U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K






(MARK
ONE)


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




For
the Fiscal Year Ended December 31, 2008




OR




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




For
the Transition Period from _______________ to _________________





Commission
file number: 000-49608




CHINA
AGRITECH, INC.


(Exact
name of Registrant 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(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant’s
telephone number, including area code:


(86)
10-59621278




SECURITIES
REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:  NONE


SECURITIES
REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:




COMMON
STOCK, PAR VALUE $0.001 PER SHARE




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o YesxNo




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




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 of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. x Yes oNo




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x




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




Large
      accelerated filer o
            
            Accelerated
      filer o
            
            Non-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). oYes x No




The
aggregate market value of the shares of common stock, par value $0.001 per
share, of the registrant held by non-affiliates on June 30, 2008 was
$29,469,061, which was computed upon the basis of the closing price on that
date.




There
were 24,699,615 shares of common stock of the registrant outstanding as of March
27, 2009.




TABLE
OF CONTENTS




PART IItem 1.
              
              Business
              
              2Item 1A.
              
              Risk Factors
              
              11Item 1B.
              
              Unresolved Staff Comments
              
              11Item 2.
              
              Properties
              
              11Item 3.
              
              Legal Proceedings
              
              12Item 4.
              
              Submission of Matters to a Vote of Security
      Holders
              
              12PART IIItem 5.
              
              Market for Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
              
              12Item 6.
              
              Selected Financial Data
              
              14Item 7.
              
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              
              15Item 7A.
              
              Quantitative and Qualitative Disclosures About
      Market Risk
              
              22Item 8.
              
              Financial Statements and Supplementary Financial
      Data
              
              22Item 9.
              
              Changes in and Disagreements With Accountants on
      Accounting and Financial Disclosure
              
              22Item 9A(T).
              
              Controls and Procedures
              
              22Item 9B.
              
              Other Information
              
              24PART IIIItem 10.
              
              Directors, Executive Officers of and Corporate
      Governance
              
              24Item 11.
              
              Executive Compensation
              
              27Item 12.
              
              Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters
              
              29Item 13.
              
              Certain Relationships and Related Transactions and
      Director Independence
              
              32Item 14.
              
              Principal Accounting Fees and
      Services
              
              33PART IVItem 15.
              
              Exhibits and Financial Statement
      Schedules
              
              35




i





INTRODUCTORY
NOTE




Except as
otherwise indicated by the context, references in this Annual Report on Form
10-K (this “Form
10-K”) 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 Co., 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
U.S. dollar, the legal currency of the United States.




Special
Note Regarding Forward-Looking Statements




This
report contains forward-looking statements and information relating to China
Agritech that are based on the beliefs of our management as well as assumptions
made by and information currently available to us.  Such statements
should not be unduly relied upon.  When used in this report,
forward-looking statements include, but are not limited to, the words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar
expressions, as well as 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,
and any statements or assumptions underlying any of the
foregoing.  These statements reflect our current view concerning
future events and are subject to risks, uncertainties and
assumptions.  There are important factors that could cause actual
results to vary materially from those described in this report as anticipated,
estimated or expected, including, but not limited to:  competition in
the fertilizer industry and the impact of such competition on pricing, revenues
and margins, volatility in the securities market due to the general economic
downturn; Securities and Exchange Commission (the “SEC”) regulations
which affect trading in the securities of “penny stocks,” and other risks and
uncertainties.  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.  Depending on the market for our stock and other conditional
tests, a specific safe harbor under the Private Securities Litigation Reform Act
of 1995 may be available.  Notwithstanding the above, Section 27A of
the Securities Act of 1933, as amended (the “Securities Act”) and
Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
expressly state 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 to be an issuer of penny stock, the safe harbor for
forward-looking statements may not apply to us at certain times.




1




PART
I




Item
      1.
                Business




Our
Business




China
Agritech, Inc. is a holding company whose direct and indirect subsidiaries
manufacture and sell organic liquid compound fertilizers and related
agricultural products.  Our business operations are conducted through
our China-based subsidiaries, Anhui Agritech, Beijing Agritech and Pacific
Dragon.  Our revenues are derived primarily from the sale of our
organic fertilizer products.  We are a leading manufacturer of
fertilizer products and, more specifically, organic fertilizer products in
liquid form, in China. We have been producing organic liquid compound fertilizer
products in China since 1994.




China is
the principal market for our products, which are primarily sold to farmers in 20
provinces in China: Hainan, Anhui, Hubei, Jiangsu, Jiangxi, Guangxi, Liaoning,
Shanxi, Heilongjiang, Hebei, Jilin, Shandong, Inner Mongolia, Henan, Sichuan,
Guangdong, Xinjiang, Yunnan, Chongqing and Guizhou.




Our sales
revenue increased 19% from $38 million in the fiscal year ended
December 31, 2007 to $45.2 million in the fiscal year ended
December 31, 2008, and our net income grew 1.3% from $8.5 million in fiscal
year 2007 to $8.6 million in the fiscal year 2008.




Our main
products include “LvLingBao III,” “LvLingBao IV,” “Tailong I,” “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 the 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 in China 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.




We
believe that our brand reputation and ability to tailor our products to meet the
requirements of various regions in 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.




To
capitalize on the increased demand for our products and geographic expansion of
our sales throughout China, we organized two operating subsidiaries in 2007,
Anhui Agritech and Beijing Agritech. Our Anhui facility, which is part of Anhui
Agritech, manufactures and sells our fertilizer products to customers generally
in the Anhui, Hubei, and Henan provinces of China which are in the central and
southern areas of China. Our Beijing Agritech facility, which is part of Beijing
Agritech, is our primary research and development center, syrup production
center and converting factory and also distributes our products to the central
and southern areas of China.  Our Harbin facility, which is part of
Pacific Dragon Fertilizer Co., Ltd primarily distributes our products to the
northern areas of China.




Our
annual production capacity in each of 2008 and 2007 was approximately
13,000  metric tons of organic liquid compound fertilizers. In 2008,
we expanded our operations to include granular fertilizers.  Our
annual production capacity for granular fertilizers in 2008 was approximately
100,000 metric tons.




2




Our
Industry




In China,
the total output of fertilizer in 2005 reached 48.3 million metric tons, which
was one third of the world’s output. China is the principal market for our
organic liquid compound fertilizers, granular fertilizer and related
agricultural products. It is anticipated that the total demand for fertilizer
will exceed 50 million metric ton by the year 2015. As a subset of the broader
fertilizer market, the use of compound fertilizers in China has likewise
increased, from 1,796,000 tons in 1985 to 13,032,000 in 2005, an increase rate
of 5.8% from 2001 to 2002, 6.7% from 2002 to 2003, and an 8% increase from 2004
to 2005 (source: 2006 China statistics Yearbook).  It is expected that
the total demand of organic compound fertilizer will reach  about 25
million metric tons by the year 2015.




The large
size and high growth rate of the Chinese fertilizer market, particularly the
environmentally friendly organic fertilizer market, can be attributed to several
factors, including China’s large population, significant farming and
agricultural activities, government incentives and environmental concerns.
Future growth in the fertilizer market is expected to be due largely to the
projected growth in the use of fertilizer products and a continuation of the
high level of farming and agricultural activities.




Our
Challenges




Our
ability to successfully operate our business and achieve our goals and
strategies is subject to numerous challenges and risks, including for
example:




·
              any
      failure to expand our operations and production capacity sufficiently to
      meet our customers’ demands;




·
              any
      inability to effectively manage rapid growth and accurately project market
      demand for our products;




·
              risks
      associated with future investments or
  acquisitions;




·
              any
      loss of key members of our senior
management;




·
              loss
      of any skilled personnel or any failure to continue to attract skilled
      personnel in the future;




·
              any
      failure to protect the proprietary formula and manufacturing processes for
      our concentrated organic liquid compound
  fertilizer;




·
              potential
      product liability claims arising from fertilizer
  products;




·
              failure
      to renew our fertilizer registration certificate;
  and




·
              unexpected
      changes in China’s political or economic situation or legal
      environment;





You
should read and consider all information set forth in this report and should
consider risks that would generally be applicable to a company such as ours,
before investing in our common stock.




Corporate
Information




We were
originally incorporated on January 5, 1925 under the laws of the State of
Nevada as Argyle Mining Company for the development of mining
claims.  On August 10, 2004, we changed our corporate domicile from
Nevada to Delaware.  We also changed our name several times since the
date of incorporation.  In May 2005, we changed our name to China
Agritech, Inc.




Since
1925, we have changed our business model several times.  We had no
active operations during the period from 1986 until February 2005, when we
completed a reverse acquisition transaction with China Tailong Holdings Company
Limited, a Hong Kong Corporation, which is the holding company for Pacific
Dragon, one of our operating companies.




3




In
addition to Pacific Dragon, we conduct business operations through two other PRC
based operating companies:  Anhui Agritech and Beijing
Agritech.




The
following chart reflects our organizational structure as of the date of this
report, which takes into account the acquisition from Yinlong Industrial Co.
Ltd., the remaining 10% equity interest in Pacific Dragon, which was entered
into on February 12, 2009 and is expected to close in early April 2009, as more
fully described under the “Business – Recent Developments” section.




businessdev





The
address of our principal executive office is Room 301 No. 11
Building.  Zhonghong International Business Garden, Future Business
Center, Chaoyang North Road, Chaoyang District, Beijing China
100024.  Our telephone number is (86)10-59621278.  We
maintain a website at http://www.chinaagritechinc.com
that contains information about us.  The information on our website is
not, and shall not be deemed to be, a part of this report.




Recent
Developments




On July
9, 2008, we entered into a contract with AL-WAHA-KHDRAA CO., a subsidiary of Al
Ezz Group, a distributor of agricultural and fertilizer products to the Middle
East and Africa.  The Egyptian government has authorized test sales of
Green Vitality fertilizer in small quantities and the initial contract was for
10,000 liters worth $75,000.




On
October 14, 2008, we entered into a non-binding business arrangement with
SINOCHEM pursuant to which we will supply Green Valley fertilizers to SINOCHEM
through December 31, 2009.  The total revenue from the contract
is expected to be equivalent to U.S. $9.5 million.  This was the
second such non-binding business arrangement for sales of Green Valley
fertilizers entered into with SINOCHEM.  The first non-binding
business arrangement was entered into in October 2007 and expired on October 8,
2008. We generated total revenue of approximately U.S.$7.8 million from the
first non-binding business arrangement.




4




On
February 12, 2009,  Tailong entered into a share purchase agreement
with Pacific Dragon, and Yinlong Industrial Co. Ltd., or Yinlong, and a
supplemental purchase agreement among Yinlong, Pacific Dragon, Mr. Yu Chang, our
Chief Executive Officer, President, Secretary and Chairman, and Ms. Xiao Rong
Teng, one of our directors, pursuant to which Tailong agreed to acquire
Yinlong’s 10% interest in Pacific Dragon for an aggregate purchase price of
$7,980,000.  Mr. Chang has an 85% equity interest in Yinlong and Ms.
Teng owns the remaining 15% equity interest.  Following this
transaction, we, as the sole shareholder of Tailong, will indirectly own 100% of
Pacific Dragon.  We recently received approval from the Ministry
of Commerce of the People’s Republic of China and expect the transaction to
close in early April 2009.





On
February 12, 2009, in connection with the supplemental purchase agreement
described above, Tailong issued an unsecured, interest-free promissory note in
the principal amount of $6,980,000 to Yinlong as consideration for the purchase
of its 10% interest in Pacific Dragon.  The promissory note has a
maturity date of December 31, 2009 and Tailong may prepay all of any portion of
the principal of the promissory note without penalty.  The unpaid
principal balance of the promissory note is due and payable on December 31,
2009, unless accelerated pursuant to an event of default.




Industry
Background and Our Principal Markets




In China,
the total output of fertilizer in 2005 reached 48.3 million metric tons, which
was one third of the world’s output.  China is the principal market
for our organic liquid compound fertilizers and related agricultural
products.  Our products are primarily sold to farmers in 20 provinces
in China:  Hainan, Anhui, Hubei, Jiangsu, Jiangxi, Guangxi, Liaoning,
Shanxi, Heilongjiang, Hebei, Jilin, Shandong, Inner Mongolia, Henan, Sichuan,
Guangdong, Xinjiang, Yunnan, Chongqing and Guizhou.




China has
the world’s largest population of nearly 1.3 billion people.  However,
China’s arable land on a per capita basis is only 0.04 hectare
(source:  2006 China Statistics Yearbook), or approximately 50% of
that present in the United States (source: US Census Bureau).  This
combination of limited arable land and a large and growing population has
created a significant need to increase the output of crops per hectare in
China.  China’s agricultural output increased 19% from 1989 to 2005.
whereby the total crop output was 407,549,000 tons in 1989 as compared to
484,022,000 tons in 2005 (source:  2006 China Statistics
Yearbook).  An increase in the use of fertilizers, with 8,840,000 tons
being used in 1978 compared to 47,662,000 tons being used in 2005, which is one
third of the world’s output, has contributed to this growth
(source:  2006 China Statistics Yearbook).  As a subset of
the broader fertilizer market, the use of compound fertilizers in China has
likewise increased, from 1,796,000 tons in 1985 to 13,032,000 in 2005, an
increase rate of 5.8% from 2001 to 2002, 6.7% from 2002 to 2003, 8% increase
from 2004 to 2005 (source:  2006 China Statistics
Yearbook).  It is expected that the total demand of organic fertilizer
will reach about 25 million metric ton by the year 2015.




We
believe that China’s fertilizer industry is mainly influenced by the following
factors:




·
              Growth and
      evolution of China’s fertilizer industry.  The fertilizer
      industry in China is in the process of rapid and continuous
      development.  China is the largest producer and consumer of
      fertilizers in the world.  The total consumption of fertilizers
      is expected to increase to 51 million tons by 2010 and 56 millions by
      2020.  We believe this will favorably influence the demand for
      our products and contribute to growth in the sales of our fertilizer
      products and our revenues.




5




·
              PRC
      regulators are encouraging the use of organic compound
      fertilizers.  In order to improve the efficient
      utilization of fertilizer, the PRC Ministry of Agriculture encourages the
      use of organic compound fertilizers instead of single nutrients, such as
      urea, or chemical fertilizers.  We believe that this factor will
      promote usage of our products.  The percentage of compound
      fertilizer consumption to the total fertilizer consumption rose from 10%
      in 1985 to 27% in 2005  (source:  2006 China
      Statistics Yearbook).  However, the usage of compound
      fertilizers in China is low compared with the average usage level of about
      70% worldwide.




·
              Availability
      of land suitable for agricultural purposes.  A decrease
      in available farmland in China, projected population growth, and the
      movement toward environmentally conscientious farming around the world are
      contributing to an increase in the use of more effective and
      environmentally friendly organic compound fertilizers.  Our
      products are designed to satisfy this
demand.




·
              Seasonality.  Like
      other fertilizer manufacturers, we experience seasonal fluctuations in
      demand for our products.  Fertilizer manufacturers are focusing
      their sales efforts in the southern and western areas of China which have
      warmer climates and longer harvesting seasons in order to realize more
      evenly distributed demand for our products throughout the
      year.




Our
Competitive Strengths




We
believe that the following competitive strengths enable us to compete
effectively in the fertilizer market in China:




·
              Strong
      Market Position.We are a leading manufacturer of
      fertilizer products and, more specifically, organic fertilizer products in
      liquid form, in China.




·
              Recognized
      and Certified Product Offerings.  Our Tailong brand of
      fertilizer products was favorably recognized by the China Association for
      Quality Supervision and the China Quality Standard Research Center in 2006
      for product quality, brand reputation and customer loyalty.  Our
      fertilizer products also have been certified by the PRC government at the
      national level.  This is an endorsement of the effectiveness of
      the products in all regions of China, making us one of only about 10% of
      the fertilizer companies in China to have been fully
      certified.




·
              Established
      Distribution Network  We sell the majority of our
      fertilizer products through an extensive distribution network of regional
      factories, which help us to establish a local presence in each community
      we serve with multi-level sales support and to educate local retailers and
      farmers on the benefits of our fertilizer
  products.




·
              Efficient
      Infrastructure.  We have created a flexible and
      responsive infrastructure, which allows us to efficiently manufacture and
      deliver high-quality fertilizer products within a short delivery
      time.




