**SECURITIES
      AND EXCHANGE COMMISSION**


**W** **ashington,
      D.C. 20549**





**FORM
      10-K/A**


**Amendment
      No. 2**





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




For
      the
      fiscal year ended: December 31, 2006





**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 Number)**A#
                Room 0706-0707, The Spaces International Center**
              **No.
                8, Dongdaqiao Road**
              **Chaoyang
                District, Beijing 100020**
              **People’s
                Republic of China**
              (Address
                of principal executive office, including zip code)**(86)
                10-58702123**(Registrant’s
                telephone number, including area code)**Securities
                registered pursuant to Section 12(b) of the Act:
                None**
              
              **Securities
                registered pursuant to Section 12(g) of the Act: Common Stock, $.001
                par value**





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





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





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





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





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





Large
                accelerated filero
            
            Accelerated
                filero
            
            Non-accelerated
                filerý





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





The
      number
      of shares and aggregate market value of common stock held by non-affiliates
      as
      of the last business day of the registrant's most recently completed second
      fiscal quarter was 11,486,470 and $37,331,027, respectively.





There
      were
      19,143,615 shares of common stock outstanding as of December 31,
      2006.





**DOCUMENTS
      INCORPORATED BY REFERENCE:** NONE


1


**EXPLANATORY
      NOTES**





China
      Agritech, Inc., or the Company, is filing this Amendment No. 2 on Form 10-K/A
      to
      its Annual Report on Form 10-K for the year ended December 31, 2006, or the
      2006
      Form 10-K, originally filed with the U.S. Securities and Exchange Commission
      on
      April 2, 2007, as amended by Amendment No. 1 on Form 10-K/A thereto filed with
      the U.S. Securities and Exchange Commission on April 19, 2007, to amend Item
      8.
“Financial Statements and Supplementary Data,” Item 9A. “Controls and
      Procedures,” and Item 15. “Exhibits, Financial Statement Schedules,” as more
      specifically described in the Explanatory Notes 1-4 below. The remainder of
      the
      information contained in the 2006 Form 10-K is not amended hereby and remains
      as
      set forth in the original filing, as previously amended.





**Explanatory
      Note 1.**  The
      2006
      Form 10-K, as amended, did not include certain required selected quarterly
      financial data. The omitted selected quarterly financial data is included with
      this Form 10-K/A with the consolidated financial statements starting on Page
      F-1
      of this Report.





**Explanatory
      Note 2.**  The
      2006
      Form 10-K, as amended, is further amended by this Form 10-K/A to clarify the
      disclosure regarding internal controls and procedures in Item 9A.




**Explanatory Note 3.**   The 2006
      Form 10-K, as amended, is further amended by this Form 10-K/A to provide certain
      required financial statement schedules that were not included in the 2006 Form
      10-K.





**Explanatory
      Note 4.**  The
      2006
      Form 10-K, as amended, included an audit report that did not address our balance
      sheet for the year ended December 31, 2005 and the statements of income,
      stockholders’ equity and cash flows for the year ended December 31, 2004. This
      Form 10-K/A includes two separate audit reports that in combination address
      these periods and matters in addition to the periods and matters already
      addressed.





PLEASE
      NOTE THAT THE INFORMATION CONTAINED IN THIS FORM 10-K/A, INCLUDING THE FINANCIAL
      STATEMENTS AND THE NOTES THERETO, DOES NOT REFLECT EVENTS OCCURRING AFTER THE
      DATE OF THE 2006 FORM 10-K OR MODIFY OR UPDATE THOSE DISCLOSURES AFFECTED
      BY SUBSEQUENT EVENTS.








2




**INTRODUCTORY
      NOTE**




Except
      as
      otherwise indicated by the context, references in this Form 10-K/A to "China
      Agritech," "we," "us," or "our," are references to the combined business of
      China Agritech, Inc. and its consolidated subsidiaries. References to "Tailong"
      are references to our wholly-owned subsidiary, China Tailong Holdings Company
      Limited, references to "Pacific Dragon" are references to Tailong’s 90% owned
      subsidiary, Pacific Dragon Fertilizers Co. Ltd., references to “CAI” are to our
      wholly owned subsidiary, CAI Investment Inc., references to “Beijing Agritech”
are to our wholly-owned indirect subsidiary, Beijing Agritech Fertilizer Ltd.
      and references to Anhui Agritech are to our wholly-owned subsidiary, Anhui
      Agritech Development Co. Ltd. References to "China" or "PRC" are references
      to
      the People's Republic of China. References to "RMB" are to Renminbi, the legal
      currency of China, and all references to "$" and dollar are to the U.S. dollar,
      the legal currency of the United States.




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




In
      addition to historical information, this Report contains forward-looking
      statements within the meaning of 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”). We use words such as "believe," "expect,"
      "anticipate," "project," "target," “plan,” "optimistic," "intend," "aim," "will"
      or similar expressions to identify forward-looking statements. Such statements
      include, among others, those concerning our expected financial performance,
      liquidity and capital resources and strategic and operational plans, as well
      as
      all assumptions, expectations, predictions, intentions or beliefs about future
      events. You are cautioned that any such forward-looking statements are not
      guarantees of future performance and involve risks and uncertainties, as well
      as
      assumptions, that, if they were to ever materialize or prove incorrect, could
      cause the results of the Company to differ materially from those expressed
      or
      implied by such forward-looking statements. Such risks and uncertainties include
      the risks identified in Item 1A. “Risk Factors,” included in the 2006 Form 10-K
      which was filed on April 2, 2007.





All
      statements other than statements of historical fact are statements that could
      be
      deemed forward-looking statements, including statements regarding new and
      existing products, technologies and opportunities; statements regarding market
      and industry segment growth and demand and acceptance of new and existing
      products; any projections of sales, earnings, revenue, margins or other
      financial items; any statements of the plans, strategies and objectives of
      management for future operations; any statements regarding future economic
      conditions or performance; uncertainties related to conducting business in
      China; any statements of belief or intention; any of the factors mentioned
      in
      the "Risk Factors" section of the Company included in the 2006 Form 10-K filed
      on April 2, 2007; and any statements or assumptions underlying any of the
      foregoing. We assume no obligation and do not intend to update these
      forward-looking statements, except as required by law.


3


Item
      8. **Financial
      Statements and Supplementary Financial Data.**




The
      consolidated financial statements, including selected quarterly financial data,
      for the Company begin on page F-1 of this Report.




Item
      9A. **Controls
      and Procedures.**




The
      third
      paragraph of Item 9A in the original filing is amended by adding the following
      to the end of such paragraph:




Our
      disclosure controls and procedures have been designed to provide reasonable
      assurance of achieving our objectives. Our chief executive officer and our
      chief
      financial officer have concluded that our disclosure controls and procedures
      are
      adequate to provide reasonable assurance that our internal control objectives
      are met.






**PART
      IV**




**Item
      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.**





(a)
      The
      following documents are filed as part of this Report:





1.
      Financial Statements:





Reports
      of Independent Registered Public Accounting Firm.


Consolidated
      Balance Sheets—December 31, 2006 and 2005.


Consolidated
      Income Statements—Years ended December 31, 2006, 2005 and 2004.


Consolidated
      Statements of Shareowners’ Equity—Years ended December 31, 2006,
      2005


and
      2004.


Consolidated
      Statements of Cash Flows—Years ended December 31, 2006, 2005 and
      2004.


Notes
      to
      Consolidated Financial Statements.




2.
      Financial Statement Schedules:





Schedule
      I—Condensed Financial Information of Registrant.





