Arrangements
That Include Software Elements(formerly EITF Issue No. 09-3).This standard removes tangible products
from the scope of software revenue recognition guidance and also provides
guidance on determining whether software deliverables in an arrangement that
includes a tangible product, such as embedded software, are within the scope of
the software revenue guidance.

        ASU No. 2009-13 - Revenue Recognition (Topic 605): Multiple-Deliverable
Revenue Arrangements(formerly EITF Issue No. 08-1). This standard
modifies the revenue recognition guidance for arrangements that involve the
delivery of multiple elements, such as product, software, services or support,
to a customer at different times as part of a single revenue generating
transaction. This standard provides principles and application guidance to
determine whether multiple deliverables exist, how the individual deliverables
should be separated and how to allocate the revenue in the arrangement among
those separate deliverables. The standard also expands the disclosure
requirements for multiple deliverable revenue arrangements. These Accounting
Standards Updates should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on
or after June 15, 2010, with earlier application permitted. Alternatively, an
entity can elect to adopt these standards on a retrospective basis, but both
these standards must be adopted in the same period using the same transition
method. The Company expects to apply this standard on a prospective basis for
revenue arrangements entered into or materially modified beginning January 1,
2011. The Company is currently evaluating the potential impact these standards
may have on its financial position and results of operations.

38

RESULTS OF OPERATIONS

Comparison of Six Months Ended December 31, 2009 and Six
Months Ended December 31, 2008.For the Six
 Months Ended December 31,2009
 
 % of Total 
 Revenues
 
 2008
 
 % of Total 
 RevenuesNET REVENUESConstruction
 
 $
 9,596,012
 
 
 85.2
 
 $
 40,273,271
 
 
 95.1Hotel
 
 
 1,512,829
 
 
 13.4
 
 
 1,687,464
 
 
 4.0Real estate
 
 
 158,981
 
 
 1.4
 
 
 382,190
 
 
 0.9Total
Revenues
 
 
 11,267,822
 
 
 100.0
 
 
 42,342,925
 
 
 100.0COST OF SALESConstruction
 
 
 8,329,680
 
 
 86.8
 *
 
 34,590,647
 
 
 85.9
 *Hotel
 
 
 1,008,859
 
 
 66.7
 *
 
 921,535
 
 
 54.6
 *Real estate
 
 
 167,050
 
 
 105.1
 *
 
 300,303
 
 
 78.6
 *Total Cost of
 Sales
 
 
 9,505,589
 
 
 84.4
 
 
 35,812,485
 
 
 84.6GROSS PROFITConstruction
 
 
 1,266,332
 
 
 13.2
 *
 
 5,682,624
 
 
 14.1
 *Hotel
 
 
 503,970
 
 
 33.3
 *
 
 765,929
 
 
 45.4
 *Real estate
 
 
 (8,069
 )
 
 (5.1
 )*
 
 81,887
 
 
 21.4
 *Total Gross
 Profit
 
 $
 1,762,233
 
 
 15.6
 
 $
 6,530,440
 
 
 15.4* Represents
percentage of respective segments total revenues

Net
Revenues. For the
six months ended December 31, 2009, our overall net revenues decreased 73.4%
from the six months ended December 31, 2008. The decrease in revenues was
mainly due to decreased activity in our construction operations caused by a
softening of the real estate market in Hohhot, as discussed elsewhere.
Additionally, during fiscal 2009 and 2010, we used substantial working capital
to construct two projects which have been leased back to schools over 20-26
years. Since we had lower working capital to fund new projects and bank
borrowing opportunities were not available, our pipeline of projects decreased
Revenues by project are summarized as follows:

Project Name
 
 For the Six Months 
 Ended 
 December 31, 2009
 
 %
 (*)
 
 For the Six Months 
 Ended 
 December 31, 2008
 
 %
 (*)Riverbank Garden Community (Buildings 5 to 8 and
Phase II)
 
 $
 
 
 
 
 
 $
 10,661,001
 
 
 26.5Tian Fu Garden residential project (Phase I and
II)
 
 
 
 
 
 
 
 
 16,722,885
 
 
 41.5Ai Bo Garden residential apartment project (Phase I
and II)
 
 
 (117,435
 )
 
 (1.1
 )
 
 8,282,437
 
 
 20.6Lanyu Garden project
 
 
 3,439,335
 
 
 35.8
 
 
 922,633
 
 
 2.3Fu Xing Committee Bath Center project
 
 
 3,054,560
 
 
 31.8
 
 
 3,684,315
 
 
 9.1Jianhe Garden residential project
 
 
 2,333,235
 
 
 24.3
 
 
 
 
 
 Tuzuoqi (Chasuqi) Low-rent House project
 
 
 886,317
 
 
 9.2
 
 
 
 
 
 Total construction segment revenues
 
 $
 9,596,012
 
 
 100.0
 
 $
 40,273,271
 
 
 100.0*
    Represents percentage of
      construction segment revenues.At December 31, 2009, the
percentage completed for each respective job is as follows:

%
 CompleteAi Bo Garden residential apartment project (Phase I
and Phase II)
 
 
 100.0
 %Lanyu Garden Number 3 residential building
 
 
 100.0
 %Fu Xing Committee Bath Center
 
 
 88.7
 %Jianhe Garden residential project
 
 
 7.8
 %Tuzuoqi (Chasuqi) Low-rent House project
 
 
 6.2
 %39

As
discussed elsewhere in this filing, at December 31, 2009, Jin Ma Construction
had three construction projects in process; 1) the Fu Xing Bath Center Project
which is approximately 89% complete; 2) the Jianhe Garden Project which is
approximately 8% complete; and 3) the Tuzuoqi (Chasuqi) Low-Rent Housing
Project which is approximately 6% complete. The Jianhe Garden Project and the
Tuzuoqi (Chasuqi) Low-Rent Housing project
are new construction projects valued at approximately RMB 301.8 million (approximately
$44.2 million) with an expected gross profit of RMB 60.3 million ($8.8
million).

In
addition to the three uncompleted projects discussed above, Jin Ma Construction
is building the Procuratorate Housing
Estates (Jian Guan) on behalf of Jin Ma Real Estate. When completed,
Procuratorate Housing will comprise of five buildings containing 600
residential apartment units sitting on 60acres. This project is a joint effort with Jin Ma Construction, which
will be serving as the general contractor for the construction of this project.
In May 2008, improvements to the land began and the construction was commenced
in July 2009, as Jin Ma Real Estate have completed the design and planning for
this project, and its anticipated completion date is May 2010. Procuratorate
Housing is located in the Yu Quan District of Hohhot City and the project is
being developed in cooperation with the local government of the Yu Quan
district. As of December 31, 2009, the Jin Ma Companies has incurred
construction costs of $4,871,915 which is reflected on the accompanying balance
sheet as construction in process, and has received advances from customers of
approximately $2,055,500 which is reflected in advances from customers on the
accompanying balance sheet. As of the date of this report, Jin Ma Real Estate
does not have a definitive agreement with the local government of the Yu Quan
district for this project and accordingly, the Company has not recognized any
revenues or expenses related to this project since the terms have not been
defined. Jin Ma Real Estate is working with the local government of the Yu Quan
district to finalize the terms of this project.