·
              Broad
      Customer Base.  We developed a diversified customer base
      of farmers and retailers located throughout China and are not dependent
      on, or heavily concentrated in, any single customer or customer
      base.




6




Our
Strategy




We
believe that our strong competitive position, our ability to meet customer
demands and our well- regarded product offerings will enable us to benefit from
the anticipated growth in China’s fertilizer market.  We are committed
to enhancing our sales, profitability and cash flows through the following
strategies:




·
              Capitalize
      on our brand reputation to increase sales of new and existing
      products.We intend to leverage the favorable reputation
      of our fertilizer products through collaboration with academic and
      governmental institutions which can attest to the quality of our current
      product offerings.  We plan to develop new compounds to better
      meet the changing needs of China’s agricultural communities by tailoring
      our product offerings to meet the local needs of the farmers and to create
      greater reliability of fertilizer products nationwide. In the third
      quarter of 2008, we added an organic granular compound fertilizer to our
      product lines and constructed a granular fertilizer line near each of our
      existing factories, located in Harbin, Beijing and
    Xinjiang.




·
              Expand Our
      Domestic Operations.  We intend to build or acquire
      additional organic granular fertilizer factories in strategic locations in
      China to serve other agricultural areas in China.  Our
      anticipated expansion plan will increase our organic granular compound
      fertilizer production capacity to 200,000 metric
  tons.




·
              Enhance
      Brand Awareness.  Our core future focus will be to build
      and enhance brand awareness of our “Lvlingbao” and “Tailong” products, as
      well as our “Green Vitality” product line and organic granular compound
      fertilizer by launching an extensive advertising campaign to educate
      retailers and farmers on the benefits of our liquid organic compound
      products.  We expect these efforts will allow us to expand our
      distribution and sales outside of our traditional base in Northeast China
      and capture a larger market
share.




·
              Increase
      Sales into Select Foreign Markets.  We plan to leverage
      our product offerings and brand reputation to expand our product sales
      into select international markets.  We are currently performing
      a feasibility study and market research on a few selected overseas markets
      which we believe will result in revenue growth in the
      future.  We also intend to pursue sales to other strategic
      foreign regions.




Our
Products




Our
fertilizer products consist primarily of organic liquid compound fertilizers
which are derived from natural sources.  We believe that our
fertilizer products are capable of increasing crop yield by as much as
30%.




Our
fertilizer is produced using proprietary formulas of humic acid and other amino
acids which have proven to have a significant effect on crop yield and quality
without the harmful side effects of chemical fertilizers.  Our
products contain over 30 active ingredients comprised of organic elements,
inorganic elements that are region specific and other active and stimulative
agents.




Our
products, which are designed to be multi-functional, improve the photosynthesis
function in crops and the root absorption system, enhance the resistance of
crops to harsh environmental conditions and increase plant size and
quality.  Our fertilizer formulas are highly concentrated, blendable
with pesticides or water for easy application and facilitate better absorption
rates due to low sedimentation.  Our products are suitable for a
variety of application methods, ranging from seed soaking, root dipping and
irrigation to application by machine and aircraft.




7




Our four
main product lines and their primary uses are as follows:




·
              Lvlingbao
      III.  Our Lvlingbao III fertilizer product line blends
      humic acid, nitrogen, phosphorus, potassium, microelements, amino acid,
      active and stimulative agents and is specially formulated for fruits and
      vegetables.




·
              Lvlingbao
      IV.  Our Lvlingbao IV fertilizer line is produced using
      humic acid, nitrogen, phosphorus, potassium, and microelements and is
      formulated for large scale crops of fruits, vegetables and grains and
      suitable for jet spray
application.




·
              Tailong
      I.  Tailong I is our highly customized fertilizer line
      used for a wide variety of crops and plants that can be tailored to local
      soil conditions.  Tailong I has been derived from LvLingBao III,
      with adjustments in the amount of amino acid, active agent and stimulative
      agent for better nutrient
absorption.




·
              Green
      Vitality.  Our new Green Vitality fertilizer product line
      is a new, premium line that will be marketed in the central and southern
      regions of China and can be applied to enhance yield in a large variety of
      crops.




We are
committed to producing “green” agricultural products which are designed to be
environmentally friendly and intend to expand our product offerings to add
organic granular compound fertilizer products.




Raw
Materials and Our Principal Suppliers




The main
raw materials of our products are humic acid, nitrogen, phosphorus, kalium and
other supplementary material, which are abundant in China.  Humic acid
is mainly mined from a soft, brownish-black coal called lignite. According to
the survey of energy resources published by the World Energy Council, China has
large lignite reserves.




There are
numerous suppliers and vendors of the raw materials needed for our products in
China.  We have entered into non-binding business arrangement with our
main suppliers:  Beijing Zhongxin Chemical Development Company, Harbin
Hai Heng Chemical Distribution Co., Ltd and Shenzhen Hongchou Technology
Company.  In fiscal year 2008, we purchased approximately 39.1% of our
humic acid from Harbin Hai Heng Chemical Distribution Co., Ltd, approximately
13.2 % of our nitrogen, phosphorus and kalium from Beijing Zhongxin Chemical
Technology Development Co., and approximately 14.7% of our other supplementary
material from Shenzhen Hongchou Technology Company.




In
December 2008, our subsidiary, Pacific Dragon entered into two-year non binding
business arrangements with each of our main suppliers to purchase approximately
US$24.4 million (RMB 166.3 million) in raw materials.  We pre-paid a
portion of these arrangements at the time they were entered into, and will pay
the remainder upon delivery of the materials.




8




Our
Distributors and Customers




We sell
most of our products through various regional distributors in
China.  We have established and maintained long-term relationships
with major distributors whom we believe have local business experience and
established regional sales networks.




For the
year ended December 31, 2008, distribution through our ten largest distributors
accounted for approximately 25.3% of our total annual sales.  Our
three largest distributors represented 8.4% in the aggregate of our total annual
sales.




On
October 8, 2007, we entered into a contractual arrangement with SINOCHEM,
pursuant to which we supplied organic Green Vitality fertilizers to SINOCHEM
through October 7, 2008, with total revenue received of approximately U.S. $7.8
million.  On October 14, 2008, we entered into a contractual
arrangement with SINOCHEM, pursuant to which we will continue to supply organic
Green Vitality fertilizers to SINOCHEM through December 31, 2009, with total
revenue expected of approximately U.S. $9.5 million.




We hold
an annual ordering conference for our major distributors to place purchasing
orders through written sales agreements.  In addition, our sales
department holds ordering conferences with our distributors in various
provinces, including Heilongjiang, Jilin, Liaoning, Hebei, Shandong, Jiangsu,
Xinjiang and Sichuan from time to time to promote our products and maintain and
strengthen these relationships.  In addition, we also sell our
products to end users directly. All purchasing orders on our products are served
on a first come, first serve basis.




We
provide our customers with a variety of customer services, including a technical
support hotline service, conducting seminars and the provision of instructional
DVDs.




We have
also been marketing and promoting our products through broadcasting on Chinese
local TV channels, such as Heilongjiang Satellite Channel and participating in
activities organized by local governments to promote information about, and use
of, fertilizers.




Competition




Our
experience is that the compound fertilizer industry in China is highly
fragmented, consisting of numerous smaller regional manufacturers and larger,
domestic and international competitors.




Our major
competitors in China include Guangxi Beihai Penshibao Co., Ltd, Henan Luo
Xiaowang Group, and Shangdong Tianda 2116.  Our major global
competitors include Phosyn from the UK, Shi Ma (Chinese translation) a part of
BASF in Germany, Kemira GrowHow Oyj in Finland, and Leffingwell in the United
States.




Due to
the Chinese government’s WTO commitment, China started to allow foreign
companies to gain the right to distribute and make retail sales of fertilizers
beginning on December 11, 2006. Our management believes that this has the
potential to change the competitive landscape in the Chinese fertilizer market
in the near future.  However, because fertilizer products usually need
to be specifically formulated for local plant, soil and climate conditions, we
believe that there are not many foreign competitors in our selected markets that
are capable of producing customized fertilizers that compete with our
products.  Nevertheless, as a result of the opening of the fertilizer
market to foreign producers, we expect that the amount of fertilizer imported to
China will rise significantly and that we will face increasing competition from
non-Chinese fertilizer manufacturers.  Judging by our 2008 financial
performance, management remains optimistic that our company can remain
competitive in its markets notwithstanding the entry of non-Chinese fertilizer
manufacturers into the marketplace, although we can make no assurances of this
belief in light of the anticipated increase in competition.




9




Intellectual
Property




We have
registered with the Trademark Office of the State Administration for Industry
and Commerce of China the trademark for the “Tailong” logo (registration
number:  836192), which is used on our products that are distributed
in China.  The trademark expires in 2016.




We rely
on trade secrets to protect our proprietary technology and
formulas.  We currently do not own any patents and have not applied
for patents on our proprietary technology and formulas because we do not want to
make available to the public a detailed description of our technology and
formulas as would be required in connection with a patent
application.  We believe that disclosure of our technology and
formulas would be detrimental to our future business.  If information
about our formulas and processes is not tightly controlled, we believe that more
competitors would likely emerge in this market.  Only certain of our
key executives have knowledge of our proprietary technology and
formulas.




Mr. Yu
Chang, our CEO, President, Secretary and Chairman, has granted us a permanent
license to use his know-how in manufacturing certain types of organic liquid
compound fertilizer on a royalty-free basis and has granted us a long-term
royalty and free license to use his know-how in manufacturing other organic
liquid compound fertilizers.  Mr. Chang is under contractual
obligations with us to keep the confidentiality of this technology and refrain
from licensing this technology to any third party or using the technology for
his own benefit.




Employees




As of
December 31, 2008, we had approximately 237 full-time employees, of which 71
were administrative and managerial staff, 87 were sales staff and 79 were
manufacturing workers.  We also hire temporary manufacturing workers
to supplement our manufacture capabilities at periods of high demand. None of
our employees is under collective bargaining agreements and they all reside in
China.  We believe that we maintain a satisfactory working
relationship with our employees and we have not experienced any significant
labor disputes or any difficulty in recruiting staff for our
operations.




Research
and Development




We
conduct on-going research and development activities relating to the improvement
of the organic liquid compound fertilizers we manufacture and the control of
related manufacturing costs.  Our primary research and development
facilities are located in Beijing and our principal research team consists of
Mr. Shuhua Liu and Mr. Kangde Liu.  We spent approximately $1,091
(RMB 7,570) and $1,480 (RMB11,240) on research and development in 2008 and 2007,
respectively.




Government
Regulation




All
fertilizers produced in China must be registered with the PRC Ministry of
Agriculture.  No fertilizers can be manufactured without such
registration.  There are two kinds of registrations: interim
registration and formal registration.  The interim registration is
valid for one year and applies to fertilizers in the stages of in-the-field
testing and test selling.  All fertilizers that have completed
in-the-field testing and test selling must obtain formal registration which,
once obtained, is valid for five years and, thereafter, may be renewed for
five-year periods.  We have obtained the necessary Formal Fertilizer
Registration Certificate for all of our fertilizer products from the PRC
Ministry of Agriculture.  Such certificate was issued on
September 3, 2002 and expired in December 2007, at which time we were
required to renew the formal registration.  We began the process of
renewing our certificate prior to December 2007 and its renewal was effective
May 28, 2008 for a period of five years.




10




Additionally,
fertilizer manufacturers in the PRC must have a manufacturing license to make
some types of fertilizer.  We have a current and active license
permitting us to manufacture those types of fertilizer.




As of
December 31, 2008, we believe that we are in material compliance with all
registrations and requirements for the issuance and maintenance of all licenses
required by the governing bodies.  Other than as mentioned in the
first paragraph in this section, as of December 31, 2008, all license fees
and filings are current.




If we
were to lose any of these licenses, we would only have a limited time to
re-apply for such licenses and would face possible regulatory
fines.  However, such licenses will generally only be revoked under
rare circumstances, such as when illegal activities have occurred.  We
are not subject to any environmental controls or restrictions that require the
outlay of capital or the obtaining of a permit in order to engage in business
operations.




Item
      1A.
            Risk
      Factors




Not
applicable to smaller reporting companies.




Item
      1B.
            Unresolved
      Staff Comments.




None.




Item
      2.
            Properties.




Our
executive office is located at Room 3F No.11 Building, Zhonghong International
Business Garden, Future Business Center, Chaoyang North Road, Chaoyang District,
Beijing, China 100024.  The rentable space in this office consists of
approximately 780 square meters (approximately 8,396 square
feet).  The lease agreement has a five-year term which expires on
February  1, 2012.   The monthly rental payment is
approximately $5,910 (RMB 41,000).




We
currently lease 9,878 square meters (approximately 106,326 square feet) in the
aggregate for office space and manufacturing facilities in Harbin, China, where
our subsidiary Pacific Dragon is located.  The lease has a 10-year
term which runs from January 1, 2004 to January 1, 2014.  Our current
rent due under this lease is approximately $518,940 (RMB 3,600,000) per
year.




We have
an office with a space of 200 square feet in Hong Kong which is located at Unit
2008, 20th Floor,
Wellable Comm. Building, 513 Hennessy Road, Causeway Bay, Hong
Kong.  The monthly rent payment is approximately $1310 (HK$10,200) and
the term of the lease expires on September 6, 2009.




In
addition, we have an office with space of 256 square meters (approximately 2,755
square feet) in Beijing which is located at Room 0817 Van-Palace Apartment No.2
of Guandongdian South Street, Chaoyang District, Beijing. The monthly rent
payment is approximately $2,883 (RMB20,000) and the term of the lease expires on
November 30, 2010.




11




We have
five factories located in Anhui, Beijing, Chongqing, and
Xinjiang.  The details of facilities and properties and lease terms
are described below.




Factories
            
            Address
            
            Area
      (m2)
                (Approx.
      ft2)
            
            Lease
      Term
            
            Monthly
      RentAnhui
            
            No.
      1188 Changzheng Rd.
              Gaoxin
      District, Bangfu City
            
            1338
      (14,402)
            
            2006.6.1-2009.5.31
            
            US$1,922
              (RMB
      13,333)Chongqing
            
            No.
      11-3, Industrial Park,
              Geleshandu
      City
            
            1874
      (20,172)
            
            2007.4.1-2012.3.31
            
            US$
      1,350
              (RMB
      9370)Xinjiang
            
            No.
      10, Gisi Rd. Industrial Park,
              Gaoxin
      District Northern District,
              Wulumuqi
      City
            
            3110
      (33,476)
            
            2007.6.10-2017.6.10
            
            US$3,604
              (RMB25,000)Beijing-liquid
            
            No.
      8, M2-4 District, Pinggu
              Industrial
      Development District,
              Pinggu
      District
            
            4484.76
      (48,274)
            
            2006.9.15-2011.9.15
            
            US$6,794
              (RMB50,000)Beijing-granular
            
            No.
      2 of Ping Gu Western Road,
              Xing
      Gu Industrial Development
              Zone,
      Beijing China
            
            4740.83
      (51,039)
            
            2008.1.1-2013.1.1
            
            US$7,808
              (RMB54,167)





Item
      3.
            Legal
      Proceedings




None.




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




There
were no matters submitted to a vote of our stockholders during the fourth
quarter of the 2008 fiscal year.




PART
II




Item
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.




Market
Price Information for our Common Stock




Our
common stock is quoted on the OTC Bulletin Board under the symbol
“CAGC.OB.”  The following table sets forth, for the periods indicated,
the high and low bid prices of our common stock.  These prices reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.




Closing
      Bid Prices(1)High
            
            
            LowYear
      Ended December 31, 20081st
      Quarter
            
            $
            3.28
            
            
            $
            1.782nd
      Quarter
            
            $
            3.30
            
            
            $
            2.013rd
      Quarter
            
            $
            2.40
            
            
            $
            1.034th
      Quarter
            
            $
            1.30
            
            
            $
            0.51


12


Closing
      Bid Prices(1)High
            
            
            
            LowYear
      Ended December 31, 20071st
      Quarter
            
            $
            4.00
            
            
            $
            1.552nd
      Quarter
            
            $
            3.80
            
            
            $
            2.903rd
      Quarter
            
            $
            3.81
            
            
            $
            2.054th
      Quarter
            
            $
            5.16
            
            
            $
            2.46







(1) The above
tables set forth the range of high and low closing bid prices per share of our
common stock as reported by QuoteMedia for the periods indicated.