All
      other
      schedules for which provision is made in the applicable accounting regulations
      of the SEC are not required under the related instructions or are inapplicable
      and, therefore, have been omitted.





3.
      Exhibits:





2.1**  Agreement
      and Plan of Reorganization, dated as of December 25, 2004, as amended, by and
      among China Agritech, Inc. (then named Basic Empire Corp), Tailong Holdings
      and
      Tailong Holding Stockholders.





3.1**  Amended
      and Restated Certificates of Incorporation of China Agritech, Inc.;





3.2**  Bylaws
      of
      China Agritech, Inc. adopted on 2005.





3.3**  Bylaws
      of
      Tailong adopted on October 21, 2003.





3.4**  Articles
      of Association of Pacific Dragon adopted on June 9, 2004.




4




10.1**  Transfer
      Agreement, dated as of June 8, 2004, by and among shareholders of Pacific
      Dragon.





10.2**  Escrow
      Agreement dated January 25, 2005 by and among the Company, Chinamerica Fund,
      LLP, Gary Evans, and the Securities Transfer Corporation.





10.3**  Stock
      Purchase Agreement dated February 3, 2005, by and among Chinamerica Fund, LLP,
      Gary Evans and the Company





10.4**  License
      Agreement between Chang Yu and Pacific Dragon dated January 6,
      2005.





10.5**  Employment
      Contract between Chang Yu and Pacific Dragon.





10.6**  Lease
      between Pacific Dragon and Yinlong dated December 30, 2003.





10.7**  Transfer
      of Capital Contribution and Profit Agreement dated June 8, 2004, by and among
      Tailong Holdings, Harbing Yinlong Co. Ltd., Beijing Taiming Applied Technology
      Institute, and Cathay-Pacific Enterprises Ltd.





10.8**  Joint
      Venture Contract of Sino-foreign Contractual Joint


Venture
      Pacific Dragon dated June 9, 2004.





10.9**  Stock
      Purchase Agreement dated June 13, 2005 by and among Chinamerica Fund, LLP,
      Steven S. Taylor, Jr. and the Company.





10.12**  Amendment
      to the Lease Agreement, dated June 28, 2005, by and between Pacific Dragon
      Fertilizers Co. Ltd. and Yinlong Industrial Co. Ltd.





10.13**  Lease
      Agreement, dated May 31, 2004, by and between China Tailong Holdings Company
      Limited and Upgrade International Trading Co., Ltd.





10.14**  Lease
      Agreement, dated May 15, 2005, by and between China Tailong Holdings Company
      Limited and Beijing Guangxin Long'An Real Estate Brokerage Co.,
      Ltd.





10.16**  Permanent
      License Agreement, dated December 3, 2005, by and between Yu Chang and Pacific
      Dragon Fertilizers Co. Ltd.





14**  Code
      of
      Ethics





21.1**  Subsidiaries
      of the Registrant





31.1*  Certification
      of Chief Executive Officer, pursuant to Rule 13a - 14(a)





31.2*  Certification
      of Chief Financial Officer, pursuant to Rule 13a - 14(a)





32.1*  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 Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




*
      Filed
      herewith




**
      Previously filed


5





**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.August 10,
                2007
            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
              Yu
                Chang
            Chief
                Executive Officer, President, Secretary and Director
            August
                10, 2007/s/
                Li Jun
                Peng
              Li
                Jun Peng
            Chief
                Financial Officer and Controller
            August
                10, 2007/s/
                Xiaorong
                Teng
              Xiaorong
                Teng
            Vice
                President of Sales and Director
            August
                10, 2007/s/
                Tao
                Liang
              Tao
                Liang
            Director
            August
                10, 2007





6


**Report
      of Independent Registered Public Accounting Firm**








Board
      of
      Directors and Stockholders of


China
      Agritech and Subsidiaries





We
      have
      audited the accompanying consolidated balance sheets of China Agritech Inc.
      and
      Subsidiaries as of December 31, 2006 and 2005, and the related consolidated
      statements of income, stockholders' equity, and cash flows for the two year
      periods ended December 31, 2006 and 2005. These consolidated financial
      statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of China Agritech
      Inc. and Subsidiaries as of December 31, 2006 and 2005, and the consolidated
      results of their operations and their consolidated cash flows for the two year
      periods ended December 31, 2006 and 2005, in conformity with U.S. generally
      accepted accounting principles.








/s/
      Kabani & Company, Inc.


**Certified
      Public Accountants**





Los
      Angeles, California




March
      10,
      2007




7


**Report
      of Independent Registered Public Accounting Firm**








TO
      THE
      STOCKHOLDERS AND BOARD OF DIRECTORS


OF
      CHINA
      TAILONG HOLDINGS COMPANY LIMITED


(Predecessor
      entity of China Agritech, Inc.)





We
      have
      audited the consolidated statements of operations, changes in stockholders'
      equity and cash flows for the year ended December 31, 2004 of China Tailong
      Holdings Company Limited and, Pacific Dragon Fertilizers Limited, its subsidiary
      (Predecessor entities of China Agritech, Inc.) These consolidated financial
      statements are the responsibility of the management of China Tailong Holdings
      Company Limited. 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 as to 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 the 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 results of operations and cash flows
      of China Tailong Holdings Company Limited (Predecessor entity of China Agritech,
      Inc.) for the year then ended December 31, 2004 in conformity with accounting
      principles generally accepted in the United States of America.








/s/
      Kabani & Company, Inc.


Huntington
      Beach, California





April
      10,
      2005




8





CHINA
      AGRITECH, INC. AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2005


**2006**
                
                
                2005**ASSETS****Current
                    Assets**Cash
                    and cash equivalents
                
                $
                6,430,009
                
                $
                255,831Restricted
                    cash
                
                
                100,028
                
                
                275,000Accounts
                    receivable, net
                
                
                12,239,073
                
                
                8,525,185Inventories
                
                
                1,322,244
                
                
                72,827Advances
                    to suppliers
                
                
                8,038,974
                
                
                2,076,252Prepayments
                    and other receivables
                
                
                382,463
                
                
                376,064**Total
                    Current Assets**
                
                
                28,512,791
                
                
                11,581,159**Property,
                    Plant and Equipment, net**
                
                
                2,514,123
                
                
                1,065,146**Total
                    Assets**
                
                $
                31,026,914
                
                $
                12,646,305**LIABILITIES
                    AND STOCKHOLDERS' EQUITY****Current
                    Liabilities**Accounts
                    payable
                
                $
                108,886
                
                $
                115,024Accrued
                    expenses and other payables
                
                
                871,495
                
                
                616,363Amount
                    due to related parties
                
                
                954
                
                
                56,702Tax
                    payables
                
                
                1,028,885
                
                
                562,355**Total
                    Current Liabilities**
                
                
                2,010,220
                
                
                1,350,444**Minority
                    Interests**
                
                
                2,160,575
                
                
                1,237,910**Commitments**
                
                
                -
                
                
                -**Stockholders'
                    Equity**Common
                    stocks; $0.001 par value, 100,000,000 sharesauthorized,
                    shares issued and outstanding 19,143,615and
                    14,343,615
                
                
                19,144
                
                
                14,344Additional
                    paid-in capital
                
                
                12,619,049
                
                
                1,547,741Statutory
                    reserves
                
                
                2,790,916
                
                
                1,731,067Accumulated
                    other comprehensive income
                
                
                601,288
                
                
                228,566Retained
                    earnings
                
                
                10,825,722
                
                
                6,536,233**Total
                    Stockholders' Equity**
                
                
                26,856,119
                
                
                10,057,951**Total
                    Liabilities and Stockholders' Equity**
                
                $
                31,026,914
                
                $
                12,646,305The
                      accompanying notes are an integral part
                      of these consolidated financial
                      statements.


F-1


CHINA
                  AGRITECH, INC. AND SUBSIDIARIESCONSOLIDATED
                  INCOME STATEMENTSFOR
                  THE YEARS ENDED DECEMBER 31, 2006, 2005 AND
                  2004
 2006
              
              
              
              
              2005
              
              
              2004**Net
                  revenue**
              
              
              $
              29,525,577
              
              
              
              $
              25,335,316
              
              $
              15,850,044**Cost
                  of revenue**
              
              
              
              (14,161,358)
              
              
              
              
              (12,848,958)
              
              
              (8,153,463)**Gross
                  profit**
              
              
              
              15,364,219
              
              
              
              
              12,486,358
              
              
              7,696,581**Operating
                  expenses****Selling
                  expenses**
              
              
              
              (2,983,756)
              
              
              
              
              (2,372,151)
              
              
              (1,443,943)**Operating
                    and administrative expenses**
              
              
              
              (2,015,252)
              
              
              
              
              (2,633,522)
              
              
              (517,831)**Total
                  operating expenses**
              
              
              
              (4,999,008)
              
              
              
              
              (5,005,673)
              
              
              (1,961,774)**Income
                  from operations**
              
              
              
              10,365,211
              
              
              
              
              7,480,685
              
              
              5,734,807**Other
                  income (expense)****Other
                  income**
              
              
              
              98,617
              
              
              
              
              -
              
              
              933**Finance
                  costs**
              
              
              
              (3,590)
              
              
              
              
              (160)
              
              
              (115)**Total
                    other income (expense)**
              
              
              
              95,027
              
              
              
              
              (160)
              
              
              818**Income
                    before income taxes and minority
                    interests**
              
              
              
              10,460,238
              
              
              
              
              7,480,525
              
              
              5,735,625**Provision
                  for income taxes**
              
              
              
              (4,248,144)
              
              
              
              
              (3,173,533)
              
              
              (1,982,252)**Income
                    before minority****interests**
              
              
              
              6,212,094
              
              
              
              
              4,306,992
              
              
              3,753,373**Minority
                  interests**
              
              
              
              (862,756)
              
              
              
              
              (631,113)
              
              
              -**Net
                  income**
              
              
              
              5,349,338
              
              
              
              
              3,675,879
              
              
              3,753,373**Other
                  comprehensive **income******Foreign
                    currency translation adjustment**
              
              
              
              372,722
              
              
              
              
              228,566
              
              
              -**Other
                  comprehensive **income****
              
              
              $
              5,722,060
              
              
              
              $
              3,904,445
              
              $
              3,753,373**Basic
                    and diluted weighted average shares
                    outstanding**
              
              
              
              18,735,944
              
              
              
              
              13,945,937
              
              
              13,435,143**Basic
                    and diluted net earnings per share**
              
              
              $
              0.29
              
              
              
              $
              0.26
              
              $
              0.28
 Baisc
                  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-2




CHINA
                  AGRITECH, INC. AND SUBSIDIARIESCONSOLIDATED
                  STATEMENT OF STOCKHOLDERS’ EQUITYFOR
                  THE YEARS ENDED DECEMBER 31, 2006, 2005 AND
                  2004
  Common stockNumber
                  of
              
              
              
              Partners'
              
              Additional
                  paid-in-
              
              Statutory
              
              Other
                  comprehensive
              
              Retainedshares
              
              Amount
              
              capital
              
              capital
              
              reserves
              
              income
              
              earnings
              
              TotalBalance
                    at January 1, 2004
              241,833
              $
              242
              $
              450,575
              $
              (241)
              $
              -
              $
              21,714
              $
              4,463,150
              $
              4,935,440Stock
                  issued for cash
              11,849,796
              
              11,850
              
              
              -
              
              (11,838)
              
              -
              
              -
              
              -
              
              12Changes
                    due to merger  between entities undercommon
                    control
              -
              
              -
              
              (450,575)
              
              276,131
              
              -
              
              797
              
              -
              
              (173,647)Net
                  income for the year
              -
              
              -
              
              
              -
              
              -
              
              -
              
              -
              
              3,753,373
              
              3,753,373Dividend
                    paid during the year
              -
              
              -
              
              
              -
              
              -
              
              -
              
              -
              
              (3,137,297)
              
              (3,137,297)Transfer
                    to statutory reserves
              -
              
              -
              
              
              -
              
              -
              
              870,531
              
              -
              
              (870,531)
              
              -Balance
                    at December 31, 2004
              12,091,629
              
              12,092
              
              
              -
              
              264,052
              
              870,531
              
              22,511
              
              4,208,695
              
              5,377,881Recapitalization
                    on reverse acquisition
              1,343,514
              
              1,344
              
              
              -
              
              (1,344)
              
              -
              
              -
              
              -
              
              -Stock
                  issued for cash
              908,472
              
              908
              
              
              -
              
              1,349,092
              
              -
              
              -
              
              -
              
              1,350,000Reclassification
                    and adjustment to minority interest
              -
              
              -
              
              
              -
              
              (64,059)
              
              (89,895)
              
              (49,207)
              
              (397,910)
              
              (601,071)Foreign
                    currency translation
              -
              
              -
              
              
              -
              
              -
              
              -
              
              255,262
              
              -
              
              255,262Net
                  income for the year
              -
              
              -
              
              
              -
              
              -
              
              -
              
              -
              
              3,675,879
              
              3,675,879Transfer
                    to statutory reserves
              -
              
              -
              
              
              -
              
              -
              
              950,431
              
              -
              
              (950,431)
              
              -Balance
                    at December 31,
                    2005
              14,343,615
              
              14,344
              
              
              -
              
              1,547,741
              
              1,731,067
              
              228,566
              
              6,536,233
              
              10,057,951Stock
                  issued for cash
              4,800,000
              
              4,800
              
              
              -
              
              11,074,905
              
              -
              
              -
              
              -
              
              11,079,705Stock
                  option expenses
              -
              
              -
              
              
              -
              
              (3,597)
              
              -
              
              -
              
              -
              
              (3,597)Foreign
                    currency translation
              -
              
              -
              
              
              -
              
              -
              
              -
              
              372,722
              
              -
              
              372,722Net
                  income for the year
              -
              
              -
              
              
              -
              
              -
              
              -
              
              -
              
              5,349,338
              
              5,349,338Transfer
                    to statutory reserves
              -
              
              -
              
              
              -
              
              -
              
              1,059,849
              
              -
              
              (1,059,849)
              
              -Balance
                    at December 31, 2006
              19,143,615
              $
              19,144
              $
              
              -
              $
              12,619,049
              $
              2,790,916
              $
              601,288
              $
              10,825,722
              $
              26,856,119The
                  accompanying notes are an integral part of these consolidated financial
                  statements




F-3


CHINA
      AGRITECH, INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENT OF CASH FLOWS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004





2006
            
            
            2005
            
            
            2004**Cash
                flows from operating activities:**Net
                income
            
            $
            5,349,338
            
            $
            3,675,879
            
            $
            3,753,373Adjustments
                to reconcile net income to net cashprovided
                by (used in) operating activities:Stock
                based compensation
            
            
            (3,597
            )
            