Revenues
for our hotel operations decreased approximately 10.3% for the six months ended
December 31, 2009 from the six months ended December 31, 2008 primarily due to decreased
sales at the hotels banquet and catering facility. While China economy has been
warming up since the first quarter of fiscal 2010, we have seen a decrease in
visitors to our banquet facility. We attribute this decrease to an increase in
competition as more restaurants open in the area. We are refocusing our
marketing efforts to increase traffic to the hotel to target new tour groups
and local traffic to the banquet facilities.

Revenues for
our real estate development operation decreased approximately 58.4% for the six
months ended December 31, 2009 to the six months ended December 31, 2008.
During the six months ended December 31, 2008, the Company sold off its
remaining inventory of apartment units available for sale and recognized
revenues of $232,695 compared to $0 for the six months ended December 31, 2009.
For the six months ended December 31, 2009 and 2008, revenues attributable to
the Inner Mongolia Electrical Vocational Technical College amounted to
$158,981 and $149,495, respectively. Pursuant to the terms of the agreement,
Jin Ma Real Estate constructed the buildings and, pursuant to a sales-type
capital lease, leased the buildings to the Inner Mongolia Electrical Vocational
Technical College and it will receive payments for a period of 26 years at an
amount of 4,800,000 RMB or approximately $700,000 per annum.

Additionally,
in September 2009, Jin Ma Real Estate entered into an agreement to construct new
dormitories for the Inner Mongolia Chemistry College. Pursuant to the terms of
the agreement, Jin Ma Real Estate constructs the buildings and, upon
completion, pursuant to a sales-type lease, leases the buildings to the Inner
Mongolia Chemistry College and it will receive payments for a period of 20
years. The cost of construction is estimated to be RMB 50 million
(approximately $7.3 million). Jin Ma Real Estate will receive an annual payment
of approximately RMB 10 million (approximately $1.5 million) for 5 years (from
January 1, 2010 to December 31, 2014) and receive an annual payment of
approximately RMB 7.5 million (approximately $1.1 million) for 15 years (from
January 1, 2015 to December 31, 2029). Jin Ma Construction completed all of the
construction services on behalf of Jin Ma Real Estate for this project. As of
January 20, 2010, Jin Ma Real Estate had received the first installment lease
payment from Inner Mongolia Chemistry College of approximately $1,500,000. The
costs associated with these projects are reflected on our balance sheet as
construction in process and we will recognize revenues and interest income on
this project in the 3rd quarter of fiscal 2010, in accordance with
FAS No. 66, Accounting for Sales of Real
Estate and related interpretations. In accordance with terms of the
agreements, at the end of the lease terms, ownership of the buildings will be
transferred to Inner Mongolia Chemistry College. During the term of lease, Jin
Ma Real Estate will not have additional commitments to the Inner Mongolia
Chemistry College, other than the customary construction warranties.

40

In
2008, in accordance with the overall arrangements of the Party Central
Committee and the State Council of China to tightening monetary policy, the Peoples
Bank of China (PBC) raised the reserve requirements for RMB deposits of
depository institutions and increased loan interest rates several times. The
higher reserve requirements and loan interest rates make it more difficult for
builders to obtain construction loans in China. This economic event has
impacted both the Company and its customers. Although Jin Ma Constructions
operations were not impacted in 2008, as a result of the tightened monetary
policy in China, construction progress seems to have been delayed on current
projects and new projects might be deferred as its customers might have
problems receiving funding. Accordingly, Jin Ma Constructions current and
future revenues have and may continue to decline, although it is not able to
quantify any anticipated amount of decline. In addition, as a portion of its
operating expenses are fixed, if Jin Ma Constructions revenues continue to
decrease, it does not expect to have significant decreases in its operating
costs which will adversely impact the profits of in Jin Ma Construction in
future periods. In September 2008, in an effort to solve prominent problems in
China economy, the PBC decided to cut the benchmark lending rate by 0.27
percentage points and lowered the RMB reserve requirement ratio by one
percentage point for most depository financial institutions. The rate cut in
September 2008 was not significant enough to materially impact Jin Ma
Constructions operations as the rate cut has not increased the number of the
local banks and credit unions giving loans. We cannot predict if the PBC will
continue to lower the rates and reserve requirements which in turn will improve
the overall performance for the construction industry as it will be easier for
construction companies to obtain capital funding. If Jin Ma Construction cannot
obtain necessary bank loans, it will need to delay some of its future projects.
Jin Ma Constructions customers mainly consist of governmental agencies and
third party developers. It does not believe that governmental agencies have
been impacted by the tightening credit markets and will continue investing in
development projects. Jin Ma Construction is currently bidding on several
projects with governmental agencies and third-party developers. Although it is
confident that it will secure several new construction projects in the near
future, it cannot predict with certainty the outcome of securing these
projects.

Cost of Sales. Overall, cost of sales decreased from
approximately 84.6% of net revenues for the six months ended December 31, 2008,
to approximately 84.4% of net revenues for the six months ended December 31,
2009. Cost of sales as a percentage of net revenues from our construction
operation for the six months ended December 31, 2009 increased to approximately
86.8% from approximately 85.9 % for six months ended December 31, 2008,
a slight decrease due to normal operation activities. While material and labor
costs worldwide are on the rise, Jin Ma Construction anticipates minimal direct
impact on its business because of its ability to factor in rising material
costs into its budgets when selecting subcontractors. Cost of sales as a percentage of
net revenues for our hotel operation for the six months ended December 31, 2009
increased to approximately 66.7% from approximately 54.6% for the six months
ended December 31, 2008. The increase in cost of sales as a percentage of net
revenues from our hotel operation for the six months ended December 31, 2009
period was primarily attributable to the increase in food costs.
Beginning in fiscal 2010, Jin Ma Hotel increased the quantity of each dish
without a proportionate increase in the sales price in order to give an
incentive to its customers and prevent significant decreases in its sales
revenues. We expect the cost of sales as a percentage of net revenues for our
hotel operation will remain in its current level in the rest of fiscal 2010.
Cost of sales for our real estate development operation as a percentage of net
revenues for the six months ended December 31, 2009 increased to approximately
105.1% from approximately 78.6% for the six months ended December 31, 2008 due
to the recording of a slight gross margin of approximately 0.6% we recognized
on our Vocational School project which was offset by various sale taxes
incurred during the period for approximately $9,000.

