SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

x  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 No. 000-49608

CHINA AGRITECH, INC.

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

A# Room 0706-0707, The Spaces International Center 
No. 8, Dongdaqiao Road 
Chaoyang District, Beijing 100020 
People's Republic of China

(86) 10-58702123 (Registrant's telephone number, including area code)

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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

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

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

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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. x

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

|Large accelerated filer□ | Accelerated filer
    □ | Non-accelerated filer  x
|------------------------ | ----------------------- | ------------------------

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

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.

Portions of the registrant's Definitive Proxy Statement for
its 2007 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission within 120 days after the close of the Registrant's fiscal
year are incorporated by reference into Part III of this Annual Report on Form
10-K.

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TABLE OF CONTENTS

|Number   |                                                                                                                  |     
|-------- | ---------------------------------------------------------------------------------------------------------------- | ----
|         |                                                                                                                  | Page
|PART I   |                                                                                                                  |     
|         |                                                                                                                  |     
|Item 1.  | Business                                                                                                         | 5   
|Item 1A. | Risk Factors                                                                                                     | 13  
|Item 1B. | Unresolved Staff Comments                                                                                        | 22  
|Item 2.  | Properties                                                                                                       | 22  
|Item 3.  | Legal Proceedings                                                                                                | 22  
|Item 4.  | Submission of Matters to a Vote of Security
    Holders                                                          | 22  
|         |                                                                                                                  |     
|PART II  |                                                                                                                  |     
|         |                                                                                                                  |     
|Item 5.  | Market for Registrant's Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity Securities | 22  
|Item 6.  | Selected Financial Data                                                                                          | 24  
|Item 7.  | Management's Discussion and Analysis of
    Financial Condition and Results of Operations                        | 26  
|Item 7A. | Quantitative and Qualitative Disclosures
    about Market Risk                                                   | 33  
|Item 8.  | Financial Statements and Supplementary Data                                                                      | 33  
|Item 9.  | Changes in and Disagreements with Accountants
    on Accounting and Financial Disclosure                         | 33  
|Item 9A. | Controls and Procedures                                                                                          | 34  
|Item 9B  | Other Information                                                                                                | 34  
|         |                                                                                                                  |     
|PART III |                                                                                                                  |     
|         |                                                                                                                  |     
|Item 10. | Directors and Executive Officers of the
    Registrant                                                           | 34  
|Item 11. | Executive Compensation                                                                                           | 37  
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management                                               | 39  
|Item 13. | Certain Relationships and Related
    Transactions                                                               | 40  
|Item 14. | Principal Accountant Fees and Services                                                                           | 41  
|         |                                                                                                                  |     
|PART IV  |                                                                                                                  |     
|         |                                                                                                                  |     
|Item 15. | Exhibits and Financial Statement Schedules                                                                       | 41  

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INTRODUCTORY NOTE

Except as otherwise indicated by the
context, references in this Report 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, among others:

- general economic and business conditions in China and in
  the local economies in which we conduct business, which can affect demand for
  our products;
- changes in laws, rules and regulations governing the
  business community in China in general and the agriculture industry in
  particular;
- competition and competitive factors in the markets in which
  we compete;
- our ability to attract new customers;
- our ability to keep pace with technological developments in
  the agriculture industry, and to develop and commercialize new products;
- our ability to employ and retain qualified employees; and
- the risks identified in Item 1A. "Risk Factors," included
  herein.

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 this Form 10-K;
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.

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PART IItem 1. Description of BusinessChina Agritech is a holding company whose direct and indirect
subsidiaries, primarily Beijing Agritech and Tailong, and Tailong's subsidiary,
Pacific Dragon, manufacture and sell organic liquid compound fertilizers and
related agricultural products. The main raw material used in our products is
humic acid which is a complex mixture of organic acids, produced mostly by the
decomposition of plant material, and lignin, which is a complex polymer that
binds to cellulose fibers and strengthens the cell walls of plants. The humic
acid we used is mainly mined from a soft, brownish-black coal called lignite. In
addition, our products contain inorganic mineral materials such as nitrogen,
phosphorus and potassium and other active and stimulative agents.
Our main products include "LvLingBao III," "LvLingBao IV," "Tailong
I" and other customized, crop specific fertilizers that are tailored to our
customers' specific requirements. Our products promote photosynthesis, root
system growth and transmission of nutrients to seeds; equilibrate absorption of
nutrients and speed a plant's maturity; eliminate the damage of harmful radicals
to plants and increase protein and vitamin content levels; accelerate the
accumulation of photosynthesis materials and cell concentration; increase
reservation ability, resistance and the utilization rate of basic fertility; and
foster the development of plant life along with neutral or acidic pesticides.
Our products can be applied on a widespread basis via spraying by machine or
aircraft.
China is the principal market for our products. Our products
are primarily sold to farmers in 12 provinces in China: Heilongjiang, Hebei,
Liaoning, Jilin, Shandong, Inner Mongolia, Henan, Sichuan, Guangdong, Xinjiang,
Yunnan and Guizhou. In 2006, we had annual production capacity of approximately
9,000 metric tons of organic liquid compound fertilizers. Our revenues are
derived primarily from the sale of our organic liquid compound fertilizers and
related agricultural products to our customers.
Background

Since May 2005, our corporate name has been China Agritech,
Inc. We were originally incorporated as Argyle Mining Company under the laws of
the State of Nevada on January 5, 1925, for the purpose of developing mining
claims. Over the years, we changed our business model several times prior to our
current business. On August 10, 2004, we merged with and into a newly formed
wholly-owned Delaware subsidiary for the purpose of changing our corporate
domicile from Nevada to Delaware. In February 2005, we completed our reverse
acquisition transaction with Tailong, whereby Tailong become our wholly-owned
subsidiary. See " Acquisition of Tailong" below. In May 2005, we changed our
name to China Agritech, Inc.
In 2006, we also initiated operations through two new
subsidiaries, Anhui Agritech and CAI. Our business operations are primarily
conducted through our indirect subsidiaries, Pacific Dragon and Beijing Agritech.
Beijing Agritech supervises our Beijing operations, which serve as a research
and development center and our primary syrup production center and converting
factory.
Acquisition of Tailong

On February 3, 2005, we completed a reverse acquisition
transaction with Tailong whereby we issued 10,606,158 shares of our restricted
common stock to the stockholders of Tailong in exchange for all of the issued
and outstanding capital stock of Tailong. Tailong thereby became our wholly
owned subsidiary and the former stockholders of Tailong became our controlling
stockholders. For accounting purposes, this transaction was treated as a reverse
acquisition with Tailong as the acquirer and China Agritech as the acquired
entity.
Also on February 3, 2005, we completed a private placement in
which we sold 590,284 shares of our common stock to two investors for gross
proceeds to us of $1,000,000 in a transaction exempt from the registration
requirements of the Securities Act
pursuant to Section 4(2) thereof and Rule 506 thereunder. Each of the investors
qualified as an "accredited investor" as defined by Rule 501 under the
Securities Act.

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On May 12, 2005, in connection with the reverse acquisition
transaction, we amended our Certificate of Incorporation to: (1) change our name
to "China Agritech, Inc." to reflect our new business of manufacturing and
marketing agricultural products; (2) allow our Board of Directors to set the
number of directors in accordance with our bylaws; and (3) effect a forward
stock split whereby each share of our issued and outstanding common stock was
converted into 1.14 shares of our common stock.
Tailong was incorporated on October 27, 2003, under the laws
of Hong Kong. Tailong had no active operations until October 9, 2004, when it
acquired 90% ownership of Pacific Dragon. Pacific Dragon conducts Tailong's only
business operations. The remaining 10% ownership of Pacific Dragon is held by
Yinlong Industrial Co. Ltd., or Yinlong, a limited company incorporated in the
PRC. Mr. Yu Chang, our CEO, President and Secretary and a member of our Board of
Directors, and Ms. Xiaorong Teng, our Chief Operating Officer and a member of
our Board of Directors, own 85% and 15% of Yinlong, respectively. Yinlong
provides wholesale and retail construction materials, automobile parts,
mechanical equipment and wood products to companies in the PRC.
Pacific Dragon is an "equity joint venture" under Chinese
foreign invested enterprise law. The legal structure of an "equity joint
venture" is similar to that of a limited liability company organized under state
laws in the United States. Pacific Dragon has registered capital of $500,000 and
its Articles of Association provide for a business term of 15 years. Upon the
expiration of the 15-year term, Pacific Dragon may apply for an extension of the
term of its Articles of Association.



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Our Current Organizational Structure
The chart below illustrates our corporate structure:



Subsequent Transactions and Activities

On January 13, 2006, we sold 4,800,000 shares of our common
stock to 22 investors for a total of $12,000,000. The shares were offered and
sold to investors in reliance upon exemptions from the registration requirements
of the Securities Act pursuant to Section 4(2) and Rule 506 thereunder. A resale
registration statement covering the shares sold in the private placement was
filed with the U.S. Securities and Exchange Commission but was subsequently
withdrawn.

During 2006, we established and reorganized our Beijing
operations and opened a new factory in Beijing. Our Beijing factory serves as
the primary syrup concentrate production center which is where our fertilizers
are manufactured in liquefied form, converting factory and research and
development institute. The syrup production center has capacity for 5,000 metric
tons per year, and is expected to supply each of the new regional facilities we
plan to open over the next several years. The converting factory, which is where
the fertilizer formulas are customized to the local region and plants, has
capacity for 2,000 metric tons per year and will serve Hebei, Shandong and
Shanxi provinces. This region comprises 19.5 million hectares, or 15%, of
China's arable

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We believe that the relocation of our research and
development center to Beijing will enhance our reputation as a national company
in China. We believe that the new location allows for better communication with
important government agencies, such as the Ministry of Agriculture, which should
help expedite expansion throughout China and support our research and
development initiatives.
In 2006 we also established a new production facility in
Anhui province that will serve our markets in Anhui and surrounding areas and
significantly increase our overall production capacity.
We expect to open additional converting facilities in
Xinjiang and Chongqing by the end of 2007. Once the anticipated facilities are
operational, we expect to have capacity for 13,000 metric tons per year, a 160%
increase in capacity from the end of 2005.

We also initiated efforts to sell our products outside of
China in 2006. On June 1, 2006, we entered into a distribution contract with KDK
Co., Ltd. ("KDK") and Aheqi Co., Ltd. ("Aheqi") through which we appointed KDK
and Aheqi, respectively, as distributors of our Tailong "Green Vitality" liquid
organic compound fertilizers in the Kyrgyz Republic and the Russian Republic.
Pursuant to the distribution contracts, KDK and Aheqi must meet certain sales
targets.

Recent Developments

On March 16, 2007, the National People's Congress of the PRC
determined to adopt a new corporate income tax law in its fifth plenary session.
The new corporate income tax law unifies the application scope, tax rate, tax
deduction and preferential policy for both domestic and foreign-invested
enterprises and will become effective on January 1, 2008. We expect that under
the new corporate income tax law, the applicable income tax rate for our PRC
subsidiaries is subject to change. As the implementation detail has not yet been
announced, we cannot be sure of the potential impact of such new corporate
income tax law on our financial position and operating results.

Industry Background and Our Principal Markets

China is the principal market for our organic liquid compound
fertilizers and related agricultural products. Our products are primarily sold
to farmers in 12 provinces in China: Heilongjiang, Hebei, Liaoning, Jilin,
Shandong, Inner Mongolia, Henan, Sichuan, Guangdong, Xinjiang, Yunnan and
Guizhou.

China has the world's largest population of nearly 1.3
billion people. However, China's arable land on a per capita basis is only 0.04
hectare (Source: 2003 China statistics Yearbook), or approximately 50% of that
present in the United States (Source: US Census Bureau, www.census.gov). This combination of limited
arable land and a large and growing population has created a significant need to
increase the output of crops per hectare in China. China's agricultural output
increased 19% from 1988 to 2004 (the total crops output was 394,080,000 tons in
1988 as compared to 469,469,000 tons in 2004) (Source: PRC Ministry of
Agriculture). An increase in the use of fertilizers - 8,840,000 tons were used
in 1978 compared to 46,366,000 tons used in 2004 (Source: PRC Ministry of
Agriculture) has contributed to this growth. As a subset of the broader
fertilizer market, the use of compound fertilizers in China has likewise
increased, from 2,720,000 tons in 1980 to 12,040,000 in 2004.

In order to improve the efficient utilization of fertilizer,
the PRC Ministry of Agriculture encourages the use of organic compound
fertilizers instead of single nutrients, such as urea, or chemical fertilizers.
The percentage of compound fertilizer consumption to the total fertilizer
consumption rose from 2% in 1980 to 26% in 2004. (Source: 2005 China Statistics
Yearbook) However, the percentage of compound fertilizers consumption is still
at a very low level compared with the average level of about 70% worldwide.

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Principal Products and Services

Our products consist primarily of organic liquid compound
fertilizers which are derived from natural sources. The main raw material used
in our products is humic acid, which is a complex mixture of organic acids,
produced mostly by the decomposition of plant material, and lignin, which is a
complex polymer that binds to cellulose fibers and strengthens the cell walls of
plants. The humic acid we used is mainly mined from a soft, brownish-black coal
called lignite. In addition, our products certain "inorganic" (that is, mineral)
elements (such as nitrogen, phosphorus and potassium), microelements (such as
boron, iron, zinc, manganese and molybdenum) and other active and stimulative
agents.

Since their inception, our operating subsidiaries have
developed, tested, produced and sold various types of organic liquid compound
fertilizers. Our main products include "LvLingBao III," "LvLingBao IV," "Tailong
I" and other customized, crop special fertilizers which are tailored to
customers' specific requirements. The characteristics and properties of our
three main products are as follows:

LvLingBao III: This product
consists of humic acid, nitrogen, phosphor, potassium, microelements (e.g.,
boron, iron, zinc, manganese and molybdenum), amino acid, active agent, stimulative agent and opsonin agent.

LvLingBao IV: This product
consists of humic acid, nitrogen, phosphor, potassium, microelements (e.g.,
boron, iron, zinc, manganese and molybdenum), active agent, stimulative
agent and opsonin agent. Formulated for large scale crops and suitable for jet
spray delivery.

Tailong I: This product is used
in the fertilization of a variety of crops and plants. Tailong I was developed
on the base of LvLingBao III, with adjustments in the amount of amino acid,
active agent and stimulative agent, in order that the nutrients can be better
absorbed.

Our products can be used to:

- promote photosynthesis, root system growth and transmission
  of nutrients to seeds;
- equilibrate absorption of nutrients and speed a plant's
  maturity;
- eliminate the damage of harmful radicals to plants and
  increase protein and vitamin content levels which improve plant quality and
  commercial value;
- accelerate the accumulation of photosynthesis materials and
  enhance the typical cellular processes of plants;
- increase the utilization rate of basic fertility;
- reduce the acidification and hardening of soil due to
  fertilizer and reduce its harmful effect on plants; and
- increase efficacy along with neutral or acidic pesticides.

Our products can be applied on a large scale basis via
spraying by machine or aircraft.

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In addition, in 2006 we organized and initiated our Beijing
operations, which serve as the primary production and conversion center for the
syrup and concentrate versions of our products.
Raw Materials and Our Principal Suppliers

The main raw material used in our products is humic acid. We
also use other organic and inorganic elements. Humic acid is the main and unique
component of organic liquid compound fertilizers. It is a complex mixture of
organic acids, produced mostly by the decomposition of plant material and lignin
which is a complex polymer that binds to cellulose fibers and strengthens the
cell walls of plants.
Humic acid, through the chelation of ions, often has a
favorable effect on living organisms. Chelation occurs when organic compounds
form coordinate bonds with metals through two or more atoms of the organic
compound. Humic acid affects soil weathering and fertility, the pH value and
alkalinity of natural waters, trace metal chemistry and bioavailability
(bioavailability is the degree or rate at which a substance is able to be
absorbed), the degradation and transport of hydrophobic organic chemicals, the
formation of disinfection byproducts during water treatment, and heterotrophic
production in black-water ecosystems (heterotrophic producers require minerals
and organic substrates to receive carbon for growth and development). Fluid
humic acid fertilizer products are widely recommended as they can be easily
mixed with water and sprayed.
Many minerals and organic elements are abundant in China.
Humic acid is mined from a soft,
brownish-black coal called lignite. China has large lignite reserves according
to the survey of energy resources published by the World Energy Council.
There are numerous suppliers and vendors in China of the raw
materials needed for our products. Our subsidiary Pacific Dragon has entered
into written contracts with several suppliers and vendors. Our main suppliers
are Inner-Mongolia Humic Acid Factory, Beijing Zhongxin Chemical Development
Company and Shenzhen Hongchou Technology Company, which are our major suppliers
of humic acid and chemical raw materials.
Our Distribution, Customers and Customer Programs

We sell most of our products through various regional
distributors in China. We have established and maintained long term
relationships with major distributors who we believe have local business
experience and established regional sales networks. We hold an annual ordering
conference for our major distributors to place purchasing orders through written
sales agreements. In addition, our sales department holds ordering conferences
with our distributors in various provinces, including Heilongjiang, Jilin,
Liaoning, Hebei, Shandong, Jiangsu, Xinjiang and Sichuan from time to time to
promote our products and maintain and strengthen these relationships. In
addition, we also sell our products to end users directly. All purchasing orders
on our products are served on a first come, first serve basis.
For the year ended December 31, 2006, distribution through
our ten largest distributors accounted for approximately 34.2% of our total
annual sales. Our three largest distributors are:
Liaoning Shenyang Military District Subsidiary Farm, which
  is located in Liaoning Province and purchased approximately 4.0% of our
  organic liquid compound fertilizers in 2006.
  Xinjiang Construction Military Group, which is located in
  Xinjiang province and purchased approximately 3.7% of our organic liquid
  compound fertilizers in 2006.
  Heilongjiang Qiqihaer Agricultural Department, which is
  located in Heilongjiang province and purchased approximately 3.6% of our
  organic liquid compound fertilizers in 2006.

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We provide our customers with a variety of customer services,
including a technical support hotline service, conducting seminars and the
provision of instructional DVDs.
We have also been marketing and promoting our products
through the following means:
Broadcasting on Chinese local TV channels, such as
  Heilongjiang Satellite Channel;
  Participation in activities organized by local governments
  to promote information about, and use of, fertilizers.Competition
China is the world's largest consumer of fertilizer and
fertilizer products and we believe that the prospects for continued growth are
positive. Our experience is that the compound fertilizer industry in China is
highly fragmented, consisting of numerous smaller regional manufacturers and
larger, domestic and international competitors.
We compete with approximately 300 small-sized Chinese
fertilizer manufacturers. The number of small fertilizer manufacturers and
companies selling fertilizer products increases and decreases from time to time.
The smaller competitors in the fertilizer industry with whom we compete
typically manufacture and market liquid compound fertilizers with annual output
of less than 1,000 metric tons. We believe that most of the smaller fertilizer
producers in China do not utilize national brand name recognition as a basis for
promoting their products. Also, due to economies of scale, we believe that these
smaller producers are generally less cost effective, have lower quality control
and minimal product development capabilities. In addition, most of their
products consist of single or dual chemical nutrients, which we believe are
generally less effective at boosting the growth of plants as compared to our
organic liquid compound fertilizers.
Another group of competitors consists of international
fertilizer producers and trading companies that import fertilizers into China.
Imported fertilizer products range from fertilizers with a single chemical
element, such as urea, phosphate and potash, to standard Nitrogen, phosphor and
kalium compound fertilizers. The quality of imported fertilizers is generally
higher and more stable than fertilizers, like ours, which are produced in China.
Due to tariffs, duties and license fees imposed on imported fertilizer products
and high shipping and transportation expenses, however, we believe that imported
fertilizers are generally less price competitive than Chinese fertilizer
products. In addition, the Chinese government imposes an annual quota on
fertilizer products that can be imported into China. Based on the Chinese
government's WTO commitment, from December 11, 2006 China started to allow
foreign companies to gain the right to retail and distribute fertilizers.
Because fertilizer products usually need to be specifically formulated for local
plant, soil and climate conditions, we believe that there are not many foreign
competitors in our selected markets that are capable of producing customized
fertilizers that compete with our products. Nevertheless, as a result of the
opening of the fertilizer market to foreign producers, we expect that the amount
of fertilizer imported to China will rise significantly and that we will face
increasing competition from non-Chinese fertilizer manufacturers.
Intellectual Property

We have registered with the Trademark Office of the State
Administration for Industry and Commerce of China the trademark for the "Tailong"
logo (registration number: 836192), which is used on our products that are
distributed in China. This trademark expires in 2016.
We rely on trade secrets to protect our proprietary
technology and formulas. We currently do not own any patents and have not
applied for patents on our proprietary technology and formulas because a patent
application requires a detailed description of our technology and formulas which
would be made available to the general public.
We believe a patent application and disclosure of our technology and formulas
would be detrimental to our future business. There are currently few competitors
in China's organic liquid compound fertilizer market that are capable of
producing customized fertilizers like our products. If knowledge of our formulas
and processes are not tightly controlled, more competitors would likely emerge
in this market. Only certain of our key executives have knowledge of our
proprietary technology and formulas.

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

As of December 31, 2006, we had approximately 188 full-time
employees, of which 21 were administrative and managerial staff, 96 were sales
staff and 42 were manufacturing workers. We also hire temporary manufacturing
workers to supplement our manufacture capabilities at periods of high demand.
None of our employees is under collective bargaining agreements and they all
reside in China. We believe that we maintain a satisfactory working relationship
with our employees and we have not experienced any significant labor disputes or
any difficulty in recruiting staff for our operations.
As required by applicable Chinese law, we have entered into
employment contracts with all of our officers, managers and employees.
Our employees in China participate in a state pension scheme
organized by Chinese municipal and provincial governments. We are required to
contribute to the scheme at a rate determined as a percentage of an employee's
average monthly salary. The compensation expenses related to this scheme was
approximately $5,070, $0 and $0 for the years ended 2006, 2005 and 2004,
respectively.
In addition, we are required by Chinese law to cover
employees in China with various types of social insurance. We have purchased
social insurance for all of our employees.
Research and Development

We conduct on-going research and development activities
relating to the improvement of the organic liquid compound fertilizers we
manufacture and the control of related manufacturing costs. Our primary research
and development facilities are located in Beijing and our principal research
team consists of Mr. Shuhua Liu and Mr. Kangde Liu. We spent approximately
$21,900 (RMB 175,200) and $13,500 (RMB 108,000) on research and development in
2006 and 2005, respectively.
Government Regulation

All fertilizers produced in China must be registered with the
PRC Ministry of Agriculture. No fertilizers can be manufactured without such
registration. There are two kinds of registrations: interim registration and
formal registration. The interim registration is valid for one year and applies
to fertilizers in the stages of in-the-field testing and test selling. All
fertilizers that have completed in-the-field testing and test selling must
obtain formal registration which, once obtained, is valid for five years and
thereafter may be renewed for five year periods. We have obtained the necessary
Formal Fertilizer Registration Certificate for all of our fertilizer products
from the PRC Ministry of Agriculture. Such certificate was issued on September
3, 2002 and will expire in December 2007, at which time we will be required to
renew the formal registration. We believe that we will be able to renew our
formal registration, and obtain any new interim and formal registration that may
be required on a timely basis and without significant cost.

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As of December 31, 2006, we believe that we are in material
compliance with all registrations and requirements for the issuance and
maintenance of all licenses required by the governing bodies. As of December 31,
2006, all license fees and filings are current.
If we were to lose any of these licenses, we would only have
a limited time to re-apply for such licenses and would face possible regulatory
fines. However, such licenses will generally only be revoked under rare
circumstances, such as when illegal activities have occurred. We are not subject
to any environmental controls or restrictions that require the outlay of capital
or the obtaining of a permit in order to engage in business operations.
Item 1A. Risk Factors
In addition to the other information presented in this
Report, readers should carefully consider the following important factors. These
factors, among others, have in some cases affected, and in the future could
affect, our financial condition and results of operations and could cause our
future results to differ materially from those expressed or implied in any
forward-looking statements that may appear in this Report or that we have made
or will make elsewhere.Risks related to our financial condition
We may need to raise additional capital in the foreseeable
future and may not be able to do so on terms favorable to us or you or at all.As of December 31, 2006, we had approximately $6.5 million in
cash. Based on current reserves and anticipated cash flow from our operations,
we anticipate that the available funds will be sufficient to meet our
anticipated needs for working capital, capital expenditures and business
expansion for the next twelve months. If we decide to expand our business
operations more broadly than currently anticipated or if cash flows from
operations are inadequate for our capital needs, we may seek to satisfy our
future capital requirements from the sale of our securities in public or private
offerings, or through loans from financial institutions or our controlling
stockholders. Adequate funds may not be available when needed or on terms
satisfactory to us. A lack of funds also may cause us to delay, reduce and/or
abandon certain or all aspects of our organic liquid compound fertilizer product
research and development programs, close facilities and/or lay-off employees
which, in turn, will likely result in decreased sales and profits.
If additional funds are raised through the issuance of equity
or convertible debt securities, the percentage ownership of our stockholders
will be reduced and our stockholders may experience additional dilution. In
addition, such equity or convertible debt securities may have rights,
preferences and privileges senior to those of our common stock. This may reduce
a stockholder's return on investment or cause a complete loss in the investment.
Our holding company structure may limit the payment of
dividends.

We have no direct business operations, other than the
ownership of our subsidiaries Pacific Dragon and Beijing Agritech. We have no
current intention of paying dividends. As a holding company, if we decide to pay
dividends in the future our ability to do so will depend upon the receipt of
dividends or other payments from our operating subsidiaries and other holdings
and investments. Our operating subsidiaries may be subject to restrictions on
their ability to make distributions to us due to Chinese law, restrictive
covenants in loan agreements, restrictions on the conversion of local currency
into U.S. dollars or other hard currency and other regulatory restrictions as
discussed below. If future dividends are paid in Renminbi, fluctuations in the
exchange rate for the conversion of
Renminbi into U.S. dollars may reduce the amount received by U.S. stockholders
upon conversion of the dividend payment into U.S. dollars.

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Chinese regulations currently permit the payment of dividends
only out of accumulated profits as determined in accordance with Chinese
accounting standards and regulations. Our subsidiaries in China are also
required to set aside a portion of their after tax profits according to Chinese
accounting standards and regulations to fund certain reserve funds. Currently,
our subsidiaries in China are the only sources of revenues or investment
holdings for the payment of dividends. If they do not accumulate sufficient
profits under Chinese accounting standards and regulations to first fund certain
reserve funds as required by Chinese accounting standards, we will not receive
any dividends and will be unable to pay any dividends to our stockholders.Risk related to our business.
Our business will be harmed if our major distributors reduce
their orders or discontinue doing business with us.As of December 31, 2006, we sell approximately 34.2% of our
fertilizer products through ten major distributors, including Liaoning Shenyang
Military District Subsidiary Farm, Xinjiang Construction Military Group and
Heilongjiang Qiqihaer Agricultural Department. If some or all of these
distributors reduce their orders or discontinue doing business with us, we could
have difficulties finding new distributors to distribute our products and our
revenues and net income could in turn decline considerably. Our reliance on
these major distributors could also affect our bargaining power in getting
favorable prices for our products. In addition, untimely payment and/or failure
to pay by these major distributors would negatively affect our cash flow.
We depend heavily on Mr. Yu Chang, our CEO, President,
Secretary and director, and without his services our prospects would be severely
limited.

Our future business and results of operations depend in
significant part upon the continuing contribution of Mr. Yu Chang, our CEO,
President, Secretary and director. Mr. Chang has extensive experience in the
liquid compound fertilizer industry and is directly involved in all of our
business operations. Mr. Chang has a 3-year employment agreement with our
subsidiary, Pacific Dragon, which expires on January 5, 2008. There can be no
assurance that we will be able to retain Mr. Chang after the expiration of his
employment agreement. If Mr. Chang ceases to be employed by us, we may have
difficulty finding a suitable replacement with equal leadership and industry
experience, and our business would suffer.
We depend heavily on skilled personnel, and any loss of such
personnel, or the failure to continue to attract such personnel in the future,
could harm our business.

The agricultural products business is specialized and
requires the employment of personnel with significant scientific and operational
experience in the industry. Accordingly, we must attract, recruit and retain a
sizeable workforce of technically competent employees. Our ability to
effectively implement our business strategy will depend upon, among other
factors, the successful recruitment and retention of additional management and
other key personnel that have the necessary scientific, technical and
operational skills and experience with the liquid compound fertilizer industry.
These individuals are difficult to find in the PRC and we may not be able to
retain such skilled employees.
Any disruption of the operations in our factories would
damage our business.

All of our products are currently manufactured in our
factories in Harbin, Beijing, and Anhui Province, China. We currently maintain insurance covering
our manufacturing facilities, machinery and other leasehold improvements.
However, we do not carry sufficient business interruption insurance. Our
operations could be interrupted by fire, flood, earthquake and other events
beyond our control. Any disruption of the operations in our factories would have
a significant negative impact on our ability to manufacture and deliver
products, which would cause a potential diminution in sales, the cancellation of
orders, damage to our reputation and potential lawsuits.

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Although we plan to build additional facilities, we have not
yet started construction of either facility, and we may not be able to complete such
facilities in a timely manner. Even if we are able to complete construction and
begin operations at our planned additional facilities, we will remain dependent
to a large extent on our Beijing facility, which will produce the syrup
concentrates used to manufacture our products at all of our facilities.
We currently rely on a small number of third parties to
supply the key raw materials we use to produce our products.

Our business depends upon the availability of key raw
materials, including humic acid, chemical raw materials and plastic goods. We
rely on only a few external suppliers for these raw materials. In fiscal year
2006, we purchased approximately 14.8% of our humic acid from Inner-Mongolia
Humic Acid Factory, approximately 33.8% of our chemical raw materials from
Beijing Zhongxin Chemical Technology Development Co., and approximately 27.1% of
our plastic goods from Shenzhen Hongchou Technology Company. We have entered
into written agreements with all of these suppliers. If any of our major
suppliers were to default or become unable to deliver the raw materials in
sufficient quantities, we may be unable to purchase these raw materials from
alternative sources on the same or similar terms, which could result in a
significant increase in our operating costs. In addition, any disruption in the
supply of our raw materials could cause delay in the delivery of our products
which would be harmful to our sales reputation and business.

If we cannot protect the proprietary formula and
manufacturing processes for our concentrated organic liquid compound fertilizer
it could increase our competition and cause our operating results to suffer.

Our success will depend in part on our ability to protect our
proprietary formula and manufacturing process for highly concentrated organic
liquid compound fertilizer. We rely on trade secrets to protect our proprietary
formulas and manufacturing processes. We have not applied for patents for our
technology and formulas as we believe an application for such patents would
result in public knowledge of our proprietary technology and formulas and could
lead competitors to attempt to copy our products, thereby increasing
competition. This could in turn result in a decrease of our market share and
hurt our operating results. Our subsidiary Pacific Dragon has entered into a license agreement with Mr. Yu
Chang, our CEO, President, Secretary and director, under which Mr. Chang granted
us an exclusive license to use his know-how in manufacturing organic liquid
compound fertilizer on a royalty-free basis. Under the license agreement, Mr.
Chang has the obligation to maintain the confidentiality of this technology and
is prohibited from freely licensing this technology to any third party or using
the technology for his own benefit. In addition, only certain of our key
executives have knowledge of our proprietary technology and formulas.

Despite these precautions, the legal regime protecting
intellectual property rights in China is weak. If we are not able to fully
protect our proprietary trade secrets, if our employees unintentionally or
willfully disclose our confidential technology to competitors, or if our
competitors independently develop similar or superior products, we may lose any
competitive advantage that we currently have. If we are forced to take legal
action to protect our proprietary formula and processes, we will incur
significant expense and further could not guarantee a favorable outcome.

In addition, our competitors may counterfeit our products and
use our trademark. These counterfeit products could damage our reputation and
create confusion for our customers.

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Certain of our officers and directors' associations
with other business enterprises could impede their ability to devote ample time
to our business and could pose conflicts of interest.
Mr. Yu Chang, our CEO, President, Secretary and director, and
Ms. Xiaorong Teng, our Chief Operating Officer, serve as the
chairman and a director, respectively, of Yinlong Industrial Co. Ltd. These
existing responsibilities to another entity could limit the amount of time they
can spend on our affairs. Mr. Chang currently spends about 90% of his time on
our affairs and about 10% of his time on the affairs of Yinlong. Ms. Teng
currently spends about 95% of her time on our affairs and about 5% of her time
on the affairs of Yinlong. In addition, in carrying out their responsibilities
for both us and Yinlong, Mr. Chang and Ms. Teng could face conflicts of interest
from time to time. We will attempt to resolve any such conflicts of interest in
our favor. Our officers and directors are accountable to us and our shareholders
as fiduciaries, which requires that such officers and directors exercise good
faith and integrity in handling our affairs.
We may be exposed to potential risks relating to our internal
controls over financial reporting and our ability to have those controls
attested to by our independent auditors.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002,
or SOX 404, the Securities and Exchange Commission adopted rules requiring
public companies to include a report of management on the company's internal
controls over financial reporting in their annual reports on Form 10-K. In
addition, the independent registered public accounting firm auditing a company's
financial statements must also attest to and report on management's assessment
of the effectiveness of the company's internal controls over financial reporting
as well as the operating effectiveness of the company's internal controls. We
are subject to these requirements beginning with this Report. We can provide no
assurance that we will comply with all of the requirements imposed thereby.
There can be no positive assurance that we will receive a positive attestation
from our independent auditors. In the event we identify significant deficiencies
or material weaknesses in our internal controls that we cannot remediate in a
timely manner or we are unable to receive a positive attestation from our
independent auditors with respect to our internal controls, investors and others
may lose confidence in the reliability of our financial statements.Risks related to our industry
Our operating results will suffer if the price of raw
materials increases and we cannot pass the increased cost through to our
customers.The primary raw materials included in our products are humic
acid, chemical raw materials and plastic goods. The prices for these raw
materials are subject to market forces largely beyond our control, including
energy costs, organic chemical feedstock, market demand, and freight costs. The
prices for these raw materials may fluctuate significantly based upon changes in
these forces. Our operating results may be seriously harmed if we are unable to
pass any raw material price increases through to our customers.
The nature of the products that we manufacture could expose
us to product liability claims.

Defects in, or unknown harmful effects caused by, organic and
inorganic chemical and elements in our products could subject us to potential
product liability claims that our products cause some harm to the human body or
to property. We have obtained product liability insurance to cover claims from
personal injuries or property damage caused by our products for the period from
July 11, 2006 to July 10, 2007. However, such insurance coverage is limited to
approximately $500,000 (RMB 4,000,000) and may not be sufficient to cover
potential claims. A successful claim against us that is in excess of our
insurance coverage could significantly harm our business and financial
condition. As of the filing of this Report, no product liability claim has ever
been brought against us.

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Fertilizers pose certain
safety risks.

The manufacture and use of fertilizers poses certain safety
risks and can cause physical injury and sickness. Although we have adopted
safety measures in our research, development and manufacturing processes,
accidents may still occur. Any accident, either at the manufacturing phase or
during the use of our products, may subject us to significant liabilities to
persons harmed by these products.

If we cannot renew our fertilizer registration certificate,
which expires in December 2007, we will be unable to sell some of our products
which will cause our sales revenues to significantly decrease.

All fertilizers produced in China must be registered with the
PRC Ministry of Agriculture. No fertilizer can be manufactured without such
registration. There are two kinds of registrations: interim registration and
formal registration. The interim registration is valid for one year and applies
to fertilizers in the stages of in-the-field testing and test selling.
Fertilizers that have completed in-the-field testing and test selling must
obtain formal registration, which is valid for five years, and thereafter must
be renewed each five years. We have obtained a Formal Fertilizer Registration
Certificate covering all of our fertilizer products from the PRC Ministry of
Agriculture. Such certificate was issued on September 3, 2002 and will expire in
December 2007.

Our belief is that the PRC Ministry of Agriculture generally
will grant an application for renewal in the absence of illegal activity by the
applicant. However, there is no guarantee that the PRC Ministry of Agriculture
will grant renewal of our Formal Fertilizer Registration Certificate. If we
cannot obtain the necessary renewal, we will not be able to manufacture and sell
our fertilizer products in China which will cause the termination of our
commercial operations.

Adverse weather conditions could reduce demand for our
products.

The demand for our organic liquid compound fertilizer
products fluctuates significantly with weather conditions, which may delay the
application of the fertilizer or render it unnecessary at all. If any natural
disasters, such as flood, drought, hail, tornado or earthquake, occur, demands
for our products will be reduced. In addition, in some cases, we allow our
distributors to purchase our products partially on credit. The distributors, in
turn, may sell the fertilizer to farmers on credit. If any natural disaster
occurs, reduced crop yields may cause farmers to default on their payments which
could harm our cash flow and results of operations.

We face competition from numerous fertilizer manufacturers in
China and elsewhere.

We compete with approximately 300 small-sized, local Chinese
fertilizer manufacturers. The number of these small companies varies from time
to time. While we may have greater resources than our smaller competitors, it is
possible that these competitors have better access in certain local markets to
customers and prospects, an enhanced ability to customize products to a
particular region or locality and established local distribution channels within
a small region. Furthermore, we face competition from international fertilizer
producers and traders who import fertilizers into China. These imported products
range from fertilizers with single chemical elements, such as urea, phosphate
and potash, to standard nitrogen phosphate, potassium compound fertilizers. The
quality of the imported products is generally higher and more stable than
fertilizers produced in China. While our resources may not be as great as our
larger competitors, we believe our product quality, sales network, brand
recognition and sales network are superior

We will face greater competition as a result of the opening
of the Chinese fertilizer market

Historically, imported fertilizers have been subject to
tariffs, duties and quota imposed by the Chinese government. In connection with
China's entry into the World Trade Organization, based on the WTO commitment,
from December 11, 2006 China will start to allow foreign companies to sell and
distribute fertilizers. As the Chinese fertilizer market starts to gain more
market participants, we will face increased competition which may create
pricing, supply and demand constraints and cause our profit margins to suffer.

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Risks related to doing business in China
The constantly evolving legal system in China is
unpredictable and may afford you and us inadequate legal protections.We conduct most of our business in China, which utilizes a
civil law system based on written statutes. Unlike common law systems, it is a
system in which precedents set in earlier legal cases are not generally used.
The overall effect of legislation enacted over the past 20 years has been to
enhance the protections afforded to foreign invested enterprises in China.
However, these laws, regulations and legal requirements are relatively recent
and are evolving rapidly, and their interpretation and enforcement involves
uncertainties. These uncertainties could limit the legal protections available
to foreign investors, such as the right of foreign invested enterprises to hold
licenses and permits, such as requisite business licenses. In addition, all of
our executive officers and directors are residents of China and not of the U.S.,
and substantially all the sets of these persons are located outside the U.S. As
a result, it could be difficult for investors to effect service of process in
the U.S., or to enforce a judgment obtained in the U.S. against us or any of
these persons.
Our business will suffer if we lose our land use rights.

There is no private ownership of land in China and all land
ownership is held by the government of the PRC, its agencies and collectives.
Land use rights can be obtained from the government for a period up to 70 years,
and are typically renewable. Land use rights can be transferred upon approval by
the land administrative authorities of the PRC (State Land Administration
Bureau) upon payment of the required land transfer fee. We have received the
necessary land use right certificate for our primary operating facilities, but
we can give no assurance that our land use rights will be renewed on terms
favorable to us or renewed at all.
Accounting laws in China mandate accounting practices which
may not be consistent with U.S. generally accepted accounting principles and
therefore our financials and their interpretation involve uncertainties.

The PRC accounting laws require an annual "statutory audit"
to be performed in accordance with PRC accounting standards and the books of
foreign invested enterprises to be maintained in accordance with Chinese
accounting laws. These Chinese accounting practices which may not be consistent
with U.S. generally accepted accounting principles, or GAAP. Article 14 of the
PRC Wholly Foreign-Owned Enterprise Law requires a wholly foreign-owned
enterprise to submit certain periodic fiscal reports and statements to
designated financial and tax authorities. Noncompliance with such requirements
may cause revocation of our business license. The translation of the financial
statements from the requirements of the PRC to U.S. GAAP, requires
interpretation and exercise of judgment.
Changes in China's political and economic situation could
harm us and our operating results.

Economic reforms adopted by the Chinese government have had a
positive effect on its economic development, but the government could change
these economic reforms or any of its legal systems at any time. Changes could
either benefit or damage our operations and profitability. Potential changes,
among others, are the following:level of
  government involvement in the economy;

control of foreign
  exchange;

methods of
  allocating resources;

balance of
  payments position;

international
  trade restrictions; and

international
  conflict.

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The Chinese economy differs from the economies of most
countries belonging to the Organization for Economic Cooperation and
Development, or OECD, in many ways. As a result of these differences, we may not
develop in the same way or at the same rate as might be expected if the Chinese
economy were similar to those of the OECD member countries.
The Chinese government exerts substantial influence over the
manner in which we conduct our business activities.

China only recently has permitted provincial and local
economic autonomy and private economic activities. The Chinese government has
exercised and continues to exercise substantial control over virtually every
sector of the Chinese economy through regulation and state ownership of business
enterprises. Our ability to operate profitably in China may be harmed by changes
in its laws and regulations, including those relating to taxation, import and
export tariffs, environmental regulations, land use rights, property and other
matters. We believe that our operations in China are in material compliance with
all applicable legal and regulatory requirements. However, the central or local
governments of these jurisdictions may impose new, stricter regulations or
interpretations of existing regulations, including stricter environmental laws
and regulations on the manufacture, storage, use and disposal of fertilizer
and/or of certain chemicals used in the manufacture of fertilizer, that would
require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations. Accordingly, government actions in the
future, including any decision not to continue to support recent economic
reforms and to return to a more centrally planned economy, or regional or local
variations in the implementation of economic policies, could have a significant
effect on economic conditions in China or particular regions thereof, and could
require us to divest ourselves of any interest we then hold in Chinese
properties or joint ventures.
Future inflation in China may inhibit our ability to conduct
business in China.

In recent years, the Chinese economy has experienced periods
of rapid expansion and widely fluctuating rates of inflation. During the past
ten years, the rate of inflation in China has been as high as 20.7% and as low
as -2.2%. These factors have led to the adoption by the Chinese government, from
time to time, of various corrective measures designed to restrict the
availability of credit or regulate growth and contain inflation. High inflation
may in the future cause the Chinese government to impose controls on credit
and/or prices, or to take other action which could inhibit economic activity in
China, and thereby harm the market for our products.
We may be unable to complete a business combination
transaction efficiently or on favorable terms due to complicated merger and
acquisition regulations implemented on September 8, 2006.

On September 8, 2006, the PRC Ministry of Commerce, or "MOFCOM,"
together with several other government agencies, promulgated a comprehensive set
of regulations governing the approval process by which a Chinese company may
participate in an acquisition of its assets or its equity interests and by which
a Chinese company may obtain public trading of its securities on a securities
exchange outside of the PRC. Depending on the structure of the transaction,
these regulations will require the Chinese parties to make a series of
applications and supplemental applications to the governmental agencies. In some
instances, the application process may require the presentation of economic data
concerning a transaction, including appraisals of the target business and
evaluations of the acquirer, which are designed to allow the government to
assess the transaction. Governmental approvals will have expiration dates by
which a transaction must be completed and reported to the governmental agencies.
Compliance with the regulations is likely to be more time consuming and
expensive than in the past and the government now can exert more control over
the combination of two businesses. Accordingly, due to these new regulations,
our ability to engage in business combination transactions has become
significantly more complicated, time consuming and expensive and we may not be
able to negotiate a transaction that is acceptable to our stockholders or will
sufficiently protect their interests in a transaction.

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The new regulations allow PRC government agencies to assess
the economic terms of a business combination transaction. Parties to a business
combination transaction may have to submit to MOFCOM and the other government
agencies an appraisal report, an evaluation report and the acquisition
agreement, all of which form part of the application for approval, depending on
the structure of the transaction. The regulations also prohibit a transaction at
an acquisition price obviously lower than the appraised value of the Chinese
business or assets and in certain transaction structures, require that
consideration must be paid within defined periods, generally not in excess of a
year. The regulations also limit our ability to negotiate various terms of the
acquisition, including aspects of the initial consideration, contingent
consideration, holdback provisions, indemnification provisions and provisions
relating to the assumption and allocation of assets and liabilities. Transaction
structures involving trusts, nominees and similar entities are prohibited.
Therefore, such regulations may impede our ability to negotiate and complete a
business combination transaction on financial terms which satisfy our investors
and protect our stockholders' economic interests and we may not be able to
negotiate a business combination transaction on terms favorable to our
stockholders.

Restrictions on currency exchange may limit our ability to
receive and use our revenue effectively.

The majority of our revenues will be settled in Renminbi, and
any future restrictions on currency exchanges may limit our ability to use
revenue generated in Renminbi to fund any future business activities outside
China or to make dividend or other payments in U.S. dollars. Although the
Chinese government introduced regulations in 1996 to allow greater
convertibility of the Renminbi for current account transactions, significant
restrictions still remain, including primarily the restriction that
foreign-invested enterprises may only buy, sell or remit foreign currencies
after providing valid commercial documents, at those banks in China authorized
to conduct foreign exchange business. In addition, conversion of Renminbi for
capital account items, including direct investment and loans, is subject to
governmental approval in China, and companies are required to open and maintain
separate foreign exchange accounts for capital account items. We cannot be
certain that the Chinese regulatory authorities will not impose more stringent
restrictions on the convertibility of the Renminbi.

The value of our securities will be affected by the foreign
exchange rate between the U.S. dollar and Renminbi.

The value of our common stock will be affected by the foreign
exchange rate between the U.S. dollar and the Renminbi, and between those
currencies and other currencies in which our sales may be denominated. For
example, if we need to convert U.S. dollars into Renminbi for our operational
needs and the Renminbi has appreciated against the U.S. dollar at that time, our
financial position and business, and the price of our common stock, may be
harmed. Conversely, if we decide to convert our Renminbi into U.S. dollars for
the purpose of declaring dividends on our common stock or for other business
purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar
equivalent of our earnings from our subsidiaries in China would be reduced.

Risks related to our common stock

The market price for our common stock may be volatile which
could result in a complete loss of your investment.

Our stock is not widely traded or traded in great volume so
the market price for our common stock is likely to be highly volatile and
subject to wide fluctuations in response to factors including the following:

- 

announcements of
  new products by us or our competitors;

changes in
  financial estimates by securities analysts;

conditions in
  the fertilizer market;

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changes
  in the economic performance or market valuations of other companies involved
  in fertilizer production;

announcements by
  our competitors of significant acquisitions;

additions or
  departures of key personnel; and

potential
  litigation.

Certain of our stockholders hold a significant percentage of
our outstanding voting securities.

Mr. Yu Chang is the beneficiary owner of approximately 56.84%
of our outstanding common stock. As a result, he possesses significant
influence, giving him the ability, among other things, to elect a majority of
our Board of Directors and to authorize or prevent significant corporate
transactions. His ownership and control may also have the effect of delaying or
preventing a future change in control, impeding a merger, consolidation,
takeover or other business combination or discourage a potential acquirer from
making a tender offer. This might result in limitations on, or a decrease in the
price of, our common stock.

Our common stock is quoted on the OTC bulletin board which
may have an unfavorable impact on our stock price and liquidity.

Our common stock is quoted on the OTC Bulletin Board under
the symbol "CAGC.OB." The OTC Bulletin Board is a significantly more limited
market than the New York Stock Exchange or Nasdaq system. The quotation of our
shares on the OTC Bulletin Board may result in a less liquid market available
for existing and potential stockholders to trade shares of our common stock,
could depress the trading price of our common stock and could have a long-term
adverse impact on our ability to raise capital in the future.

We are subject to penny stock regulations and restrictions.

The SEC has adopted regulations which generally define
so-called "penny stocks" to be an equity security that has a market price less
than $5.00 per share or an exercise price of less than $5.00 per share, subject
to certain exemptions. As of March 26, 2007, the closing bid and asked prices
for our common stock were $2.83 per share and, therefore, it is designated a
"penny stock." Although since February 3, 2005, we have met the net worth
exemption from the "penny stock" definition, no assurance can be given that such
exemption will be maintained. As a "penny stock," our common stock may become
subject to Rule 15g-9 under the Exchange Act of 1934, or the "Penny Stock Rule."
This rule imposes additional sales practice requirements on broker-dealers that
sell such securities to persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by Rule 15g-9, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. As a result, this rule may
affect the ability of broker-dealers to sell our securities and may affect the
ability of purchasers to sell any of our securities in the secondary market.

Unless exempt, for any transaction involving a penny stock,
the rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the SEC relating to the penny stock market.
Disclosure is also required to be made about sales commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in the penny stock.

There can be no assurance that our common stock will qualify
for exemption from the Penny Stock Rule. In any event, even if our common stock
were exempt from the Penny Stock Rule, we would remain subject to Section
15(b)(6) of the Exchange Act, which gives
the SEC the authority to restrict any person from participating in a
distribution of a penny stock if the SEC determines that such a restriction
would be in the public interest.

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Item 1B. Unresolved Staff Comments.

The registrant currently does not have any unresolved
comments of issues with the Staff of the Corporation Finance Division of the
U.S. Securities and Exchange Commission.Item 2. Properties.

Our executive office is located at A# Room 0706-0707, The
Spaces International Center, No. 8 Dongdaqiao Road, Chaoyang District, Beijing,
China 100020. This office consists of approximately 318 square meters. The lease
agreement has a three-year term which expires in May 2008. The monthly rental
payment is approximately $3,625 (RMB 29,000).

We currently lease 9,878 square meters in the aggregate for
office space and manufacturing facilities in Harbin, China where our subsidiary
Pacific Dragon is located. The lease has a 10-year term which runs from January
1, 2004 to January 1, 2014. Our current rent due under this lease is
approximately $450,000 (RMB 3,600,000) per year.

In addition, we have an office with a space of 200 square
feet in Hong Kong which is located at Room 2008, 20/F, Wellable Commercial
Building, 513 Hennessy Road, Causeway Bay, Hong Kong. The monthly rent payment
is approximately $1,625 and the term of the lease expires on September 6, 2007.

Our new Beijing production facility measures 48,298 square
feet and is located at M-2-8, Beijing Pinggu District Xingu Economic Development
Zone. Our lease for the facility runs until September 5, 2011 and has a monthly
rent of $6,250.

Our new Anhui office measures 130 square meters. The monthly
rent for this space is $167, and the lease term runs from April 6, 2006 to April
6, 2007. Our new Anhui production center measures 1,138 square meters. The
monthly rent for this space is $1,727, and the lease term runs from June 1, 2006
to May 31, 2016. Both the Anhui office and production center are located at No.
1188 of Chang Zheng Road, Bengbu City, Anhui Province.

Item 3. Legal Proceedings

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

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

None.

PART II

Item 5. Market for our Common Stock

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

22

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|                             |                      
|---------------------------- | ---------------------
|                             | Closing Bid Prices(1)
|                             | High                 
|Year Ended December 31, 2006 |                      
|1st
    Quarter              | $ 4.75               
|2nd
    Quarter              | 5.00                 
|3rd
    Quarter              | 4.00                 
|4th Quarter                  | 3.50                 
|                             |                      
|Year Ended December 31, 2005 |                      
|1st
    Quarter              | $4.00                
|2nd
    Quarter              | 3.00                 
|3rd
    Quarter              | 4.50                 
|4th Quarter                  | 4.30                 

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

On March 26, 2007, the closing price of our common stock on
the OTCBB was $2.83.

Reports to Stockholders

We plan to furnish our stockholders with an annual report for
each fiscal year ending December 31 containing financial statements audited by
our independent certified public accountants. Additionally, we may, in our sole
discretion, issue unaudited quarterly or other interim reports to our
stockholders when we deem appropriate. We intend to maintain compliance with the
periodic reporting requirements of the Securities Exchange Act of 1934.

Approximate Number of Holders of Our Common Stock

On December 31, 2006, there were approximately 34 holders of
record of our common stock.

Dividend Policy

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

Recent Sales of Unregistered Securities

On February 3, 2005, we sold 590,283 shares of our common
stock at a price of $1.6941 per share to two accredited investors, Chinamerica
Fund, LLP and Gary Evans, for a total of $1,000,000 pursuant to a stock purchase
agreement. The issuance of our shares to these investors was made in reliance on
the exemption provided by Section 4(2) of the Securities Act for the offer and
sale of securities not involving a public offering and regulation D promulgated
thereunder.

On June 13, 2005, we sold 235,516 shares of our common stock
at a price of $1.4861 per share to two accredited investors, Chinamerica Fund,
LLP and Steven Taylor, for a total of $350,000. The issuance of our shares to
these investors was made in reliance on the exemption provided by Section 4(2)
of the Securities Act for the offer and sale of securities not involving a
public offering and regulation D promulgated thereunder.

23

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On January 13, 2006, we sold 4,800,000 shares of our common
stock at a price of $2.50 per share to twenty-two accredited investors for a
total of $12,000,000. The issuance of our shares to these investors was made in
reliance on the exemption provided by Section 4(2) of the Securities Act for the
offer and sale of securities not involving a public offering and regulation D
promulgated thereunder.  In instances described above where we issued
securities in reliance upon Regulation D, we relied upon Rule 506 of Regulation
D of the Securities Act. These stockholders who received the securities in such
instances made representations that (a) the stockholder is acquiring the
securities for his, her or its own account for investment and not for the
account of any other person and not with a view to or for distribution,
assignment or resale in connection with any distribution within the meaning of
the Securities Act, (b) the stockholder agrees not to sell or otherwise transfer
the purchased shares unless they are registered under the Securities Act and any
applicable state securities laws, or an exemption or exemptions from such
registration are available, (c) the stockholder has knowledge and experience in
financial and business matters such that he, she or it is capable of evaluating
the merits and risks of an investment in us, (d) the stockholder had access to
all of our documents, records, and books pertaining to the investment and was
provided the opportunity ask questions and receive answers regarding the terms
and conditions of the offering and to obtain any additional information which we
possessed or were able to acquire without unreasonable effort and expense, and
(e) the stockholder has no need for the liquidity in its investment in us and
could afford the complete loss of such investment. Management made the
determination that the investors in instances where we relied on Regulation D
are Accredited Investors (as defined in Regulation D) based upon management's
inquiry into their sophistication and net worth. In addition, there was no
general solicitation or advertising for securities issued in reliance upon
Regulation D.

In instances described above where we indicate that we relied
upon Section 4(2) of the Securities Act in issuing securities, our reliance was
based upon the following factors: (a) the issuance of the securities was an
isolated private transaction by us which did not involve a public offering; (b)
there were only a limited number of offerees; (c) there were no subsequent or
contemporaneous public offerings of the securities by us; (d) the securities
were not broken down into smaller denominations; and (e) the negotiations for
the sale of the stock took place directly between the offeree and us.

Item 6.

The following table sets forth selected financial data on an
historical basis for China Agritech. This data should be read in conjunction
with the consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K.

24

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|                                                              |   | Year ended December 31,
|------------------------------------------------------------- | - | -----------------------
|                                                              |   | 2002                   
|                                                              |   | (Unaudited)            
|Statement of operations data:                                 |   |                        
|Net revenue                                                   | $ | 6,411,015              
|Cost of revenue                                               |   | (2,673,176)            
|Gross profit                                                  |   | 3,737,839              
|Operating expenses                                            |   |                        
|Selling expenses                                              |   | (710,569)              
|Operating and administrative
    expenses                     |   | (553,559)              
|Total operating expenses                                      |   | (1,264,128)            
|Income from  operations                                       |   | 2,473,711              
|Other income (expense)                                        |   |                        
|Merger costs                                                  |   | -                      
|Other (expense) income                                        |   | -                      
|Finance costs                                                 |   | (3,111)                
|Total other income (expense)                                  |   | (3,111)                
|Income before income taxes and
    minority interests         |   | 2,470,600              
|Provision for income taxes                                    |   | (792,637)              
|                                                              |   |                        
|Income before minority
    interests                          |   | 1,677,963              
|Minority interests                                            |   | -                      
|Net income                                                    |   | 1,677,963              
|Other comprehensive income                                    |   |                        
|Foreign currency translation
    adjustment                   |   | -                      
|Other comprehensive income                                    | $ | 1,677,963              
|Basic and diluted weighted
    average shares outstanding     |   | n/a                    
|per share                                                     | $ | n/a                    
|                                                              |   |                        
|Cash flow data:                                               |   |                        
|Net cash flows provided by
    (used in) operating activities | $ | (454,171)              
|Net cash provided by (used in)
    investing activities       |   | 456,539                
|Net cash provided by (used in)
    financing activities       |   | (2,093)                
|                                                              |   |                        
|                                                              |   | December 31,           
|                                                              |   | 2002                   
|Balance sheet data:                                           |   | (Unaudited)            
|Cash and cash equivalents                                     | $ | 752                    
|Working capital                                               |   | 2,863,702              
|Total assets                                                  |   | 4,372,281              
|Total current liabilities                                     |   | 1,374,897              
|Long term liabilities                                         |   | 68,675                 
|Total liabilities                                             |   | 1,443,572              
|Total stockholders' equity                                    |   | 2,028,709              

25

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Item 7.

Overview

We are a holding company whose direct and indirect
subsidiaries, primarily Pacific Dragon and Beijing Agritech, manufacture and
sell organic liquid compound fertilizers and related agricultural products.

China is the principal market for our products. Our products
are primarily sold to farmers in 12 provinces in China. Our revenues are derived
primarily from the sale of our organic liquid compound fertilizers and related
agricultural products to our customers.

Background

We were originally incorporated on January 5, 1925 under the
laws of the State of Nevada as Argyle Mining Company for the development of
mining claims. Over the years, we changed our business model several times and,
presently, we engage in the business of manufacturing and selling agricultural
products. On August 10, 2004, we merged with and into a newly formed
wholly-owned Delaware subsidiary for the purpose of changing our corporate
domicile from Nevada to Delaware. The new entity maintained the same name and
capital structure. On February 3, 2005, we completed a reverse acquisition
transaction with Tailong whereby we issued 10,606,158 shares of our restricted
common stock to the stockholders of Tailong in exchange for all of the issued
and outstanding capital stock of Tailong. Tailong thereby became our wholly
owned subsidiary and the former stockholders of Tailong became our controlling
stockholders. In May 2005, following completion of the reverse acquisition
transaction, we changed our name to China Agritech, Inc.

In September 2006, we organized our Beijing operations, which
operate primarily as our research and development center. Our business
operations are conducted through our wholly owned subsidiary, Beijing Agritech,
and Tailong's 90% owned operating subsidiary, Pacific Dragon.

Recent Developments

Corporate Income Tax Law. On March 16, 2007, the National
People's Congress of the PRC determined to adopt a new corporate income tax law
in its fifth plenary session. The new corporate income tax law unifies the
application scope, tax rate, tax deduction and preferential policy for both
domestic and foreign-invested enterprises and will become effective on January
1, 2008. Under to the new corporate income tax law, the applicable income tax
rate for our PRC subsidiaries is subject to change. As the implementation detail
has not yet been announced, we cannot be sure of the potential impact of such
new corporate income tax law on our financial position and operating results.

Industry Wide Factors that are Relevant to Our Business

The fertilizer industry in China is in the process of rapid
and continuous development. China is the largest producer, importer and consumer
of fertilizers in the world. In 2004, the total consumption of fertilizers in
China amounted to approximately 46.4 million tons, an increase of 11.8% from
2000. The total consumption of fertilizers is expected to increase to 51 million
tons by 2010 and 56 millions by 2020. We believe this trend will impact
favorably on the demand for our products, and this will result in growth in
sales of fertilizers and increased revenue for us.

A related trend that affects our industry is the growing
demand for compound fertilizers. The percentage of compound fertilizer
consumption to the total fertilizer consumption in China rose from 2% in 1980 to
26% in 2004. We believe our revenue will grow as a result of the continuing
increase of the demand of compound fertilizers.

26

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The Chinese government strongly encourages the development of
the agriculture industry and encourages companies in the agriculture sector to
become bigger and build name recognition. We plan to utilize this regulatory and
political policy support to expand our operations in various parts of China and
to improve our name recognition in the market.

Our industry faces increasing competition. See "Business 

Competition." The increased level of competition puts pressure on the sales
prices of our products, which may result in lower margin for us.

Results of Operations

Year Ended December 31, 2006 Compared with Year Ended
December 31, 2005

All amounts, other than percentages, in millions of U.S.
dollars

|                        | December 31, |        | Increase   | %
    Increase
|----------------------- | ------------ | ------ | ---------- | --------------
|Item                    | 2006         | 2005   | (Decrease) | (% Decrease)  
|Sales Revenue           | 29.5         | 25.3   | 4.2        | 17%           
|Costs of Goods
    Sold | (14.1)       | (12.8) | 1.3        | 10%           
|Selling Expenses        | (3.0)        | (2.4)  | 0.6        | 25%           
|Operating and           |              |        |            |               
|Administrative          |              |        |            |               
|Expenses                | (2.0)        | (2.0)  | -          | -             
|Income from             |              |        |            |               
|Operations              | 10.4         | 8.1    | 2.3        | 28%           
|Other income            |              |        |            |               
|(expenses)              | 0.1          | 0.6    | 0.7        | 117%          
|Income tax              | (4.3)        | (3.2)  | 1.1        | 34%           
|Minority interest       | (0.9)        | (0.6)  | (0.3)      | 50%           
|Net income              | 5.3          | 3.7    | 1.6        | 43%           

Sales Revenues. Sales revenues increased $4,190,261, or
17 % to $29,525,577 for the year ended December 31, 2006 from $25,335,316 for the year in 2005. This increase was mainly attributable to the change of
delivery time as well as improvement of product mix. In 2005, some orders that
had historically been delivered in the third quarter were delivered earlier in
the second quarter of 2005, while in 2006, this did not happen. In addition, we
increased the sales of Tailong I, which has a higher selling price than our
other products, from 1,209 tons of 2005 to 1,544 tons of 2006.

Cost of Goods Sold. Our cost of goods sold increased $1,312,400, or 10% to $14,161,358 for the year ended December 31, 2006 from $12,848,958 in the same period in 2005. The increase was primarily due to an
increase in sales of our fertilizer products which required us to purchase more
raw materials. This increase was due to the increase of the sales revenue. As a
percentage of net revenues, the cost of goods sold decreased to 47.8% during the
year ended December 31, 2006 from 50.6% in the same period of 2005. Such
increase of gross margin was mainly attributable to the reduced material cost as
a result of improved production cost control measures, as well as increased
sales of higher margin products.

Gross Profit. Our gross profit increased $2,877,861 to $15,364,219 for the year ended December 31, 2006 from $12,486,358 for the same period in 2005. Gross profit as a percentage of net
revenues was 52.2 % for the year ended December 31, 2006, as compared to 49.4%
during the same period in 2005. Such
increase was due to reduced material cost as a result of improved production
cost control measures, as well as increased sales of higher margin products.

27

---

Administrative Expenses. Our administrative expenses did
not change for the year ended December 31, 2006 compared to the same period in
2005. As a percentage of net revenues, administrative expenses decreased to 6.8%
for the year ended December 31, 2006 from 7.9% for the same period in 2005. This
percentage decrease was primarily attributable to more efficient controls of our
administrative expenses.
Amortization and depreciation. Our amortization and
depreciation expenses increase $52,391, or 50.9%, to $155,292 for the year ended
December 31, 2006 from $102,901 for the same period in 2005. As a percentage of
net revenues, expenses associated with amortization and depreciation increased
to 0.5 % for the year ended December 31, 2006 from 0.4 % for the same period in
2005.
Selling expenses. Our selling expenses increased
$611,605, or 25%, to $2,983,756 for the year ended December 31, 2006 from
$2,372,151 for the same period in 2005. As a percentage of net
revenues, our selling expenses increased to 10.2% for the year ended December
31, 2006 from 9.5 % for the same period in 2005. This increase was primarily
attributable to the expansion of our distribution network from northern China to
southern China and the increase in our advertising activities.
Total expenses. Our total expenses increased $633,335, or
3.9%, to $4,999,008 for the year ended December 31, 2006 from $4,365,673 for
the same period in 2005. As a percentage of net revenues, our total expenses
decreased to 16.9% for the year ended December 31, 2006 from 17.4% for the same
period in 2005. This decrease was primarily attributable to more efficient
controls of our administrative expenses.
Income from operations before taxes. Income from
operations before taxes increased $2,979,713, or 39.8%, to $10,460,238
during the year ended December 31, 2006 from $7,480,525 during the same
period in 2005. Income from operations before taxes as a percentage of net
revenues increased to 35.6% during the year ended December 31, 2006 from 29.6%
during the same period in 2005.
Provision for income taxes. Provision for income taxes
increased $1,074,611, or 34%, to $4,248,144 during the year ended December 31,
2006 from $3,173,533 during the same period in 2005. Our effective tax
rate for the year ended December 31, 2006, was 33%. Our 2007 effective tax
rate is expected to be 33%.
Net income. Net income increased $1,673,459, or
46%, to $5,349,338  during the year ended December 31, 2006 from
$3,675,879  during the same period in 2005, as a result of the factors
described above.Year Ended December 31, 2005 Compared to Year Ended December
31, 2004
All amounts, other than percentages, in millions of U.S.
dollars
December 31,
    
    Increase
    %
    IncreaseItem
    2005
    2004
    (Decrease)
    (%
    Decrease)Sales Revenue
    25.3
    15.8
    9.4
    60%Costs of Goods Sold
    (12.8)
    (8.2)
    4.6
    56%Selling Expenses
    (2.4)
    (1.4)
    1.0
    64%Operating andAdministrativeExpenses
    (2.0)
    (0.5)
    1.5
    300%Income fromOperations
    8.1
    5.7
    2.4
    42%Other income(expenses)
    (0.6)
    0
    0.6
    n/aIncome tax
    (3.2)
    (2.0)
    1.2
    60%Minority interest
    (0.6)
    0
    0.6
    100%Net income
    3.7
    3.7
    0
    0%28Sales Revenue.    

Our sales revenue in fiscal year 2005 was $25,335,316, which
is approximately $9,485,272 or 60% more than that of fiscal year 2004, where we
had revenue of $15,850,044. The increase in sales revenue is primarily the
result of the expansion of our distribution network from northern China to
southern China and the increase of our advertising activities. In 2005, sales to
new customers amounted to approximately $2.2 million, representing 9% of the
total revenue. In the meantime, we have also recorded increased sales to our
existing customers. We plan to continue our efforts in expanding the markets for
our products and we anticipate that our sales revenue will continue to grow.
Costs of Goods Sold.   

Cost of goods sold, which consist of raw materials, direct
labor and manufacturing overhead expenses, were $12,848,958 for the year ended
December 31, 2005, a increase of $4,695,495 or 56%, as compared to $8,153,463
for the year ended December 31, 2004. The proportions of cost of sales to total
revenues are 50.72% and 51.44% for the years of 2005 and 2004, respectively, a
decrease of approximately 1%. The main reason for this decrease is an
improvement in cost control measures.
Selling expenses.   

Selling expenses, which consist primarily of sales
commission, advertising and promotion expenses, freight charges and related
compensation, were $2,372,151 in 2005, as compared to $1,443,943 in 2004, an
increase of $925,208 or approximately 64%. We believe the increases in selling
expenses were generally in line with the increase of sales revenue.
Operating and administrative expenses.   

Our general and administrative expenses, which consist
primarily of rental expenses, related salaries, business development,
depreciation and traveling expenses, were $1,993,522 in 2005, as compared to
$517,831 in 2004, an increase of $1,475,691 or approximately 300%. The increase
is also attributable to an increase of $102,637 traveling expenses and an
expense of $136,275 incurred by Tailong which had minimal operation before its
acquisition of Pacific Dragon in October 2004. The traveling expenses increased
because of our expanded marketing efforts.
Environmental Laws Compliance Costs.   

We incurred no cost for environmental compliance in fiscal
years 2005 and 2004.

Income From Operations.    Income from operations was $7,480,685 in 2005, as compared to
$5,734,807 in 2004, an increase of $1,745,878 or approximately 32%. The increase
was mainly attributable to the increased sales revenue.

Other income (expenses).    Our other income (expenses), which consist primarily of
merger costs, were $640,160 in 2005, as compared to $818 in 2004. The increase
was mainly attributable to a one-time merger cost of $640,000, consisting of a
financial advisory fee, attorneys' fees and other costs in connection with the
reverse acquisition of Tailong in February 2005.

Income taxes.   

Our Chinese subsidiaries are taxed at a rate of 33% of
assessable profit. We incurred income taxes of $3,173,533 in 2005. This is an
increase of $1,191,281or 60% from the taxes we incurred in 2004, which were
$1,982,252. We paid more taxes in 2005 mostly because of higher income in 2005
compared to 2004.



---



Minority interest.   

Our financial statements in 2005 reflect an adjustment to our
consolidated group net income equal to $631,113, reflecting the 10% ownership of
Pacific Dragon held by Yinlong. No minority interest was recorded in 2004.

On June 8, 2004, Tailong and the three owners of Pacific
Dragon entered into a Capital Transfer Agreement whereby Tailong acquired 90% of
the equity interest in Pacific Dragon. Before such acquisition, Pacific Dragon
had effectively been controlled by Yinlong which was owned by the same
stockholders as Tailong. As such, Tailong and Pacific Dragon were under common
control. On such basis, the financial statements for the year ended December 31,
2004 are prepared by combining the accounts of Tailong and Pacific Dragon in a
manner similar to the pooling of interest and no minority interest was recorded.

In the financial statements for the year ended December 31,
2005, a minority interest was recorded because on February 3, 2005, China
Agritech, a public company with numerous shareholders, acquired 100% of Tailong.
As a result of such reverse acquisition, Yinlong, the 10% owner of Pacific
Dragon, is no longer owned by the same stockholders as Tailong.

Net Income.   

We earned net income of $3,675,879 in fiscal year of 2005.
This is a decreaseof $77,494 or approximately 2% from fiscal year 2004
which had a net income of $3,753,373. The decrease of our net income in 2005 was
mainly attributable to the one-time merger cost of $640,000.

Foreign Currency Translation Gains

We had a foreign currency translation gain of $601,288 in
fiscal year 2006 as compared with a foreign currency translation gain of
$228,566 in 2005.

Liquidity and capital resources

As of December 31, 2006, we had cash and cash equivalents of
$6,530,037. Our current assets were $28,512,791 and our current liabilities were
$2,010,220 as of December 31, 2006 which results in a current ratio of
approximately 14.2 Total stockholders' equity as of December 31, 2006, was
$26,856,119.

We had no bank loans or other interest bearing borrowings as
of December 31, 2006.

In fiscal year 2005, we raised a total of $1,350,000 from the
sale of 590,283 (before the 1-for-1.14 forward stock split) and 235,516 (after
the 1-for-1.14 forward stock split) shares of our common stock through private
placement transactions. The proceeds from these private placement transactions
were initially placed in an escrow account and are to be released upon the
satisfaction of the conditions set out in certain Escrow Agreement we entered into pursuant to the stock purchase
agreements with the private placement investors. As of December 31, 2005,
$1,000,000 of the proceeds was released from the escrow account, the remaining
$350,000 is held in escrow account for the purpose of disbursing expenses as set
forth in the escrow agreements.

On January 13, 2006, we further sold 4,800,000 shares of our
common stock to 22 investors for a total of $12,000,000. The shares were offered
and sold to investors in reliance upon exemptions from the registration
requirements of the Securities Act pursuant to Section 4(2) and Rule 506
thereunder.

We believe that our currently available working capital will
be sufficient to maintain our operations at our current levels for the next
twelve months. As of December 31, 2006 we did not have any material commitments
for capital expenditures.

30

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Critical Accounting Policies

The preparation of financial statements in conformity with
U.S. GAAP requires our management to make assumptions, estimates and judgments
that affect the amounts reported in the financial statements, including the
notes thereto, and related disclosures of commitments and contingencies, if any.
We consider our critical accounting policies to be those that require the more
significant judgments and estimates in the preparation of financial statements,
including the following:











31

---



- Revenue
  Recognition: our 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
  our company exist and collectibility is reasonably assured. Payments received
  before all of the relevant criteria for revenue recognition are satisfied are
  recorded as unearned revenue. Our revenue consists of invoiced value of goods,
  net of a value-added tax ("VAT"). No product return or sales discount
  allowance is made as products delivered and accepted by customers are normally
  not returnable and sales discount is normally not granted after products are
  delivered. All of our products that are sold in the PRC are subject to a
  Chinese value-added tax at a predetermined rate of 6% of the gross sales
  price. The total VAT paid for the year ended December 31, 2006 and 2005 were
  $1,749,001 and $1,532,000, respectively.
- 

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

32

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Inflation

We believe that inflation has not had a material impact on
our results of operations for the years ended December 31, 2006 and 2005. See
also Item 1A. "Risk Factors  Risks related to doing business in China  Future
inflation in China may inhibit our ability to conduct business in China."

Seasonality

We may experience seasonal variations in our future revenues
and our operating costs due to seasonality, however, we do not believe that
these variations will be material. However, weather may have a significant
impact on our business as discussed under Item 1A. "Risk Factors  Risks related
to our industry  Adverse weather conditions could reduce demand for our
products."

Item 7A. Quantitative and Qualitative Disclosures About
Market Risk

Interest Rate Risk

We had no bank loans or other interest bearing borrowings as
of December 31, 2006; therefore, we are not exposed to interest rate risk.

Foreign Exchange Risk

While our reporting currency is the U.S. dollar, all of our
consolidated revenues and consolidated costs and expenses are denominated in RMB.
All of our assets are denominated in RMB except for cash. As a result, we are
exposed to foreign exchange risk as our revenues and results of operations may
be affected by fluctuations in the exchange rate between U.S. dollars and RMB.
If the RMB depreciates against the U.S. dollar, the value of our RMB revenues,
earnings and assets as expressed in our U.S. dollar financial statements will
decline. We have not entered into any hedging transactions in an effort to
reduce our exposure to foreign exchange risk.

Inflation

Inflationary factors such as increases in the cost of our
product and overhead costs may adversely affect our operating results. Although
we do not believe that inflation has had a material impact on our financial
position or results of operations to date, a high rate of inflation in the
future may have an adverse effect on our ability to maintain current levels of
gross margin and selling, general and administrative expenses as a percentage of
net revenues if the selling prices of our products do not increase with these
increased costs.

Item 8. Financial Statements and Supplementary Financial Data

The full text of our audited consolidated financial
statements as of December 31, 2006 and 2005 begins on page F-1 of this Report.

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

None.

33

---



Item 9A. Controls and Procedures.

We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit to the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified by the Securities and
Exchange Commission's rules and forms, and that information is accumulated and
communicated to our management, including our Chief Executive Officer and our
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. The effectiveness of our disclosure controls and procedures
is subject to certain limitations, including the exercise of judgment in
designing, implementing and evaluating the controls and procedures, the
assumptions used in identifying the likelihood of future events, and the
inability to eliminate errors or misconduct completely. As a result, there can
be no assurance that our disclosure controls and procedures will detect all
errors or fraud. By their nature, any system of internal control, including our
system, can provide only reasonable assurance regarding management's control
objectives.

Under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial
Officer, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934) as December 31, 2006, the end of the period
covered by this Report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2006.

Management does not expect that the Company's disclosure
controls and procedures or its internal control over financial reporting will
prevent or detect all errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control systems are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in a cost-effective control system, no evaluation of
internal control over financial reporting can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within the Company have been detected.

As part of our normal operations, we update our internal
controls as necessary to accommodate any modifications to our business processes
or accounting procedures. There have not been any other changes in our internal
controls or in other factors that materially affected, or are reasonably likely
to materially affect these controls as of the end of the period covered by this
Report.

Item 9B. Other Information.

None.

Part III

Item 10. Directors, Executive Officers of the Registrant and
Corporate Governance

Directors and Executive Officers

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

|Name           | Age | Position                                                      
|-------------- | --- | --------------------------------------------------------------
|               |     |                                                               
|Yu Chang       | 52  | Chief Executive
    Officer, President, Secretary and Director
|Xiao Rong Teng | 37  | Chief Operating
    Officer                                   
|Tao Liang      | 42  | Director                                                      
|Li Jun Peng    | 66  | Chief Financial
    Officer and Controller                    
|Ming Fang Zhu  | 40  | Vice President of
    Strategic Development                   
|Ji Wei Zhang   | 38  | Vice President of
    Administration                          
|Wen Sheng Chen | 39  | Vice President of Sales                                       

34

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Yu Chang

Xiao Rong Teng: Ms. Teng has served as our Chief
Operating Officer since February 3, 2005 and our director since June 2005. Ms. Teng has
served as a director of Pacific Dragon since 2000. She has also served as a
director of Tailong since its inception in 2003. Ms. