**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**


(Mark
      One)





x QUARTERLY
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      quarterly period ended: September 30, 2008





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





Commission
      File Number: 000-49608





**CHINA
      AGRITECH, INC.**


(Exact
      name of small business issuer as specified in its charter)





Delaware
            75-2955368(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)





Room
                3F No. 11 Building, Zhonghong International Business Garden, Future
                Business Center,
              Chaoyang
                North Road, Chaoyang District, Beijing, China 100024
              People's
                Republic of China
              (Address
                of principal executive offices, Zip Code)(86)
                10-59621278
              (Registrant's
                telephone number, including area code)N/A
              (Former
                name, former address and former fiscal year, if changed since last
                report)





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





Indicate
      by check mark whether the registrant is a larger accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of "large accelerated filer”, “accelerated filer" and “small
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large
                  accelerated filer o
              
              Accelerated
                  filer oNon-accelerated
                  filer o
              
              Smaller
                  Reporting Company x(Do
                  not check if a smaller reporting company)





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





The
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of November 7, 2008 is as follows:





**Class
                of Securities**
            **Shares
                Outstanding**Common
                Stock, $0.001 par value
            24,699,615











TABLE
      OF
      CONTENTS




PagePART
                I - FINANCIAL INFORMATION
            3Item
                1 Condensed Interim Financial Statements
            3Item
                2 Management's Discussion and Analysis of Financial Condition and
                Resultsof
                Operations
            21Item
                3 Quantitative and Qualitative Disclosure about Market
                Risk
            —Item
                4 Controls and Procedures
            32PART
                II - OTHER INFORMATION
            34Item
                1 Legal Proceedings
            34Item
                2 Unregistered Sales of Equity Securities and Use of
                Proceeds
            34Item
                3 Defaults Upon Senior Securities
            34Item
                4 Submission of Matters to a Vote of Security Holders
            34Item
                5 Other Information
            34Item
                6 Exhibits
            34SIGNATURES
            36




2




**PART
      I**




**FINANCIAL
      INFORMATION**




**ITEM
      1. CONDENSED INTERIM FINANCIAL STATEMENTS.**





**CHINA
      AGRITECH, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**




**SEPTEMBER 30, 2008**
            
            **DECEMBER 31, 2007****(UNAUDITED)****ASSETS****Current
                Assets**Cash
                and cash equivalents
            
            $
            5,265,474
            
            $
            11,841,221Restricted
                cash
            
            
            2,000,000
            
            
            2,011,415Accounts
                receivable, net of allowance for doubtful accounts of $248,881 and
                $227,981 at September 30, 2008 and December 31, 2007
                respectively
            
            
            44,930,728
            
            
            22,695,039Inventories
            
            
            9,654,932
            
            
            3,508,741Advances
                to suppliers
            
            
            4,348,443
            
            
            12,343,255Prepayments
                and other receivables
            
            
            1,983,648
            
            
            1,242,692**Total
                Current Assets**
            
            
            68,183,225
            
            
            53,642,364**Property
                and equipment, net**
            
            
            4,627,915
            
            
            3,798,958**Construction
                in progress**
            
            
            877,800
            
            
            -**Total
                Assets**
            
            $
            73,688,940
            
            $
            57,441,322**LIABILITIES
                AND STOCKHOLDERS’S EQUITY****Current
                Liabilities**Accounts
                payable
            
            $
            3,297,290
            
            $
            41,146Accrued
                expenses and other payables
            
            
            1,571,938
            
            
            1,047,721Amount
                due to related parties
            
            
            -
            
            
            352,505Taxes
                payable
            
            
            2,365,178
            
            
            1,650,243**Total
                Current Liabilities**
            
            
            7,234,406
            
            
            3,091,614**Minority
                Interest**
            
            
            4,719,389
            
            
            3,465,724**Commitments**
            
            
            -
            
            
            -**Stockholders'
                Equity**Common
                stocks; $0.001 par value, 100,000,000 shares authorized,24,699,615
                shares issued and outstanding as of September 30,2008 and December
                31,2007
            
            
            24,700
            
            
            24,700Additional
                paid in capital
            
            
            26,135,913
            
            
            26,135,914Statutory
                reserve
            
            
            5,644,918
            
            
            4,299,653Accumulated
                other comprehensive income
            
            
            5,851,996
            
            
            2,578,107Retained
                earnings
            
            
            24,077,618
            
            
            17,845,610**Total
                Stockholders' Equity**
            
            
            61,735,145
            
            
            50,883,984**Total
                Liabilities and Stockholders' Equity**
            
            $
            73,688,940
            
            $
            57,441,322





The
      accompanying notes are an integral part of these Condensed Interim  Financial
      Statements.





3




**CHINA
      AGRITECH, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      INCOME STATEMENTS**


**FOR
      THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND 2007**


**(UNAUDITED)**




**THREE MONTHS
                PERIODS  ENDED SEPTEMBER 30,**
            
            **NINE MONTHS
                PERIODS  ENDED SEPTEMBER 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****Net
                sales**
            
            $
            16,674,095
            
            $
            11,595,798
            
            $
            38,083,747
            
            $
            30,074,430**Cost
                of sales**
            
            
            (9,896,393
            )
            
            (5,415,761
            )
            
            (20,429,067
            )
            
            (13,631,864
            )**Gross
                profit**
            
            
            6,777,702
            
            
            6,180,037
            
            
            17,654,680
            
            
            16,442,566**Operating
                expenses**Selling
                expenses
            
            
            (1,084,382
            )
            
            (824,695
            )
            
            (3,016,586
            )
            
            (2,229,480
            )General
                and administrative expenses
            
            
            (779,840
            )
            
            (736,424
            )
            
            (2,703,731
            )
            
            (1,748,581
            )**Total
                operating expenses**
            
            
            (1,864,222
            )
            
            (1,561,118
            )
            
            (5,720,317
            )
            
            (3,978,061
            )**Income
                from operations**
            
            
            4,913,480
            
            
            4,618,919
            
            
            11,934,363
            
            
            12,464,505Other
                income (expense)
            
            
            43,452
            
            
            (50,296
            )
            
            (28,870
            )
            
            (54,621
            )Interest
                income
            
            
            22,006
            
            
            3,467
            
            
            85,902
            
            
            37,763Exchange
                gain (loss)
            
            
            54,955
            
            
            (32,680
            )
            
            (47,562
            )
            
            (32,696
            )**Total
                other income (expense)**
            
            
            120,413
            
            
            (79,509
            )
            
            9,470
            
            
            (49,554
            )**Income
                before income taxes and minority interest**
            
            
            5,033,893
            
            
            4,539,410
            
            
            11,943,833
            
            
            12,414,951**Provision
                for income taxes**
            
            
            (1,225,991
            )
            
            (1,648,340
            )
            
            (3,375,985
            )
            
            (4,452,532
            )**Income
                before minority interests**
            
            
            3,807,902
            
            
            2,891,070
            
            
            8,567,848
            
            
            7,962,419**Minority
                interests**
            
            
            (345,579
            )
            
            (333,392
            )
            
            (990,577
            )
            
            (885,469
            )**Net
                income**
            
            
            3,462,323
            
            
            2,557,678
            
            
            7,577,271
            
            
            7,076,950**Other
                comprehensive income**Foreign
                currency translation adjustment
            
            
            158,711
            
            
            522,622
            
            
            3,273,889
            
            
            1,354,428**Comprehensive
                income**
            
            $
            3,621,034
            
            $
            3,080,333
            
            $
            10,851,160
            
            $
            8,431,378**Basic
                and diluted weighted average shares outstanding**
            
            
            24,699,615
            
            
            24,397,658
            
            
            24,699,615
            
            
            20,914,208**Basic
                and diluted net earnings per share**
            
            $
            0.14
            
            $
            0.10
            
            $
            0.31
            
            $
            0.34





The
      accompanying notes are an integral part of these Condensed Interim Financial
      Statements.




4





**CHINA
      AGRITECH, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007**


**SEPTEMBER
                  30,****2008**
              
              **2007****Cash
                  flows from operating activities:**Net income
              
              $
              7,577,272
              
              $
              7,076,949Adjustments
                  to reconcile net income to net cash used in operating
                  activities:Stock
                  based compensation
              
              
              -
              
              
              51,484Minority
                  interest
              
              
              990,578
              
              
              885,469Depreciation
                  and amortization
              
              
              470,198
              
              
              259,542(Increase)
                  decrease in current assets:Accounts
                  receivable
              
              
              (22,235,689
              )
              
              (17,070,111
              )Inventories
              
              
              (6,146,191
              )
              
              (4,033,019
              )Advances
                  to suppliers
              
              
              7,994,813
              
              
              7,717,799Prepayments
                  and other receivable
              
              
              (740,955
              )
              
              (89,244
              )Due
                  from shareholders
              
              
              
              
              
              22,507Increase
                  (decrease) in current liabilities:Accounts
                  payable
              
              
              3,256,144
              
              
              (157,478
              )Taxes
                  payable
              
              
              714,935
              
              
              1,096,563Accrued
                  expenses and other payables
              
              
              171,714
              
              
              1,050,860Net
                  cash used in operating activities
              
              
              (7,947,183
              )
              
              (3,188,679
              )**Cash
                  flows from investing activities:**Acquisition
                  of property & equipment
              
              
              (1,299,156
              )
              
              (1,459,705
              )Construction
                  in progress
              
              
              (877,800
              )
              
              (3,009
              )Restricted
                  cash
              
              
              11,415Net
                  cash used in investing activities
              
              
              (2,165,541
              )
              
              (1,462,714
              )**Cash
                  flows from financing activities:**Amount
                  held in escrow account
              
              
              -
              
              
              (2,000,000
              )Issuance
                  of shares for cash
              
              
              -
              
              
              13,484,478Net
                  cash provided by financing activities
              
              
              -
              
              
              11,484,478**Net
                  (decrease)/increase in cash and cash equivalents**
              
              
              (10,112,724
              )
              
              6,833,085**Effect
                  of exchange rate change on cash and cash
                  equivalents**
              
              
              3,536,977
              
              
              428,879**Cash
                  and cash equivalents, beginning of year**
              
              
              11,841,221
              
              
              6,430,009**Cash
                  and cash equivalents, end of year**
              
              $
              5,265,474
              
              $
              13,691,973**Supplement
                  disclosure of cash flow information:**Income
                  taxes paid
              
              $
              3,362,504
              
              $
              3,595,008**Noncash
                  Investment and Financing Activity:**Offset
                  of amounts due to/from stockholders
              
              $
              330,032
              
              $
              -





The
      accompanying notes are an integral part of these Condensed Interim Financial
      Statements.