Gross Profit. Gross profit decreased approximately 73.0% from
$6,530,440 (15.4% of overall net revenues) for the six months ended December
31, 2008 to $1,762,233 (15.6% of overall net revenues) for the six months ended
December 31, 2009.

Operating Expenses. For the six months ended December 31, 2009,
overall operating expenses decreased approximately 33.7% from the six months
ended December 31, 2008. This decrease was mainly due to a one-time gain from
the sale of land use rights as discussed below which was offset by a
decrease in a gain from bad debt recovery related to the collection of accounts
receivable which had previously been written off and an increase in hotel
operating expenses consisting of related to the purchase of low costs items
such as plates, glasses, and utensils, and an increase in salaries and employee
benefits. We expect our operation expenses will maintain its current level with
minimal increases during the rest of fiscal 2010.

Hotel Operating Expenses. Hotel operating expense, represent costs and
expenses associated with operating Jin Ma Hotels restaurant and banquet
facilities and hotel operating expenses except for food and beverage costs which
have been included in cost of revenues. Hotel operating expenses increased
approximately 220.1% for the six months ended December 31, 2009 from the six
months ended December 31, 2008. Hotel operating expenses were approximately
6.8% of hotel revenues for the six months ended December 31, 2009 as compared
to approximately 1.9% for the six months ended December 31, 2008. The increase
in hotel operating expenses for the six months ended December 31, 2009 period
is primarily attributable to an increase in expenditures related to the
purchase of low cost items such as plates, glasses, utensils, napkins, and seat
covers.

41

Bad Debt Recovery (Expense). For the six months ended December 31, 2009, bad
debt recovery income amounted to $105,555 as compared to bad debt recovery
income of $193,901 for the six months ended December 31, 2008, a decrease of
approximately 45.6%. We have a policy of reserving for uncollectible accounts
based on our best estimate of the amount of probable credit losses in our existing
accounts and other receivables. We periodically review our accounts receivable
and other receivables to determine whether an allowance is necessary based on
an analysis of past due accounts and other factors that may indicate that the
realization of an account may be in doubt. Account balances deemed to be
uncollectible are charged to the allowance after all means of collection have
been exhausted and the potential for recovery is considered remote. Bad
debt recovery represents the collection of amounts which had previously been
written off.

Salaries and Employee Benefits. For the six months ended December 31, 2009,
salaries and employee benefits amounted to $392,435 as compared to $301,848 for
the six months ended December 31, 2008, an increase of approximately 30.0% and
primarily related to an increase in salary for our chief executive
officer. For the six months ended December 31, 2009 and 2008, we paid or
accrued salary to our chief executive office of $90,000 and $0, respectively.

Depreciation and Amortization. For the six months ended December 31, 2009,
depreciation and amortization decreased approximately 12.1% as compared to the
same period of 2008. This decrease was primarily due to the disposal of
construction equipment in fiscal 2009, which primarily included cranes and
other heavy equipment.

Gain on disposal of land use right.
For the six months ended December 31, 2009, gain on disposal of land use rights
and certain property and equipment was $449,473 as described in greater detail
in Note 4 to the financial statements included elsewhere in this report. We did
not generate any comparable income for the six months ended December 31, 2008.

Selling, General and Administrative Expenses. Selling, general and administrative expenses
consist of office expenses and supplies, utilities, insurance, telephone and
communications, maintenance and automobile expense incurred by the Jin Ma
Companies as well as expenses incurred by us which primarily consist of professional
and other fees. Selling, general and administrative expenses decreased by
$41,916 or approximately 14.2% for the six months ended December 31, 2009
compared to the six months ended December 31, 2008. The decrease was primarily
attributable to a decrease in professional fees paid for investor
relations service.

Total Other Expenses. Total other expenses increased approximately
127.0% from $781,530 for the six months ended December 31, 2008 to
$1,773,881for the six months ended December 31, 2009. The increase is
primarily attributable to an increase in interest expense related to the
amortization of non-cash debt discount and increased interest incurred on our
amended and restated 14% convertible secured debenture offset by a decrease in
amortization of debt issuance costs. In connection with the amendment of the
Securities Purchase Agreements and related agreements, we recorded a discount
on the convertible notes which we must amortize over a 9-month period from July
1, 2009 to March 31, 2010. Upon repayment or conversion of the convertible
notes, we expense any remaining unamortized discount.

Provision for Income Taxes. Total provision for income taxes decreased
approximately 79.0% for the six months ended December 31, 2009 from the six
months ended December 31, 2008. The decrease is attributable to a decrease in
income before income taxes related to our Chinese operating entities.

Net Income. Net income decreased approximately 126.8% from net
income of $3,375,195 the six months ended December 31, 2008 to a net loss of
$(904,876) for the six months ended December 31, 2009. The decrease for the six
months ended December 31, 2009 as compared to the six months ended December 31,
2008 was due primarily to a decrease in revenue and related gross
profits and the increase in interest expense offset by a decrease in operating
expenses and income taxes. This translates to basic earnings per common share
of $(0.02) and $0.06, and diluted earnings per common share of $(0.02) and
$0.06, for the six months ended December 31, 2009 and 2008, respectively.

Comprehensive Income. For the six months ended December 31, 2009, we
reported unrealized gain on foreign currency translation of $33,860 as compared
to $63,724 for the six months ended December 31, 2008 which reflects the effect
of the declining value of the U.S. dollar. These gains are non-cash items. As
described elsewhere herein, our functional currency is the Chinese Renminbi;
however the accompanying condensed consolidated financial statements have been
translated and presented in U.S. dollars using period-end rates of exchange for
assets and liabilities, and average rates of exchange for the period for
revenues, costs, and expenses. Net gains and losses resulting from foreign
exchange transactions, if any, are included in the consolidated statements of
operations and do not have a significant effect on our consolidated financial
statements. As a result of this non-cash foreign currency translation gain, we
reported comprehensive loss of $871,016 for the six months ended December 31,
2009 as compared to comprehensive income of $3,438,919 for the six months ended
December 31, 2008.

42

Comparison of three months Ended December 31, 2009 and 2008

For the Three Months
 Ended December 31,2009
 
 % of Total
 Revenues
 
 2008
 
 % of Total 
 RevenuesNET REVENUESConstruction
 
 $
 4,405,892
 
 
 83.1
 
 $
 11,894,829
 
 
 92.2Hotel
 
 
 734,809
 
 
 13.9
 
 
 858,378
 
 
 6.7Real estate
 
 
 158,981
 
 
 3.0
 
 
 149,490
 
 
 1.1Total Revenues
 
 
 5,299,682
 
 
 100.0
 
 
 12,902,697
 
 
 100.0COST OF SALESConstruction
 
 
 3,878,214
 
 
 88.0
 *
 
 10,207,643
 
 
 85.8
 *Hotel
 
 
 494,312
 
 
 67.3
 *
 
 475,448
 
 
 55.4
 *Real estate
 
 
 167,050
 
 
 105.1
 *
 
 157,087
 
 
 105.1
 *Total Cost of Sales
 
 
 4,539,576
 
 
 85.7
 
 
 10,840,178
 
 
 84.0GROSS PROFITConstruction
 
 
 527,678
 
 
 12.0
 *
 
 1,687,186
 
 
 14.2
 *Hotel
 
 
 240,497
 
 
 32.7
 *
 
 382,930
 
 
 44.6
 *Real estate
 
 
 (8,069
 )
 
 (5.1
 )*
 
 (7,597
 )
 
 (5.1
 )*Total Gross Profit
 
 $
 760,106
 
 
 14.3
 
 $
 2,062,519
 
 
 16.0*
Represents percentage of
respective segments total revenues

Net Revenues. For the
three months ended December 31, 2009, our overall net revenues decreased 58.9%
from the three months ended December 31, 2008. As with the decrease in revenues
in the six months period, the decrease in revenues was mainly due
to decreased activity in construction operations as discussed above which
are summarized as follows:

Project Name
 
 
 For the Three
 Months Ended
 December 31, 2009
 
 
 %
 
 
 For the Three
 Months Ended
 December 31, 2008
 
 
 %Riverbank Garden
 Community (Buildings 5 to 8 and Phase II)
 
 $
 
 
 
 
 
 $
 2,754,383
 
 
 23.2Tian Fu Garden
 residential project (Phase I and II)
 
 
 
 
 
 
 
 
 2,438,980
 
 
 20.5Fu Xing Bath
 Center
 
 
 917,870
 
 
 20.8
 
 
 3,684,315
 
 
 31.0Lanyu Garden
 Number 3 residential building
 
 
 385,905
 
 
 8.8
 
 
 922,633
 
 
 7.7Ai Bo Garden
 residential apartment project
 
 
 (117,435
 )
 
 (2.7
 )
 
 2,094,518
 
 
 17.6Jianhe Garden
 residential project
 
 
 2,333,235
 
 
 53.0
 
 
 
 
 
 Tuzuoqi Low-rent
 House project
 
 
 886,317
 
 
 20.1
 
 
 
 
 
 Total construction segment revenues
 
 $
 4,405,892
 
 
 100
 %
 $
 11,894,829
 
 
 100
 %*
Represents percentage of construction segment revenues.

43

Cost of Sales. Overall,
cost of sales decreased $6,300,602 from $10,840,178 for the three months ended
December 31, 2008 to $4,539,576 for the three months ended December 31, 2009.
Our overall cost of sales as a percentage of our overall net revenues increased
from approximately 84.0% of net revenues for the three months ended December
31, 2008, to approximately 85.7% of net revenues for the three months ended
December 31, 2009. Cost of sales as a percentage of net revenues for Jin Ma
Construction for the three months ended December 31, 2009 increased to
approximately 88.0% from approximately 85.8% for the three months ended
December 31, 2008. The slight increase was primarily due to the rising in
construction material and labor costs. Cost of sales as a percentage of net
revenues for Jin Ma Hotels operations for the three months ended December 31,
2009 increased to approximately 67.3% from approximately 55.4% for the three
months ended December 31, 2008. As described earlier in this section, this
increase in cost of sales was primarily attributable to the increase in
food costs. Cost of sales for our real estate development operation as a percentage
of net revenues for the three months ended December 31, 2009 is approximately
105.1% which equals the ratio of cost of sales for our real estate development
operation as a percentage of net revenues for the three months ended December
31, 2008.

Gross Profit. Gross
profit decreased approximately 63.1% to $760,106 (14.3% of overall net
revenues) for the three months ended December 31, 2009 from $2,062,519 (16.0%
of overall net revenues) for the three months ended December 31, 2008.

Operating Expenses. For the three months ended December 31,
2009, overall operating expenses increased approximately 4.2% from the three
months ended December 31, 2008. This increase was mainly due to an increase in
hotel operating expenses as discussed below which was offset by an increase in
a gain from bad debt recovery related to the collection of accounts receivable
which had previously been written off.

Hotel Operating Expenses.
Hotel operating expenses represent costs and expenses associated with operating
Jin Ma Hotels restaurant and banquet facilities and hotel operating expenses,
except for food and beverage costs which have been included in cost of
revenues. Hotel operating expenses increased approximately 359.7% for the three
months ended December 31, 2009 from the three months ended December 31, 2008.
Hotel operating expenses were approximately 10.4% of hotel revenues for the
three months ended December 31, 2009 as compared to approximately 1.9% for the
three months ended December 31, 2008. The increase in hotel operating
expenses for the six months ended December 31, 2009 period is primarily
attributable to an increase in expenditures related to the purchase of
low cost items such as plates, glasses, utensils, napkins, and seat covers.

Bad Debt Recovery (Expense).
For the three months ended December 31, 2009, bad debt recovery income amounted
to $97,564 as compared to bad debt recovery income of $11,285 for the three
months ended December 31, 2008, an increase of approximately 764.5%. We have a
policy of reserving for uncollectible accounts based on our best estimate of
the amount of probable credit losses in our existing accounts and other
receivables. We periodically review our accounts receivable, other receivable
and prepayments to determine whether an allowance is necessary based on an
analysis of past due accounts and other factors that may indicate that the
realization of an account may be in doubt. Account balances deemed to be
uncollectible are charged to the allowance after all means of collection have
been exhausted and the potential for recovery is considered remote. Bad debt
recovery represents the collection of amounts which had previously been written
off.

Salaries and Employee Benefits. For the three months ended December 31,
2009, salaries and employee benefits amounted to $198,349 as compared to
$150,307 for the three months ended December 31, 2008, an increase of
approximately 32.0% and primarily related to an increase in salary for our
chief executive officer. For the three months ended December 31, 2009 and 2008,
we paid or accrued salary to our chief executive office of $45,000 and $0,
respectively.

Depreciation and Amortization. For the three months ended December 31,
2009, depreciation and amortization decreased approximately 8.6% for the three
months ended December 31, 2009 as compared to the same period 2008. This
decrease was primarily due to the disposal of construction equipment in fiscal
2009, which primarily included cranes and other heavy equipment.

Gain on disposal of land use right. For the three months ended December 31,
2009, gain on disposal of land use rights and certain property and equipment
was $167 which is attributable to the exchange rate fluctuation.

Selling, General and Administrative Expenses. Selling, general and administrative
expenses consist of office expenses and supplies, utilities, insurance,
telephone and communications, maintenance and automobile expense incurred by
the Jin Ma Companies as well as expenses incurred by us which primarily consist
of professional and other fees. Selling, general and administrative expenses
increased by $15,460 or approximately 17.7% for the three months ended December
31, 2009 compared to the three months ended December 31, 2008. The slight
increase was primarily attributable to our hotel segment and consisted of
increased expenditure for maintenance.

44

Total Other Expenses. Total other expenses increased
approximately 71.2% for the three months ended December 31, 2009 from the three
months ended December 31, 2008. The increase is primarily attributable to an
increase in interest expense related to the amortization of non-cash debt
discount and increased interest incurred on our amended and restated 14% convertible
secured debenture offset by a slight decrease in amortization of debt issuance
costs. In connection with the amendment of the Securities Purchase Agreements
and related agreements, we recorded a discount on the convertible notes which
we must amortize over a 9-month period from July 1, 2009 to March 31, 2010.
Upon repayment or conversion of the convertible notes, we expense any remaining
unamortized discount.

Provision for Income Taxes. Total provision for income taxes
decreased approximately 84.1% for the three months ended December 31, 2009 from
the three months ended December 31, 2008 (33.5% of income before income taxes).
The decrease is attributable to a decrease in income before income taxes from
our Chinese operations.

Net Income. Net income decreased approximately 99.3%
from net income of $991,421 for the three months ended December 31, 2008 to net
income of $6,497 for the three months ended December 31, 2009. The decrease for
the three months ended December 31, 2009 as compared to the three months ended
December 31, 2008 was due primarily to a decrease in revenue and related gross
profits and the increase in interest expense offset by a decrease in income
taxes. This translates to basic earnings per common share of $0.00 and $0.02,
and diluted earnings per common share of $0.00 and $0.02, for the three months
ended December 31, 2009 and 2008, respectively.

Comprehensive Income. For
the three months ended December 31, 2009 we reported unrealized gain on foreign
currency translation of $1,715 as compared to $9,130 for the three months ended
December 31, 2008 which reflects the effect of the declining value of the U.S.
dollar. These gains are non-cash items. As described elsewhere herein, our
functional currency is the Chinese Renminbi; however the accompanying condensed
consolidated financial statements have been translated and presented in U.S.
dollars using period-end rates of exchange for assets and liabilities, and
average rates of exchange for the period for revenues, costs, and expenses. Net
gains and losses resulting from foreign exchange transactions, if any, are
included in the consolidated statements of income and do not have a significant
effect on our financial statements. As a result of this non-cash foreign
currency translation gain, we reported comprehensive income of $8,212 for the
three months ended December 31, 2009 as compared to comprehensive income of
$1,000,551 for the three months ended December 31, 2008.

Liquidity
and Capital Resources

Liquidity
is the ability of a company to generate adequate amounts of cash to meet its
needs for cash.

At
December 31, 2009, we had a cash balance of $441,055, substantially all of
which is located in financial institutions in China under the control of the
Jin Ma Companies.

Our
working capital decreased $ 451,382 to $4,966,024 at December 31, 2009 from $
5,417,406 at June 30, 2009. This decrease in working capital is primarily
attributable to:


 a decrease in other receivable, net of allowance for
 doubtful accounts, of $1,175,175,
 a decrease in due from related parties of $33,283,
 a decrease in prepaid land use rights for resale of
 $1,623,023,
 an increase in convertible debt of $502,777,
 an increase in due to related parties of $1,170,701,
 an increase in advances from customers of
 $2,622,459,Offset by:
 an increase in cash and cash equivalents of
 $328,921,
 an increase in accounts receivable, net of allowance
 for doubtful accounts. of $528,073,
 an increase in inventories of $49,810,
 an increase in advance to suppliers of $74,290,
 an increase in construction in progress, current
 portion, $1,585,193,
 a decrease in loans payable, current portion, of
 $104,780,
 a decrease in accounts payable of $2,259,863,
 a decrease in accrued expenses of $311,147,
 a decrease in taxes payable of $1,451,029.45

Our
balance sheet at December 31, 2009, reflects notes payable to third parties of
$4,659,218 due through September 2012 which were working capital loans made to
us by these third parties. These loans bear annual interest rates ranging from
9.45% to 24% and are due between December 2009 (The amount due by December 2009
was paid off in January 2010.) and September 2012. Of this amount,
approximately $2,900,000 is secured by the assets of the Jin Ma Hotel and the
remaining balances are unsecured. As discussed elsewhere in this report, at December
31, 2009, we have 14% convertible debt approximately $754,000 due on March 31,
2010. Additionally, we owe accrued interest of $29,625 on this debt and owe
liquidated penalties of $168,333. The Jin Ma Companies plan on funding this installment payment
through working capital and additional advances from related parties. Jin
Ma Construction is expecting to sell additional land use rights with a cost of
approximately $2,415,000 for a profit in the near future. The Jin Ma Companies
are actively pursuing collection on its accounts receivable balances. We
estimate that the Jin Ma Companies will have sufficient cash flow from
operation to satisfy its working capital needs and to funds us in order for us
to satisfy the debt repayment schedule for the next 12 months. However, any
delay in the sale of our land use rights held for sale or the collection of our
receivables would have an adverse effect on our ability to repay our debt
obligation and fund our working capital requirements. If we do not repay the debenture
holders, it is likely that the debenture holders will institute legal
proceedings against us to collect the amounts due under the debentures and to
foreclose on the pledged collateral. Unless the Jin Ma Companies pay us the
amounts due us we do not have the funds necessary to satisfy our obligations to
the debenture holders. If the debenture holders successfully foreclose on the
pledged collateral that would result in a change of control of our company as
those securities represent approximately 31% of our outstanding common stock.
There occurrence of any of these events would be materially adverse to our
ability to continue our business as it is presently conducted.

At
December 31, 2009, we have advances to suppliers of approximately $275,000 as
compared to approximately $201,000 at June 30, 2009, an increase of
approximately $74,000. The increase was primarily attributed to the prepayments
we made to our suppliers for the Procuratorate residential project.

At
December 31, 2009, we have advances from customers of approximately $2,869,000
as compared to approximately $246,000 at June 30, 2009, an increase of
approximately $ 2,623,000. The increase was primarily attributed to deposits
received from the Procuratorate Housing government committee and various
employees of the government as a deposit towards future purchases of the
building and specific units of the Procuratorate housing project of
approximately $1,909,000 as well as an advance of the partial first annual
lease payment of approximately $714,000 from the Inner Mongolia Chemistry
College.

Operating
Activities

Net
cash flow used in operating activities was $2,125,742 for the six months ended
December 31, 2009 as compared to net cash used in operating activities of $5,194,897
for the six months ended December 31, 2008, a decrease of $3,069,155. For the
six months ended December 31, 2009, net cash flow used in operating activities
was primarily due to net loss of $904,876, bad debt recovery of $105,555, a
one-time gain on disposal of land use right of $449,472, an increase in
accounts receivable of $409,136, an increase in advance to suppliers of
$74,053, an increase in construction in progress of $2,746,228, a decrease in
account payable and accrued expenses of $2,310,257, a decrease in taxes payable
of $1,452,604 offset by a decrease in note receivable of $158,067, a decrease
in other receivable of $1,176,271, an increase in advances from customers of
$2,621,660 and the add back of non-cash items such as depreciation of $385,121,
stock based compensation of $57,500, and interest expense from amortization of
debt discount of $1,931,611.

Net
cash flow used in operating activities was $5,194,897 for the six months ended
December 31, 2008. This was primarily attributed to an increase in accounts
receivable of $3,847,036, an increase in construction in progress of
$9,486,120, a decrease in taxes payable of $1,382,271, and an adjustment for
bad debt recovery of $193,901, offset by the add-back of net income of $3,375,195,
non-cash items such as depreciation of $438,257 and interest expense from
amortization of debt discount of $818,625, a decrease in note receivable of
$200,378, a decrease in costs and estimated earnings in excess of billings of
$217,038, a decrease in real estate held for sale of $125,412, a decrease in
refundable performance deposit of $145,920 and in increase in accounts payable
and accrued expenses of $4,283,475.

Investing
Activities

Net
cash flow provided by investing activities was $2,161,621 for the six months
ended December 31, 2009 as compared to net cash provided by investing
activities of $3,672,505 for the six months ended December 31, 2008. For the
six months ended December 31, 2009, cash provided by investing activities
consisted of proceeds from sale of land use right of $2,193,441 offset by
$31,820 cash used for purchase of property and equipment. For the six months
ended December 31, 2008, net cash provided by investing activities consisted of
cash provided by repayment of amounts due from related party of $1,661,601 and
proceeds from return of deposit on prepaid land use rights of $2,028,288 offset
by $ 17,384 cash used for purchase of property and equipment.

46

Financing
Activities

Net
cash flow provided by financing activities was $293,501 for the six months
ended December 31, 2009 which was attributable to proceeds from advances from
related party of $1,203,780 offset by repayment of loan payable of $146,229 and
repayment of convertible debt of $764,050. Net cash flow provided by
financing activities was $124,000 for the six months ended December 31, 2008
which was attributable to proceeds from sale of common stock.

Other
than our existing cash, we presently have no other alternative source of
working capital. We have no operations other than the Contractual Arrangements
with the Jin Ma Companies and, accordingly, we are dependent upon the quarterly
service fees due us to or for the receipt of working capital from the Jin Ma
Companies to provide cash to pay our operating expenses. To date, no quarterly
service fees have been tendered to us and those funds are being retained by the
Jin Ma Companies to fund their operations. At December 31, 2009 we were owed
approximately $15.6 million in service fees, which such amount remains
outstanding as of the date of this report. In addition, we transferred
$1,800,000 of the net proceeds from the November 2007 sale of the 10% secured
convertible debentures to the Jin Ma Companies in the form of an unsecured,
interest free advance for use by the Jin Ma Companies in their operations and
to fund their registered capital requirements under PRC wholly-owned foreign
enterprise rules. Jin Ma Companies repaid us approximately $921,000 of the
amounts advanced to that company from July 2009 to December 2009. The rest of
that amount remains outstanding and we do not have an understanding with the
Jin Ma Companies regarding the repayment of the remainder.

In
May 2009 we restructured the payment terms of our 10% secured convertible
debentures through the issuance of 14% secured convertible debenture, the
payment schedule of which is as follows:

Repayment Date
 
 Principal Amount DueJuly 24, 2009 (1)
 
 $
 327,450September 30, 2009 (2)
 
 
 436,600December 31, 2009 (3)
 
 
 1,091,500March 31, 2010
 
 
 327,450Total
 
 $
 2,183,000We
have made our installment payments on July 23, 2009 and September 30, 2009 on a
timely basis. We did not make the third installment due by December 31, 2009
and, accordingly, the debentures are now in default. During the period
from July 1, 2009 to February 11, 2010, we issued 7,897,840 shares of our
common stock in connection with the conversion of $789,784 of convertible debt
and issued 409,149 shares of our common stock in order to pay the accrued and
unpaid interest of $ 40,915 related the outstanding convertible debt. As of
February 10, 2010, our outstanding convertible debt is approximately $629,000.
We expect that investors will continue to convert the convertible debt into
common stock, although there are no assurances that our expectations are
correct. We plan
on funding this obligation and all interest and penalties due using funds to be
repaid to us by the Jin Ma Companies. The Company intends to repay all
remaining outstanding convertible debt balances and all interest due prior to
March 31, 2010. The Company has not received any notices of default and does
not expect to pay any further liquidated penalties the Company has not received
any notices of default from the debenture holders and does not expect to pay
any further liquidated penalties and as discussed elsewhere, has accrued all
liquidated penalties due pursuant to the Exchange Debentures.

Pursuant
to the repayment schedule, unless the Exchanged Debenture is paid in full on or
before December 31, 2009, the March 31, 2010 Monthly Redemption Amount will
include a premium equal to 10% of the principal amount of the Exchanged
Debenture outstanding immediately prior to the consummation of the Amendment Agreement
amounting to $218,300. As of June 30, 2009, the Company had accrued this
penalty of $218.300 which is included in accrued expenses on the accompanying
balance sheets. Since certain debenture holders were repaid or converted their
debt into the Companys common shares prior to December 31, 2009, the Company
reduced accrued expenses by $49,867, which reduced interest expense by $49,967.
At December 31, 2009 and June 30, 2009, accrued liquidated penalties, which are
included in accrued expenses on the accompanying balance sheets, amounted to
$168,333 and $218,300, respectively.

We
currently have no material commitments for capital expenditures. Other than
working capital and loans, the Jin Ma Companies presently have no other
alternative source of working capital. We have been advised by the Jin Ma
Companies that they have sufficient cash flow from operations to satisfy its
working capital needs and to provide funds us in order for us to satisfy the
debt repayment schedule for the next 12 months. However, any delay in the sale
of its land use rights held for sale or the collection of its receivables would
have an adverse effect on its ability to repay our debt obligation and fund our
working capital requirements.