On March
27, 2009, the closing price of our common stock on the OTC Bulletin Board
was $1.25.




Number
of Record Holders of Our Common Stock




As of
March 27, 2009, we had 950 holders of record of our common
stock.  The number of record holders was determined from the records
of our transfer agent and does not include beneficial owners of common stock, of
which we have over 3,000, whose shares are held in the names of various security
brokers, dealers and registered clearing agencies.




Dividend
Policy




Our Board
of Directors will make any future decisions regarding dividends.  We
currently intend to retain and use any future earnings for the development and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.




Securities
Authorized for Issuance Under Equity Compensation Plans




Plan
      category
            
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
            
            
            Weighted-average
      exercise price of outstanding options, warrants and rights
            
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))(a)
            
            
            (b)
            
            
            (c)Equity
      compensation plans approved by security holders
            
            
            —
            
            
            
            —
            
            
            
            —Equity
      compensation plans not approved by security holders
            
            
            150,000
            
            
            
            2.5
            
            
            
            3,450,000Total
            
            
            150,000
            
            
            
            2.5
            
            
            
            3,450,000




13




Under the
China Agritech, Inc. 2008 Equity Incentive Plan (the “Plan”), a maximum of 3.6
million shares of our common stock are available for issuance, subject to
adjustment.  The Plan permits the grant of options, stock appreciation
rights, restricted stock, restricted stock units and other share-based
awards.  The exercise price per share with respect to each option and each
stock appreciation rights is determined by the administrator, provided that
the exercise price per share cannot be less than the fair market value of a
share on a grant date.  The Plan will terminate 10 years following the
earlier of (i) the date it was adopted by our Board of Directors or (ii)
the date it became effective upon approval by our stockholders, unless sooner
terminated by our Board of Directors pursuant to the Plan.  The Plan was
adopted by our Board of Directors on October 22, 2008




Performance
Graph




Not
applicable to smaller reporting companies.




Recent
Sales of Unregistered Securities




None.





Issuer
Purchases of Equity Securities




None.




Item
      6.
            Selected
      Financial
      Data




Not
applicable to smaller reporting companies.




14




Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations




Overview




China
Agritech, Inc. is a Delaware corporation which is the parent company to three
China-based operating subsidiaries, Pacific Dragon, Anhui Agritech and Beijing
Agritech.  Through these subsidiaries, we develop, manufacture and
sell fertilizer products and, more specifically, organic liquid compound
fertilizer products in China.  We have been producing fertilizer
products in China since 1994.  We have experienced growth in our sales
revenue due to increasing demand for our fertilizer products, broadening of our
customer base, and an expansion of our production capacity and product
offerings.




Our main
products include “LvLingBao III,” “LvLingBao IV,” “Tailong I”, “Green Vitality”
and other customized, crop specific fertilizers that are tailored to our
customers’ specific requirements.  China is the principal market for
our fertilizer products, which are primarily sold to farmers in twenty provinces
in China including:  Hainan, Anhui, Hubei, Jiangsu, Jiangxi, Guangxi,
Liaoning, Shanxi Heilongjiang, Hebei, Jilin, Shandong, Inner Mongolia, Henan,
Sichuan, Guangdong, Xinjiang, Yunnan, Chongqing and Guizhou.




To
capitalize on the increased demand for our products and geographic expansion of
our sales throughout China, we organized two operating subsidiaries in 2007,
Anhui Agritech and Beijing Agritech. Our Anhui facility, which is part of Anhui
Agritech, manufactures and sells our fertilizer products to customers generally
in the Anhui, Hubei, and Henan provinces of China, which are in the central and
southern areas of China. Our Beijing Agritech facility, which is part of Beijing
Agritech, is our primary research and development center, syrup production
center and converting factory and also distributes our products to the central
and southern areas of China.  Our Harbin facility, which is part of
Pacific Dragon Fertilizer Co., Ltd., primarily distributes our products to the
northern areas of China.




As of
December 31, 2008, we had 237 employees working at our Harbin, Beijing, Anhui,
Chongqing, and Xinjiang facilities, which together have an annual production
capacity of approximately 13,000 metric tons of organic liquid compound
fertilizers.




We plan
to expand our product mix by introducing organic granular compound fertilizer in
the second quarter of 2009 to our product lines and expect to construct an
organic granular compound fertilizer line near each of our existing factories,
located in Harbin, Beijing, Anhui and Xinjiang.




Principal
Factors Affecting Our Financial Performance




We
believe that the following factors will continue to affect our financial
performance:




Growth and
evolution of China’s fertilizer industry.The fertilizer
industry in China is in the process of rapid and continuous
development.  China is the largest producer, importer and consumer of
fertilizers in the world.  The total consumption of fertilizers in
China in 2005 amounted to approximately RMB120 billion - RMB160
billion (or approximately $155.8 million - $207.8 million), according to China
Statistical Yearbook 2006.  The total consumption of fertilizers is
expected to exceed 50 million metric tons by the year of 2015. We believe this
growth trend will favorably influence the demand for our fertilizer
products.




PRC regulations
promoting the growth of the fertilizer industry.  Management
believes that the Chinese government, through regulation and other measures,
will continue to promote the development of the agriculture industry and
encourage companies in the agriculture sector to become bigger and build name
recognition.  Favorable regulation and political policy support afford
us with an opportunity to expand our operations in various parts of China and to
improve our name recognition in the market.




15




Expansion of our
production capacity and product offerings.  We believe we will
need to expand our production capacity to meet our projected increase in demand
for our fertilizer products. We have already expanded our operations in the
Beijing and Anhui regions of China through the commencement of our Anhui
Agritech and Beijing Agritech operations.  In addition, in March 2009,
we completed the construction and testing of our first facility for granular
organic compound fertilizers in China.  Located in Anhui province, it
is expected to begin production in April 2009 and has a 100,000 ton annual
production capacity.




Availability of
land suitable for agricultural purposes.  The continuing
decrease in available farmland in China, along with the projected increase in
population in China, and the growth of environmentally friendly farming around
the world has caused an increase in the use of organic compounds as fertilizers
due to their safety, efficacy, and environmental benefits. Our products are
designed to satisfy this demand.




Seasonality.  Like
other fertilizer manufacturers, we experience a high degree of fluctuation in
demand for our products due to seasonality.  The first and fourth
quarters are historically the weakest while the second and third quarters are
the strongest.  The warmer climate in the southern and western areas
allows for longer growing season with multiple harvests and more diversified
crops and a corresponding increase in demand for our products.  We
have expanded our operations and sales to these areas in order to realize more
evenly distributed yearly demand for our products.




Increase in
exports.  We plan to expand sales of our fertilizer products to
foreign markets.  In 2007, we had no sales to foreign
customers.  We are currently performing a feasibility study and market
research on a few selected overseas markets.




Results
of Operations




Year
Ended December 31, 2008 Compared with Year Ended December 31, 2007




All
amounts in the chart below, other than percentages, in thousands of U.S.
dollars




December
      31,
            
            
            Increase
            
            
            %
      IncreaseItem
            
            2008
            
            
            2007
            
            
            (Decrease)
            
            
            (%
      Decrease)Net
      Revenue
            
            
            45,240
            
            
            
            38,009
            
            
            
            7,231
            
            
            
            19.0Cost
      of Revenue
            
            
            (24,889
            )
            
            
            (18,940
            )
            
            
            5,949
            
            
            
            31.4Gross
      Profit
            
            
            20,351
            
            
            
            19,069
            
            
            
            1,282
            
            
            
            6.7Selling
      Expenses
            
            
            (2,370
            )
            
            
            (1,724
            )
            
            
            646
            
            
            
            37.5Operating
      and Administrative
            
            
            (4,266
            )
            
            
            (2,419
            )
            
            
            1,847
            
            
            
            76.3ExpensesIncome
      from Operations
            
            
            13,715
            
            
            
            14,926
            
            
            
            (1,211
            )
            
            
            (8.1
            )Other
      income/(expenses)
            
            
            267
            
            
            
            112
            
            
            
            155
            
            
            
            138.4Income
      tax
            
            
            (4,152
            )
            
            
            (5,391
            )
            
            
            (1,239
            )
            
            
            (23.0
            )Minority
      interest
            
            
            (1,189
            )
            
            
            (1,118
            )
            
            
            71
            
            
            
            6.4Foreign
      Currency Translation Gain
            
            
            3,260
            
            
            
            1,977
            
            
            
            1,283
            
            
            
            64.9Net
      income
            
            
            8,641
            
            
            
            8,529
            
            
            
            112
            
            
            
            1.3




16




Net
Revenue.  Net revenue increased $7.2 million, or 19.0%, to
$45.2 million for the year ended December 31, 2008 from $38 million for the
same period in 2007. Our net revenue is generated from sales of our organic
liquid and granular fertilizer products. The increase in net revenues was 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 the third quarter of 2008 also
contributed to the increase in sales.





Cost of
Revenue.  Our cost of revenue increased $5.9 million, or 31.4%,
to $25.0 million for the year ended December 31, 2008 from $18.9 million
for the same period in 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 as a result of higher sales, but the percentages of
the costs of revenue to total revenue also increased to 55.0% from 49.8% for the
year ended December 31, 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 also contributed to the rise
in cost of revenue.




Gross
Profit.Our
gross profit increased $1.3 million, or 6.7%, to $20.4 million for the year
ended December 31, 2008 from $19.1 million for the same period in
2007.  Gross profit as a percentage of net revenues was 45% for the
year ended December 31, 2008, as compared to 50.1% for the same period in
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 compared to our organic liquid
compound fertilizer. Increases in the costs of raw 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
$2.4 million for the year ended December 31, 2008, as compared to $1.7 million
for the same period in 2007, an increase of approximately $646 thousand, or
37.5%. 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. Higher advertisement costs were also incurred for newly
established central and southern regions in China. 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 year ended December 31,
2007.




Operating and
Administrative Expenses. Our general and administrative expenses were
$4.3 million for the year ended December 31, 2008, as compared to $2.4 million
for the year ended December 31, 2007, an increase of $1.8 million, or 76.3%. 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 were because of the
increase in legal, accounting and professional consulting fees due to corporate
exercisescarried out in 2008, which did not have similar cost in
2007.  Higher salary expenses also resulted from the addition of two
new management members to our payroll in 2008. We incurred additional general
administrative costs mainly related to the newly established sales markets
(Xinjiang and Chongqing). Similar costs were  not incurred prior to
March 2007  and July 2007 for Chongqing and Xinjiang, respectively.
Finally, additional allowances for accounts receivable and 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.




17




Income from
operations. Income from operations
was $13.7 million for the year ended December 31, 2008, as compared to $14.9
million for the year ended December 31, 2007, a decrease of approximately $1.2
million, or approximately 8.1%. This decrease was primarily attributable to the
increase in selling expenses as sa result of increased sales of our products,
operating and administrative expenses and costs of revenue.




Other Income
(Expenses).Interest income was $91 thousand for the year ended December
31, 2008, as compared to $152 thousand for the year ended December 31, 2007, a
decrease of approximately $61 thousand, or approximately 40%. Higher interest
income in 2007 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 December
31, 2008 also contributed to higher other income for the year ended December 31,
2008.




Income taxes.We incurred
income taxes of $4.2 million for the year ended on December 31, 2008. This was a
decrease of approximately $1.2 million, or 23.0% from the taxes we incurred for
the year ended December 31, 2007, which was $5.4 million. We paid less in taxes
for the year ended December 31, 2008 as compared to the year ended December 31,
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 $1.2 million and $1.1 million for the year ended December 31, 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 an 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 year ended December 31, 2008 as compared to $2.0 million for the
year ended December 31, 2007, an increase of approximately 1.3 million, or
64.9%. The increase in foreign currency translation gains can be attributed to a
stronger RMB relative to U.S. dollars as of December 31, 2008 as compared to
December 31, 2007.





Net
Income. We earned net income of $8.6 million for the year ended December
31, 2008 as compared to $8.5 million for the year ended December 31, 2007. The
increase in net income of $112 thousand,  or 1.3%, 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 year ended
December 31, 2008 as explained above.





18





Liquidity
and capital resources




As of
December 31, 2008, we had cash and cash equivalents of $12
million.  Our current assets were $66.5 million and our current
liabilities were $4.9 million as of December 31, 2008 which results in a
current ratio of approximately 13.5 times.  Total stockholders’ equity
as of December 31, 2008 was $62.8 million.




We had no
bank loans or other interest bearing borrowings as of December 31, 2008. We
believe that our currently available working capital will be sufficient to
maintain our operations at our current level for the next twelve months. As of
December 31, 2008, we had approximately $219,718 in capital commitment for the
purchase of organic granular compound fertilizer production
facilities.




The
following table sets forth a summary of our cash flows for the periods
indicated:




(in
      thousands)
            
            2008
            
            
            2007Net
      cash used in operating activities
            
            $
            (716
            )
            
            $
            (4,647
            )Net
      cash used in investing activities
            
            
            (2,083
            )
            
            
            (1,340
            )Net
      cash provided by financing activities
            
            
            2,000
            
            
            
            11,484Effect
      of exchange rate changes on cash and cash equivalents
            
            
            911
            
            
            
            (85
            )Net
      increase/(decrease) in cash and cash equivalent
            
            
            (800
            )
            
            
            5,496Cash
      and cash equivalents at the beginning of year
            
            
            11,841
            
            
            
            6,430Cash
      and cash equivalents at the end of year
            
            
            11,952
            
            
            
            11,841





On July
3, 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
documents, $2 million of the proceeds from the private placement remained in a
trust account and were released when we hired a new CFO and modified our board
of directors in 2008.  As of December 31, 2008, all $2 million in the
escrow account had been released to us.




Operating
Activities




Net cash
used in operating activities was $716 thousand for the fiscal year ended
December 31, 2008, which is a decrease of $3.9 million from the $4.65
million net cash used in operating activities for the same period in
2007.  The decrease was mainly due to the lower advances made to
suppliers toward the year end for the purchase of raw materials.




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 for the year
ended December 31, 2008 was $2.1 million, which is an increase of approximately
$0.8 million from net cash used for investing activities of $1.3 million for the
year ended December 31, 2007.




19





Financing
Activities




On July
5, 2007, we sold 5,556,000 shares of our common stock to 20 investors for a
total of approximately $15 million in a private placement
transaction.




Our debt
to equity ratio was 0% as of December 31, 2008 as we had no bank loans or other
borrowings.




Net cash
provided by financing activities in the fiscal year ended December 31, 2008
totaled $2 million as compared to $11.4 million provided by financing activities
in 2007.  The decrease of the cash provided by financing activities
was mainly attributable to the fact that no fund raising activity was carried
out in 2008. The $2 million cash was released to us from the escrow account in
December 31, 2008 in accordance to the term of private placement, which was
completed on July 3, 2007.




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 at 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.




20




·
            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.Stock-based
      CompensationOn
      December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,”
      which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and
      supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”
      SFAS No. 123R requires all sharebasedpayments
      to employees, including grants of employee stock options, to be recognized
      in the financial statements based on the grant datefair
      value of the award. Under SFAS No. 123R, we must determine the appropriate
      fair value model to be used for valuing share-basedpayments,
      the amortization method for compensation cost and the transition method to
      be used at date of adoption. The transition methods include prospective
      and retroactive adoption options. Under the retroactive options, prior
      periods may be restated either as of the beginning ofthe
      year of adoption or for all periods presented. The prospective method
      requires that compensation expense be recorded for all unvested stockoptions
      and restricted stock at the beginning of the first quarter of adoption of
      SFAS No. 123R, while the retroactive methods would recordcompensation
      expense for all unvested stock options and restricted stock beginning with
      the first period restated. We have adopted therequirements
      of SFAS No. 123R for the fiscal year beginning on December 26, 2005, and
      recorded the compensation expense for all unvestedstock
      options.





21




Off-Balance
Sheet Arrangements




None.




Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market
Risk




Not
applicable to smaller reporting companies.




Item
      8.
            Financial
      Statements and Supplementary Financial
Data




Consolidated
Financial Statements




The
financial statements required by this item begin on page F-1
hereof.







Item
      9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.




Not Applicable




Item
      9A(T).
              Controls
      and Procedures.




Disclosure
Controls and Procedures




Under 
the  supervision  and  with  the 
participation of  our management, including  our principal
executive officer and principal financial officer, we  conducted  an
evaluation of the effectiveness, as of December 31, 2008, of  the 
design and operation of our disclosure controls and procedures, as such 
term  is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on
this evaluation, our principal executive officer and principal financial
officer  have  concluded that, as of such date, our disclosure
controls and procedures  are  effective  to  ensure 
that  information  required  to  be disclosed  by 
us  in  our  Exchange  Act  reports  is recorded,
processed, summarized,  and  reported  within  the time
periods specified in the SEC’s rules  and forms, and that such information
is accumulated and communicated to  our management, including our principal
executive officer and principal financial  officer,  as 
appropriate  to  allow  timely decisions regarding required
disclosure.




22




Internal
Controls Over Financial Reporting




Management’s Report on
Internal Control over Financial Reporting.




Our 
management  is  responsible  for establishing and maintaining
adequate internal  control  over  financial 
reporting,  as  such term is defined in Exchange   Act 
Rules  13a-15(f)  and  15d-15(f).   Internal 
control  over financial  reporting  refers  to 
the  process  designed  by,  or under the supervision 
of,  our  principal  executive officer and principal financial
officer,  and  effected  by  our  Board  of
Directors, management and other personnel,  to  provide 
reasonable  assurance regarding the reliability of financial 
reporting  and  the  preparation  of  financial 
statements  for external   purposes   in 
accordance  with  generally  accepted  accounting
principles, and includes those policies and procedures that:




(1)
              Pertain 
      to the maintenance of records that in reasonable detail accurately 
      and  fairly  reflect the transactions and dispositions of our
      assets;




(2)
              Provide 
      reasonable  assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with 
      generally accepted accounting principles, and that our receipts and
      expenditures are being made only in accordance with authorization of our
      management and directors; and




(3)
              Provide 
      reasonable  assurance  regarding  prevention  or
      timely detection  of  unauthorized  acquisitions,  use
      or disposition of our assets that could have a material effect on the
      financial statements.




Internal
control over financial reporting cannot provide absolute assurance of 
achieving  financial  reporting  objectives  because 
of  its  inherent limitations.  Internal  control  over
financial reporting is a process that involves  human  diligence 
and  compliance  and  is  subject  to lapses in
judgment  and  breakdowns  resulting  from human failures.
Internal control over  financial reporting also can be circumvented by
collusion or improper  management  override.  Because 
of  such  limitations, there is a risk that material 
misstatements  may not be prevented or detected on a timely
basis  by  internal  control  over 
financial  reporting.  However, these inherent limitations  
are  known  features  of  the  financial 
reporting  process. Therefore,  it is possible to design into the
process safeguards to reduce, though not eliminate, this risk. Management is
responsible for establishing and  maintaining adequate internal control
over financial reporting for the company.





Management
has used the framework set forth in the report entitled Internal
Control—Integrated  Framework  published  by  the 
Committee  of Sponsoring Organizations  of  the  Treadway
Commission, known as COSO, to evaluate the effectiveness  of 
our  internal control over financial reporting. Based on this 
assessment,  our Chief Executive Officer and Chief Financial Officer
have  concluded that our internal control over financial reporting was
effective as of December 31, 2008.





This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting. Our 
management’s  report  was not subject to attestation by our registered
public  accounting  firm  pursuant to temporary rules of the
Securities and Exchange  Commission that permit us to provide only our
management’s report in this Annual Report.  We are not required to include
in our Annual Report an  attestation report by our independent auditors
under the Public Company Accounting  Oversight  Board’s  auditing
Standard No. 2 until the filing of the Annual Report for the fiscal year ending
December 31, 2009.





Changes
in Internal Controls over Financial Reporting.




There has 
been no change in our internal control over financial reporting during 
the  fourth  quarter  of  2008  that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.




23







Item
      9B.
            Other
      Information.




Not
applicable.




PART
III




Item 10.
            Directors,
      Executive Officers of and Corporate
Governance




Directors
and Executive Officers




Set forth
below are the names of our directors, officers and significant employees, their
age, all positions and offices that they hold with us, the period during which
they have served as such, and their business experience during at least the last
five years.  The directors will serve until the next annual meeting of
the stockholders or until their successors are elected or appointed and
qualified. Executive officers will serve at the board’s discretion.




Name
            
            Age
            
            PositionYu
      Chang
            
            53
            
            Chief
      Executive Officer, President, Secretary and ChairmanMing
      Fang Zhu
            
            42
            
            Chief
      Operating OfficerYau-Sing
      Tang
            
            46
            
            Chief
      Financial Officer and ControllerKelviz
      Lim Kok Siak
            
            35
            
            Vice
      President of FinanceXiao
      Rong Teng
            
            39
            
            DirectorGene
      Michael Bennett
            
            60
            
            DirectorLun
      Zhang Dai
            
            73
            
            DirectorHai
      Lin Zhang
            
            58
            
            Director





Yu
Chang:  Mr. Chang has been our Chief Executive Officer,
President, Secretary and Chairman since February 3, 2005. Since 1994,
Mr. Chang has been serving as the Chairman of the Board of Directors of
Pacific Dragon and Tailong.  He has also been serving as the Chairman
of Board of Directors of Yinlong since 1993.  Mr. Chang currently
spends approximately 10% of his time on the affairs of
Yinlong.  Mr. Chang graduated from the Heilongjiang Forestry
Cadre Management Institute.




Zhu Ming
Fang:  Mr. Zhu has been our Chief Operating Officer since March
13, 2009.  Mr. Zhu joined Beijing Agritech Fertilizer Co., Ltd.
(“Beijing Agritech”), one of our wholly owned subsidiaries, in January 2006 as
Vice President of Strategic Development until April 2007. He became the
President of Beijing Agritech in April 2007 until March 2009. From 2002 to end
of 2005, Mr. Zhu was the CEO and Director of Gateguard Information Security Co,
Ltd., an information technology company based in Beijing. Mr. Zhu holds a
bachelor’s degree in physics from Xuzhou Normal University and a master’s in
economics from Henan University. He also holds a law degree and is a
state-certified Economist in China.




Yau-Sing
Tang:  Mr. Tang has been our Chief Financial Officer and
Controller since October 22, 2008.  Mr. Tang was most recently
financial controller of Carpenter Tan Holdings Ltd., a retail chain in Mainland
China which is applying to be listed on the Hong Kong Stock Exchange, from
August 2006 to March 2008.  Prior to that, he was the founder and managing
director of GC Alliance Limited, a CPA firm in Hong Kong from January 2006 to
July 2006.  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.  Mr. Tang was appointed to serve a twoyear term as our Chief
Financial Officer and Controller ending on October 16, 2010.




24




Kelviz Lim Kok
Siak:  Mr. Lim has been our Vice President of Finance since
July, 2007.  He is responsible for managing our daily financial
operations and is our key representative interfacing with
investors.  Mr. Lim previously held various positions at Ernst
& Young Shanghai, including Audit Assistant Manager and Senior
Accountant.  He worked at Ernst & Young Shanghai from June 2004 to
June 2007.  He worked at Arthur Anderson from June 2000 through 2002,
which then merged with Ernst & Young where he worked through May
2004.  Mr. Lim graduated with honors from Multimedia University,
Kuala Lumpur, Malaysia with a Bachelor of Accounting degree.  He is a
member of the Association of Chartered Certified Accountants
(ACCA).  Mr. Lim was appointed to serve a 3 year term as Vice
President of Finance ending on October 16, 2010.




Xiao Rong
Teng:Ms Teng has served as our Chief Operating Officer from
February 3, 2005 to March, 13 2009 and our director since June 2005. Ms Teng has
served as a director of Pacific Dragon since 2000. She has also served as a
director of Tailong since its inception in 2003 until now Ms Teng worked for
Yinlong from 1994 to 2000 as the General Manager and worked for Pacific Dragon
from 2000 to 2005 as Vice General Manager.  She worked for Harbin Post
& Telecommunication Bureau from 1992 to 1994.  Ms. Teng received a
bachelor’s degree in Chinese from Harbin University and a master’s degree in
business administration from Harbin Normal University.





Lun Zhang
Dai:Mr. Dai has
been a member of our Board of Directors since October 22, 2008.  Mr.
Dai has served on the Planning Committee of the North-East Cooperative Bank in
China and as its Secretary General since 2003. Mr. Dai has served as senior
research fellow at the People’s Bank of China since 2004. Mr. Dai is also a
full-time professor for the Academy of International Economic Relations, a
research institution sponsored by the People’s Bank of China, where he has
taught courses in international economics since 1983, and has been retained as a
part-time professor at several Chinese universities, as well as a visiting
professor of international economics in the graduate programs of Queens College,
City University of New York and American University. Mr. Dai is a fellow at
the Institute of Internal Auditors and received his master’s degree in economics
from the University of Moscow. He studied at Kiel University in Germany and at
the London School of Economics in England, both as a visiting
scholar.




Hai Lin Zhang:Mr. Zhang has been a member of our Board of Directors since October 22,
2008.  Mr. Zhang has served as Vice Principal of the Chinese Academy
of Agricultural Sciences and Resources since May 2003. He is also the Division
Deputy Director of the Agricultural Research Institute in China, a position in
which he has served since June 1996. He graduated from the Renmin University of
China in 1987 with a bachelor’s degree with a major in economic and
administration management.





Gene Michael
Bennett:Mr. Bennett has been a member of our Board of Directors since
October 22, 2008.  Mr. Bennett has over 25 years of experience as
chief financial officer, accounting and audit professor, and financial
consultant. From 2004 to present, he has been the managing partner for
Beijing-based Nexis Investment Consulting Corporation (BNICC), helping Chinese
companies establish good corporate governance and raise funds. From 2000 to
2004, he was a partner at ProCFO, a California-based contract-CFO consulting
firm. From 1998 to 2000, Mr. Bennett was a professor and lecturer in accounting
and tax for University of Hawaii, and Chaminade University of Honolulu. Prior to
that, he was the CFO and a board member of Argonaut Computers, professor and
lecturer in accounting and tax at California State University at Fullerton, and
a CPA with Gerbel Butzbaugh which became part of Grant Thornton. Mr. Bennett
holds a B.A. and MBA from Michigan State University and is currently pursuing a
doctorate of business administration at City University of Hong Kong in
Corporate Governance. Mr. Bennett currently serves on the boards of China
Shenzhou Mining & Resources, Inc. (AmEx: SHZ) and China Pharma Holding, Inc.
(OTC-BB:CPHI).




25





Nominating
and Governance Committee




Our
Nominating and Governance Committee (the “Nominating
Committee”) is governed by our Nominating Committee
Charter.  The Nominating Committee will give consideration to any
director candidates nominated by one or more security
holders.  However, the Nominating Committee does not have a formal
policy with regard to the consideration of any director candidates recommended
by security holders.  Currently, the members of our Nominating
Committee are Mr. Bennett, Mr. Dai and Mr. Zhang.  Mr. Zhang has been
selected as the Chair of our Nominating Committee.




Audit
Committee




We have a
standing Audit Committee, which is governed by our Audit Committee
Charter.  The members of our Audit Committee are Mr. Bennett, Mr. Dai,
and Mr. Zhang.  Mr. Bennett has been selected as Chair of our Audit
Committee.  Our Board of Directors has determined that Mr. Bennett,
Mr. Dai and Mr. Zhang are “independent” under the listing standards of the NYSE
Alternext.  In addition, our Board of Directors has determined that
Mr. Bennett qualifies as an “audit committee financial expert” as defined by the
SEC rules.




Family
Relationships




There are
no family relationships among our directors or officers.




Code
of Ethics




On April
12, 2006, our Board of Directors adopted a Code of Ethics to which our Chief
Executive Officer, Chief Financial Officer, Chief Operating Officer, Controller
and any person who may perform similar functions are
subject.  Currently, Mr. Chang, Mr. Tang and Mr. Zhu are our
only officers subject to the Code of Ethics.  If we retain additional
officers in the future to act as our principal financial officer, principal
accounting officer, controller or persons serving similar functions, they would
become subject to our Code of Ethics.




Section
16(A) Beneficial Ownership Reporting Compliance




Under
U.S. securities laws, directors, certain executive officers and persons holding
more than 10% of our common stock must report their initial ownership of the
common stock, and any changes in that ownership, to the SEC.  The SEC
has designated specific due dates for these reports.  Based solely on
our review of copies of such reports filed with the SEC and written
representations of our directors and executive officers, we believe that all
persons subject to reporting filed the required reports on time in
2008.


26


Item
      11.
            Executive
      Compensation




Summary
Compensation Table




The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to our Chief Executive Officer and
Chief Financial Officer, for services during the last three fiscal years in all
capacities to us, our subsidiaries and predecessors.




Name
      and
                Principal
                Position
            
            Year
            
            Salary
                ($)
            
            
            Option
                Awards
                ($)
            
            
            Total
                ($)Yu
      Chang, Chief Executive Officer, President and Secretary
            
            Fiscal
      2007 –Dec. 31, 2007
            
            $
            120,000
            
            
            
            —
            
            
            $
            120,000Fiscal
      2008 –Dec. 31, 2008
            
            $
            120,000
            
            
            
            —
            
            
            $
            120,000Li-Jun
      Peng, Chief Financial Officer  and Controller
(1)
            
            Fiscal
      2007 –Dec. 31, 2007
            
            
            —
            
            
            
            —
            
            
            
            —Fiscal
      2008 –Dec. 31, 2008
            
            
            —
            
            
            
            —
            
            
            
            —Yau-Sing
      Tang, Chief Financial Officer and Controller (2)
            
            Fiscal
      2008 – Dec. 31, 2008
            
            $
            37,500
            
            
            $
            13,000
            
            
            $
            50,500Kelviz
      Lim Kok Siak, Vice President of Finance
            
            Fiscal
      2007 –Dec.
      31 2007
            
            $
            51,894
            
            
            
            —
            
            
            $
            51,894Fiscal
      2008 –Dec.
      31, 2008
            
            $
            103,788
            
            
            
            —
            
            
            $
            103,788





(1)    Effective
October 22, 2008, Ms. Peng resigned as our Chief Financial Officer and
Controller.





(2)   Effective
October 22, 2008, Mr. Tang was appointed as our Chief Financial Officer and
Controller.





We
provide our executive officers with a base salary to compensate them for
services rendered during the year.  In addition, we believe that it
will be advantageous to provide our executives discretionary bonuses, equity
incentives, retirement benefits, perquisites, deferred compensation or other
benefits, such as through the 2008 Equity Incentive Plan, to continue to be
successful.




Base Salary.  The
base salary paid to Mr. Chang during 2008 was approximately $120,000 (RMB
832,466).  The base salary paid to Mr. Tang during 2008 was
approximately $75,000 (RMB 520,291), which was the prorated portion of his
annual salary for the time he was employed with us during 2008.  Mr.
Tang is entitled to an annual base salary of $150,000 (RMB
1,040,583).  The base salary of Mr. Lim during 2008 was approximately
$103,788 (RMB 720,000).  The base salary paid to Mr. Chang and Mr.
Tang during 2008 were paid in cash.  The value of base salary reflects
each executive’s skill set and the market value of that skill set in the sole
discretion of the Board of Directors.




27




On
October 17, 2008, China Agritech, Inc. entered into an employment agreement with
Mr. Tang pursuant to which he was appointed as its Chief Financial Officer.
Mr. Tang will receive a base salary of $150,000 annum (the “Base Salary”),
which is payable in advance on a monthly basis. The term of Mr. Tang’s
employment ends October 16, 2010.  In addition, we will issue options
to purchase up to 300,000 shares of our common stock to Mr. Tang during his
employment period, of which we granted an option to purchase 100,000 shares of
our common stock at an exercise price of $2.00 to Mr. Tang upon signing of the
employment agreement and may be exercised at anytime, in whole or in part, for
five years from the date of the grant.  The remaining options have not
yet been granted and will be granted when Mr. Tang completes his employment
terms with us.  So, if he terminates or we terminate him prior to his
two-year term, he will not receive the option to purchase the additional 200,000
shares of our common stock.   If Mr. Tang’s employment is
terminated voluntarily by him, the unvested portion of the stock option grant,
if any, will immediately expire on the date of the termination. If his
employment is terminated for cause, all unvested shares, if any, will
immediately expire on the date of termination.  The vested shares, to
the extent unexercised, will expire 30 days after termination of the
employment.  This employment agreement may be terminated by Mr. Tang
with not less than one month’s notice in writing or we can, at our sole option,
make Mr. Tang’s termination effective anytime prior to the end of such notice
period by payment of Mr. Tang’s salary to which he is entitled to through the
last day of the notice period.




On May 8,
2007, China Agritech, Inc. entered into an employment agreement with Mr. Kelviz
Lim Kok Siak pursuant to which he was appointed as its financial
controller.  Mr. Lim is currently the Vice President of
Finance.  Beginning July 1, 2007, Mr. Lim receives a base salary of
RMB 720,000 ($US 103,788) per annum, which is payable on a twelve months
basis.  The employment agreement may be terminated with not less than
2 month’s notice in writing or payment in lieu of notice by either
party.




Limitation
of Liability and Indemnification of Officers and Directors




As
permitted by Delaware law, we have adopted provisions in our amended and
restated certificate of incorporation and bylaws that limit or eliminate the
personal liability of our directors and officers to the fullest extent permitted
by Delaware law, as it now exists or may in the future be amended, and against
all expenses and liabilities reasonably incurred in connection with their
service for or on our behalf.  In addition, our certificate of
incorporation provides that our directors will not be personally liable for
monetary damages to us for breaches of their fiduciary duty as directors, unless
they violated their duty of loyalty to us or our stockholders, acted in bad
faith, knowingly or intentionally violated the law, authorized illegal dividends
or redemptions or derived an improper personal benefit from their action as
directors.




Outstanding
Equity Awards at Fiscal Year-End




As of
December 31, 2008, we had the following outstanding equity awards:




Option
      awardsName
            
            Number
      of securities
              underlying
              unexercised
      options
              (#)
      exercisable
            
            
            Number
      of securities
              underlying
              unexercised
              options
              (#)
      unexercisable
            
            
            Equity
              incentive
              plan
      awards:
              Number
      of
              securities
              underlying
              unexercised
              unearned
              options
              (#)
            
            
            Option
              exercise
      price
              ($)
            
            Option
      expiration date(a)
            
            (b)
            
            
            (c)
            
            
            (d)
            
            
            (e)
            
            (f)Yau-Sing
      Tang
            
            
            100,000
            
            
            
            -
            
            
            
            -
            
            
            
            2.00
            
            October
      17,  2013





28




Director
Compensation




Name
            
            Fees
      earned or
              paid
      in cash
              ($)
            
            
            Stock
      awards
              ($)
            
            
            Option
      awards
              ($)
            
            
            Non-equity
              incentiveplan
              compensation
              ($)
            
            
            Nonqualified
      deferred
              compensation
              earnings
              ($)
            
            
            All
      other compensation
              ($)
            
            
            Total
              ($)(a)
            
            (b)
            
            
            (c)
            
            
            (d)
            
            
            (e)
            
            
            (f)
            
            
            (g)
            
            
            (h)Gene
      Michael Bennett
            
            
            5,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,000Lun
      Zhang Dai
            
            
            5,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,000Hai
      Lin Zhang
            
            
            5,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,000





On
September 24, 2008, China Agritech, Inc. entered into an Independent Director’s
Contract with each of Mr. Lun Zhang Dai, Mr. Hai Lin Zhang and Mr. Gene Michael
Bennett, the term of which continues until the director’s removal or
resignation.  Pursuant to the Contract, the director is entitled to a
director’s fee of $20,000 per annum, payable semi-annually, except in the case
of Mr. Bennett whose fee is payable quarterly, and is in addition to any fees to
which the director may be entitled under guidelines and rules established by us
from time to time for compensating non-employee directors for serving on, and
attending meetings of, committees of our Board of Directors and the board of
directors of our subsidiaries.  The directors are also entitled to
reimbursement of pre-approved reasonable business related expenses in the
performance of their duties as directors.




Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.




Security
Ownership of Certain Beneficial Owners and Management




The
following table sets forth information regarding beneficial ownership of our
common stock as of March 27, 2009 (i) by each person who is known by us to
beneficially own more than 5% of our common stock; (ii) by each of our
officers and directors; and (iii) by all of our officers and directors as a
group.  Unless otherwise stated, the address of all persons in the
table is c/o China Agritech, Inc., Room 3F, No 11 Building, Zhonghong
International Business Garden, Future Business Center, Chaoyang North Road,
Chaoyang District, Beijing China 100024.




29




As of
March 27, 2009, an aggregate of 24,699,615 shares of our common stock were
outstanding.







Title
      of Class
            
            Name
      & Address of Beneficial Owner
            
            Office,
      If Any
            
            Amount
      & Nature of Beneficial Ownership1
            
            
            Percent
      of Class1Common
      Stock $0.001 par value
            
            Yu
      Chang
            
            Chief
      Executive Officer, President, Secretary and Chairman
            
            
            10,364,834
            2
            
            
            41.96
            %Common
      Stock $0.001 par value
            
            Xiao
      Rong Teng
            
            Director
            
            
            624,552
            
            
            
            2.53
            %Common
      Stock $0.001 par value
            
            China
      Tailong Group Limited
            
            
            
            
            8,644,839
            2
            
            
            35
            %Common
      Stock $0.001 par value
            
            Zhu
      Ming Fang
            
            Chief
      Operating Officer
            
            
            —
            
            
            
            —Common
      Stock $0.001 par value
            
            Yau-Sing
      Tang
            
            Chief
      Financial Officer and Controller
            
            
            100,000
            3
            
            
            0.4
            %Common
      Stock $0.001 par value
            
            Kelviz
      Lim Kok Siak
            
            Vice
      President of Finance
            
            
            —
            
            
            
            —Common
      Stock $0.001 par value
            
            Gene
      Michael Bennett
            
            Director
            
            
            —
            
            
            
            —Common
      Stock $0.001 par value
            
            Lun
      Zhang Dai
            
            Director
            
            
            —
            
            
            
            —Common
      Stock $0.001
            
            Hai
      Lin Zhang
            
            Director
            
            
            —
            
            
            
            —Common
      Stock $0.001 par value
            
            All
      officers and directors as a group (8 persons named above)
            
            
            
            
            11,089,386
            
            
            
            44.72
            %Common
      Stock $0.001 par value
            
            Wellington
      Trust Company, NA4
            
            
            
            
            1,600,288
            
            
            
            6.48
            %Common
      Stock $0.001 par value
            
            Total
      Shares Owned by Persons Named above
            
            
            
            
            21,334,513
            
            
            
            86.03
            %





*
            Less
      than 1%.




1
            Pursuant
      to Rule 13d-3 under the Exchange Act, a person has beneficial ownership of
      any securities as to which such person, directly or indirectly, through
      any contract, arrangement, undertaking, relationship or otherwise has or
      shares voting power and/or investment power or as to which such person has
      the right to acquire such voting and/or or investment power within 60
      days.  Unless otherwise stated, each beneficial owner has sole
      power to vote and dispose of the
shares.




30




2
            Including8,644,839shares of our common stock held by
      China Tailong Group Limited of which Mr. Chang has 100% of the
      registered shares.  Although Mr. Chang owns 100% of the
      registered share of China Tailong Group Limited, Mr. Tao Liang and Mr. Tik
      Man Tsoi have an unwritten agreement with Mr. Chang entitling them to 5%
      and 30%, respectively, of the shares of China Tailong Group
      Limited.  Mr. Chang is deemed to be the beneficial owner of the
      8,644,839 shares directly owned by China Tailong Group Limited and has
      shared voting and dispositive power over these 8,644,839 shares with China
      Tailong.  In addition, Mr. Chang has sole voting and dispositive
      power over 1,692,983 shares of our common
stock.




3
            Includes
      100,000 shares of common stock issuable upon the exercise of stock options
      at an exercise price of $2.00 per
share.




4
            The
      address is c/o Wellington Management Company, LLP, 75 State Street,
      Boston, MA  02109.  Based on Schedule 13G filed with
      the SEC on February 18, 2009, Wellington Trust, in its capacity as
      investment adviser, may be deemed to beneficially own 1,600,288 of our
      shares of common stock, which are held of record by clients of Wellington
      Trust.  Wellington Trust does not have any sole power to vote or
      dispose of the 1,600,288 shares of our common stock.  They have
      shared power to vote or dispose of such
shares.




31




Securities
Authorized for Issuance Under Equity C ompensation
Plans




Plan category
            
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
            
            
            Weighted-average
      exercise price of outstanding options, warrants and rights
            
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))(a)
            
            
            (b)
            
            
            (c)Equity
      compensation plans approved by security holders
            
            
            —
            
            
            
            —
            
            
            
            —Equity
      compensation plans not approved by security holders
            
            
            150,000
            
            
            
            2.5
            
            
            
            3,450,000Total
            
            
            150,000
            
            
            
            2.5
            
            
            
            3,450,000





Changes
in Control




Not
Applicable.




Item
      13.
            Certain
      Relationships and Related Transactions and Director
      Independence




Related
Parties Transactions




Our 90%
owned PRC subsidiary, Pacific Dragon, entered into a tenancy agreement with
Yinlong, the joint venture partners, which at such time held a 10% equity
interest in Pacific Dragon, to lease two factory plants and one office building
with a total floor area of 9,878 sq. meters (approximately 75,541 sq. feet) 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 $172,980 (at then current exchange
rates)).  The tenancy agreement was revised by increasing the annual
rent to RMB 3,600,000 (equivalent to $442,800 (at then current exchange rates))
effective from July 1, 2005.  During the years ended December 31, 2007
and December 31, 2008, we paid RMB 3,600,000 (equivalent to $528,084 (at then
current exchange rates)) to Yinlong for each of those years.





On
January 6, 2005, Pacific Dragon, entered into a license agreement with Mr.
Chang, our Chief Executive Officer, President, Secretary and
Chairman.  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 Section 5.1(f) of the Securities Purchase
Agreement, dated June 29, 2007, entered among us, Yu Chang and the investors
named therein, an additional license agreement was entered for the know-how
mentioned above between Mr. Chang and Pacific Dragon, confirming that the
license has been extended to December 31, 2011.





On
February 12, 2009,  Tailong, our wholly owned subsidiary, entered into
(i) a share purchase agreement between Pacific Dragon and Yinlong, and (ii) a
supplemental purchase agreement among Yinlong, Pacific Dragon, Mr. Chang and Ms.
Xiao Rong Teng, one of our directors, pursuant to which Tailong has agreed to
acquired Yinlong’s remaining 10% interest in Pacific Dragon for an aggregate
purchase price of $7,980,000.  Mr. Chang owns 85% of Yinlong’s issued
and outstanding shares and Ms. Teng owns the remaining 15% of Yinlong’s issued
and outstanding shares. Following this transaction, we, through our
subsidiaries, will become the sole owner of all issued and outstanding shares of
Pacific Dragon.  Thus, we, as the sole shareholder of Tailong, will
indirectly own 100% of Pacific Dragon.  Subject to approval of the
government of the PRC, the transaction is expected to close in early April,
2009.




32





On
February 12, 2009, in connection with the supplemental purchase agreement
described above, Tailong issued an unsecured, interest-free promissory note in
the principal amount of $6,980,000 to Yinlong as consideration for the purchase
of its 10% interest in Pacific Dragon.  The promissory note has a
maturity date of December 31, 2009 and Tailong may prepay all of any portion of
the principal of the promissory note without penalty.  The unpaid
principal balance of the promissory note is due and payable on December 31,
2009, unless accelerated pursuant to an event of default.





On July
2, 2007, Beijing Agritech entered into a tenancy agreement with Ms. Teng Xiao
Rong, one of our directors, 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 492,000 (equivalent to approximately
$70,922).





Director
Independence




Three of
our directors, Messrs. Dai, Bennett and  Zhang, have been determined
to be independent under the listing standards of the NYSE Alternext
US.  No transactions, relationships or arrangements were considered by
the board of directors in determining that these directors were
independent.




Item
      14.
            Principal
      Accounting Fees and Services.




Effective
April 18, 2008, we formally engaged Grobstein, Horwath & Company LLP as our
principal independent registered public accounting firm to examine our
consolidated financial statements for the fiscal year ended December 31,
2008.  Effective December 8, 2008, Grobstein, Horwath & Company
LLP merged with and into Crowe Horwath LLP.  As a result of the
merger, Grobstein Horwath & Company LLP resigned on January 7, 2009 as our
independent registered public accounting firm and Crowe Horwath LLP was formally
engaged on January 19, 2009 as our new independent public accounting
firm.  Kabani & Co., LLP, Certified Public Accountants, was the
our independent registered public accounting firm engaged to examine our
consolidated financial statements for the fiscal year ended December 31,
2007, 2006 and 2005.




Fees
for the fiscal years ended December 31, 2008 and 2007




Audit Fees.Crowe,
Horwath LLP was paid aggregate fees of approximately $150,000 for the audit of
our annual financial statements for the fiscal year ended December 31,
2008.  Grobstein, Horwath & Company LLP was paid aggregate fees of
approximately $50,000 for the review of the financial statements included in our
Quarterly Reports on Form 10-Q for the periods ended March 31, 2008,
June 30, 2008, and September 30, 2008.  Kabani & Co.,
LLP, was paid aggregate fees of approximately $145,000 for the fiscal year ended
December 31, 2007 for professional services rendered for the audit of our
annual financial statements, responding to SEC inquiries and for the reviews of
the financial statements included in our Quarterly Reports on Form 10-Q for the
periods ended March 31, 2007, June 30, 2007 and September 30,
2007.




Audit-Related
Fees.None.




33




Tax
Fees.None.




All Other Fees.  The
aggregate fees billed in the fiscal years ended December 31, 2008 and 2007
for products and services provided by the principal accountant for the relevant
fiscal year, other than services reported above under other captions of this
Item 14 are $5,500 and $0, respectively.  This service provided by
Kabani & Company, Inc. and Grobstein, Horwath & Company LLP for the
fiscal year ended December 31, 2008 was for the opinion they issued in
connection with the filing of Form S-8.




As
provided for in our Audit Committee charter, the Audit Committee pre-approves
all audit and non-audit services by the independent auditors as required by
applicable law and the rules of any securities exhange upon which our securities
may be listed.




34




PART
IV




Item
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES




Exhibit
                No.
            
            Description2.1
            
            Agreement
      and Plan of Merger, dated July 1, 2004 by and between Basic Empire
      Corporation, a Nevada Corporation and Basic Empire Corporation, a Delaware
      corporation (incorporated by reference to Exhibit 10.2 in the our annual
      report on Form 10-KSB filed on April 15, 2005).2.2
            
            Agreement
      and Plan of Reorganization, dated as of December 25, 2004, as amended, by
      and among the us, China Tailong Holdings Company Limited and its
      stockholders (incorporated by reference to Exhibit 2.1 in the our current
      report on Form 8-K filed on February 3, 2005, as
  amended).3.1
            
            Amended
      and Restated Certificates of Incorporation as filed with the Secretary of
      the State of Delaware (incorporated by reference to Exhibit 3.1 in the our
      registration statement on Form SB-2 filed on July 22, 2005, as
      amended).3.2
            
            Articles
      of Association of China Tailong Holdings Company Limited (incorporated by
      reference to Exhibit 4.2 in our current report on Form 8-K filed on
      February 3, 2005, as amended).3.3
            
            Articles
      of Association of Pacific Dragon Fertilizers Co. Ltd. (incorporated by
      reference to Exhibit 4.3 in our current report on Form 8-K filed on
      February 3, 2005, as amended).3.4
            
            Amended
      and Restated Bylaws (incorporated by reference to Exhibit 3.2 in our
      registration statement on Form SB-2 filed on July 22, 2005, as
      amended).4.1
            
            Form
      of Registration Right Agreement, dated June 29, 2007, by and among us,
      Securities Transfer Corporation and the Investors (incorporated by
      reference to Exhibit 4 in registration statement on our Form S-1/A filed
      on October 19, 2007).4.2
            
            Common
      Stock Purchase Warrant, dated July 5, 2007, issued to Roth Capital
      Partner, LLC. (incorporated by reference to Exhibit 4.1 in our
      registration statement on Form S-1 filed on August 20,
    2007).10.1
            
            Joint
      Venture Contract of Sino-foreign Contractual Joint Venture Pacific Dragon,
      dated June 9, 2004 (incorporated by reference to Exhibit 10.8 in our
      registration statement on Form SB-2 filed on July 22, 2005, as
      amended).10.2
            
            Transfer
      of Capital Contribution and Profit Agreement, dated June 8, 2004, by and
      among China Tailong Holdings Limited, Yinlong Industrial Co. Ltd., Beijing
      Taiming Applied Technology Institute and Cathay-Pacific Enterprises Ltd.
      (incorporated by reference to Exhibit 4.1 in our current report on Form
      8-K filed on February 3, 2005, as amended).10.3
            
            Form
      of Escrow Agreement, dated June 2007 (incorporated by reference to
      Exhibit 10.2 in our current report on Form 8-K filed on July 6,
      2007).10.4
            
            Form
      of Escrow Agreement, dated June 2007 (incorporated by reference to
      Exhibit 10.3 in our current report on Form 8-K filed on July 6,
      2007).10.5
            
            Stock
      Purchase Agreement, dated March 2, 2006, by and among the registrant,
      China Tailong Group Limited and Mr. Yu Chang (incorporated by
      reference to Exhibit 10.11 in our registration statement on Form
      SB-2/A filed on April 28, 2006).