5





**CHINA
      AGRITECH, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED INTERIM FINANCIAL STATEMENTS**


**(UNAUDITED)**




**1.**  **ORGANIZATION
      AND DESCRIPTION OF BUSINESS**




China
      Agritech (the
      "Company" or “we”) is
      a
      holding company whose direct and indirect subsidiaries manufacture and sell
      organic liquid compound fertilizers and related agricultural products. Our
      business operations are primarily conducted through our direct and indirect
      subsidiaries, primarily Anhui Agritech Agriculture
      Development Limited (“Anhui Agritech”) ,
      Beijing
      Agritech Fertilizer Ltd., China
      Tailong Holdings Company Limited ("Tailong") and
      Tailong’s subsidiary, Pacific Dragon Fertilizers
      Co. Ltd. ("Pacific Dragon") .
      Our
      revenues are derived primarily from the sale of our organic liquid compound
      fertilizers and related agricultural products to our customers.





We
      became
      a public company in the U.S. by entering into a transaction with an existing
      U.S. public company pursuant to the Reorganization Agreement (defined below)
      effective February 3, 2005. The Company that is now China Agritech, Inc. was
      originally incorporated on January 5, 1925, under the laws of the State of
      Nevada as Argyle Mining Company. The Company changed its name to Argyle
      Corporation in January 1960, Basic Empire in November 1963, Basic Empire Corp
      in
      December 1976 and finally to China Agritech, Inc. in May 2005. On August 10,
      2004, the Company changed its corporate domicile from Nevada to Delaware.
      Throughout its existence the Company has changed its business model several
      times, and conducted no substantive business from 1986 until February 2005,
      when
      the Company closed the transaction pursuant to the Reorganization
      Agreement.





On
      December 25, 2004, the Company, Tailong, and the stockholders of Tailong (the
      "Tailong Stockholders") entered into the Agreement and Plan of Reorganization
      ("Reorganization Agreement"), as amended and such reorganization became
      effective on February 3, 2005. The Reorganization Agreement provided for the
      acquisition by the Company from the Tailong Stockholders of all of the issued
      and outstanding Tailong shares in exchange for 10,606,158 shares of newly issued
      restricted common stock of the Company, whereby the Tailong Stockholders
      obtained control of the Company and in this connection, Tailong became a
      wholly-owned subsidiary of the Company.




As
      a
      result of the acquisition of Tailong, the Company took on the business of our
      operating subsidiaries and became a fertilizer manufacturer and conducted its
      operations in the People's Republic of China (the "PRC") through its
      wholly-owned subsidiary, Tailong and Tailong's 90% owned subsidiary, Pacific
      Dragon.




Tailong
      was incorporated on October 27, 2003 under the laws of Hong Kong. On October
      9,
      2004, Tailong acquired 90% of Pacific Dragon, which conducts Tailong's only
      business operations. Pacific Dragon is a foreign investment joint venture and
      was incorporated in the PRC on May 20, 1994. Pacific Dragon is classified as
      a
      Foreign Invested Enterprise ("FIE") in the PRC and is subject to the FIE laws
      of
      the PRC. Its legal structure is similar to that of a limited liability company
      organized under state laws in the United States.




As
      discussed above, prior to the acquisition of Tailong, the Company was a
      non-operating public shell corporation. Pursuant to Securities and Exchange
      Commission rules, the merger or acquisition of a private operating company
      into
      a non-operating public shell corporation with nominal net assets is considered
      a
      capital transaction in substance, rather than a business combination.
      Accordingly, for accounting purposes, the transaction has been treated as a
      reverse acquisition and a recapitalization. Transaction costs incurred in the
      reverse acquisition have been charged to expense. On April 21, 2005, the Company
      filed a Schedule 14C - Information Statement pursuant to Section 14(c) of the
      Securities Exchange Act of 1934, giving notice that the Company had received
      written consents in lieu of a meeting from the holders of a majority of the
      Company's issued and outstanding common stock of a proposal to amend and restate
      the Company's Certificate of Incorporation (the "Restated Certificate") to
      effect, among other things, a forward stock split whereby each share of issued
      and outstanding common stock was converted into 1.14 shares of the Company's
      common stock. On May 12, 2005, the stock split was effected when the Company
      filed the Restated Certificate with the Secretary of State of the State of
      Delaware. The effect of this action is reflected in the Company's financial
      statements as of the first day of the first period presented.





6


On
      June
      29, 2006, the Company established a wholly owned subsidiary, Anhui Agritech.
      Anhui Agritech engages in the business of manufacturing and marketing a series
      of organic liquid compound fertilizers.




On
      November 1, 2006, the Company and the stockholders of CAI Investment, Inc (the
      “CAI stockholders”) entered into an equity transfer agreement. The CAI
      stockholders transferred 100% equity interest in CAI Investment, Inc. (“CAI”) to
      the Company in exchange for $1,000.




Prior
      to
      the equity transfer, CAI established a wholly owned subsidiary, Agritech
      Fertilizer Limited (“Agritech Fertilizer”). Agritech Fertilizer engages in the
      business of manufacturing and marketing a series of organic liquid compound
      fertilizers.




**2.**  **BASIS
      OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**




These
      Condensed Interim Financial Statements of the Company and its subsidiaries
      are
      prepared in accordance with accounting principles generally accepted in the
      United States of America (“U.S. GAAP”), provided that, in accordance with the
      rules and regulations of the Securities and Exchange Commission (the “SEC”), the
      accompanying condensed interim financial statements are unaudited and may not
      include all information and footnotes necessary for a complete presentation
      of
      financial statements in conformity with U.S. GAAP in the opinion of our auditors
      and, accordingly, these Condensed Interim Financial Statements should be read
      in
      conjunction with the Company’s Annual Report on Form 10-K for the fiscal year
      ended December 31, 2007, filed with the SEC on March 28, 2008. In the opinion
      of
      management, all adjustments and disclosures necessary for a fair presentation
      of
      these condensed interim financial statements have been included. The results
      reported in these Condensed Interim Financial Statements are not necessarily
      indicative of the results that may be reported for the entire year.





Unless
      otherwise noted, all
      references to "$" and dollar are to the United States dollar, the legal currency
      of the United States .




a. Principles of consolidation




The
      accompanying Condensed Interim Financial Statements include the accounts of
      the
      Company (which includes our direct and indirect subsidiaries). All significant
      inter-company accounts and transactions have been eliminated in
      consolidation.




7


b. Use
        of estimates




c. Cash
      and cash equivalents




For
      Statement of Cash Flows purposes, the Company considers all cash on hand and
      in
      banks, including accounts in book overdraft positions, certificates of deposit
      and other highly-liquid investments with maturities of three months or less,
      when purchased, to be cash and cash equivalents.




d. Accounts receivable




The
      Company's policy is to maintain reserves for potential credit losses on accounts
      receivable. Management reviews the composition of accounts receivable and
      analyzes historical bad debts, customer concentrations, customer
      creditworthiness, current economic trends and changes in customer payment
      patterns to evaluate the adequacy of these reserves. The Company gives most
      clients an extended credit policy for one year. The Company extends credit
      to
      its customers based upon its assessment of their credit worthiness and generally
      does not require collateral. Credit losses have not been
      significant.




e. Inventories




Inventories
      are valued at the lower of cost (determined on a weighted average basis) or
      market. Management compares the cost of inventories with market value and an
      allowance is provided to reduce the value of inventories to their net market
      value.





f. Advances to suppliers




The
      Company provides advances to certain vendors for purchase of its
      material.




g. Property and equipment




Property
      and equipment are recorded at cost. Gains or losses on disposals are reflected
      as gain or loss in the year of disposal. The cost of improvements that extend
      the life of property and equipment are capitalized. These capitalized costs
      may
      include structural improvements, equipment and fixtures. All ordinary repair
      and
      maintenance costs are expensed as incurred.




8


Depreciation
      and amortization for financial reporting purposes is provided using the
      straight-line method over the estimated useful lives of the assets: 5 to 15
      years for machinery; 3 to 5 years for leasehold improvement, 5 to 10 years
      for
      office equipment; and 5 to 8 years for motor vehicles.




h. Construction in Progress




Construction
      in progress represents the costs incurred in connection with the construction
      of
      buildings or new additions to the Company's plant facilities. No depreciation
      is
      provided for construction in progress until such time as the relevant assets
      are
      completed and are ready for their intended use.




i. Impairment




The
      Company applies the provisions of Statement of Financial Accounting Standards
      (“SFAS”) No. 144, "Accounting for the Impairment or Disposal of Long-Lived
      Assets", issued by the Financial Accounting Standards Board ("FASB"). SFAS
      No.
      144 requires that long-lived assets be reviewed for impairment whenever events
      or changes in circumstances indicate that the carrying amount of an asset may
      not be recoverable through the estimated undiscounted cash flows expected to
      result from the use and eventual disposition of the assets. Whenever any such
      impairment exists, an impairment loss will be recognized for the amount by
      which
      the carrying value exceeds the fair value.




The
      Company tests long-lived assets, including property and equipment and intangible
      assets subject to periodic amortization, for recoverability at least annually
      or
      more frequently upon the occurrence of an event or when circumstances indicate
      that the net carrying amount is greater than its fair value. Assets are grouped
      and evaluated at the lowest level for their identifiable cash flows that are
      largely independent of the cash flows of other groups of assets. The Company
      considers historical performance and future estimated results in its evaluation
      of potential impairment and then compares the carrying amount of the asset
      to
      the future estimated cash flows expected to result from the use of the asset.
      If
      the carrying amount of the asset exceeds estimated expected undiscounted future
      cash flows, the Company measures the amount of impairment by comparing the
      carrying amount of the asset to its fair value. The estimation of fair value
      is
      generally measured by discounting expected future cash flows as the rate the
      Company utilizes to evaluate potential investments. The Company estimates fair
      value based on the information available in making whatever estimates, judgments
      and projections are considered necessary. There was no impairment of long-lived
      assets for the period ended September 30, 2008 and year ended December 31,
      2007.




j. Revenue recognition




The
      Company's revenue recognition policies are in compliance with Staff Accounting
      Bulletin 104. Sales revenue is recognized at the date of shipment to customers
      when a formal arrangement exists, the price is fixed or determinable, the
      delivery is completed, no other significant obligations of the Company exist
      and
      collectibility is reasonably assured. Payments received before all of the
      relevant criteria for revenue recognition are satisfied are recorded as unearned
      revenue.




The
      Company's revenue consists of the invoiced value of goods, net of a value-added
      tax (“VAT”).




9




k. Advertising costs




The
      Company expenses the cost of advertising as incurred or, as appropriate, the
      first time the advertising takes place. Advertising costs for the three months
      ended September 30, 2008 and 2007 were $208,814 and $111,619, respectively.
      Advertising costs for the nine months ended September 30, 2008 and 2007 were
      $513,424 and $303,393, respectively.




l. Shipping and Handling




The
      Company classifies shipping cost under selling expenses. Shipping costs for
      the
      three months ended September 30, 2008 and 2007 were $201,801 and $151,861,
      respectively. Shipping costs for the nine months ended September 30, 2008 and
      2007 were $564,114 and $405,877, respectively




m. Income taxes




The
      Company utilizes SFAS No. 109, "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 basis 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.




The
      Company accounts for income taxes using an asset and liability approach which
      allows for the recognition and measurement of deferred tax assets based upon
      the
      likelihood of realization of tax benefits in future years. Under the asset
      and
      liability approach, deferred taxes are provided for the net tax effects of
      temporary differences between the carrying amounts of assets and liabilities
      for
      financial reporting purposes and the amounts used for income tax purposes.
      A
      valuation allowance is provided for deferred tax assets if it is more likely
      than not these items will either expire before the Company is able to realize
      their benefits, or that future deductibility is uncertain.