47

We
continue to be reliant on the Jin Ma Companies to pay the service fees due us
and/or to repay all or a portion of the funds advanced to the Jin Ma Companies.
Even if the Jin Ma Companies pay all the past due amounts to us, it is possible
that the Jin Ma Companies will continue to fail to timely pay our management
fees. Although we have received funds from the Jin Ma Companies to fund our
operation during the six months ended June 30, 2010, if the quarterly service
fees due us under the Contractual Arrangement are not paid to us on a timely
basis, it is possible that we will not have sufficient funds to satisfy our
obligations as they become due and pay our operating expenses in future
periods, our ability to continue as a going concern is in jeopardy and
investors could lose their entire investment in our company. In addition, if we
were to fail to pay the 14% secured convertible debentures in accordance with
the repayment schedule and the debenture holders were to declare a default
which we were unable to remedy, it is possible that we could be forced to cease
operations in which event shareholders would lose their entire investment in
our company.

Contractual
Obligations and Off-Balance Sheet Arrangements

Contractual
Obligations

In
the past, Jin Ma Real Estate guaranteed a customers mortgage until the home
and the title of ownership are delivered to the customer. If a property buyer
defaults under the loan, Jin Ma Real Estate is required, during the guarantee
period, to repay all debt owed by the defaulting property buyer to the mortgage
bank. Jin Ma Real Estates liability for guarantors obligation is valued based
on the actual outstanding mortgage amount at each reporting period. For the six
months ended December 31, 2009 and 2008, the liability for guarantors
obligation was not material and Jin Ma Real Estate has not suffered any losses.

We
have certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash flows.

The
following tables summarize our contractual obligations as of December 31, 2009,
and the effect these obligations are expected to have on our liquidity and cash
flows in future periods.

Payments
 Due by PeriodTotal
 
 Less than
 1 year
 
 1-3 Years
 
 4-5 Years
 
 5 Years +Contractual Obligations :Other
 Indebtedness *
 
 $
 4,659,218
 
 $
 4,315,510
 
 $
 343,708
 
 
 
 
 
 Convertible debt
 
 
 754,166
 
 
 754,166
 
 
 
 
 
 
 
 
 Accrued default
 penalties on convertible debt
 
 
 168,333
 
 
 168,333Interest
 payments on convertible debt
 
 
 56,406
 
 
 56,406
 
 
 
 
 
 
 
 
 Total
 Contractual Obligations:
 
 $
 5,638,123
 
 $
 5,294,415
 
 $
 343,708
 
 
 
 
 
 *
Other indebtedness includes loans borrowed from individuals and credit unions.

Off-balance
Sheet Arrangements

We
have not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered
into any derivative contracts that are indexed to our shares and classified as
stockholders equity or that are not reflected in our condensed consolidated
financial statements. Furthermore, we do not have any retained or contingent
interest in assets transferred to an unconsolidated entity that serves as
credit, liquidity or market risk support to such entity. We do not have any
variable interest in any unconsolidated entity that provides financing,
liquidity, market risk or credit support to us or engages in leasing or hedging
services with us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.

Not
applicable to a smaller reporting company.

48

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As
required by Rule 13a-15 under the Securities Exchange Act of 1934, as of
December 31, 2009, the end of the period covered by this report, our management
concluded its evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures.

Disclosure
controls and procedures refer to controls and other procedures designed to
ensure that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the SEC and that such information is accumulated and communicated
to our management, including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating and implementing possible controls and procedures.

Our
management does not expect that our disclosure controls and procedures will
prevent all error and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control systems objectives will be met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. The design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions.

Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our chief executive officer and our chief financial officer.
Based on that evaluation, Messrs. Yang and Wasserman concluded that because of
the continuing material weaknesses in internal control over financial
reporting, our disclosure controls and procedures were not effective as of
December 31, 2009. In our annual report on Form 10-K for the year ended June
30, 2009 we reported that we had a number of material weaknesses in internal
control over financial reporting, including (i) the lack of U.S. GAAP
expertise of our internal accounting staff, (ii) our internal audit functions
and (iii) the absence of an Audit Committee, and (iv) a lack of segregation of
duties within accounting functions. In order to correct the foregoing weaknesses, we have taken the following
remediation measures: (i) We have committed to the establishment of
effective internal audit functions, however, due to the scarcity of qualified
candidates with extensive experience in U.S. GAAP reporting and accounting in
the region, we were not able to hire sufficient internal audit resources before
the end of 2009. However, we will increase our search for qualified candidates
with assistance from recruiters and through referrals, (ii) We
have started searching for an independent director qualified to serve on an
audit committee to be established by our Board of Directors and we anticipate
that our Board of Directors will also establish a compensation committee to be
headed by one of an independent director.

Due
to our size and nature, segregation of all conflicting duties may not always be
possible and may not be economically feasible. However, to the extent possible,
we will implement procedures to assure that the initiation of transactions, the
custody of assets and the recording of transactions will be performed by
separate individuals.

We
believe that the foregoing steps will remediate the material weaknesses
identified above, and we will continue to monitor the effectiveness of these
steps and make any changes that our management deems appropriate. Due to the
nature of these material weaknesses in our internal control over financial
reporting, there is more than a remote likelihood that misstatements which
could be material to our annual or interim financial statements could occur
that would not be prevented or detected.

A material
weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency,
or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of our
annual or interim financial statements will not be prevented or detected on a
timely basis. A significant deficiency is a deficiency, or a combination of
deficiencies, in internal control over financial reporting that is less severe
than a material weakness; yet important enough to merit attention by those
responsible for oversight of the companys financial reporting.

49

Changes in Internal Control over Financial Reporting

There
have been no changes in our internal control over financial reporting
identified in connection with our evaluation that occurred during our last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

PART II  OTHER
INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

Not
applicable to a smaller reporting company.

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

During the
period from October 1, 2009 to December 31, 2009, we issued 5,197,840 shares of
our common stock in connection with the conversion of $519,784 of convertible
debt. The recipients were accredited investors and the issuances were exempt
from registration under the Securities Act of 1933 in reliance on exemptions
provided by Section 3(a)(9) of that act.

On
September 10, 2009, we issued 3,055,000 shares of our common stock valued at
$305,500. These shares, which were valued at $0.10 per share, the fair market
value of our common stock on the date of issuance, were issued to seven of our
officers and directors as satisfaction for $248,000 of accrued expense and
$57,500 as additional compensation. The recipients were accredited investors
and the issuances were exempt from registration under the Securities Act of
1933 in reliance on exemptions provided by Section 4(2) of that act.

During the period from October 1, 2009 to December 31, 2009, we issued 3,750
shares of our common stock to entities who were accredited investors in
connection with repayment of accrued and unpaid interest related to our 14%
secured convertible debentures in the amount of $375. The issuance was exempt
from registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 3(a) (9) of that act.

During the period from January 1, 2010 to February 10, 2010, we issued
1,250,000 shares of our common stock in connection with the conversion of
$125,000 of convertible debt. The recipients were accredited
investors and the issuances were exempt from registration under the Securities
Act of 1933 in reliance on exemptions provided by Section 3(a)(9) of that act.