35




Exhibit
                No.
            
            Description10.6
            
            Form
      of Securities Purchase Agreement, dated June 29, 2007 (incorporated by
      reference to Exhibit 10.1 in our current report on Form 8-K filed on July
      6, 2007).10.7
            
            Lease
      Agreement, dated December 30, 2003, by and between Pacific Dragon
      Fertilizers Co. Ltd. and Yinlong Industrial Co. Ltd. (incorporated by
      reference to Exhibit 10.6 in our registration statement on Form SB-2 filed
      on July 22, 2005, as amended).10.8
            
            Amendment
      to the Lease Agreement, dated June 28, 2005, by and between Pacific Dragon
      Fertilizers Co. Ltd. and Yinlong Industrial Co. Ltd. (incorporated by
      reference to Exhibit 10.12 in our annual report on Form 10-KSB filed on
      April 14, 2006).10.9*
            
            Lease
      Agreement, dated September 7, 2008, by and between China Tailong Holdings
      Company Limited and Superior Strategy Company Limited.10.10
            
            License
      Agreement, dated January 6, 2005, by and between Yu Chang and Pacific
      Dragon Fertilizers Co. Ltd. (incorporated by reference to Exhibit 10.4 in
      our registration statement on Form SB-2 filed on July 22, 2005, as
      amended).10.11
            
            Permanent
      License Agreement, dated December 3, 2005, by and between Yu Chang and
      Pacific Dragon Fertilizers Co. Ltd. (incorporated by reference to Exhibit
      10.16 in our annual report on Form 10-KSB filed on April 14,
      2006)10.12
            
            Permanent
      License Agreement, dated July 5, 2007, by and between Yu Chang and Pacific
      Dragon Fertilizers Co., Ltd. (incorporated by reference to Exhibit 10.21
      in our registration statement on Form S-1 filed on August 17,
      2007).10.13
            
            Employment
      Agreement, datd January 6, 2005, between Yu Chang and Pacific Dragon
      Fertilizers Co. Ltd. (incorporated by reference to Exhibit 10.5 in our
      registration statement on Form SB-2 filed on July 22, 2005, as
      amended).10.14
            
            Employment
      Agreement, dated May 8, 2007, by and between Kelviz Lim Kok Siak and
      Pacific Dragon Fertilizers Co. Ltd. (incorporated by reference to Exhibit
      10.23 in our registration statement on Form S-1 filed on August 20,
      2007).




36




Exhibit
                No.
            
            Description10.15
            
            Supplier
      contracts dated October 8, 2007, by and between China Agritech, Inc. and
      Sinochem Fertilizer Co., Ltd. (incorporated by reference to Exhibit 10.1
      in our current report on Form 8-K filed on October 10,
    2007).10.16
            
            Supplier
      contracts dated October 14, 2008, by and between China Agritech, Inc. and
      Sinochem Fertilizer Co., Ltd. (incorporated by reference to Exhibit 10.1
      in our current report on Form 8-K filed on October 14,
    2008).10.17
            
            Employment
      Agreement, dated October 17, 2008, by and between China Agritech, Inc. and
      Mr. Yau-Sing Tang (incorporated by reference to Exhibit 99.1 in our
      current report on Form 8-K filed on October 24, 2008).10.18
            
            Independent
      Director’s Contract, dated September 24, 2008, by and  between
      China Agritech, Inc. and Mr. Lun Zhang Dai (incorporated by reference to
      Exhibit 99.2 in our current report on Form 8-K filed on October 24,
      2008)10.19
            
            Independent
      Director’s Contract, dated September 24, 2008, by and between China
      Agritech, Inc. and Mr. Hai Lin Zhang (incorporated by reference to Exhibit
      99.3 in our current report on Form 8-K filed on October 24,
      2008)10.20
            
            Independent
      Director’s Contract, dated September 24, 2008, by and between China
      Agritech, Inc. and Mr. Gene Michael Bennett (incorporated by reference to
      Exhibit 99.4 in our current report on Form 8-K filed on October 24,
      2008)10.21
            
            China
      Agritech, Inc. 2008 Equity Incentive Plan (incorporated by reference to
      Exhibit 4.1 in our registration statement on Form S-8 filed on December
      22, 2008).10.22
            
            Form
      of Share Purchase Agreement, dated February 12, 2009, among Yinlong
      Industrial Co. Ltd., Tailong Holdings Company Limited and Pacific Dragon
      Fertilizer Co. Ltd. (incorporated by reference to Exhibit 10.1 in our
      current report on Form 8-K filed on February 18, 2008).10.23
            
            Form
      of  Supplemental Share Purchase Agreement, dated February 12, 2009,
      among Yinlong Industrial Co. Ltd., Tailong Holdings Company Limited,
      Pacific Dragon Fertilizer Co. Ltd., Yu Chang and Xiao Rong Teng
      (incorporated by reference to Exhibit 10.2 in our current report on Form
      8-K filed on February 18, 2008).10.24
            
            Form
      of Promissory Note, dated February 12, 2009, by Tailong Holding Company
      Limited, in favor of Yinlong Industrial Co. Ltd. (incorporated by
      reference to Exhibit 10.3 in our current report on Form 8-K filed on
      February 18, 2008).




37




Exhibit
                No.
            
            Description14
            
            Code
      of ethics (incorporated by reference to Exhibit 14 in our annual report on
      Form 10-KSB filed on April 14, 2006)16.1
            
            Letter
      fromKabani & Company, Inc., regarding change in certifying accountant,
      dated May 7, 2008 (incorporated by reference to Exhibit 16.1 in our
      current report on Form 8-K filed on May 7, 2008).16.2
            
            Letter
      fromGrobstein,
      Horwath & Company LLP regarding change in certifying accountant,
      dated February 13, 2009(incorporated by reference to
      Exhibit 16.1 in our current report on Form 8-K/A filed on February 18,
      2009).16.3
            
            Letter
      fromGrobstein,
      Horwath & Company LLP regarding agreement with the
      disclosures made in the Current Report on Form 8-K/A, dated
      March 10, 2009 (incorporated by reference to Exhibit 16.2 in our current
      report on Form 8-K/A filed on March 10, 2009).21
            
            Subsidiaries
      of the Registrant (incorporated by reference to Exhibit 21 in our annual
      report on Form 10K filed on April 2, 2007)23.1*
            
            Consent
      of Kabani & Company, Inc., independent registered public accounting
      firm23.2*
            
            Consent
      of Crowe Horwath LLP, independent registered public accounting
      firm31.1*
            
            Certification
      of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2*
            
            Certification
      of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1*
            
            Certification
      of Chief Executive Officer, 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 Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  *







* Filed
herewith




38




CHINA
AGRITECH, INC.


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS


ENDED
DECEMBER 31, 2007 AND 2008




Contents
            
            Page(s)Report
      of Independent Registered Public Accounting Firm
            
            
            F-2Report
      of Predecessor Independent Registered Public Accounting
    Firm
            
            
            F-3Consolidated
      Balance Sheets as of December 31, 2007 and 2008
            
            
            F-4Consolidated
      Statements of Income and Comprehensive Income for the years ended December
      31, 2007 and 2008
            
            
            F-5Consolidated
      Statements of Shareholders’ Equity for the years ended December 31, 2007
      and 2008
            
            
            F-6Consolidated
      Statements of Cash Flows for the years ended December 31, 2007 and
      2008
            
            
            F-7Notes
      to the Consolidated Financial Statements
            
            
            F-8




F-1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Stockholders and Board of Directors of China Agritech, Inc. and
Subsidiaries





We have
audited the accompanying consolidated balance sheet of China Agritech, Inc. and
Subsidiaries as of December 31, 2008, and the related consolidated statements of
income and other comprehensive income, stockholders' equity, and cash flows for
the year then ended.  These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.





In our
opinion, the 2008 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2008, and the consolidated results of its operations
and its cash flows for the year then ended, in conformity with U.S. generally
accepted accounting principles.







Sherman
Oaks,
California                                                                 /s/
Crowe Horwath  LLP


March 26,
2009




F-2


Report
of Independent Registered Public Accounting Firm
   Board of
Directors and Stockholders of
 China
Agritech and Subsidiaries
 
 We have
audited the accompanying consolidated balance sheet of China Agritech Inc. and
Subsidiaries as of December 31, 2007, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year ended December 31,
2007.   These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provide a reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of China Agritech
Inc. and Subsidiaries as of December 31, 2007, and the consolidated income
statements and their consolidated cash flows for
the  year  ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.
  
 /s/
Kabani & Company, Inc.
 Certified
Public Accountants
 
 Los
Angeles, California
 March 10,
2008


F-3




CHINA
AGRITECH, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2007








DECEMBER 31,
              2008
            
            
            DECEMBER 31,
              2007ASSETSCurrent
      AssetsCash
      and cash equivalents
            
            $
            11,952,235
            
            
            $
            11,841,221Restricted
      cash
            
            
            —
            
            
            
            2,011,415Accounts
      receivable, net
            
            
            34,773,115
            
            
            
            21,876,368Inventories
            
            
            6,452,618
            
            
            
            3,508,741Advances
      to suppliers
            
            
            10,795,357
            
            
            
            12,343,255Prepayments
      and other receivables
            
            
            2,484,346
            
            
            
            1,242,693Total
      Current Assets
            
            
            66,457,671
            
            
            
            52,823,693Property
      and equipment, net
            
            
            4,496,045
            
            
            
            3,798,958Deposit
      for equipment
            
            
            749,799Construction
      in progress
            
            
            961,551
            
            
            
            —Total
      Assets
            
            $
            72,665,066
            
            
            $
            56,622,651LIABILITIES AND
      STOCKHOLDERS’S EQUITYCurrent
      LiabilitiesAccounts
      payable
            
            $
            3,327,281
            
            
            $
            41,146Accrued
      expenses and other payables
            
            
            221,954
            
            
            
            229,049Amount
      due to related parties
            
            
            —
            
            
            
            352,505Taxes
      payable
            
            
            1,388,897
            
            
            
            1,650,243Total
      Current Liabilities
            
            
            4,938,132
            
            
            
            2,272,943Minority
      Interest
            
            
            4,928,434
            
            
            
            3,465,724Commitments
            
            
            —
            
            
            
            —Stockholders'
      EquityCommon
      stocks; $0.001 par value, 100,000,000 shares authorized, 24,699,615
      shares issued and outstanding as of December 31,2008 and December
      31,2007
            
            
            24,700
            
            
            
            24,700Additional
      paid in capital
            
            
            26,148,879
            
            
            
            26,135,914Statutory
      reserve
            
            
            5,425,407
            
            
            
            4,299,653Accumulated
      other comprehensive income
            
            
            5,837,917
            
            
            
            2,578,107Retained
      earnings
            
            
            25,361,597
            
            
            
            17,845,610Total
      Stockholders' Equity
            
            
            62,798,500
            
            
            
            50,883,984Total
      Liabilities and Stockholders' Equity
            
            $
            72,665,066
            
            
            $
            56,622,651




The
accompanying notes are an integral part of these consolidated financial
statements.




F-4




CHINA
AGRITECH, INC. AND SUBSIDIARIES


CONSOLIDATED
INCOME STATEMENTS


FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007




2008
            
            
            2007Net
      revenue
            
            $
            45,240,212
            
            
            $
            38,008,580Cost
      of revenue
            
            
            (24,889,387
            )
            
            
            (18,939,725
            )Gross
      profit
            
            
            20,350,825
            
            
            
            19,068,855Operating
      expensesSelling
      expenses
            
            
            (2,369,763
            )
            
            
            (1,723,869
            )Operating
      and administrative expenses
            
            
            (4,265,655
            )
            
            
            (2,418,895
            )Total
      operating expenses
            
            
            (6,635,418
            )
            
            
            (4,142,764
            )Income
      from operations
            
            
            13,715,407
            
            
            
            14,926,091Other
      income/(expense)
            
            
            (56,165
            )
            
            
            (40,548
            )Interest
      income
            
            
            91,984
            
            
            
            152,400Exchange
      gain/(loss)
            
            
            231,326
            
            
            
            (271
            )Total
      other income/(expense)
            
            
            267,145
            
            
            
            111,581Income
      before income taxes and minority interests
            
            
            13,982,552
            
            
            
            15,037,672Provision
      for income taxes
            
            
            (4,151,782
            )
            
            
            (5,391,464
            )Income
      before minority interests
            
            
            9,830,770
            
            
            
            9,646,208Minority
      interests
            
            
            (1,189,029
            )
            
            
            (1,117,583
            )Net
      income
            
            
            8,641,741
            
            
            
            8,528,625Other
      comprehensive incomeForeign
      currency translation adjustment
            
            
            3,259,810
            
            
            
            1,976,819Comprehensive
      income
            
            
            11,901,551
            
            
            
            10,505,444Basic
      weighted average shares outstanding
            
            
            24,699,615
            
            
            
            21,868,338Basic
      net earning per share
            
            
            0.35
            
            
            
            0.39Diluted
      weighted average shares outstanding
            
            
            24,699,615
            
            
            
            21,929,031Diluted
      net earnings per share
            
            
            0.35
            
            
            $
            0.39





Basic and
diluted weighted average shares outstanding are the same as there is no
antidilutive effect.




The
accompanying notes are an integral part of these consolidated financial
statements.