The
      Company records a valuation allowance for deferred tax assets, if any, based
      on
      its estimates of its future taxable income as well as its tax planning
      strategies when it is more likely than not that a portion or all of its deferred
      tax assets will not be realized. If the Company is able to utilize more of
      its
      deferred tax assets than the net amount previously recorded when unanticipated
      events occur, an adjustment to deferred tax assets would increase the Company’s
      net income. The Company does not have any significant deferred tax assets or
      liabilities in the PRC tax jurisdiction.




When
      tax
      returns are filed, it is most likely that some positions taken would be
      sustained upon examination by the taxing authorities, while others are subject
      to uncertainty about the merits of the position taken or the amount of the
      position that would be ultimately sustained. The benefit of a tax position
      is
      recognized in the financial statements in the period during which, based on
      all
      available evidence, management believes it is more likely than not that the
      position will be sustained upon examination, including the resolution of appeals
      or litigation processes, if any. Tax positions taken are not offset or
      aggregated with other positions. Tax positions that meet the
      more-likely-than-not recognition threshold are measured as the largest amount
      of
      tax benefit that the Company believes is more than 50% likely of being realized
      upon settlement with the applicable taxing authority. The portion of the
      benefits associated with tax positions taken that exceeds the amount measured
      as
      described above is reflected as a liability for unrecognized tax benefits in
      the
      accompanying balance sheet along with any associated interest and penalties
      that
      would be payable to the taxing authorities upon examination.




10


Interest
      and penalties associated with unrecognized tax benefits are classified as
      additional income taxes in the statement of income.




n. Foreign currency translation




The
      Company uses the United States dollar for financial reporting purposes. The
      Company's subsidiaries maintain their books and records in their functional
      currency, being the primary currency of the economic environment in which their
      operations are conducted. Such financial statements were translated into U.S.
      dollars in accordance with SFAS No. 52, “Foreign Currency Translation.”
According to SFAS No. 52, all assets and liabilities are translated at the
      current exchange rate, stockholder’s equity are translated at the historical
      rates and income statement items are translated at the average exchange rate
      for
      the period. The resulting translation adjustments are reported under other
      comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive
      Income” as a component of shareholders’ equity.




o. Fair
      values of financial instruments




SFAS
      No.
      107, "Disclosures about Fair Value of Financial Instruments," requires that
      the
      Company disclose estimated fair values of financial instruments. The Company's
      financial instruments primarily consist of cash and cash equivalents, accounts
      receivable, other receivables, advances to suppliers, accounts payable, other
      payables, taxes payable, and related party advances and borrowings.




As
      of the
      balance sheet dates, the estimated fair values of the financial instruments
      were
      not materially different from their carrying values as presented on the balance
      sheet. This is attributed to the short maturities of the instruments and to
      the
      interest rates on the borrowings approximating those that would have been
      available for loans of similar remaining maturity and risk profile at respective
      balance sheet dates.




p. Earning per share (EPS)




Earnings
      per share is calculated in accordance with the SFAS No. 128, “Earnings per
      share.” Basic earnings per share is based upon the weighted average number of
      common shares outstanding. Diluted earnings per share is based on the assumption
      that all dilutive convertible shares and stock options were converted or
      exercised. Dilution is computed by applying the treasury stock method. Under
      this method, options and warrants are assumed to be exercised at the beginning
      of the period (or at the time of issuance, if later), and as if funds obtained
      thereby were used to purchase common stock at the average market price during
      the period.




q. Segment reporting




SFAS
      No.
      131, "Disclosure about Segments of an Enterprise and Related Information"
      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.




11


SFAS
      No.
      131 has no effect on the Company's Condensed Interim Financial Statements as
      the
      Company operates in one reportable business segment.




r. Statement of cash flows




In
      accordance with SFAS No. 95, "Statement of Cash Flows," cash flows from the
      Company's operations is calculated based upon the local currencies. As a result,
      amounts related to assets and liabilities reported on the statement of cash
      flows may not necessarily agree with changes in the corresponding balances
      on
      the balance sheets.




s. Recent Accounting Pronouncements




In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities - Including an amendment of FASB
      Statement No. 115." SFAS No. 159 permits companies to choose to measure many
      financial instruments and certain other items at fair value that are not
      currently required to be measured at fair value. The objective of SFAS No.
      159
      is to provide opportunities to mitigate volatility in reported earnings caused
      by measuring related assets and liabilities differently, without having to
      apply
      hedge accounting provisions. SFAS No. 159 also establishes presentation and
      disclosure requirements designed to facilitate comparisons between companies
      that choose different measurement attributes for similar types of assets and
      liabilities. SFAS No. 159 will be effective in the first quarter of fiscal
      2009.
      The Company is evaluating the impact that this statement will have on its
      Condensed Interim Financial Statements.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements.” SFAS No. 160 amends Accounting Research
      Bulletin (“ARB”) 51, “Consolidated Financial Statements,” to establish
      accounting and reporting standards for the noncontrolling (minority) interest
      in
      a subsidiary and for the deconsolidation of a subsidiary. It clarifies that
      a
      noncontrolling interest in a subsidiary is an ownership interest in the
      consolidated entity that should be reported as equity in the Condensed Interim
      Financial Statements. SFAS No. 160 is effective for the Company’s fiscal year
      beginning October 1, 2009. Management is currently evaluating the effect of
      this
      pronouncement on the Condensed Interim Financial Statements.





In
      December 2007, FASB issued SFAS No. 141(R), “Business Combinations.” This
      Statement replaces SFAS No. 141, “Business Combinations.” This Statement retains
      the fundamental requirements in SFAS No. 141 that the acquisition method of
      accounting (which SFAS No. 141 called the purchase method) be used for all
      business combinations and for an acquirer to be identified for each business
      combination. This Statement also establishes principles and requirements for
      how
      the acquirer: a) recognizes and measures in its financial statements the
      identifiable assets acquired, the liabilities assumed, and any noncontrolling
      interest in the acquiree; b) recognizes and measures the goodwill acquired
      in
      the business combination or a gain from a bargain purchase and c) determines
      what information to disclose to enable users of the financial statements to
      evaluate the nature and financial effects of the business combination. SFAS
      No.
      141(R) will apply prospectively to business combinations for which the
      acquisition date is on or after Company’s fiscal year beginning October 1, 2009.
      While the Company has not yet evaluated this statement for the impact, if any,
      that SFAS No. 141(R) will have on its Condensed Interim Financial Statements,
      the Company will be required to expense costs related to any acquisitions after
      September 30, 2009.





12


In
      March
      2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
      Hedging Activities.” SFAS No. 161 requires enhanced disclosures about an
      entity’s derivative and hedging activities and thereby improves the transparency
      of financial reporting. The objective of SFAS No. 161 is to provide adequate
      information about how derivative and hedging activities affect an entity’s
      financial position, financial performance and cash flows. SFAS No. 161 will
      be
      effective in the first quarter of fiscal 2009. The Company is evaluating the
      impact that this statement will have on its Condensed Interim Financial
      Statements.





In
      May
      2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
      Principles.” SFAS No. 162 identifies the sources of accounting principles and
      the framework for selecting the principles to be used in the preparation of
      financial statements of nongovernmental entities that are presented in
      conformity with U.S. GAAP. SFAS No. 162 shall be effective 60 days following
      the
      SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”)
      amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With
      Generally Accepted Accounting Principles.” The Company is evaluating the impact
      that this statement will have on its Condensed Interim Financial
      Statements.





In
      May
      2008, FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance
      Contracts.” SFAS No. 163 requires that an insurance enterprise recognize a claim
      liability prior to an event of default (insured event) when there is evidence
      that credit deteriorations have occurred in an insured financial obligation.
      SFAS No. 163 is effective for financial statements issued for fiscal years
      beginning after December 15, 2008. The adoption of SFAS No. 163 will not have
      a
      material impact on the Company’s Condensed Interim Financial
      Statements.





In
      September 2006, FASB issued SFAS No. 157, “Fair Value Measurements,”
which is effective for fiscal years beginning after November 15, 2007, and
      for interim periods within those years. SFAS No. 157 defines fair value,
      establishes a framework for measuring fair value under U.S. GAAP, and enhances
      disclosures about fair value measurements. SFAS No. 157 applies when other
      accounting pronouncements require fair value measurements; it does not require
      any new fair value measurements. In February 2008, the FASB issued FASB
      Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB
      Statement No. 157,” which defers the effective date of SFAS No. 157
      for non-financial assets and liabilities, except those that are recognized
      or
      disclosed at fair value in the financial statements on a recurring basis (at
      least annually), until fiscal years and interim periods beginning after
      November 15, 2008. We expect to adopt FSP No. FAS 157-2 as of
      January 1, 2009, and we are currently assessing the impact of applying SFAS
      No. 157 to non-financial assets and non-financial liabilities on our
      results of operations, cash flows and financial position.





As
      a
      result of the recent credit crisis, on October 10, 2008, the FASB issued
      FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset in a
      Market That is Not Active.” This FSP clarifies the application of SFAS
      No. 157 in a market that is not active. The FSP addresses how management
      should consider measuring fair value when relevant observable data does not
      exist. The FSP also provides guidance on how observable market information
      in a
      market that is not active should be considered when measuring fair value, as
      well as how the use of market quotes should be considered when assessing the
      relevance of observable and unobservable data available to measure fair value.
      This FSP is effective upon issuance, including prior periods for which financial
      statements have not been issued. Revisions resulting from a change in the
      valuation technique or its application shall be accounted for as a change in
      accounting estimate in accordance with SFAS No. 154, “Accounting Changes
      and Error Corrections.” Adoption of this standard had no effect on our results
      of operations, cash flows or financial position.





13




**3.**  **RESTRICTED
      CASH**




On
      July
      5, 2007, the Company issued and sold 5,556,000 shares of our Company’s common
      stock for $2.70 per share for a purchase price, in the aggregate, of
      $15,001,200. The direct costs related to this stock sale, including legal and
      professional fees, were deducted from the related proceeds and $2,000,000 was
      deposited in an escrow account. The balances held in escrow were $2,000,000
      as
      of September 30, 2008 and December 31, 2007.





Included
      in the balance of December 31, 2007, there was an amount of $11,415 held for
      the
      settlement of outstanding share transfer agent fee.




**4.**  **INVENTORIES**




Inventories
      consist of the following as of September 30, 2008 and December 31,
      2007:




September 30
            
            December 312008
            
            2007Raw
                Materials
            
            $
            7,817,767
            
            $
            2,579,210Packing
                Materials
            
            
            367,290
            
            
            37,645Finished
                goods
            
            
            1,469,875
            
            
            891,886$
            9,654,932
            
            $
            3,508,741




**5.**  **PREPAYMENTS
      AND OTHER RECEIVABLES**




Prepayments
      and other receivables primarily include prepaid rent, prepaid advertising and
      advanced travel expenses to employees.




**6.**  **PROPERTY
      AND EQUIPMENT**




Property
      and equipment consist of the following as of September 30, 2008 and December
      31,
      2007:




September 30
            
            December 312008
            
            2007Manufacturing
                machinery
            
            $
            4,722,378
            
            $
            3,750,525Leasehold
                improvement
            
            
            438,173
            
            
            165,905Office
                equipment
            
            
            209,192
            
            
            210,998Motor
                vehicles
            
            
            617,503
            
            
            565,3105,987,246
            
            
            4,692,738Less:
                Accumulated Depreciation
            
            
            (1,359,331
            )
            
            (893,780
            )$
            4,627,915
            
            $
            3,798,958




14




Depreciation
      and amortization expense for the three months ended September 30, 2008 and
      September 30, 2007 was $145,165 and $92,550, respectively. Depreciation and
      amortization expense for the nine months ended September 30, 2008 and 2007
      was
      $470,198 and $259,542, respectively.




**7.**  **CONSTRUCTION
      IN PROGRESS**





The
      construction in progress consists of property and equipment for the organic
      granular compound fertilizer plants in Haerbin.






**8.** **ACCRUED EXPENSES AND OTHER PAYABLES**




Accrued
      expenses and other payables consist of the following as of September 30, 2008
      and December 31, 2007:




September 30
            
            December 312008
            
            2007Accrued
                commission payable
            
            $
            1,293,626
            
            $
            818,671Other
                accrued expense
            
            
            221,858
            
            
            103,495Other
                payables
            
            
            56,454
            
            
            125,555$
            1,571,938
            
            $
            1,047,721




**9.**  **AMOUNTS
      DUE TO RELATED PARTIES**




The
      amounts due to related parties represented advances from the Company’s officers
      and shareholders, and were unsecured, non-interest bearing and due on
      demand.







**10.**  **TAXES
      PAYABLE**




Taxes
      payable consist of the following as of September 30, 2008 and December 31,
      2007:




September 30
            
            December 312008
            
            2007Income
                tax payable
            
            $
            1,227,380
            
            $
            1,069,936VAT
                tax payable
            
            
            1,132,724
            
            
            576,911Others
            
            
            5,074
            
            
            3,396$
            2,365,178
            
            $
            1,650,243




15




**11.**  **INCOME
      TAXES**




Local
      PRC income tax




The
      Company is governed by the Income Tax Law of the PRC concerning Chinese
      registered limited liability companies. Under the Income Tax Laws of the PRC,
      Chinese enterprises are generally subject to an income tax at an effective
      rate
      of 25% and 33% (30% state income taxes plus 3% local income taxes) for the
      periods ended September 30, 2008 and 2007, respectively, on income reported
      in
      the statutory financial statements after appropriate tax adjustments, unless
      the
      enterprise is located in a specially designated region for which more favorable
      effective tax rates are applicable. The provision for income taxes for the
      three
      and nine months ended September 30, 2008 and 2007 consisted of the
      following:




Three month periods ended September 30,
            
            Nine month periods ended September 30,2008
            
            2007
            
            2008
            
            2007Provision
                for China income and local tax
            
            $
            1,225,991
            
            $
            1,648,340
            
            $
            3,375,985
            
            $
            4,452,532Deferred
                taxes for China
            
            
            -
            
            
            -
            
            
            -
            
            
            -Provision
                for U.S. income and local tax
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                provision for income taxes
            
            $
            1,225,991
            
            $
            1,648,340
            
            $
            3,375,985
            
            $
            4,452,532




The
      following table reconciles the U.S. statutory rates to the Company’s effective
      tax rate at September 30, 2008 and 2007 respectively;





2008
            
            2007Tax
                at statutory rate
            
            
            25
            %
            
            33
            %Foreign
                tax rate difference
            
            
            (1
            )%
            
            (1
            )%Net
                operating loss in other tax jurisdiction for where no benefit is
                realized
            
            
            4
            %
            
            4
            %28
            %
            
            36
            %




Beginning
      January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
      existing laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises
      (“FIEs”). The new standard EIT rate of 25% will replace the 33% rate currently
      applicable to both DEs and FIEs. The two years tax exemption three years 50%
      tax
      reduction tax holiday for production-oriental FIE will be
      eliminated.




**12.**  **MINORITY
      INTEREST**




Represents
      the 10% interest of our minority shareholder, Yinlong Industrial Co., Ltd.,
      a
      related party of the Company, in Pacific Dragon.




16




**13.**  **STOCKHOLDERS’
        EQUITY**




On
      July
      5, 2007, the Company issued and sold 5,556,000 shares of its common stock for
      $2.70 per share for a purchase price, in the aggregate, of $15,001,200. The
      direct costs related to this stock sale, including legal and professional fees,
      were deducted from the related proceeds and the net amount in excess of par
      value was recorded as additional paid-in capital. See Note 3 for more
      information.




**14.** **CURRENT
      VULNERABILITY DUE TO CERTAIN CONCENTRATIONS**




The
      Company’s operations are all 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 environments 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
      and
      Western Europe. These include risks associated with, among others, the
      political, economic and legal environments and foreign currency exchange. 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.








**15.**  **MAJOR
      CUSTOMERS AND VENDORS** ****




There
      were no major customers which accounted for more than 10% of the total net
      revenue for the nine month periods ended September 30, 2008 and
      2007.




Four
      vendors provided approximately 70% of the Company’s raw materials for the nine
      months ended September 30, 2008, with each vendor individually accounting for
      approximately 43%, 12%, 8% and 7%. Four vendors provided approximately 80%
      of
      the Company’s dollar value of raw materials for the nine months ended September
      30, 2007, with each individually accounting for approximately 29%, 20%, 19%
      and
      12%.






**16.**  **STOCK
      OPTIONS AND WARRANTS**




The
      Company adopted SFAS No. 123 (Revised 2004), “Share Based Payment,” under
      the modified-prospective transition method on January 1, 2006. SFAS
      No. 123R requires companies to measure and recognize the cost of employee
      services received in exchange for an award of equity instruments based on the
      grant-date fair value. Share-based compensation recognized under the
      modified-prospective transition method of SFAS No. 123R includes
      share-based compensation based on the grant-date fair value determined in
      accordance with the original provisions of SFAS No. 123, “Accounting for
      Stock-Based Compensation,” for all share-based payments granted prior to and not
      yet vested as of January 1, 2006 and share-based compensation based on the
      grant-date fair-value determined in accordance with SFAS No. 123R for all
      share-based payments granted after January 1, 2006. SFAS No. 123R
      eliminates the ability to account for the award of these instruments under
      the
      intrinsic value method proscribed by Accounting Principles Board ("APB") Opinion
      No. 25, “Accounting for Stock Issued to Employees,” and allowed under the
      original provisions of SFAS No. 123. Prior to the adoption of SFAS
      No. 123R, the Company accounted for stock option plans using the intrinsic
      value method in accordance with the provisions of APB Opinion No. 25 and
      related interpretations.




17


As
      a
      result of adopting SFAS No. 123R, the Company recognized $0 and $2,398 in
      share-based compensation expense for the nine months ended September 30, 2008
      and 2007. The Company recognized $0 and $1,197 in share-based compensation
      expenses for the three months ended September 30, 2008 and 2007. There was
      no
      impact of this share-based compensation expense on the Company's basic and
      diluted earnings per share. The fair value of our stock options was estimated
      using the Black-Scholes option pricing model.




Options




On
      May
      10, 2006, the Company granted an unrelated party an option to purchase 50,000
      shares of its common stock with 12,500 vesting on May 10, 2006 and with 12,500
      vesting each quarter after May 10, 2006 until the full 50,000 is vested. 
The option exercise price is $3.50 per share. The fair value of the shares
      at
      the time of granting of the options was $3.00 per share.




The
      assumptions used in calculating the fair value of options granted using the
      Black-Scholes option- pricing model are as follows:





Risk-free
                interest rate
            
            
            6.0
            %Expected
                life of the options
            
            
            0.75
                yearsExpected
                volatility
            
            
            80
            %Expected
                dividend yield
            
            
            0





Following
      is a summary of the stock option activity:




Options
              outstanding
            
            Weighted
              Average Exercise
              Price
            
            Aggregate
              Intrinsic
              ValueOutstanding,
                December 31, 2006
            
            
            50,000
            
            $
            3.50
            
            $
            0.00GrantedForfeitedExercisedOutstanding,
                December 31, 2007
            
            
            50,000
            
            $
            3.50
            
            $
            0.00Granted
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -Outstanding,
                September 30, 2008
            
            
            50,000
            
            $
            3.50
            
            $
            0.00





Following
      is a summary of the status of options outstanding at September 30,
      2008:





Outstanding Options
            
            Exercisable OptionsExercise Price
            
            Number
            
            Average
              Remaining
              Contractual Life
            
            Average
              Exercise Price
            
            Number
            
            Average Exercise
              Price$3.50
            
            
            50,000
            
            
            2.625
            
            $
            3.50
            
            
            50,000
            
            $
            3.50




18




Warrants




In
      connection with a private placement which occurred on July 5, 2007, the Company
      granted the private placement consultant warrants to purchase 388,920 shares
      of
      its common stock. The warrants vested immediately. The exercise price of the
      warrants is $2.70 per share. The fair value of the warrants at the time of
      granting of the warrants was $3.22 per share.




The
      assumptions used in calculating the fair value of warrants granted using the
      Black-Scholes option- pricing model are as follows:




Risk-free
                interest rate
            
            
            4.05
            %Expected
                life of the options
            
            
            5.00
                yearsExpected
                volatility
            
            
            95
            %Expected
                dividend yield
            
            
            0




Following
      is a summary of the warrants activity:




Warrants
              outstanding
            
            Weighted
              Average Exercise
              Price
            
            Aggregate Intrinsic
              ValueOutstanding,
                December 31, 2006
            
            
            0
            
            $
            0.00
            
            $
            0.00Granted
            
            
            388,920
            
            $
            2.70
            
            $
            0.00Forfeited
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -Outstanding,
                December 31, 2007
            
            
            388,920
            
            $
            2.70
            
            $
            0.00GrantedForfeitedExercisedOutstanding,
                September 30, 2008
            
            
            388,920
            
            $
            2.70
            
            $
            0.00








Following
      is a summary of the status of warrants outstanding at September 30,
      2008:





Outstanding Warrants
            
            Exercisable WarrantsExercise Price
            
            Number
            
            Average
              Remaining
              Contractual Life
            
            Average
              Exercise Price
            
            Number
            
            Average Exercise
              Price$2.70
            
            
            388,920
            
            
            3.75
            
            $
            2.70
            
            
            388,920
            
            $
            2.70




19




**17.**  **STATUTORY
      RESERVES**




As
      stipulated by the Company Law of the People's Republic of China, net income
      after taxation can only be distributed as dividends after appropriation has
      been
      made for the following:




i)
      Making
      up cumulative prior years' losses, if any;




ii)
      Allocations to the "Statutory surplus reserve" of at least 10% of income after
      tax, as determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company's registered capital;




iii)
      Allocations of 5-10% of income after tax, as determined under PRC accounting
      rules and regulations, to the Company's "Statutory common welfare fund," which
      is established for the purpose of providing employee facilities and other
      collective benefits to the Company's employees; and




iv)
      Allocations to the discretionary surplus reserve, if approved in the
      shareholders' general meeting.




In
      accordance with the Chinese Company Law, the Company has allocated 10% of its
      net income to surplus. The amount included in the statutory reserves as of
      September 30, 2008 and December 31, 2007 amounted to $3,763,279 and $2,866,436,
      respectively.




The
      Company established a reserve for the annual contribution of 5% of net income
      to
      the common welfare fund. The amount included in the statutory reserves as of
      September 30, 2008 and December 31, 2007 amounted to $1,881,639 and $1,433,217,
      respectively.




**18.**  **RELATED
      PARTY TRANSACTIONS AND COMMITMENTS AND LEASES**




On
      January 6, 2005, our subsidiary Pacific Dragon entered into a license agreement
      with Mr. Yu Chang, our Chairman, Chief Executive Officer and President. Under
      this license agreement, Mr. Chang granted an exclusive license to Pacific Dragon
      for the use of know-how in manufacturing organic liquid compound fertilizer
      on a
      royalty-free basis. On December 3, 2005, Mr. Chang and Pacific Dragon entered
      into another license agreement pursuant to which the term of the license was
      extended to a permanent license. In accordance with the Securities Purchase
      Agreement, dated June 29, 2007, among the Company, Mr. Chang, and the investors
      named therein, an additional license agreement was entered into for the know-how
      mentioned above between Mr. Chang and Pacific Dragon Fertilizers Co. Ltd. (a
      subsidiary of the Company), confirming that the license has been extended until
      December 31, 2011.




The
      Company's PRC subsidiary, Pacific Dragon, has entered into a tenancy agreement
      with a related party, Yinlong Industrial Co. Ltd. ("Yinlong"), the joint
      venturer holding a 10% equity interest in Pacific Dragon, to lease two factory
      plants and one office building with a total floor area of 7,018 sq. meters
      for a
      term of 10 years from January 1, 2004 to December 31, 2013 at an annual rent
      of
      RMB 1,200,000 (equivalent to $144,578). The tenancy agreement was revised by
      increasing the annual rent to RMB 3,600,000 (equivalent to $442,800) effective
      from July 1, 2005. Yinlong is owned and controlled by Mr. Yu Chang and Ms.
      Xiaorong Tang, who are directors of the Company.





On
      July
      2, 2007, Agritech Fertilizer Co., Ltd entered into a tenancy agreement with
      Ms
      Teng Xiao Rong (a director of the Company) to lease an office with a total
      floor
      area of 780 meter square for a term of 5 years from February 1, 2007 to February
      1, 2012 at an annual rent of RMB 480,000 (equivalent to approximately $68,800)
      effective from July 2, 2007.




20


As
      of
      September 30, 2008, we have approximately $77,000 in capital commitments for
      the
      purchase of organic granular compound fertilizer’s production
      facilities.




The
      Company incurred rent expense of $607,279 and $518,296 related to the above
      leases for the nine month periods ended September 30, 2008 and 2007,
      respectively, and $212,127 and $180,538 for the three month periods ended
      September 30, 2008 and 2007, respectively. The rent obligations for the next
      five years after September 30, 2008 are as follows:




Year
                2008
            
            
            215,714Year
                2009
            
            
            848,670Year
                2010
            
            
            847,953Year
                2011
            
            
            830,032Year
                2012
            
            
            685,181Thereafter
            
            
            788,057$
            4,215,607







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





***Special
      Note Regarding Forward Looking Statements***





This
      report contains forward-looking statements and information relating to China
      Agritech, Inc., that are based on the beliefs of our management as well as
      assumptions made by and information currently available to us. When used in
      this
      report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,”
“will,” “plan” and similar expressions, as they relate to us or our management,
      are intended to identify forward-looking statements. These statements reflect
      our current view concerning future events and are subject to risks,
      uncertainties and assumptions, including among others: a general economic
      downturn; a downturn in the securities markets; Securities and Exchange
      Commission (“SEC”) regulations which affect trading in the securities of "penny
      stocks," and other risks and uncertainties. Should any of these risks or
      uncertainties materialize, or should underlying assumptions prove incorrect,
      actual results may vary materially from those described in this report as
      anticipated, estimated or expected. Except as required by law, we assume no
      obligation to update any forward-looking statements publicly, or to update
      the
      reasons actual results could differ materially from those anticipated in any
      forward- looking statements, even if new information becomes available in the
      future. Important factors that may cause actual results to differ from those
      projected include the risk factors specified above. Notwithstanding the above,
      Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
      Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”)
      expressly states that the safe harbor for forward-looking statements does not
      apply to companies that issue penny stock. Because we may from time to time
      be
      considered as an issuer of penny stock, the safe harbor for forward-looking
      statements may not apply to us at certain times.





21


All
      statements other than statements of historical fact are statements that could
      be
      deemed forward-looking statements, including statements regarding new and
      existing products, technologies and opportunities; statements regarding market
      and industry segment growth and demand and acceptance of new and existing
      products; any projections of sales, earnings, revenue, margins or other
      financial items; any statements of the plans, strategies and objectives of
      management for future operations; any statements regarding future economic
      conditions or performance; uncertainties related to conducting business in
      China; any statements of belief or intention; any of the factors mentioned
      in
      the "Risk Factors" section of the Company’s Annual Report on Form 10-K for the
      year ended December 31, 2007, originally filed with the SEC on March 28, 2008,
      as amended; and any statements or assumptions underlying any of the foregoing.
      We assume no obligation and do not intend to update these forward-looking
      statements, except as required by law.





Except
      as
      otherwise indicated by the context, references in this Report to the “Company,”
“China Agritech,” “we,” “us” or “our” are references to the combined business of
      China Agritech, Inc. and its consolidated subsidiaries. References to "Tailong"
      are references to our wholly-owned subsidiary, China Tailong Holdings Company
      Limited; references to "Pacific Dragon" are references to Tailong’s 90% owned
      subsidiary, Pacific Dragon Fertilizers Co. Ltd.; references to “CAI” are to our
      wholly owned subsidiary, CAI Investment Inc.; references to “Beijing Agritech”
are to our wholly-owned indirect subsidiary, Beijing Agritech Fertilizer Ltd.;
      and references to Anhui Agritech are to our wholly-owned subsidiary, Anhui
      Agritech Development Co. Ltd. References to "China" or "PRC" are references
      to
      the People's Republic of China. References to "RMB" are to Renminbi, the legal
      currency of China, and all references to "$" and dollar are to the United States
      dollar, the legal currency of the United States.





**Our
      Business**




China
      Agritech is a holding company whose direct and indirect subsidiaries manufacture
      and sell organic liquid compound fertilizers and related agricultural products.
      Our business operations are primarily conducted through our direct and indirect
      subsidiaries, primarily Anhui Agritech, Beijing Agritech, Tailong and Tailong’s
      subsidiary, Pacific Dragon. Our revenues are derived primarily from the sale
      of
      our organic liquid compound fertilizers and related agricultural products to
      our
      customers.





Our
      main
      products include “LvLingBao III,” “LvLingBao IV,” “Tailong I,” and “Green
      Vitality” and other customized, crop specific fertilizers that are tailored to
      our customers' specific requirements. Our products promote photosynthesis,
      root
      system growth and transmission of nutrients to seeds; equilibrate absorption
      of
      nutrients and speed a plant's maturity; eliminate the damage of harmful radicals
      to plants and increase protein and vitamin content levels; accelerate the
      accumulation of photosynthesis materials and cell concentration; increase
      reservation ability to resist drought, resistance and the utilization rate
      of
      basic fertility; and foster the development of plant life along with neutral
      or
      acidic pesticides. Our products can be applied on a widespread basis via
      spraying by machine or aircraft. Our products have been recognized for their
      quality and effectiveness by leading industry associations and have been
      certified by the PRC government at the national level, which is an endorsement
      of the effectiveness of the products in all regions of China.





China
      is
      the principal market for our products, which are primarily sold to farmers
      in
      the Heilongjiang, Hebei, Liaoning, Jilin, Shandong, Inner Mongolia, Henan,
      Sichuan, Guangdong, Xinjiang, Yunnan, Guizhou, Hainan and Jiangsu provinces
      in
      China. Presently, the annual production capacity of organic liquid compound
      fertilizers is approximately 13,000 **** metric
      tons.





22


We
      believe that our brand reputation and ability to tailor our products to meet
      the
      requirements of various regions of China affords us a competitive advantage.
      We
      purchase the majority of our raw materials from suppliers located in China
      and
      use suppliers that are located in close proximity to our manufacturing
      facilities.





**Overview**





Sales
      during the third quarter of 2008 were approximately 43.8% higher than sales
      during the third quarter of 2007.  The
      Company’s consolidated balance sheet as of September 30, 2008 included current
      assets of $68,183,225 and total assets of $73,688,940. The Company had no
      long-term debt at September 30, 2008.





We
      have
      made progress in expanding our operations through our recently formed Anhui
      Agritech and Beijing Agritech operating subsidiaries. Anhui Agritech operates
      our recently constructed facility in the Anhui province and began operations
      in
      the first quarter of 2007. It manufactures and sells our fertilizer products
      to
      customers in the Anhui, Hubei and Henan provinces of China. Beijing Agritech
      supervises our Beijing operations, which serve as a research and development
      center and as our primary syrup production center and converting factory (the
      syrup is used as a base for mixing our fertilizer products). Our Beijing
      Agritech operations commenced business in September 2006. Our annual production
      capacity in 2007 was approximately 13,000 metric tons of organic liquid compound
      fertilizers. We expect that the integration of our Anhui Agritech and Beijing
      Agritech operating subsidiaries which continued in the third quarter of 2008
      will contribute to our financial results during the final quarter of the 2008
      fiscal year. Also, in the third quarter, we completed developing our granular
      plant in Beijing with 100,000 MT production capacity.





On
      March
      16, 2007, the National People’s Congress of the PRC determined to adopt a new
      corporate income tax law in its fifth plenary session. The new corporate income
      tax law unifies the application scope, tax rate, tax deduction and preferential
      policy for both domestic and foreign-invested enterprises and became effective
      on January 1, 2008. Because of the new corporate income tax law, the income
      tax
      rate for our PRC subsidiaries was subject to a change. However, there was not
      and we do not anticipate any material adverse effect on our financial condition,
      results of operations or cash flows as a result of any such change. The change
      in the corporate income tax law acted to lower our tax expense (as a percentage
      of new revenues) and caused improved earnings in the third quarter of
      2008.