On
January 5, 2010, we issued 1,642,857 shares of our common stock to our chief
executive officer and our chief financial officer for services rendered by
them. The shares were valued at $0.07 per share based on the fair value on the
date of grant. In connection with the issuance of these shares, the Company
recorded stock-based compensation of $115,000. The recipients were accredited
investors and the issuances were exempt from registration under the Securities
Act of 1933 in reliance on exemptions provided by Section 4(2) of that act.

On
January 25, 2010, the Company issued 148,003 shares of its common stock to a
debenture holder valued at $8,954 in satisfaction of accrued and unpaid
interest. The recipients were accredited investors and the
issuances were exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 3(a)(9) of that act.

On
January 25, 2010, the Company issued 747,752 shares of its common stock to
three debenture holders upon the cashless exercise of 2,180,233 warrants. The
recipients were accredited investors and the issuances were exempt from
registration under the Securities Act of 1933 in reliance on exemptions
provided by Section 3(a)(9) of that act.

On
January 28, 2010, the Company issued 3,000,000 shares of common stock to
consultants for business development services. The shares were valued at $0.12
per share based on the fair value on the date of grant. In connection with the
issuance of these shares, the Company recorded stock-based consulting expense of
$360,000. The recipients were accredited investors and the
issuances were exempt from registration under the Securities Act of 1933 in
reliance on exemptions provided by Section 4(2) of that act

50

Item 3. Defaults Upon Senior Securities.

As
described later in this section and elsewhere in this report, in November 2007
we issued and sold $2,183,000 principal amount secured convertible debentures
which originally matured on March 31, 2009. On May 18, 2009, the Company and
the debenture holders signed a Debenture and Warrant Amendment Agreement (the
Amendment Agreement) and an Amended and Restated 14% Secured Convertible
Debenture (the Exchanged Debentures). On June 30, 2009, the Company and the
debenture holders executed an Amendment to the Amendment Agreement effectively
consummating the Amendment Agreement and issuing the Exchanged Debentures
thereby ceasing any written or non-written declarations of an event of default
under its Securities Purchase Agreement and the related 10% secured convertible
debentures and any process to foreclose upon the pledged shares in accordance
with the terms of the pledge agreement executed in connection Securities
Purchase Agreement. The Exchanged Debenture was revised and the debenture
principal repayment schedule is as follows:

Repayment Date
 
 PrincipalAmount DueJuly 24, 2009 (1)
 
 $
 327,450September 30, 2009 (2)
 
 
 436,600December 31, 2009 (3)
 
 
 1,091,500March 31, 2010
 
 
 327,450Total
 
 $
 2,183,000We
paid the installment payment on July 24, 2009 and September 30, 2009. However,
we did not pay the outstanding amount by December 31, 2009. During the six
months ended December 31, 2009, we issued 6,647,840 shares of our common stock
in connection with the conversion of $664,784 of convertible debt and during
January 2010, we issued 1,250,000 of our common stock in connection with the
conversion of $125,000 of convertible debt. As of the date of this report, we
have not repaid the remaining December 31, 2009 installment in the amount of
$301,176. The Company expects to repay all remaining outstanding convertible
debt balances and all interest due prior to March 31, 2010. We have not
received any notices of default and do not expect to pay any further liquidated
penalties.

Pursuant
to the repayment schedule, unless the Exchanged Debenture was paid in full on
or before December 31, 2009, the March 31, 2010 Monthly Redemption Amount will
include a premium equal to 10% of the principal amount of the Exchanged
Debenture outstanding immediately prior to the consummation of the Amendment
Agreement amounting to $218,300. We did not pay the December 31, 2009 amount in
full when due accordingly we will be subject to this premium. As of June 30,
2009, we had accrued this penalty of $218.300 which is included in accrued
expenses on the accompanying balance sheets. Since certain debenture holders
were repaid or converted their debt into our common shares prior to December
31, 2009, we reduced accrued expenses by $49,867, which reduced interest
expense by $49,967. At December 31, 2009 and June 30, 2009, accrued liquidated
penalties, which are included in accrued expenses on the accompanying balance
sheets amounted to $168,333 and $218,300, respectively.

In conjunction with the transaction Messrs. Liankuan Yang and Yang Yang and Ms.
Runlan Ma, executive e officers and directors of both our company and the Jin
Ma Companies, pledged an aggregate of 19,000,000 shares of our common stock
owned by them as additional security for our obligations under the debentures.

As
previously disclosed, the Jin Ma Companies had previously represented to us
that they intended to repay a portion of the amounts advanced to them to ensure
that we had sufficient capital to make the interest and principal payments on
the 14% secured convertible debentures. Mr. Liankuan Yang, our CEO, is also the
CEO and controlling person of the Jin Ma Companies.

These
amounts, however, were not paid to us which led to the default in the repayment
of the December 31, 2009 installment payment. The source of the funds for these
repayments was a repayment to us by the Jin Ma Companies of a portion of the
amounts owed our company. To date, however, we have been unable to consummate this
restructure. Cash on deposit in China is subject to the regulations of the PRC
which restricts the transfer of cash from that country, except under certain
specific circumstances. These currency laws have served to hinder Mr. Yangs
and the Jin Ma Companies ability to provide the funds to us necessary to
restructure the debenture terms.

51

As
of the date of this report the debenture holders have not made a formal demand
for payment under the terms of the debentures, nor have they taken any actions
to foreclose on the collateral pledged to secure the obligations. If the Jin Ma
Companies are able to repay us a portion of the amounts due us we intend to
repay the remaining debt of approximately $629,000 plus all accrued interest
and liquidated penalties. If we do not repay the debenture holders, it is
likely that the debenture holders will institute legal proceedings against us
to collect the amounts due under the debentures and to foreclose on the pledged
collateral. Unless the Jin Ma Companies pay us the amounts due us we do not
have the funds necessary to satisfy our obligations to the debenture holders.
If the debenture holders successfully foreclose on the pledged collateral that
would result in a change of control of our company as those securities
represent approximately 31% of our outstanding common stock. There occurrence
of any of these events would be materially adverse to our ability to continue
our business as it is presently conducted.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits

10.1
 Consulting agreement with GEP Capital Group Ltd.31.1
 Rule 13a-14(a)/15d-14(a) certification of Chief
 Executive Officer31.2
 Rule 13a-14(a)/15d-14(a) certificate of Chief
 Financial Officer32.1
 Section 1350 certification of Chief Executive
 Officer32.2
 Section 1350 certification of Chief Financial
 Officer52

SIGNATURES

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

Gold Horse International, Inc.Date: February 11, 2010
 By:
 /s/ Liankuan YangLiankuan YangChief Executive Officer, principal executive officerDate: February 11, 2010
 By:
 /s/ Adam WassermanAdam WassermanChief Financial Officer, principal financial and
 accounting officer53