F-5




CHINA
AGRITECH, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY


FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007





Common
      stock
            
            
            
            
            
            
            
            
            OtherNumber
      of
                Shares
            
            
            Amount
            
            
            Additional
                  paid-in-
                  capital
            
            
            Statutory
                reserves
            
            
            Comprehensive
                    income
            
            
            Retained
                earnings
            
            
            TotalBalance
      at December 31, 2006
            
            
            19,143,615
            
            
            $
            19,144
            
            
            
            12,619,049
            
            
            
            2,790,916
            
            
            
            601,288
            
            
            
            10,825,722
            
            
            
            26,856,119Stock
      issued for cash
            
            
            5,556,000
            
            
            
            5,556
            
            
            
            13,478,922
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            13,484,478Stock
      option expenses
            
            
            —
            
            
            
            —
            
            
            
            37,943
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            37,943Foreign
      currency translation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,976,819
            
            
            
            —
            
            
            
            1,976,819Net
      income for the year
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            8,528,625
            
            
            
            8,528,625Transfer
      to statutory reserve
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,508,737
            
            
            
            —
            
            
            
            (1,508,737
            )
            
            
            —Balance
      at December 31, 2007
            
            
            24,699,615
            
            
            $
            24,700
            
            
            
            26,135,914
            
            
            
            4,299,653
            
            
            
            2,578,107
            
            
            
            17,845,610
            
            
            
            50,883,984Stock
      issued for cash
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Stock
      option expenses
            
            
            —
            
            
            
            —
            
            
            
            12,965
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            12,965Foreign
      currency translation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            3,259,810
            
            
            
            —
            
            
            
            3,259,810Net
      income for the year
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            8,641,741
            
            
            
            8,641,741Transfer
      to statutory reserve
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,125,754
            
            
            
            —
            
            
            
            (1,125,754
            )
            
            
            —Balance
      at December 31, 2008
            
            
            24,699,615
            
            
            $
            24,700
            
            
            
            26,148,879
            
            
            
            5,425,407
            
            
            
            5,837,917
            
            
            
            25,361,597
            
            
            
            62,798,500




F-6




CHINA
AGRITECH, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF CASH FLOWS


FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007




2008
                  
                  
                  2007Cash
      flows from operating activities:Net
      income
                  
                  
                  8,641,741
                  
                  
                  
                  8,528,625Adjustments
      to reconcile net income to net cashProvided
      by (used in) operating activities:Stock
      based compensation
                  
                  
                  12,965
                  
                  
                  
                  37,942Minority
      Interest
                  
                  
                  1,189,029
                  
                  
                  
                  1,117,583Depreciation
      and amortisation
                  
                  
                  549,341
                  
                  
                  
                  390,736Provision
      for doubtful debts
                  
                  
                  195,616
                  
                  
                  
                  57,745Decrease
      / (Increase) in current assets:Accounts
      receivable
                  
                  
                  (11,306,241
                  )
                  
                  
                  (9,333,639
                  )Inventories
                  
                  
                  (2,638,273
                  )
                  
                  
                  (2,186,497
                  )Advances
      to suppliers
                  
                  
                  1,668,798
                  
                  
                  
                  (3,626,775
                  )Prepayments
      and other receivable
                  
                  
                  (1,503,874
                  )
                  
                  
                  (455,699
                  )Due
      from shareholders
                  
                  
                  —
                  
                  
                  
                  22,532(Decrease)
      / Increase in current liabilities:Accounts
      payable
                  
                  
                  3,226,288
                  
                  
                  
                  (357,627
                  )Tax
      payables
                  
                  
                  (375,076
                  )
                  
                  
                  532,043Accrued
      expenses and other payables
                  
                  
                  (553,730
                  )
                  
                  
                  625,851Net
      cash used in operating activities
                  
                  
                  (893,416
                  )
                  
                  
                  (4,647,180
                  )Cash
      flows from investing activities:Acquisition
      of property & equipment
                  
                  
                  (951,588
                  )
                  
                  
                  (1,429,517
                  )Construction
      in progress
                  
                  
                  (966,168
                  )
                  
                  
                  —Restricted
      cash
                  
                  
                  11,415
                  
                  
                  
                  88,821Net
      cash used in investing activities
                  
                  
                  (1,906,341
                  )
                  
                  
                  (1,340,696
                  )Cash
      flows from financing activities:Amount
      held in escrow account
                  
                  
                  2,000,000
                  
                  
                  
                  (2,000,000
                  )Advance
      from shareholders
                  
                  
                  —Issuance
      of shares for cash
                  
                  
                  —
                  
                  
                  
                  13,484,478Net
      cash provided by financing activities
                  
                  
                  2,000,000
                  
                  
                  
                  11,484,478Net
      increase in cash and cash equivalents
                  
                  
                  (799,757
                  )
                  
                  
                  5,496,602Effect
      of exchange rate change on cash and cash equivalents
                  
                  
                  910,771
                  
                  
                  
                  (85,390
                  )Cash
      and cash equivalents, beginning of year
                  
                  
                  11,841,221
                  
                  
                  
                  6,430,009Cash
      and cash equivalents, end of year
                  
                  
                  11,952,235
                  
                  
                  
                  11,841,221Supplement
      disclosure of cash flow information:Interest
      expense paid
                  
                  $
                  —
                  
                  
                  $
                  —Income
      taxes paid
                  
                  
                  4,437,384
                  
                  
                  $
                  5,266,039Cash
      from issue of common stock placed in escrow account
                  
                  
                  —
                  
                  
                  $
                  2,000,000Noncash
      Investment and Financing ActivityOffset
      of amounts due to/from stockholders
                  
                  $
                  320,666
                  
                  
                  
                  —




F-7




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS




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, organic
granular compound fertilizers and related agricultural products. Our business
operations are primarily conducted through Anhui Agritech Agriculture
Development Limited (“Anhui Agritech”), Beijing Agritech Fertilizer Ltd.
(“Beijing Agritech”), China Tailong Holdings Company Limited ("Tailong") and
Tailong’s subsidiary, Pacific Dragon Fertilizers Co. Ltd. ("Pacific Dragon").
Our revenues are derived from the sale of our fertilizers and related
agricultural products to our customers.





We
acquired the line of business in which we now operate by entering into a
transaction with Tailong and the shareholders of Tailong pursuant to the
Reorganization Agreement (defined below) effective February 3,
2005.  We were originally incorporated on January 5, 1925, under the
laws of the State of Nevada as Argyle Mining Company. We changed our 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, we changed our corporate domicile from Nevada to Delaware. Throughout
our existence, we have changed our business model several times, and conducted
no substantive business from 1986 until February 2005, when we 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 as a result, 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.





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.




F-8




Prior to
the equity transfer, CAI established a wholly owned subsidiary, Beijing 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




a.  Principles of
consolidation




The
consolidated financial statements include the accounts of China Agritech, Inc.
and all of its subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.




b.  Use of
estimates




The
preparation of these Condensed Interim Financial Statements in conformity with
U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the condensed interim financial statements and
the amount of revenues and expenses during the reporting periods. Management
makes these estimates using the best information available at the time the
estimates are made. However, actual results could differ materially from those
estimates.





c. Basis of
presentation





This
basis of accounting differs in certain respects from that used for the
preparation of the books of account of the Company’s subsidiaries, which are
prepared in accordance with the accounting principles and the relevant financial
regulations applicable to enterprises with limited liabilities established in
the PRC and Hong Kong, the place of their domicile. The accompanying Condensed
Interim  Financial Statements reflect necessary adjustments not
recorded in the books of account of the Company's subsidiaries to present them
in conformity with U.S. GAAP.




d.  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.




e.  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.




f.  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-9





g.  Advances to
suppliers




The
Company provides advances to certain vendors for purchase of its material.
Advancing of funds to vendors is a common practice in China and the Company
expects to realize these advances in the form of inventory receipts within a one
year period.




h.  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.




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 or shorter of the lease period for leasehold
improvement, 5 to 10 years for office equipment; and 5 to 8 years for motor
vehicles.




i.  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.




j.  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 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 year ended December 31, 2008 and year ended December 31,
2007.




F-10




k.  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.




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





l.  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 year ended
December 31, 2008 and 2007 were $646,242 and $460,403,
respectively.




m.Shipping and
Handling




The
Company classifies shipping cost under selling expenses. Shipping costs for the
year ended December 31, 2008 and 2007 were $720,401 and $405,877,
respectively




n.  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 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.




F-11





The
Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. FIN 48
clarifies the accounting foe uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB Statement 109,
“Accounting for Income Taxes”, and prescribes a recognition threshold and
measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provide
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition.




Based on
our evaluation, we have concluded that there are no significant uncertain tax
positions requiring recognition in our financial statements. Our evaluation was
performed for the tax years ended December 31, 2008 and 2007, the tax years
which remain subject to examination by major tax jurisdictions (PRC) as of
December 31, 2008. We may from time to time be assessed interest or penalties by
major tax jurisdictions. In the event we receive an assessment for interest
and/or penalties, it will be classified in the financial statements as tax
expense.





o.  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 is 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.




p.  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.




q.  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 warrant 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.




F-12




The
following table is a reconciliation of the weighted average shares used in the
computation of basic and diluted earnings per share for the periods
presented (amounts in thousands, except per share data):





2008
            
            
            
            
            
            
            
            
            2007Weighted
            
            
            
            
            
            
            
            
            WeightedAverage
            
            
            Per
            
            
            
            
            
            Average
            
            
            PerIncome
            
            
            Shares
            
            
            Shares
            
            
            Income
            
            
            Shares
            
            
            SharesEarning
      per share - basicIncome
      available to common stockholders
            
            $
            8,641
            
            
            
            24,700
            
            
            $
            0.35
            
            
            $
            8,529
            
            
            
            21,868
            
            
            $
            0.39Effect
      of dilutive options and warrants
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            60Earning
      per share - dilutedIncome
      available to common stockholders
            
            $
            8,641
            
            
            
            24,700
            
            
            $
            0.35
            
            
            $
            8,529
            
            
            
            21,928
            
            
            $
            0.39





The
dilutive earnings per share computation for 2008 excludes options and warrants
to purchase 538,920 shares of common stock and for 2007 excludes options
and warrants to purchase 438,920 shares of common stock because the impact
was anti-dilutive.




r.  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.




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




s.  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.




F-13





t.  Stock-based
compensation





On
December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”, which
replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes
APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R
requires all share based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
the grant date fair value of the award. The Company has adopted the
requirements of SFAS No. 123R for the fiscal year beginning on December 26,
2005, and recorded the compensation expense for all unvested stock options
existing prior to the adoption during the period.




u.  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 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. Adoption of SFAS No.159 did not
have a material impact on our consolidated 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 Consolidated
Financial Statements. SFAS No. 160 is effective for the Company’s fiscal year
beginning after December 15, 2008. Management is currently evaluating the effect
of this pronouncement on the Consolidated 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 Consolidated Financial
Statements..





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 Consolidated Financial
Statements.




F-14





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 will evaluate the impact
that this statement will have on its Consolidated Financial Statements when this
pronouncement becomes effective.





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 Consolidated 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.  The impact
of FAS 157 with respect to financial assets did not have a significant impact on
our financial statements.





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.





F-15





3. RESTRICTED
CASH




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 $2,000,000 was deposited in an
escrow account. The balance held in escrow was $2,000,000 as of December 31,
2007. In December 2008, the $2,000,000 was released from escrow.





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





There
were no requirements or contingencies with respect to this restricted cash
balance beyond the amount being held in escrow until certain specified
conditions were fulfilled.




4. ACCOUNTS
RECEIVABLE





Accounts
receivable consist of the following:





December 31
            
            December 312008
            
            2007Accounts
      receivable
            
            $
            35,221,721
            
            
            $
            22,104,349Less:
      Allowance for doubtful accounts
            
            
            (448,606
            )
            
            
            (227,981
            )$
            34,773,115
            
            
            $
            21,876,368




The
activity in the Company’s allowance for doubtful accounts is summarized as
follows:





December 31
            
            December 312008
            
            2007Balance
      at the beginning of the year
            
            $
            227,981
            
            
            
            170,236Add:
      provision during the year
            
            
            220,625
            
            
            
            57,745Balance
      at the end of the year
            
            $
            448,606
            
            
            $
            227,981








5. INVENTORIES




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




December 31
            
            December 312008
            
            2007Raw
      Materials
            
            $
            4,941,787
            
            
            $
            2,579,210Packing
      Materials
            
            
            107,053
            
            
            
            37,645Finished
      goods
            
            
            1,403,778
            
            
            
            891,886$
            6,452,618
            
            
            $
            3,508,741




F-16




6. PREPAYMENTS
AND OTHER RECEIVABLES




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




7. PROPERTY
AND EQUIPMENT




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




December 30
            
            
            December 312008
            
            
            2007Manufacturing
      machinery
            
            $
            4,735,761
            
            
            $
            3,750,525Leasehold
      improvement
            
            
            439,341
            
            
            
            165,905Office
      equipment
            
            
            220,031
            
            
            
            210,998Motor
      vehicles
            
            
            619,149
            
            
            
            565,3106,014,282
            
            
            
            4,692,738Less:
      Accumulated Depreciation
            
            
            (1,518,237
            )
            
            
            (893,780
            )$
            4,496,045,
            
            
            $
            3,798,958




Depreciation
and amortization expense for the year ended December 31, 2008 and 2007 was
$548,571 and $390,736, respectively.




8. CONSTRUCTION
IN PROGRESS





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





9. DEPOSIT
FOR EQUIPMENT





Deposit
for equipment consists of advances to the supplier for the purchase of machinery
for granular organic fertilizer plant.





10.ACCRUED EXPENSES AND OTHER
PAYABLES




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




December 31
            
            December 312008
            
            2007Other
      accrued expense
            
            
            105,924
            
            
            
            103,495Other
      payables
            
            
            116,030
            
            
            
            125,555$
            221,954
            
            
            $
            229,050




F-17




11. 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.




12. TAXES
PAYABLE




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




December 31
            
            December 312008
            
            2007Income
      tax payable
            
            $
            857,324
            
            
            $
            1,069,936VAT
      tax payable
            
            
            529,313
            
            
            
            576,911Others
            
            
            2,260
            
            
            
            3,396$
            1,388,897
            
            
            $
            1,650,243




13. 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 year
ended December 31, 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.





Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law  replaced
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 and the
three years 50% tax reduction tax holiday for production-oriented FIE will be
eliminated.





The
provision for income taxes for the year ended December 31, 2008 and 2007
consisted of the following:




Year
      ended December 31,2008
            
            
            2007Provision
      for China income and local tax
            
            $
            4,151,782
            
            
            $
            5,391,464





F-18




The
following table reconciles the statutory rates to the Company’s effective tax
rate at December  31, 2008
and 2007 respectively;





2008
            
            
            
            2007Tax
      at statutory rate
            
            
            25
            %
            
            
            33
            %Net
      operating loss in other tax jurisdiction for where no benefit is
      realized
            
            
            5
            %
            
            
            3
            %30
            %
            
            
            36
            %




14. MINORITY
INTEREST




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




15.
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.




16. MAJOR
CUSTOMERS AND VENDORS




There
were no major customers which accounted for more than 10% of the total net
revenue for the year ended December 31, 2008 and 2007.




Four
vendors provided approximately 68% of the Company’s raw materials for the year
ended December 31, 2008, with each vendor individually accounting for
approximately 33%, 12%, 12% and 11%. Four vendors provided approximately 80% of
the Company’s dollar value of raw materials for the year ended December 31,
2007, with each individually accounting for approximately 31%, 19%, 21% and
10%.





F-19





17.
RETIREMENT PLAN





As
stipulated by the regulations of the PRC government, companies operating in the
PRC have defined contribution retirement plans for their employees. The PRC
government is responsible for the pension liability to these retired employees.
Commencing January 1, 2002, the Company was required to make specified
contributions to the state-sponsored retirement plan at 20% of the basic salary
cost of their staff. Each of the employees of the PRC subsidiaries is
required to contribute 8% of his/her basic salary. For the years ended December
31, 2008 and 2007, contributions made by the Company were approximately
$43,871and $27,085 respectively.




18. 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.




As a
result of adopting SFAS No. 123R, the Company recognized $12,965 and
$37,942 in share-based compensation expense for the year ended December 31, 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.





The
Company’s 2008 Equity Incentive Plan (“the Plan”) which was shareholder
approved, permits the grant of Options, Stock Appreciation Rights, Restricted
Stock, Restricted Stock Units, and Other Share-Based Awards as the Administrator
may determine to its Employees, Directors and Consultants. Three million six
hundred thousand (3,600,000) Shares will be available for issuance under the
Plan. The Company believes the Plan will promote the success of the
Company’s business, advance the interests of the Company, and attract and retain
the best available personnel for positions of substantial
responsibility  The exercise price per share with respect to the Plan
will be determined by the Administrator provided that the exercise price
per share cannot be less than the Fair Market Value of a Share on the Grant Date
and the Administrator shall establish and set forth in the Award Agreement the
times, installments or conditions upon which the Option, Stock Appreciation
Rights, Restricted Stock, Restricted Stock Units, and Other Share-Based Awards
shall vest and become exercisable, which may include, among other things, the
achievement of the Company-wide, business unit, and individual goals (including,
but not limited to continued employment or services)




F-20




Options




In
connection with the appointment of the Company’s new CFO, which occurred on
October 17, 2008, the Company granted the CFO options to purchase 100,000 shares
of its common stock. The options vested immediately upon signing of the
employment contract. The exercise price of the options is $2.00 per
share.