On
      October 22, 2008, Mr. Yau-Sing Tang was appointed as the Chief Financial Officer
      of the Company. Mr. Tang, age 46, was most recently chief financial officer
      of
      Carpenter Tan Holdings Ltd., a retail chain in Mainland China which is applying
      to be listed on the Hong Kong Stock Exchange. Prior to that, he was the founder
      and managing director of GC Alliance Limited, a CPA firm in Hong Kong. From
      April 2003 to December 2005, he was executive director and chief financial
      officer of China Cable and Communication, Inc., which was listed on the OTC
      Bulletin Board. Mr. Tang received his Bachelor of Social Sciences (Honors)
      degree from the University of Hong Kong. He is a fellow of the Association
      of
      Chartered Certified Accountants in the U.K. and the Hong Kong Institute of
      Certified Public Accountants. He is also a member of the Institute of Chartered
      Accountants in England and Wales and the Taxation Institute of Hong
      Kong




23


Mr.
      Gene
      Michael Bennett, Professor Lun Zhang Dai and Mr. Hai Lin Zhang were appointed
      as
      members of the Board of Directors on October 22, 2008, and Mr. Tao Liang, one
      of
      our former directors resigned from the Board of Directors. Mr. Bennett,
      Professor Dai and Mr. Zhang will all be members of the newly formed audit,
      compensation and nominating and governance committees. Mr. Bennett has been
      selected as chair of the audit committee, Professor Dai will serve as chair
      of
      the compensation committee, and Mr.Zhang will serve as chair of the nominating
      and governance committee.








**Results
      of Operations**





**Comparison
      of Three Months Ended September 30, 2008 and September 30,
      2007.**





The
      following table summarizes the results of our operations during the three-month
      periods ended September 30, 2008 and 2007 and provides information regarding
      the
      dollar and percentage increase or (decrease) from the 2007 fiscal period to
      the
      2008 fiscal period:





**(All
      amounts, other than percentages, in thousands of U.S.
      dollars)**





**Three
                Months Ended**
              **9/30/08**
            
            **Three
                Months**
              **Ended**
              **9/30/07**
            
            **Dollar
                ($)**
              **Increase**
              **(Decrease)**
            
            **Percentage
                (%) Increase**
              **(Decrease)**Net
                Revenue
            
            
            16,674
            
            
            11,596
            
            
            5,078
            
            
            43.8Cost
                of Revenue
            
            
            (9,896
            )
            
            (5,416
            )
            
            4,480
            
            
            82.7Gross
                Profit
            
            
            6,778
            
            
            6,180
            
            
            598
            
            
            9.7Selling
                Expenses
            
            
            (1,084
            )
            
            (825
            )
            
            259
            
            
            31.4Operating
                and Administrative Expenses
            
            
            (780
            )
            
            (736
            )
            
            44
            
            
            5.9Income
                From Operations
            
            
            4,913
            
            
            4,619
            
            
            294
            
            
            6.4Other
                Income (Expenses)
            
            
            120
            
            
            (79
            )
            
            199
            
            
            251.9Income
                Tax
            
            
            (1,226
            )
            
            (1,648
            )
            
            (422
            )
            
            (25.6
            )Minority
                Interest
            
            
            (346
            )
            
            (333
            )
            
            13
            
            
            3.9Foreign
                Currency Translation Gains
            
            
            159
            
            
            523
            
            
            (364
            )
            
            (69.6
            )Net
                income
            
            
            3,462
            
            
            2,558
            
            
            904
            
            
            35.3





***Net
      Revenue*** .
      Our net
      revenue for the three months ended September 30, 2008 amounted to $16.7 million,
      which is approximately $5.1 million or 43.8% more than that of the same period
      ended on September 30, 2007, when we had revenue of $11.6 million. Our net
      revenue is generated from sales of our organic liquid and granular fertilizer
      products. The increase in net revenue is mainly attributable to expansion of
      customers based in the newly established sales markets in the central and
      southern regions of China. Sales of newly launched organic granular compound
      fertilizers in third quarter also contributed to the increase in
      sales. ****





***Costs
      of Revenue*** .
      Our
      cost of revenue was $9.9 million for the three-month period ended September
      30,
      2008, an increase of approximately $4.5 million or 82.7%, as compared to $5.4
      million for the three-month period ended September 30, 2007. Our costs of
      revenue are primarily comprised of the cost of our raw materials, direct labor
      and manufacturing overhead expenses. Our cost of revenue increased period to
      period as a result of higher sales, but the percentages of the costs of revenue
      to total revenues increased to 59.4% from 46.7% for the three-month periods
      ended September 30, 2008 and 2007, respectively. The higher cost of revenue
      as a
      percentage of sales was primarily due to the change in product mix as a result
      of sales of organic granular compound fertilizer which has a higher cost of
      sales to revenue as compared to organic liquid compound fertilizer. In addition,
      increases in the prices of raw materials and packaging materials also
      contributed to the rise in cost of revenue. ****





24


***Gross
      Profit*** **.** Our
      gross profit is equal to the difference between our sales revenue and our cost
      of goods sold. Our gross profit was $6.8 million for the three-month period
      ended September 30, 2008, an increase of approximately $0.6 million or 9.7%,
      as
      compared to $6.2 million for the three-month period ended September 30, 2007.
      Gross profit as a percentage of net revenues was 40.6% for the three months
      ended September 30, 2008, as compared to 53.3% for the three months ended
      September 30, 2007. The decrease in gross profit as a percentage of revenues
      was
      mainly due to voluminous sales of newly launched organic granular compound
      fertilizer which has a lower gross profit margin. Increases in the costs of
      raw
      materials and packing materials also contributed to the lower gross profit
      achieved.





***Selling
      Expenses*** .
      Our
      selling expenses consist primarily of sales commission, advertising and
      promotion expenses, freight charges and related compensation. Our selling
      expenses were $1.1 million for the three-month period ended September 30, 2008,
      as compared to $0.8 million for the same period ended September 30, 2007, an
      increase of approximately $0.3 million or 31.4%. The increase was primarily
      attributable to an increase in sales representative compensation as a result
      of
      salary increases and adjustments made to the commission basis. We also paid
      more
      in sales commissions because we sold more of our products. Freight charges
      related to sales have increased as a result of the increase in fuel prices
      and
      sales volume both from liquid and granular fertilizer compared to the three
      months ended September 30, 2007.





***Operating
      and Administrative Expenses.*** Our
      general and administrative expenses were $0.8 million for the three-month period
      ended September 30, 2008, as compared to $0.7 million for the same period ended
      September 30, 2007, an increase of less than $0.1 million or 14.3%. Our
      operating and administrative expenses consist primarily of rental expenses,
      salaries, business development, depreciation and travel expenses, and legal
      and
      professional expenses. Higher administrative expenses for the three month period
      ended September 30, 2008, were primarily attributable to administrative cost
      such as factory rental expenses for the newly constructed organic granular
      compound fertilizer plant in Beijing and an addition of two new management
      members to our payroll was also a factor in the increase in operating and
      administrative expenses.





***Income
      From Operations.*** Income
      from operations was $4.9 million for the three-month period ended September
      30,
      2008, as compared to $4.6 million for the same period ended September 30, 2007,
      a decrease of approximately $0.3 million or approximately 6.4%. The increase
      in
      our income from operations from period to period was caused by an increase
      in
      sales during the third quarter of 2008 which was partially offset by an increase
      in selling expenses, operating and administrative expenses and cost of
      revenue.




***Other
      Income (Expenses).*** Interest
      income was $22 thousand for the three-month period ended September 30, 2008,
      as
      compared to $3 thousand for the same period ended September 30, 2007. The
      increase in interest income was due to an increase in cash on deposit with
      our
      bank derived from the proceeds of common shares issued and sold in July 2007.
      The increase in exchange gain resulted from the weaker U.S. dollar relative
      to
      RMB as of September 30, 2008.





25


***Income
      taxes*** .
      We
      incurred income taxes of $1.2 million for the three-month period ended on
      September 30, 2008. This is a decrease of approximately $0.4 million or 25.6%
      from the taxes we incurred for the same period in 2007, which were $1.6 million.
      Our Chinese subsidiaries are taxed at a rate of 25% of assessable profit. We
      paid less in taxes for the three months ended September 30, 2008 than for the
      three month ended September 30, 2007 due to the new corporate income tax law
      in
      the PRC, which reduced the corporate tax rate that we pay from 33% to 25% as
      of
      January 1, 2008.





***Minority
      interest*** .
      Our
      financial statements reflect the minority interest held by Yinlong in our
      subsidiary Pacific Dragon. Our financial statements reflect an adjustment to
      our
      consolidated group net income equal to $0.3 million for the three-month periods
      ended September 30, 2008 and 2007, respectively, reflecting the minority
      interest held by Yinlong in our subsidiary Pacific Dragon. The increase in
      the
      minority interest adjustment is due to the increase in the net income of Pacific
      Dragon.





***Foreign
      Currency Translation Gains*** .
      We had
      a foreign currency translation gain of $0.2 million for the three-month period
      ended September 30, 2008 as compared to $0.5 million for the three-month period
      ended September 30, 2007. The increase in foreign currency translation gains
      is
      attributable to a stronger RMB relative to U.S. dollars as of September 30,
      2008
      as compared to September 30, 2007.





***Net
      Income*** .
      We
      earned net income of $3.5 million for the three-month period ended September
      30,
      2008. This is an increase of approximately $0.9 million or 35.3% from our net
      income during the same period ended September 30, 2007 of $2.5 million. The
      increase in net income was attributable to higher sales achieved and lower
      taxes
      paid, partially offset by the increase in the administrative and selling
      expenses for the three month period ended September 30, 2008 as explained
      above.





**Comparison
      of Nine Months Ended September 30, 2008 and September 30,
      2007.**





The
      following table summarizes the results of our operations during the nine-month
      periods ended September 30, 2008 and September 30, 2007 and provides information
      regarding the dollar and percentage increase (or decrease) from the 2007 fiscal
      period to the 2008 fiscal period:





**(All
      amounts, other than percentages, in thousands of U.S.
      dollars)**





Nine-Months
              Ended
                September 30, 2008
            
            Nine-Months
              Ended
                September 30, 2007
            
            Dollar
                ($)
              Increase
                (Decrease)
            
            Percentage
                (%) Increase
              (Decrease)Net
                Revenue
            
            
            38,084
            
            
            30,074
            
            $
            8,009
            
            
            26.6Costs
                of Revenue
            
            
            (20,429
            )
            
            (13,632
            )
            
            6,797
            
            
            49.9Gross
                Profit
            
            
            17,655
            
            
            16,443
            
            
            1,212
            
            
            7.4Selling
                Expenses
            
            
            (3,017
            )
            
            (2,229
            )
            
            788
            
            
            35.4Operating
                and Administrative Expenses
            
            
            (2,704
            )
            
            (1,749
            )
            
            955
            
            
            54.6Income
                from Operations
            
            
            11,934
            
            
            12,465
            
            
            (531
            )
            
            (4.3
            )Other
                income (Expenses)
            
            
            9
            
            
            (49
            )
            
            58
            
            
            118.4Income
                Tax
            
            
            (3,376
            )
            
            (4,452
            )
            
            (1,076
            )
            
            (24.2
            )Minority
                Interest
            
            
            (991
            )
            
            (885
            )
            
            106
            
            
            12.0Foreign
                Currency Translation Gains
            
            
            3,274
            
            
            1,354
            
            
            1,920
            
            
            141.8Net
                Income
            
            
            7,577
            
            
            7,077
            
            
            500
            
            
            7.1




26




***Net
      Revenue.*** Our net
      revenue for the nine months ended September 30, 2008 amounted to $38.1 million,
      which is approximately $8.0 million or 26.6% more than that of the same period
      ended on September 30, 2007, when we had revenue of $30.1 million. The increase
      in net revenue is mainly attributed to sales of newly launched organic granular
      compound fertilizer products and continued expansion of customers based in
      the
      newly established sales markets in the central and southern regions of China
      in
      the 2008 period.





***Cost
      of Revenue*** .
      Our
      cost of revenue was $20.4 million for the nine-month period ended September
      30,
      2008, an increase of approximately $6.8 million or 49.9%, as compared to $13.6
      million for the nine-month period ended September 30, 2007. The percentages
      of
      the cost of sales to the total revenues are 53.6% and 45.3% for the nine-month
      periods ended on September 30, 2008 and 2007, respectively, an increase of
      approximately 8.3%. This change was primarily due to the change of product
      mix
      as a result of sales of organic granular compound fertilizer which has a higher
      cost of sales to revenue as compared to organic liquid compound fertilizer.





***Gross
      Profit*** **.** Our
      gross profit is equal to the difference between our sales revenue and our cost
      of goods sold. Our gross profit was $17.7 million for the nine-month period
      ended September 30, 2008, an increase of approximately $1.2 million or 0.7%,
      as
      compared to $16.4 million for the nine-month period ended September 30, 2007.
      Gross profit as a percentage of net revenues was 46.4% for the nine months
      ended
      September 30, 2008, as compared to 54.6% for the nine months ended September
      30,
      2007. The decrease in gross profit as a percentage of revenues was mainly due
      to
      the voluminous sales of newly launched organic granular compound fertilizer
      which has a lower gross profit margin.





***Selling
      Expenses*** .
      Our
      selling expenses were $3.0 million for the nine-month period ended September
      30,
      2008, as compared to $2.2 million for the same period ended September 30, 2007,
      an increase of approximately $0.8 million or 35.4%, mainly due to an increase
      in
      sales representative compensation attributed to a salary increase and an
      adjustment to the commission basis. The higher sales commissions were incurred
      because of increased sales. Selling and marketing activities were also increased
      in the first nine months of 2008 in the newly established sales markets in
      the
      central and southern regions of China compared to the first six months of 2007,
      resulting in an increase in selling expenses. We have seen the cost of travel
      related to sales increase as a result of our geographical expansion into the
      Chongqing and Xinjiang regions. Finally, freight charges related to the sales
      have increased as a result of the increase in fuel prices, Olympic season and
      sales volume compared to the nine month period ended September 30,
      2007.




***Operating
      and Administrative Expenses*** .
      Our
      general and administrative expenses were $2.7 million for the nine-month period
      ended September 30, 2008, as compared to $1.7 million for the same period ended
      September 30, 2007, an increase of approximately $1.0 million or 54.6%, partly
      because of the increase in legal, accounting and professional consulting fees.
      Besides, higher salary expenses were also experienced from the addition of
      two
      new management members to our payroll in 2008. We have incurred additional
      general administrative costs mainly related to the newly established sales
      markets (Xinjiang and Chongqing) and similar costs were incurred prior to March
      and July 2007 for Chongqing and Xinjiang respectively. Finally, administrative
      costs, such as factory rental expenses for the newly constructed organic
      granular compound fertilizer plant in Beijing, have also contributed to the
      increase in the operating and administrative expenses.




27


***Income
      From Operations*** .
      Income
      from operations was $12.0 million for the nine-month period ended September
      30,
      2008, as compared to $12.5 million for the same period ended September 30,
      2007,
      a decrease of approximately $0.5 million or approximately 4.3%. This decrease
      was primarily attributable to the increase in sales for the nine month period
      ended September 30, 2008, which was partially offset by the increase in selling
      expenses, operating and administrative expenses and costs of
      revenue.




***Other
      Income (Expenses).*** Interest
      income was $86 thousand for the nine-month period ended September 30, 2008,
      as
      compared to $38 thousand for the same period ended September 30, 2007. The
      increase in interest income was due to an increase in cash on deposit with
      our
      bank derived from the proceeds of common shares issued and sold in July 2007.
      Other expenses mainly consisted of exchange loss. The increase in exchange
      loss
      resulted from the weaker U.S. dollar relative to RMB as of September 30,
      2008.




***Income
      taxes*** .
      We
      incurred income taxes of $3.4 million for the nine-month period ended on
      September 30, 2008. This is a decrease of approximately $1.1 million or 24.2%
      from the taxes we incurred for the same period in 2007, which were $4.5 million.
      We paid less in taxes in the nine months ended September 30, 2008 as compared
      to
      the same period in 2007 due to the new corporate income tax law in the PRC,
      which revised the corporate tax rate that we pay from 33% to 25% as of January
      1, 2008.





***Minority
      interest*** .
      Our
      financial statements reflect an adjustment to our consolidated group net income
      equal to $1.0 million and $0.9 million for the nine-month periods ended
      September 30, 2008 and 2007, respectively, reflecting the minority interest
      held
      by Yinlong in our subsidiary Pacific Dragon. The increase in the minority
      interest adjustment is due to increase in the net income of Pacific
      Dragon.




***Foreign
      Currency Translation Gains*** .
      We had
      a foreign currency translation gain of $3.3 million for the nine-month period
      ended September 30, 2008 as compared to $1.4 million for the nine-month period
      ended September 30, 2007. The increase in foreign currency translation gains
      can
      be attributed to a stronger RMB relative to U.S. dollars as of September 30,
      2008 as compared to the same date in 2007.





***Net
      Income*** .
      We
      earned net income of $7.6 million for the nine-month period ended September
      30,
      2008 as compared to $7.1 million for the nine-month period ended September
      30, 2007. The increase in net income of $0.5 million, or 7.0%, was attributable
      to higher sales revenues achieved and lower taxes, which were partially offset
      by the increase in the administrative and selling expenses for the nine-month
      period ended September 30, 2008 as explained above.




**Liquidity
      and Capital Resources**





As
      of
      September 30, 2008, we had cash and cash equivalents of $5.3 million and
      restricted cash of $2 **** million
      that was held in escrow. Our current assets were $68.2 million and our current
      liabilities were $7.2 million as of September 30, 2008, which results in a
      current ratio of approximately 9.4 times. Our total stockholders’ equity as of
      September 30, 2008 was $61.7 million. We had no bank loans or other interest
      bearing borrowings as of September 30, 2008. We believe that our currently
      available working capital will be sufficient to maintain our operations at
      our
      current levels for the next twelve months. As of September 30, 2008, we have
      approximately $77 thousand in capital commitment for the purchase of organic
      granular compound fertilizer production facilities.





28


On
      July
      5, 2007, we raised a total of approximately $15 million from the sale of
      5,556,000 shares of our common stock through a private placement transaction.
      In
      accordance with the terms of the private placement, $2 million of the proceeds
      from the private placement transactions were kept in an escrow account and
      will
      be released when we hire a new CFO and modify our board of directors in
      accordance with the terms of the private placement documents. As of September
      30, 2008, all $2 million remained in escrow.






**Cash
                Flows (in U.S. Dollars)****Nine
                Months**
              **Ended
                September 30,****2008**
            
            **2007**Net
                cash used in operating activities
            
            
            (7,947,183
            )
            
            (3,188,677
            )Net
                cash provided by (used in) investing activities
            
            
            (2,165,541
            )
            
            (1,462,714
            )Net
                cash provided by financing activities
            
            
            -
            
            
            11,484,478Net
                (decrease)/increase in cash
            
            
            (10,112,724
            )
            
            6,833,085








**Operating
      Activities** :




Net
      cash
      used in operating activities was $7.9 million for the nine-month period ended
      September 30, 2008, which was an increase of $4.7 million from the $3.2 million
      net cash used in operating activities for the same period in 2007. The increase
      was attributable to an increase in the inventory for raw materials for our
      newly
      constructed organic granular compound fertilizer’s production facilities. Sales
      of the organic granular compound fertilizer and expansion of our central and
      southern region customer base has increased the overall accounts receivable
      as
      the Company’s average credit terms given for liquid and granular fertilizer
      ranged from 6 to 12 months and 1 to 3 months respectively, hence this also
      contributed to the increase in the net cash used in operating
      activities.





**Investing
      Activities** :




Our
      main
      uses of cash for investing activities were payment for the acquisition of
      property, plant, equipment and construction in progress for plant and
      equipment **** for
      granular fertilizer. Net cash used in investing activities in the nine-month
      period ended September 30, 2008 was $2.2 million, which is an increase of
      approximately $0.7 million from net cash provided for investing activities
      of
      $1.5 million in the same period of 2007. The increase was due to the
      construction of organic granular compound fertilizer production facilities.





**Financing
      Activities** :





Net
      cash
      provided by financing activities in the nine-month period ended September 30,
      2007 was mainly attributable to capital raising activities on July 5, 2007.
      The
      decrease was attributable to no similar capital raising activities for the
      nine-month period ended September 30, 2008.





29




**Critical
      Accounting Policies**





The
      preparation of financial statements in conformity with accounting
      principles generally accepted in the United States of America (“U.S. GAAP”) requires
      our management to make assumptions, estimates and judgments that affect the
      amounts reported in the financial statements, including the notes thereto,
      and
      related disclosures of commitments and contingencies, if any. We consider our
      critical accounting policies to be those that require the most significant
      judgments and estimates in the preparation of financial statements, including
      the following:






·
            ***Accounts
                Receivable***.
                 Our policy is to maintain reserves for potential credit losses on
                accounts receivable. Management reviews the composition of accounts
                receivable and analyzes historical bad debts, customer concentrations,
                customer credit worthiness, current economic trends and changes in
                customer payment patterns to evaluate the adequacy of these reserves.







·
            ***Inventories***.
                 Inventories are valued at the lower of cost (determined on a
                first-in first-out basis) or net realizable value. Our management
                compares
                the cost of inventories with the net realizable value and an allowance
                is
                made for inventories with net realizable value, if lower than the
                cost.




·
            ***Impairment***.
                 We apply the provisions of Statement of Financial Accounting
                Standard (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of
                Long-Lived Assets,” issued by the Financial Accounting Standards Board
                (“FASB”). SFAS No. 144 requires that long-lived assets be reviewed for
                impairment whenever events or changes in circumstances indicate that
                the
                carrying amount of an asset may not be recoverable through the estimated
                undiscounted cash flows expected to result from the use and eventual
                disposition of the assets. Whenever any such impairment exists, an
                impairment loss will be recognized for the amount by which the carrying
                value exceeds the fair value.We
                test long-lived assets, including property, plant and equipment and
                intangible assets subject to periodic amortization, for recoverability
                at
                least annually or more frequently upon the occurrence of an event
                or when
                circumstances indicate that the net carrying amount is greater than
                its
                fair value. Assets are grouped and evaluated at the lowest level
                for their
                identifiable cash flows that are largely independent of the cash
                flows of
                other groups of assets. We consider historical performance and future
                estimate results in our evaluation of potential impairment and then
                compare the carrying amount of the asset to the future estimated
                cash
                flows expected to result from the use of the asset. If the carrying
                amount
                of the asset exceeds estimated expected undiscounted future cash
                flows, we
                measure the amount of impairment by comparing the carrying amount
                of the
                asset to its fair value. The estimation of fair value is generally
                measured by discounting expected future cash flows as the rate we
                utilize
                to evaluate potential investments. We estimate fair value based on
                the
                information available in making whatever estimates, judgments and
                projections are considered
                necessary.




30




·
            ***Revenue
                Recognition***.
                 Our revenue recognition policies are in compliance with Staff
                Accounting Bulletin 104. Sales revenue is recognized at the date
                of
                shipment to customers when a formal arrangement exists, the price
                is fixed
                or determinable, the delivery is completed, no other significant
                obligations of our company exist and collectibility is reasonably
                assured.
                Payments received before all of the relevant criteria for revenue
                recognition are satisfied are recorded as unearned revenue. Our revenue
                consists of invoiced value of goods, net of a value-added tax (“VAT”). No
                product return or sales discount allowance is made as products delivered
                and accepted by customers are normally not returnable and sales discounts
                are normally not granted after products are delivered.




·
            ***Foreign
                currency translation***.
                We use U.S. dollars for financial reporting purposes. Our subsidiaries
                maintain their books and records in their functional currency, RMB,
                being
                the primary currency of the PRC, the economic environment in which
                their
                operations are conducted. In general, for consolidation purposes,
                we
                translate our subsidiaries’ assets and liabilities into U.S. dollars using
                the applicable exchange rates prevailing at the balance sheet date,
                and
                the statement of income is translated at average exchange rates during
                the
                reporting period. Gain or loss on foreign currency transactions are
                reflected on the income statement. Gain or loss on financial statement
                translation from foreign currency are recorded as a separate component
                in
                the equity section of the balance sheet, as component of comprehensive
                income. The functional currency of our Company is RMB. Until July
                21,
                2005, RMB had been pegged to the U.S. dollar at the rate of RMB
                8.28:$1.00. On July 21, 2005, the PRC government reformed the exchange
                rate system into a managed floating exchange rate system based on
                market
                supply and demand with reference to a basket of currencies. In addition,
                the exchange rate of RMB to U.S. dollars was adjusted to RMB 8.11:$1.00
                as
                of July 21, 2005. The People's Bank of China announces the closing
                price
                of a foreign currency such as U.S. dollar traded against RMB in the
                inter-bank foreign exchange market after the closing of the market
                on each
                working day, which will become the unified exchange rate for the
                trading
                against RMB on the following working day. The daily trading price
                of U.S.
                dollars against RMB in the inter-bank foreign exchange market is
                allowed
                to float within a band of 0.3% around the unified exchange rate published
                by the People's Bank of China. This quotation of exchange rates does
                not
                imply free convertibility of RMB to other foreign currencies. All
                foreign
                exchange transactions continue to take place either through the People’s
                Bank of China or other banks authorized to buy and sell foreign currencies
                at the exchange rates quoted by the People's Bank of China. Approval
                of
                foreign currency payments by the People’s Bank of China or other
                institutions require submitting a payment application form together
                with
                invoices, shipping documents and signed contracts.





**Off-Balance
      Sheet Arrangements**





We
      do not
      have any off-balance sheet arrangements.





**Seasonality**





We
      may
      experience seasonal variations in our future revenues and our operating costs
      due to seasonality, but we do not believe that these variations will be
      material. However, demand for our organic liquid compound fertilizer products
      fluctuates significantly with weather conditions, which may delay the
      application of the fertilizer or render it unnecessary thereby reducing demand
      for our products.





31


**ITEM
      3. QUANTITATIVE
      AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.**




Not
      applicable.




**ITEM
      4. CONTROLS AND PROCEDURES**





***Disclosure
      Controls and Procedures***





We
      maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under
      the Securities Exchange Act that are designed to ensure that information that
      would be required to be disclosed in Securities Exchange Act reports is
      recorded, processed, summarized and reported within the time period specified
      in
      the SEC’s rules and forms, and that such information is accumulated and
      communicated to our management, including to our Chief Executive Officer and
      Chief Financial Officer, as appropriate, to allow timely decisions regarding
      required disclosure.





As
      required by Rule 13a-15 under the Securities Exchange Act, under the supervision
      and with the participation of our management, including our Chief Executive
      Officer and our Chief Financial Officer, we evaluated the effectiveness of
      the
      design and operation of our disclosure controls and procedures as of September
      30, 2008. Based on that evaluation, such officers concluded that because of
      the
      material weakness in internal control over financial reporting described below,
      our disclosure controls and procedures were not effective as of September 30,
      2008.





In
      connection with their review of our internal controls over financial reporting
      for the fiscal year ended December 31, 2007, our management concluded that
      there
      were several significant deficiencies that, when combined, resulted in a
      material weakness in our internal controls.




As
      we
      have disclosed in our prior SEC filings, we conduct all of our operations
      through our Chinese operating subsidiaries. At the time of the transaction
      in
      2005 whereby our operating subsidiaries became part of a U.S. public company,
      these Chinese companies did not have in place the financial controls and
      procedures required to comply with U.S. financial reporting standards. As a
      public company, we have implemented and continue to implement remediation
      measures with respect to our internal controls over financial
      reporting.





In
      the
      absence of full implementation of the remediation measures described below,
      we
      have undertaken additional steps to ensure that our Condensed Interim Financial
      Statements included in this report were prepared in accordance with U.S. GAAP.
      Accordingly, the Company's management believes that the Condensed Interim
      Financial Statements included in this Report fairly present in all material
      respects the Company’s financial condition, results of operations and cash flows
      for the period presented and that this Report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make
      the statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      Report.




The
      following is a description of each deficiency or weakness with respect to our
      internal controls over financial reporting identified and the remediation
      initiatives that we have implemented or intend to implement in the near
      future:




32


1. *Issue* :
       The Company does not have a formal employee code of conduct and ethics and
      not all duties are properly segregated due to the high turnover in the
      Company.





*Remediation
      Plan* :
       We conducted a survey and sought an opinion from each department on their
      current ethics and job function segregation procedures to gather sufficient
      information for preparing a formal employee code of conduct and ethics (the
      “Code”) and job function segregation plan, and management is currently working
      on establishing and adopting the Cord. Every employee will be required to attend
      a training session on the Code, and we intend to have the Code reviewed and
      revised annually. We have also reviewed the job description for each position
      in
      the entire company to ensure no overlapping of roles and responsibilities.
      Based
      on the results of the review, the management revised the job description for
      each position when necessary and has located sufficient personnel to fill any
      vacant positions to minimize any internal control issues that were related
      to
      overlapping roles or responsibilities.





2. *Issue* : 
      There is lack of formal training program for the finance, administration and
      logistics departments, and the Company is focusing training solely on sales
      and
      technical departments.





*Remediation
      Plan* :
      Our
      Human Resources department developed an annual training program for each
      department so that each member of our staff will receive continuing and
      systematic training. We focused the training of each department based on such
      department’s functions. After each training, we conducted an assessment to
      assess the effectiveness of the training.




3. *Issue* : 
      The current staff in the accounting department is relatively new and
      inexperienced, and needs substantial training due to staff turnover and the
      higher demands of keeping accounting records in compliance with U.S. GAAP.
      The
      accounting skills and understanding necessary to fulfill the requirements of
      U.S. GAAP-based reporting, including the consolidation of subsidiary financial
      statements, are inadequate. Additionally, there is lack of financial analysis
      being done on financial statements. Currently, we are only performing the
      financial analysis on the cash flow statement between budgeted and actual
      results.




*Remediation
      Plan* :
      We have
      expanded our internal accounting staff and intend to continue this effort in
      the
      future. In particular, we are seeking accountants experienced in several key
      areas of accounting, including persons with experience in Chinese and U.S.
      GAAP,
      U.S. GAAP consolidation requirements, and SEC financial reporting requirements.
      In addition, we plan to allocate additional resources to train our existing
      accounting staff.





We
      appointed a new CFO in October 2008 and we hired a new Vice President of Finance
      in 2007 to supplement our accounting department.





We
      have
      developed procedures for financial statement analysis which we believer are
      proper, including inter-year comparisons, explanation of significant or unusual
      fluctuations, follow-up action plans and reporting and recording
      mechanisms.





4. *Issue* :
       Our Internal Audit Department has not taken an active role in the conduct
      of internal audits or control procedures or other activities typically performed
      by an Internal Audit Department due to insufficient resources. The annual plan,
      budget and specific procedures to perform the internal audit function have
      not
      been developed and an anti-fraud audit plan has not been developed.





*Remediation
      Plan* :
       The management is committed to developing a comprehensive and risk-based
      internal audit function within the Company. We have enhanced our efforts in
      recruitment. We expect to have a functioning Internal Audit Department by
      December, 2008. The roles and responsibilities of the Internal Audit Department
      will be formulated and the risk-based internal audit plan will be developed
      and
      approved by the Audit Committee.





33


In
      addition, in October 2008 we appointed three independent directors to our Board
      of Directors and established Audit, Compensation and Nominating and Governance
      Committees of the Board on which only such independent directors will serve.





***Changes
      in Internal Controls over Financial Reporting.***




During
      the third quarter ended September 30, 2008, other than the remediation plan
      efforts described above, there were no changes in our internal control over
      financial reporting identified in connection with the evaluation performed
      during the second fiscal quarter covered by this report 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**





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





**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**




None.




**ITEM
      3.  DEFAULTS UPON SENIOR SECURITIES**





None.





**ITEM
      4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**





None.





**ITEM
      5.  OTHER INFORMATION**





None.




**ITEM
      6.  EXHIBITS**




34


EXHIBITS.




31.1
            Certification
                of Principal Executive Officer filed pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.




31.2
            Certification
                of Principal Financial Officer filed pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.




32.1
            Certification
                of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
                1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.




32.2
            Certification
                of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
                1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.








35





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.





DATED:
      November 7, 2008





**CHINA
                AGRITECH, INC.**/s/
                Yu ChangYu
                ChangChief
                Executive Officer/s/
                Yau-Sing TangYau-Sing
                TangChief
                Financial Officer (Principal Financial
                Officer)








36





EXHIBIT
      INDEX


ExhibitNumber
              Description31.1
              Certification
                  of Principal Executive Officer filed pursuant to Section 302 of
                  the
                  Sarbanes-Oxley Act of 2002.31.2
              Certification
                  of Principal Financial Officer filed pursuant to Section 302 of
                  the
                  Sarbanes-Oxley Act of 2002.32.1
              Certification
                  of Principal Executive Officer furnished pursuant to 18 U.S.C.
                  Section
                  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                  Act of
                  2002.32.2
              Certification
                  of Principal Financial Officer furnished pursuant to 18 U.S.C.
                  Section
                  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                  Act of
                  2002.
  37