            -
            
            
            -Minority
                Interest
            
            
            862,756
            
            
            631,113
            
            
            -Depreciation
            
            
            155,292
            
            
            102,901
            
            
            103,679Loss
                on disposal of fixed assets
            
            
            -
            
            
            -
            
            
            36,141Delivery
                charges
            
            
            -
            
            
            -
            
            
            (387
            )Decrease
                / (Increase) in current assets:Accounts
                receivable
            
            
            (3,357,026
            )
            
            (2,759,236
            )
            
            (3,581,853
            )Other
                receivables
            
            
            55,024
            
            
            (65,730
            )
            
            103,886Inventory
            
            
            (1,502,205
            )
            
            487,630
            
            
            431,537Advances
                to suppliers
            
            
            (5,769,071
            )
            
            (1,914,346
            )
            
            -Prepayments
            
            
            (62,887
            )
            
            100,289
            
            
            232,500Other
                assets
            
            
            2,024
            
            
            (226,162
            )
            
            -(Decrease)
                / Increase in current liabilities:Accounts
                payable
            
            
            262,020
            
            
            (281,234
            )
            
            127,299Tax
                payables
            
            
            365,731
            
            
            131,998
            
            
            (50,489
            )Accrued
                expenses and other payables
            
            
            305,739
            
            
            280,280
            
            
            (23,712
            )Net
                cash provided by (used in) operating activities
            
            
            (3,336,862
            )
            
            163,382
            
            
            1,131,974**Cash
                flows from investing activities:**Acquisition
                of property & equipment
            
            
            (1,541,812
            )
            
            (8,238
            )
            
            (11,789
            )Restricted
                cash
            
            
            174,972
            
            
            (275,000
            )
            
            -Proceeds
                from disposal of fixed assets
            
            
            -
            
            
            -
            
            
            205Net
                cash used in investing activities
            
            
            (1,366,840
            )
            
            (283,238
            )
            
            (11,584
            )**Cash
                flows from financing activities:**Repayment
                of instalment loan
            
            
            -
            
            
            -
            
            
            (9,639
            )Payments
                to shareholders / related parties
            
            
            (51,312
            )
            
            (1,026,846
            )
            
            2,053,998Capital
                contributed
            
            
            11,079,705
            
            
            1,350,000
            
            
            12Dividend
                paid
            
            
            -
            
            
            -
            
            
            (3,137,297
            )Net
                cash provided by (used in) financing activities
            
            
            11,028,393
            
            
            323,154
            
            
            (1,092,926
            )**Net
                increase in cash and cash equivalents**
            
            
            6,324,691
            
            
            203,298
            
            
            27,464**Effect
                of exchange rate change on cash and cash
                equivalents**
            
            
            (150,513
            )
            
            14,468
            
            
            -**Cash
                and cash equivalents, beginning of year**
            
            
            255,831
            
            
            38,065
            
            
            10,601**Cash
                and cash equivalents, end of year**
            
            $
            6,430,009
            
            $
            255,831
            
            $
            38,065**Supplement
                disclosure of cash flow information:**Interest
                expense paid
            
            $
            3,590
            
            $
            160
            
            $
            115Income
                taxes paid
            
            $
            3,760,570
            
            $
            3,043,223
            
            $
            2,066,497Cash
                from issue of common stock placed in escrow account
            
            $
            11,079,705
            
            $
            1,350,000
            
            $
            12





F-4


CHINA
      AGRITECH, INC. AND SUBSIDIARIES




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




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




China
      Agritech, Inc. (the "Company") was originally incorporated on January 5, 1925
      under the laws of the State of Nevada as Argyle Mining Company for the
      development of mining claims. Throughout our existence we have changed our
      business model several times, and conducted no substantive business from 1986
      until February 2005 as discussed below.




On
      August
      10, 2004, we merged with and into a newly formed wholly-owned Delaware
      subsidiary of the same name for the purpose of changing our corporate domicile
      from Nevada to Delaware.




We
      have
      experienced several corporate name changes as follows: Argyle Corporation in
      January 1960, Basic Empire in November 1963, Basic Empire Corp in December
      1976
      and China Agritech, Inc. in May 2005.




On
      December 25, 2004, the Company, China Tailong Holdings Company Limited
      ("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. In this connection, Tailong became a wholly-owned subsidiary of the
      Company.




As
      a
      result of the acquisition of Tailong, the Company became a fertilizer
      manufacturer and conducts operations in the People's Republic of China (the
      "PRC") through its wholly-owned subsidiary, Tailong and Tailong's 90% owned
      subsidiary, Pacific Dragon Fertilizers Co. Ltd. ("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 operation. 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 a limited liability company organized
      under state laws in the United States. The Articles of Associations provide
      for
      a term of 15 years with registered capital of $500,000. Pacific Dragon engages
      in the business of manufacturing and marketing a series of organic liquid
      compound fertilizers. These products are marketed and sold to farmers in 11
      provinces of China. Pacific Dragon conducts ongoing research and development
      to
      enhance concentration of the organic liquid compound fertilizer and lower the
      manufacturing cost. The principal researchers in Pacific Dragon are Liu Shuhua
      and Liu Kangde. Our major products include "LvLingBao II", LvLingBao III" and
      "Tailong I".




Prior
      to
      the acquisition of Tailong, the Company was a non-operating public shell
      corporation. Pursuant to Securities and Exchange Commission rules, the merger
      or
      acquisition of a private operating company into a non-operating public shell
      corporation with nominal net assets is considered a capital transaction in
      substance, rather than a business combination. Accordingly, for accounting
      purposes, the transaction has been treated as a reverse acquisition and a
      recapitalization, and pro-forma information is not presented. Transaction costs
      incurred in the reverse acquisition have been charged to expense.




On
      April
      21, 2005, the Company filed a Form Definitive 14C - Information Statement
      pursuant to Section 14(c) of the Securities Exchange Act of 1934 giving notice
      that the Company received written consents in lieu of a meeting from the holders
      of a majority of the Company's issued and outstanding common stock of a proposal
      to amend and restate the Company's Certificate of Incorporation (the
      "Restatement") to effect, among other things, a forward stock split whereby
      each
      share of issued and outstanding common stock is converted into 1.14 shares
      of
      the Company's common stock. The Form Definitive 14C became effective on May
      12,
      2005 when the Company filed its amended and restated Certificate of
      Incorporation with the Secretary of the State of Delaware. The effect of this
      action is reflected in the Company's financial statements as of the first day
      of
      the first period presented.




F-5




On
      June
      29, 2006, the Company established a wholly owned subsidiary, Anhui Agritech
      Agriculture Development Limited (“Anhui Agritech”). Anhui Agritech engages in
      the business of manufacturing and marketing in 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 shall transfer 100% equity interest in CAI Investment, Inc. (“CAI”)
      to the Company in exchange for USD1,000.




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




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




a. Principle
      of consolidation




The
      accompanying consolidated financial statements include the accounts of the
      Company and its wholly-owned subsidiaries, Tailong, Anhui Agritech, Agritech
      Fertilizer and its 90% owned subsidiary, Pacific Dragon (collectively referred
      to hereinafter as the “Company"). All significant inter-company accounts and
      transactions have been eliminated in consolidation.




b. Use
      of
      estimates




The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America 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 consolidated 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 results.




c. Cash
      and cash equivalents




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




d. Accounts
      receivable




The
      Company's policy is to maintain reserves for potential credit losses on accounts
      receivable. Management reviews the composition of accounts receivable and
      analyzes historical bad debts, customer concentrations, customer credit
      worthiness, current economic trends and changes in customer payment patterns
      to
      evaluate the adequacy of these reserves. As of December 31, 2006 and 2005,
      the
      Company had accounts receivable of $12,239,073 and $8,525,185, net of allowance
      of $170,236 and $164,739, respectively.




e. Advances
      to suppliers




The
      Company advances to certain vendors for purchase of its material. As of December
      31, 2006 and 2005, the advances to suppliers amounted to $8,038,974 and $
      2,076,252, respectively.




f. Inventories




Inventories
      are valued at the lower of cost (determined on a weighted average basis) or
      net
      realizable value. The management compares the cost of inventories with the
      net
      realizable value and an allowance is made for writing down the inventories
      to
      their net realizable value, if lower than the cost.




F-6




**2.** **BASIS
      OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (CONT’D)**




g. Property,
      plant and equipment




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




h. Impairment




The
      Company applies the provisions of Statement of Financial Accounting Standard
      No.
      144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
      No.
      144"), issued by the Financial Accounting Standards Board ("FASB"). FAS 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, 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. 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 years ended
      December 31, 2006 and 2005.




i. Revenue
      recognition




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




The
      Company's revenue consists of 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
      discount is normally not granted after products are delivered.




F-7




**2.** **BASIS
      OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (CONT’D)**




j. 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 years ended
      December 31, 2006, 2005 and 2004 were $686,384, $428,040, and $246,840,
      respectively.




k. Income
      taxes




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
      net income when those events occur. The Company does not have any significant
      deferred tax asset or liabilities in the PRC tax jurisdiction.




l. Foreign
      currency translation




The
      Company uses the United States dollar ("U.S. dollars") 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. In general, for consolidation purposes,
      the Company translates the 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 the Company is Chinese Renminbi.




In
      particular, Renminbi ("RMB"), the PRC's official currency, is the functional
      currency of Pacific Dragon. Until July 21, 2005, RMB had been pegged to US$
      at
      the rate of RMB8.28: US$1.00. On July 21, 2005, the PRC government reformed
      the
      exchange rate system into a managed floating exchange rate system based on
      market supply and demand with reference to a basket of currencies. In addition,
      the exchange rate of RMB to US$ was adjusted to RMB8.11: US$1.00 as of July
      21,
      2005. The People's Bank of China announces the closing price of a foreign
      currency such as US$ 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 US$ 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 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 Bank of China or other institutions required
      submitting a payment application form together with invoices, shipping documents
      and signed contracts.




The
      rates
      used to translate subsidiaries' assets and liabilities at December 31, 2006
      and
      its statement of income are RMB1:US$0.128138 and RMB1:US$0.125434, respectively.
      No representation is made that RMB amounts have been, or could be, converted
      into US$ at these rates.




F-8




**2.** **BASIS
      OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (CONT’D)**




m. Fair
      values of financial instruments




Statement
      of Financial Accounting Standard 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 payable, tax 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 that
      interest rates on the borrowings approximate those that would have been
      available for loans of similar remaining maturity and risk profile at respective
      balance sheet dates.




n. Earning
      per share (EPS)




Earnings
      per share is calculated in accordance with the Statement of financial accounting
      standards No. 128 (SFAS No. 128), “Earnings per share”. SFAS No. 128 superseded
      Accounting Principles Board Opinion No.15 (APB 15). Earnings per share for
      all
      periods presented has been restated to reflect the adoption of SFAS No. 128.
      Basic earnings per share is based upon the weighted average number of common
      shares outstanding. Diluted earnings per share is based on the assumption that
      all dilutive convertible shares and stock options were converted or exercised.
      Dilution is computed by applying the treasury stock method. Under this method,
      options and warrants are assumed to be exercised at the beginning of the period
      (or at the time of issuance, if later), and as if funds obtained thereby were
      used to purchase common stock at the average market price during the period.




Basic
      and
      diluted earning per share were $0.29, $0.26, and $0.28 for the years ended
      December 31, 2006, 2005 and 2004.




o. Segment
      reporting




Statement
      of Financial Accounting Standards No. 131 ("SFAS 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 - manufacture and marketing
      of fertilizers in China.




p. Statement
      of cash flows




In
      accordance with Statement of Financial Accounting Standards 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 sheet.




F-9




**2.** **BASIS
      OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      (CONT’D)**




q. Recent
      accounting pronouncements




In
      February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
      Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid
      financial instrument that contains an embedded derivative that otherwise would
      require bifurcation, clarifies which interest-only strips and principal-only
      strips are not subject to the requirements of SFAS No. 133, establishes a
      requirement to evaluate interest in securitized financial assets to identify
      interests that are freestanding derivatives or that are hybrid financial
      instruments that contain an embedded derivative requiring bifurcation, clarifies
      that concentrations of credit risk in the form of subordination are not embedded
      derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
      qualifying special-purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument. This statement is effective for all financial instruments acquired
      or issued after the beginning of the Company's first fiscal year that begins
      after September 15, 2006. The Company has not evaluated the impact of this
      pronouncement its financial statements.




In
      March
      2006 FASB issued SFAS 156 'Accounting for Servicing of Financial Assets' this
      Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing
      of Financial Assets and Extinguishments of Liabilities, with respect to the
      accounting for separately recognized servicing assets and servicing liabilities.
      This Statement:




1.
      Requires an entity to recognize a servicing asset or servicing liability each
      time it undertakes an obligation to service a financial asset by entering into
      a
      servicing contract.




2.
      Requires all separately recognized servicing assets and servicing liabilities
      to
      be initially measured at fair value, if practicable.




3.
      Permits an entity to choose 'Amortization method' or Fair value measurement
      method' for each class of separately recognized servicing assets and servicing
      liabilities.




4.
      At its
      initial adoption, permits a one-time reclassification of available-for-sale
      securities to trading securities by entities with recognized servicing rights,
      without calling into question the treatment of other available-for-sale
      securities under Statement 115, provided that the available-for-sale securities
      are identified in some manner as offsetting the entity's exposure to changes
      in
      fair value of servicing assets or servicing liabilities that a servicer elects
      to subsequently measure at fair value.




5.
      Requires separate presentation of servicing assets and servicing liabilities
      subsequently measured at fair value in the statement of financial position
      and
      additional disclosures for all separately recognized servicing assets and
      servicing liabilities. An entity should adopt this Statement as of the beginning
      of its first fiscal year that begins after September 15, 2006. Management
      believes that this statement will not have a significant impact on the financial
      statement.




In
      September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (“GAAP”), and expands disclosures about
      fair value measurements. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the Board having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. This Statement is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The management is currently
      evaluating the effect of this pronouncement on the consolidated financial
      statements.




In
      September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
      Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
      88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
      employer to recognize the over funded or under funded status of a defined
      benefit postretirement




F-10




plan
      (other than a multiemployer plan) as an asset or liability in its statement
      of
      financial position and to recognize changes in that funded status in the year
      in
      which the changes occur through comprehensive income of a business entity or
      changes in unrestricted net assets of a not-for-profit organization. This
      Statement also improves financial reporting by requiring an employer to measure
      the funded status of a plan as of the date of its year-end statement of
      financial position, with limited exceptions. An employer with publicly traded
      equity securities is required to initially recognize the funded status of a
      defined benefit postretirement plan and to provide the required disclosures
      as
      of the end of the fiscal year ending after December 15, 2006. An employer
      without publicly traded equity securities is required to recognize the funded
      status of a defined benefit postretirement plan and to provide the required
      disclosures as of the end of the fiscal year ending after June 15, 2007.
      However, an employer without publicly traded equity securities is required
      to
      disclose the following information in the notes to financial statements for
      a
      fiscal year ending after December 15, 2006, but before June 16, 2007, unless
      it
      has applied the recognition provisions of this Statement in preparing those
      financial statements:





1.
            A
                brief description of the provisions of this Statement


2.
            The
                date that adoption is required


3.
            The
                date the employer plans to adopt the recognition provisions of this
                Statement, if earlier.





The
      requirement to measure plan assets and benefit obligations as of the date of
      the
      employer’s fiscal year-end statement of financial position is effective for
      fiscal years ending after December 15, 2008. The management is currently
      evaluating the effect of this pronouncement on the consolidated financial
      statements.





In
      February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
      Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
      years beginning after November 15, 2007. Early adoption is permitted subject
      to
      specific requirements outlined in the new Statement. Therefore, calendar-year
      companies may be able to adopt FAS 159 for their first quarter 2007 financial
      statements.




The
      new
      Statement allows entities to choose, at specified election dates, to measure
      eligible financial assets and liabilities at fair value that are not otherwise
      required to be measured at fair value. If a company elects the fair value option
      for an eligible item, changes in that item's fair value in subsequent reporting
      periods must be recognized in current earnings. FAS 159 also establishes
      presentation and disclosure requirements designed to draw comparison between
      entities that elect different measurement attributes for similar assets and
      liabilities.




r. Reclassifications




Certain
      prior period amounts have been reclassified to conform to the current period
      presentation.




**3.**  **QUARTERLY FINANCIAL DATA (UNAUDITED)**




F-11


**Quarter
                  Ended**
              
              
              **M
                  ar. 31**
              
              
              **Jun.
                  30**
              
              
              **Sep.
                  30**
              
              
              **Dec.
                  31**
              
              
              **Total**Fiscal
                  year 2004Revenue
              
              $
              2,161,774
              
              $
              5,519,830
              
              $
              5,326,047
              
              $
              2,842,393
              
              $
              15,850,044Gross
                  profit
              
              
              1,065,489
              
              
              2,085,390
              
              
              2,992,939
              
              
              1,552,763
              
              
              7,696,581Net
                  income
              
              
              555,633
              
              
              964,538
              
              
              1,734,151
              
              
              499,051
              
              
              3,753,373Basic
                    earnings per share
              
              
              0.05
              
              
              0.08
              
              
              0.14
              
              
              0.04
              
              
              0.28Diluted
                    earnings per share
              
              
              0.05
              
              
              0.08
              
              
              0.14
              
              
              0.04
              
              
              0.28Fiscal
                  year 2005Revenue
              
              $
              4,985,120
              
              $
              10,184,925
              
              $
              5,760,407
              
              $
              4,404,864
              
              $
              25,335,316Gross
                  profit
              
              
              2,617,518
              
              
              4,642,910
              
              
              2,563,319
              
              
              2,662,611
              
              
              12,486,358Net
                  income
              
              
              221,770
              
              
              1,848,990
              
              
              525,475
              
              
              1,079,644
              
              
              3,675,879Basic
                    earnings per share
              
              
              0.02
              
              
              0.13
              
              
              0.04
              
              
              0.08
              
              
              0.26Diluted
                earnings pershare
              
              
              0.02
              
              
              0.13
              
              
              0.04
              
              
              0.08
              
              
              0.26Fiscal
                  year 2006Revenue
              
              $
              5,685,397
              
              $
              10,235,393
              
              $
              7,601,819
              
              $
              6,002,968
              
              $
              29,525,577Gross
                  profit
              
              
              2,820,082
              
              
              5,382,941
              
              
              4,011,947
              
              
              3,149,249
              
              
              15,364,219Net
                  income
              
              
              1,014,328
              
              
              2,087,802
              
              
              1,108,226
              
              
              1,138,982
              
              
              5,349,338Basic
                    earnings per share
              
              
              0.05
              
              
              0.11
              
              
              0.06
              
              
              0.06
              
              
              0.29Diluted
                    earnings per share
              
              
              0.05
              
              
              0.11
              
              
              0.06
              
              
              0.06
              
              
              0.29






**4.**
            **RESTRICTED
                CASH**






Proceeds
      amounting $1,350,000 from the issuance of shares during the year 2005 were
      deposited in an escrow account. The purchase price was to be released from
      escrow. In accordance with the terms of the stock purchase agreement, $600,000
      of the proceeds was kept in a trust account for certain corporate communication
      program. At December 31, 2006 and 2005, the Company had $100,028 and $275,000
      in
      this account for the corporate communication program.






**5.**
            **INVENTORIES**






Inventories
      consist of the following as of December 31, 2006 and 2005:




2006
              
              2005Raw
                  materials
              $
              483,100
              $
              18,980Packing
                  materials
              
              46,133
              
              18,968Finished
                  goods
              
              791,380
              
              34,879Work-in-progress
              
              1,631
              
              -$
              1,322,244
              $
              72,827




F-12




**6.**
            **PREPAYMENTS
                AND OTHER RECEIVABLE**






As
      of
      December 31, 2006 and 2005, Company had prepayments and other receivable was
      amounted to $382,463 and $376,064, respectively and include mainly prepaid
      rent
      and advanced travel expenses to employees.






**7.**
            **PROPERTY,
                PLANT AND EQUIPMENT**






Property,
      plant and equipment consist of the following as of December 31, 2006 and 2005:


2006
              
              2005Manufacturing
                  machinery
              
              $
              2,388,716
              
              $
              1,171,266Leasehold
                  improvements
              
              
              57,706
              
              
              1,471Office
                  equipment
              
              
              228,172
              
              
              84,155Motor
                  vehicles
              
              
              342,570
              
              
              142,0953,017,164
              
              
              1,398,987Less:
                  Accumulated depreciation
              
              
              (503,041)
              
              
              (333,841)$
              2,514,123
              
              $
              1,065,146




Depreciation
      expenses for the years ended December 31, 2006, 2005 and 2004 were $155,292,
      $102,901 and $103,679, respectively.




**8.**
            **AMOUNT
                DUE TO RELATED PARTIES**




The
      amount due to related parties were the advances to the Company’s officers and
      shareholders, and was unsecured, non-interest bearing and due on demand. As
      of
      December 31, 2006 and 2005, due to related parties amounted to $954 and $56,702,
      respectively.




**9.**
            **ACCOUNTS
                PAYABLE**




Accounts
      payable consist of the following as of December 31, 2006 and 2005:





2006
            
            
            2005Accounts
              payable are mainly payable to
              vendors
            
            $
            108,886
            
            $
            115,024




**10.**
            **ACCRUED
                EXPENSES AND OTHER
                PAYABLES**




Accrued
      expenses and other payables of the following as of December 31, 2006 and
      2005:




As
      of
      December 31, 2006, accrued expenses include $577,571 accrued commission
      payables, $90,000 accrued professional expenses, and $17,678 other accrued
      expenses. Other payables include $148,395 vendor deposits and $37,851 payables
      to other parties.




As
      of
      December 31, 2005, accrued expenses include $310,683 accrued commission
      payables, $60,000 accrued professional expenses, and $219,757 other accrued
      expenses. Other payables include $25,923 vendor deposits and payable to other
      parties.




**11.**
            **TAX
                PAYABLES**




F-13




Tax
      payables consist of the following as of December 31, 2006 and 2005:


2006
              
              2005Income
                  tax payable
              
              $
              880,716
              
              $
              544,215VAT
                  tax payable
              
              
              144,641
              
              
              18,140Individual
                  income tax payable
              
              
              1,002
              
              
              -Others
              
              
              2,526
              
              
              -$
              1,028,885
              
              $
              562,355




**12.**
            **OTHER
                INCOME (EXPENSES)**




Other
      income (expenses) consists of the following as of December 31, 2006, 2005 and
      2004:


2006
              
              2005
              
              2004Interest
                  income
              
              $
              115,162
              
              $
              -
              
              $
              933Listing
                  fees
              
              
              (2,852)
              
              
              -
              
              
              -Exchange
                  gain (loss)
              
              
              (13,693)
              
              
              -
              
              
              -Financial
                  cost
              
              
              (3,590)
              
              
              (160)
              
              
              (115)$
              95,027
              
              $
              (160)
              
              $
              818




**13.**
            **INCOME
                TAXES**




The
      Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
      the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amounts at each period end based
      on
      enacted tax laws and statutory tax rates applicable to the periods in which
      the
      differences are expected to affect taxable income. Valuation allowances are
      established, when necessary, to reduce deferred tax assets to the amount
      expected to be realized.




The
      Company is subject to PRC Enterprise Income Tax at a rate of 33% on the net
      income. The income tax expenses for the years ended December 31, 2006, 2005
      and
      2004 are $4,248,144, $3,173,533 and $1,982,252 respectively.


2006
              
              2005
              
              2004Tax
                  at statutory rate
              34%
              
              34%
              
              34%Foreign
                  tax rate difference
              -1%
              
              -1%
              
              -1%33%
              
              33%
              
              33%






F-14




Net
      operating loss carry forward for the US and Hong Kong tax jurisdictions amounted
      to $1,460,000, $2,004,000 and $0, for the years ended December 31, 2006, 2005,
      and 2004, respectively. A 100% valuation allowance has been recorded for the
      deferred tax asset of $746,400 due to uncertainty of its realization. There
      were
      no other significant book and tax basis difference.




**14.**
            **MAJOR
                CUSTOMERS AND VENDORS**




There
      were no major customers which accounting over 10% of the total net revenue
      for
      the year ended December 31, 2006 and 2005. Ten major customers accounted for
      34%
      and 49% of the net revenue for the years ended December 31, 2006 and 2005,
      respectively. The Company had $2,982,820 and $2,736,378 accounts receivable
      to
      theses customers as of December 31, 2006 and 2005, respectively.




Three
      vendors provided 76% of the Company’s purchase of raw materials for the year
      ended December 31, 2006 with each vendor individually accounting for about
      34%,
      27% & 15%. Three vendors provided 79% of the Company’s purchase of raw
      material for the year ended December 31, 2005 with each individually accounting
      for about 65%, 18% and 8%. The Company had $74,785 and $53,922 accounts payable
      to these vendors as of December 31, 2006 and 2005, respectively.




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.




**15.**
            **RELATED
                PARTY TRANSACTIONS**




On
      January 6, 2005, Pacific Dragon entered into a License Agreement with Mr. Chang
      Yu, director of the Company. Under this License Agreement, Mr. Chang Yu
      authorized Pacific Dragon to use the know-how in manufacturing organic liquid
      compound fertilizer owned by him for free until December 31, 2009.




The
      Company's PRC subsidiary, Pacific Dragon, has entered into a tenancy agreement
      with Harbin Yinlong Enterprise Co. Ltd. ("Yinlong"), the joint venture partners
      holding 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
      RMB1,200,000 (equivalent to $144,578). The tenancy agreement was revised by
      increasing the annual rent to RMB3,600,000 (equivalent to $442,800) effective
      from July 1, 2005. During the years ended December 31, 2006 and 2005, the
      Company paid RMB 3,600,000 (equivalent to $451,562) and RMB2,400,000 (equivalent
      to $295,200) to Yinlong respectively.




**16.**
            **MINORITY
                INTEREST**




The
      amounts of $2,160,575 and $1,237,910, as of December 31, 2006 and 2005,
      represent the minority shareholder, Harbin Yinlong Enterprise Co., Ltd., a
      related party of the Company, interest in Pacific Dragon, a 90% subsidiary.




**17.**
            **CURRENT
                VULNERABILITY DUE TO CERTAIN CONCENTRATIONS**




Pacific
      Dragon's operations are all carried out in the PRC. Accordingly, Pacific
      Dragon'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.




Pacific
      Dragon's operations in the PRC are subject to specific considerations and
      significant risks not typically associated with companies in the North America
      and Western Europe. These include risks associated with, among others, the
      political, economic and legal environments and foreign currency exchange.
      Pacific Dragon'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.




**18.**
            **STOCKHOLDERS’
                EQUITY**




F-15




Pursuant
      to the Reorganization Agreement (as defined in Note 1 "Organization and
      Description of Business" above), the Company issued 10,606,158 shares of newly
      issued restricted common stock in exchange for all of the issued and outstanding
      common stock of Tailong.




On
      February 3, 2005, and following the combination with Tailong, the Company
      completed the sale of 590,283 shares of its restricted common stock ("Private
      Placement Shares") for $1.6941 per share for a total of $1,000,000 to accredited
      investors pursuant to the stock purchase agreement dated February 3, 2005.




On
      May
      12, 2005, the Company made a forward stock split whereby each share of issued
      and outstanding common stock is converted into 1.14 shares of the Company's
      common stock. As a result, the common stock amount has been increased
      proportionately based on the forward stock split ratio and the additional
      paid-in capital has been reduced by the same amount.




On
      June
      13, 2005, the Company entered into a stock purchase agreement for the sale
      of
      235,516 shares of the Company's common stock for $1.4861 per share for a total
      of $350,000. Out of the amount of $350,000 received, $275,000 was held in escrow
      at December 31, 2005 for the purpose of disbursing expenses as set forth in
      the
      escrow agreement. The funds shall be released subject to the fulfillment of
      the
      conditions set out in the escrow agreement entered into by the Company pursuant
      to the stock purchase agreements.




On
      January 13, 2006, the Company entered into a stock purchase agreement for the
      sale of 4,800,000 shares of the Company's common stock for $2.50 per share
      for a
      total of $12,000,000. The proceeds have been received in March,
      2006. **** The
      direct costs related to this stock sale, including legal and professional fees,
      were deducted from the related proceeds and the net amount in excess of par
      value was recorded as additional paid-in capital.




**19.**
            **STOCK
                OPTIONS**




The
      Company adopted SFAS No. 123 (Revised 2004), *Share
      Based Payment* ("SFAS
      No. 123R"), 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 our stock option plans
      using the intrinsic value method in accordance with the provisions of APB
      Opinion No. 25 and related interpretations.




Primarily
      as a result of adopting SFAS No. 123R, the Company recognized $3,597 in
      share-based compensation expense for the year ended December 31, 2006 and $0
      for
      the year ended December 31, 2005 as there was no stock options issued in year
      2005. The impact of this share-based compensation expense on the Company's
      basic
      and diluted earnings per share was $0.00 per share. The fair value of our stock
      options was estimated using the Black-Scholes option pricing model.




On
      May
      10, 2006, the Company granted an unrelated party 125,000 stock options vesting
      over 5 years proportionately.  The option exercise price is $3.50. The fair
      value of the shares at the time of granting of the options was $3.00. Following
      is a summary of the stock option activity:




Options
                outstanding
            
            Weighted
                Average Exercise Price
            
            Aggregate
                Intrinsic ValueOutstanding,
                December 31, 2005
            0
            
            $0.00
            
            $0.00Granted
            
            
            $3.50
            
            $0.00




F-16




125,000Forfeited
            -
            
            -
            
            -Exercised
            -
            
            -
            
            -Outstanding,
                December 31, 2006
            125,000
            
            $3.50
            
            $0.00





Following
      is a summary of the status of options outstanding at December 31, 2006:





Outstanding
                Options
            Exercisable
                OptionsExercise
                Price
            Number
            Average
                Remaining Contractual Life
            Average
                Exercise Price
            Number
            Average
                Exercise Price$3.50
            125,000
            4.25
            $3.50
            125,000
            $3.50




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





Risk-free
                interest rate
            6.0%Expected
                life of the options
            5.00
                yearsExpected
                volatility
            80%Expected
                dividend yield
            0




**20.**
            **STATUTORY
                RESERVES**




As
      stipulated by the Company Law of the People's Republic of China (PRC), 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, 2006 and 2005 amounted to $1,860,610 and $1,169,455,
      respectively.




The
      Company established a reserve for the annual contribution of 5% of net income
      to
      the common welfare fund. The amount included in the statutory reserves as of
      December 31, 2006 and 2005 amounted to $930,306 and $561,612,
      respectively.




**21.**
            **COMMITMENTS
                AND LEASES**




The
      Company incurred rent expenses $621,106 and $461,580 for the years ended
      December 31, 2006 and 2005. The rent expenses for the next five years after
      December 31, 2006 are as follows:




F-17




Year
                  2007
              
              $
              635,515Year
                  2008
              
              
              557,918Year
                  2009
              
              
              546,892Year
                  2010
              
              
              546,892Year
                  2011
              
              
              524,941Year
                  2012 and thereafter
              
              
              992,434$
              3,804,592




**22.
      ALLOWANCE FOR DOUBTFUL ACCOUNTS**


**ALLOWANCE
                    FOR DOUBTFUL ACCOUNTS**
                The
                  allowance for doubtful accounts reflects our best estimate of probable
                  losses inherent in the accounts receivable balance. We determine
                  the
                  allowance based on known troubled accounts, historical experience,
                  and
                  other currently available evidence.**Balance
                  at**
              
              **Charged
                  to costs**
              
              **Write-offs**
              
              **Balance
                  at****Year
                  Ended June 30**
              
              **beginning
                  of period**
              
              **and
                  expenses**
              
              **and
                  other**
              
              **end
                  of period**2004
              $
              
              48,193
              $
              -
              $
              -
              $
              48,1932005
              $
              
              48,193
              $
              116,546
              $
              -
              $
              164,7392006
              $
              
              164,739
              $
              5,497
              $
              -
              $
              170,236




**FINANCIAL
      STATEMENT SCHEDULES**





**SCHEDULE
      I**





**CHINA
                AGRITECH INC.****BALANCE
                SHEET - US HOLDING COMPANY ONLY****AS
                OF DECEMBER 31, 2006 AND 2005**


**2006**
            
            
            **2005****ASSETS**Cash
                and cash equivalent
            
            $
            2,047,788
            
            $
            7,322Restricted
                cash
            
            
            100,028
            
            
            275,000Investment
                in subsidiary
            
            
            1,500,000
            
            
            125,775Intercompany
                receivable
            
            
            7,661,775
            
            
            -**TOTAL
                ASSETS**
            
            $
            11,309,591
            
            $
            408,097**LIABILITIES
                AND STOCKHOLDERS' EQUITY****CURRENT
                LIABILITIES:**Other
                payables
            
            $
            330,773
            
            $
            331,845Accrued
                expenses
            
            
            91,760
            
            
            90,960




F-18




Total
                current liabilities
            
            
            422,533
            
            
            422,805**STOCKHOLDERS'
                EQUITY:**Common
                stock, $0.001 per share; authorized 100,000,000 shares;19,143,615
                and 14,343,615 issued and outstanding
            
            
            19,144
            
            
            14,344Additional
                paid-in capital
            
            
            12,414,159
            
            
            1,335,656Foreign
                currency translation
            
            
            (3,878
            )
            
            (4,427
            )Accumulated
                deficit
            
            
            (1,542,367
            )
            
            (1,360,281
            )Total
                stockholders' equity
            
            
            10,887,058
            
            
            (14,708
            )**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            11,309,591
            
            $
            408,097








**CHINA
                AGRITECH INC.****STATEMENTS
                OF OPERATIONS - US HOLDING COMPANY ONLY****FOR
                THE YEARS ENDED DECEMBER 31, 2006, 2005 AND
                2004**


**2006**
            
            
            **2005**
            
            
            **2004****Operating
                expenses**General
                and administrative expenses
            
            $
            (269,258)
            
            $
            (119,404)
            
            $
            (60,597)**Non-operating
                income (expense):**Listing
                fee
            
            
            -
            
            
            (1,241,022)
            
            
            5,000Interest
                income
            
            
            87,311
            
            
            145
            
            
            -Interest
                expense
            
            
            (139)
            
            
            -
            
            
            -**Total
                non-operating income (expense)**
            
            
            87,172
            
            
            (1,240,877)
            
            
            5,000**Net
                loss**
            
            $
            (182,086)
            
            $
            (1,360,281)
            
            $
            (55,597)






F-19




**CHINA
                AGRITECH INC****STATEMENTS
                OF CASH FLOWS - US HOLDING COMPANY ONLY****FOR
                THE YEARS ENDED DECEMBER 31, 2006, 2005 AND
                2004**


**2006**
            
            
            **2005**
            
            
            **2004****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                loss
            
            $
            (182,086)
            
            $
            (1,360,281)
            
            $
            (55,597)Adjustments
                to reconcile net loss to net cashWarrants/stock
                option issued to a shareholder
            
            
            3,597
            
            
            -
            
            
            2,232Gain
                on settlement of debt
            
            
            -
            
            
            -
            
            
            (5,000)Increase
                in current Liabilities
            
            
            979
            
            
            90,661
            
            
            12,705Net
                cash used in operating activities
            
            
            (177,510)
            
            
            (1,269,620
            )
            
            (45,660)**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Investment
                in marketable securities
            
            
            (1,500,000)
            
            
            -
            
            
            -Decrease
                of cash in acquisition
            
            
            -
            
            
            (198,340)
            
            
            -Decrease
                in amount due to a shareholder
            
            
            -
            
            
            -
            
            
            (11,000
            )Net
                cash used in investing activities
            
            
            (1,500,000)
            
            
            (198,340)
            
            
            (11,000
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Due
                from China Tailong
            
            
            (7,536,000)
            
            
            (125,362)
            
            
            -Due
                to related party
            
            
            -
            
            
            330,755
            
            
            -Proceeds
                from issuance of common stock
            
            
            11,079,705
            
            
            1,350,000
            
            
            200,000Cash
                received from promissory notes
            
            
            -
            
            
            -
            
            
            30,000Restricted
                cash
            
            
            174,972
            
            
            (275,000
            )
            
            -Cash
                received from exercise of warrants
            
            
            -
            
            
            -
            
            
            25,000Net
                cash provided by financing activities
            
            
            3,718,677
            
            
            1,280,393
            
            
            255,000








F-20






Effect
                of exchange rate change on cash and cash equivalents
            
            
            (701)
            
            
            (3,452)
            
            
            -**NET
                INCREASE IN CASH & CASH EQUIVALENTS**
            
            
            2,040,466
            
            
            (191,020)
            
            
            198,340**CASH
                & CASH EQUIVALENTS, BEGINNING BALANCE**
            
            
            7,322
            
            
            198,340
            
            
            -**CASH
                & CASH EQUIVALENTS, ENDING BALANCE**
            
            $
            2,047,788
            
            $
            7,322
            
            $
            198,340






2004
      includes the financial statements for the US holding company prior to
      merger.






F-21