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





2008Risk-free
      interest rate
                                
                                
                                1.34
                                %Expected
      life of the options
                                
                                1 yearExpected
      volatility
                                
                                
                                99
                                %Expected
      dividend yield
                                
                                
                                0
                                %





Following
is a summary of the stock option activity:




Options
              outstanding
            
            
            Weighted
              Average Exercise
              Price
            
            
            Grant
      Date Fair
              Market
      Value
              of
      a ShareOutstanding,
      December 31, 2006
            
            
            50,000
            
            
            $
            3.50GrantedForfeitedExercisedOutstanding,
      December 31, 2007
            
            
            50,000
            
            
            $
            3.50Granted
            
            
            100,000
            
            
            
            2.00
            
            
            $
            0.13Forfeited
            
            
            —
            
            
            
            —Exercised
            
            
            —
            
            
            
            —Outstanding,
      December 31, 2008
            
            
            150,000
            
            
            $
            2.50







Following
is a summary of the status of options outstanding at December 31,
2008:





Outstanding Options
            
            Exercisable OptionsExercise Price
            
            Number
            
            Average
              Remaining
              Contractual Life
            
            Average
              Exercise Price
            
            Number
            
            Average Exercise
              Price$3.50
            
            
            50,000
            
            2.4
      years
            
            $
            3.50
            
            50,000
            
            $
            3.50$2.00
            
            
            100,000
            
            4.8
      years
            
            
            2.00
            
            100,000
            
            
            2.00




F-21





As of
December 31, 2008, our options had no intrinsic value.




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




Risk-free
      interest rate
            
            
            5.02
            %Expected
      life of the options
            
            5
      yearsExpected
      volatility
            
            
            83
            %Expected
      dividend yield
            
            
            0
            %




Following
is a summary of the warrants activity:




Warrants
                        outstanding
                      
                      
                      Weighted
                        Average Exercise
                        Price
                      
                      
                      Grant
      Date Fair Market Value of a ShareOutstanding,
      December 31, 2006
                      
                      
                      —
                      
                      
                      $
                      —Granted
                      
                      
                      388,920
                      
                      
                      $
                      2.70
                      
                      
                      $
                      2.31Forfeited
                      
                      
                      —
                      
                      
                      
                      —Exercised
                      
                      
                      —
                      
                      
                      
                      —Outstanding,
      December 31, 2007
                      
                      
                      388,920
                      
                      
                      $
                      2.70GrantedForfeitedExercisedOutstanding,
      December 31, 2008
                      
                      
                      388,920
                      
                      
                      $
                      2.70




F-22




Following
is a summary of the status of warrants outstanding at December 31,
2008:





Outstanding Warrants
            
            Exercisable WarrantsExercise Price
            
            Number
            
            Average
              Remaining
              Contractual Life
            
            Average
              Exercise Price
            
            Number
            
            Average Exercise
              Price$2.70
            
            
            388,920
            
            3.5
      years
            
            $
            2.70
            
            388,920
            
            $
            2.70




As of
December 31, 2008, our warrant had no intrinsic value.




19. 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
December 31, 2008 and December 31, 2007 amounted to $5,425,406 and $4,299,653,
respectively.





20. 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. The Company continues to refine the manufacturing
know-how of the product at its expense. 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 $518,940) effective
from July 1, 2005.  Yinlong is owned and controlled by Mr. Yu Chang
and Ms. Xiaorong Tang, who are directors of the Company.




F-23





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 492,000 (equivalent to approximately $70,922)
effective from July 2, 2007.




As of
December 31, 2008, we have approximately $219,718 in capital commitments for the
purchase of organic granular compound fertilizer’s production
facilities.





The
Company incurred rent expense of $888,460 and $701,761 related to the above
leases for the  year ended December 31, 2008 and 2007,
respectively.  The rent obligations for the next five years after
December 31, 2008 are as follows:




Year
      2009
            
            
            915,223Year
      2010
            
            
            880,982Year
      2011
            
            
            830,183Year
      2012
            
            
            681,978Year
      2013
            
            
            576,492Thereafter
            
            
            171,627$
            4,056,485







21. SUBSEQUENT
EVENT




On
February 12, 2009,  Tailong entered into a share purchase agreement
with Pacific Dragon Fertilizers Co. Ltd., or Pacific Dragon,  and
Yinlong Industrial Co. Ltd., or Yinlong, and a supplemental purchase agreement
among Yinlong, Pacific Dragon, Mr. Yu Chang, the Company’s Chief Executive
Officer, President, Secretary and Chairman, and Ms. Xiao Rong Teng, one of the
Company’s directors, pursuant to which Tailong agreed to acquire Yinlong’s 10%
interest in Pacific Dragon for an aggregate purchase price of
$7,980,000.  Mr. Chang has an 85% equity interest in Yinlong and Ms.
Teng owns the remaining 15% equity interest.  Following this
transaction, the Company, as the sole shareholder of Tailong, will indirectly
own 100% of Pacific Dragon.  Subject to approval from the Ministry of
Commerce of the People’s Republic of China, the transaction is expected to close
in early April, 2009.





On
February 12, 2009, in connection with the supplemental purchase agreement
described above, Tailong issued an unsecured, interest-free promissory note in
the principal amount of $6,980,000 to Yinlong as consideration for the purchase
of its 10% interest in Pacific Dragon.  The promissory note has a
maturity date of December 31, 2009 and Tailong may prepay all of any portion of
the principal of the promissory note without penalty.  The unpaid
principal balance of the promissory note is due and payable on December 31,
2009, unless accelerated pursuant to an event of default.




F-24




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) 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.




CHINA
      AGRITECH, INC.March
      31, 2009
              By:
              /s/ Yu
      Chang(Date
      Signed)
              
              Yu
      Chang, Chief Executive Officer, President,
                and
      Secretary






Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.




Signature
            
            Capacity
            
            Date/s/ Yu
      Chang
            
            Chief
      Executive Officer, President, Secretary and Chairman
            
            March
      31, 2009Yu
      Chang/s/ Yau Sing Tang
            
            Chief
      Financial Officer and Controller
            
            March
      31, 2009Yau-Sing
      Tang/s/ Ming Fang Zhu
            
            Chief
      Operating Officer
            
            March
      31, 2009Ming
      Fang Zhus/ Xiarong Teng
            
            Director
            
            March
      31, 2009Xiarong
      Teng/s/ Gene Michael Bennett
            
            Director
            
            March
      31, 2009Gene
      Michael Bennett/s/ Lun Zhang Dai
            
            Director
            
            March
      31, 2009Lun
      Zhang Dai/s/ Hai Lin Zhang
            
            Director
            
            March
      31, 2009Hai
      Lin Zhang





39




Exhibit
Index


Exhibit
                  No.
              
              Description2.1
              
              Agreement
      and Plan of Merger, dated July 1, 2004 by and between Basic Empire
      Corporation, a Nevada Corporation and Basic Empire Corporation, a Delaware
      corporation (incorporated by reference to Exhibit 10.2 in the our annual
      report on Form 10-KSB filed on April 15, 2005).2.2
              
              Agreement
      and Plan of Reorganization, dated as of December 25, 2004, as amended, by
      and among the us, China Tailong Holdings Company Limited and its
      stockholders (incorporated by reference to Exhibit 2.1 in the our current
      report on Form 8-K filed on February 3, 2005, as
  amended).3.1
              
              Amended
      and Restated Certificates of Incorporation as filed with the Secretary of
      the State of Delaware (incorporated by reference to Exhibit 3.1 in the our
      registration statement on Form SB-2 filed on July 22, 2005, as
      amended).3.2
              
              Articles
      of Association of China Tailong Holdings Company Limited (incorporated by
      reference to Exhibit 4.2 in our current report on Form 8-K filed on
      February 3, 2005, as amended).3.3
              
              Articles
      of Association of Pacific Dragon Fertilizers Co. Ltd. (incorporated by
      reference to Exhibit 4.3 in our current report on Form 8-K filed on
      February 3, 2005, as amended).3.4
              
              Amended
      and Restated Bylaws (incorporated by reference to Exhibit 3.2 in our
      registration statement on Form SB-2 filed on July 22, 2005, as
      amended).4.1
              
              Form
      of Registration Right Agreement, dated June 29, 2007, by and among us,
      Securities Transfer Corporation and the Investors (incorporated by
      reference to Exhibit 4 in registration statement on our Form S-1/A filed
      on October 19, 2007).4.2
              
              Common
      Stock Purchase Warrant, dated July 5, 2007, issued to Roth Capital
      Partner, LLC. (incorporated by reference to Exhibit 4.1 in our
      registration statement on Form S-1 filed on August 20,
    2007).10.1
              
              Joint
      Venture Contract of Sino-foreign Contractual Joint Venture Pacific Dragon,
      dated June 9, 2004 (incorporated by reference to Exhibit 10.8 in our
      registration statement on Form SB-2 filed on July 22, 2005, as
      amended).10.2
              
              Transfer
      of Capital Contribution and Profit Agreement, dated June 8, 2004, by and
      among China Tailong Holdings Limited, Yinlong Industrial Co. Ltd., Beijing
      Taiming Applied Technology Institute and Cathay-Pacific Enterprises Ltd.
      (incorporated by reference to Exhibit 4.1 in our current report on Form
      8-K filed on February 3, 2005, as amended).10.3
              
              Form
      of Escrow Agreement, dated June 2007 (incorporated by reference to
      Exhibit 10.2 in our current report on Form 8-K filed on July 6,
      2007).10.4
              
              Form
      of Escrow Agreement, dated June 2007 (incorporated by reference to
      Exhibit 10.3 in our current report on Form 8-K filed on July 6,
      2007).10.5
              
              Stock
      Purchase Agreement, dated March 2, 2006, by and among the registrant,
      China Tailong Group Limited and Mr. Yu Chang (incorporated by
      reference to Exhibit 10.11 in our registration statement on Form
      SB-2/A filed on April 28, 2006).
  40
  Exhibit
                  No.
              
              Description10.6
              
              Form
      of Securities Purchase Agreement, dated June 29, 2007 (incorporated by
      reference to Exhibit 10.1 in our current report on Form 8-K filed on July
      6, 2007).10.7
              
              Lease
      Agreement, dated December 30, 2003, by and between Pacific Dragon
      Fertilizers Co. Ltd. and Yinlong Industrial Co. Ltd. (incorporated by
      reference to Exhibit 10.6 in our registration statement on Form SB-2 filed
      on July 22, 2005, as amended).10.8
              
              Amendment
      to the Lease Agreement, dated June 28, 2005, by and between Pacific Dragon
      Fertilizers Co. Ltd. and Yinlong Industrial Co. Ltd. (incorporated by
      reference to Exhibit 10.12 in our annual report on Form 10-KSB filed on
      April 14, 2006).10.9*
              
              Lease
      Agreement, dated September 7, 2008, by and between China Tailong Holdings
      Company Limited and Superior Strategy Company Limited.10.10
              
              License
      Agreement, dated January 6, 2005, by and between Yu Chang and Pacific
      Dragon Fertilizers Co. Ltd. (incorporated by reference to Exhibit 10.4 in
      our registration statement on Form SB-2 filed on July 22, 2005, as
      amended).10.11
              
              Permanent
      License Agreement, dated December 3, 2005, by and between Yu Chang and
      Pacific Dragon Fertilizers Co. Ltd. (incorporated by reference to Exhibit
      10.16 in our annual report on Form 10-KSB filed on April 14,
      2006)10.12
              
              Permanent
      License Agreement, dated July 5, 2007, by and between Yu Chang and Pacific
      Dragon Fertilizers Co., Ltd. (incorporated by reference to Exhibit 10.21
      in our registration statement on Form S-1 filed on August 17,
      2007).10.13
              
              Employment
      Agreement, datd January 6, 2005, between Yu Chang and Pacific Dragon
      Fertilizers Co. Ltd. (incorporated by reference to Exhibit 10.5 in our
      registration statement on Form SB-2 filed on July 22, 2005, as
      amended).10.14
              
              Employment
      Agreement, dated May 8, 2007, by and between Kelviz Lim Kok Siak and
      Pacific Dragon Fertilizers Co. Ltd. (incorporated by reference to Exhibit
      10.23 in our registration statement on Form S-1 filed on August 20,
      2007).
  41
  Exhibit
                  No.
              
              Description10.15
              
              Supplier
      contracts dated October 8, 2007, by and between China Agritech, Inc. and
      Sinochem Fertilizer Co., Ltd. (incorporated by reference to Exhibit 10.1
      in our current report on Form 8-K filed on October 10,
    2007).10.16
              
              Supplier
      contracts dated October 14, 2008, by and between China Agritech, Inc. and
      Sinochem Fertilizer Co., Ltd. (incorporated by reference to Exhibit 10.1
      in our current report on Form 8-K filed on October 14,
    2008).10.17
              
              Employment
      Agreement, dated October 17, 2008, by and between China Agritech, Inc. and
      Mr. Yau-Sing Tang (incorporated by reference to Exhibit 99.1 in our
      current report on Form 8-K filed on October 24, 2008).10.18
              
              Independent
      Director’s Contract, dated September 24, 2008, by and  between
      China Agritech, Inc. and Mr. Lun Zhang Dai (incorporated by reference to
      Exhibit 99.2 in our current report on Form 8-K filed on October 24,
      2008)10.19
              
              Independent
      Director’s Contract, dated September 24, 2008, by and between China
      Agritech, Inc. and Mr. Hai Lin Zhang (incorporated by reference to Exhibit
      99.3 in our current report on Form 8-K filed on October 24,
      2008)10.20
              
              Independent
      Director’s Contract, dated September 24, 2008, by and between China
      Agritech, Inc. and Mr. Gene Michael Bennett (incorporated by reference to
      Exhibit 99.4 in our current report on Form 8-K filed on October 24,
      2008)10.21
              
              China
      Agritech, Inc. 2008 Equity Incentive Plan (incorporated by reference to
      Exhibit 4.1 in our registration statement on Form S-8 filed on December
      22, 2008).10.22
              
              Form
      of Share Purchase Agreement, dated February 12, 2009, among Yinlong
      Industrial Co. Ltd., Tailong Holdings Company Limited and Pacific Dragon
      Fertilizer Co. Ltd. (incorporated by reference to Exhibit 10.1 in our
      current report on Form 8-K filed on February 18, 2008).10.23
              
              Form
      of  Supplemental Share Purchase Agreement, dated February 12, 2009,
      among Yinlong Industrial Co. Ltd., Tailong Holdings Company Limited,
      Pacific Dragon Fertilizer Co. Ltd., Yu Chang and Xiao Rong Teng
      (incorporated by reference to Exhibit 10.2 in our current report on Form
      8-K filed on February 18, 2008).10.24
              
              Form
      of Promissory Note, dated February 12, 2009, by Tailong Holding Company
      Limited, in favor of Yinlong Industrial Co. Ltd. (incorporated by
      reference to Exhibit 10.3 in our current report on Form 8-K filed on
      February 18, 2008).
  42
  Exhibit
                  No.
              
              Description14
              
              Code
      of ethics (incorporated by reference to Exhibit 14 in our annual report on
      Form 10-KSB filed on April 14, 2006)16.1
              
              Letter
      fromKabani & Company, Inc., regarding change in certifying accountant,
      dated May 7, 2008 (incorporated by reference to Exhibit 16.1 in our
      current report on Form 8-K filed on May 7,
2008).16.2
              
              Letter
      fromGrobstein,
      Horwath & Company LLP regarding change in certifying accountant,
      dated February 13, 2009(incorporated by reference to
      Exhibit 16.1 in our current report on Form 8-K/A filed on February 18,
      2009).16.3
              
              Letter
      fromGrobstein,
      Horwath & Company LLP regarding agreement with the
      disclosures made in the Current Report on Form 8-K/A, dated
      March 10, 2009 (incorporated by reference to Exhibit 16.2 in our current
      report on Form 8-K/A filed on March 10, 2009).21
              
              Subsidiaries
      of the Registrant (incorporated by reference to Exhibit 21 in our annual
      report on Form 10K filed on April 2, 2007)23.1*
              
              Consent
      of Kabani & Company, Inc., independent registered public accounting
      firm23.2*
              
              Consent
      of Crowe Horwath LLP, independent registered public accounting
      firm31.1*
              
              Certification
      of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2*
              
              Certification
      of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1*
              
              Certification
      of Chief Executive Officer, 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 Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  *
  
 * Filed
herewith


43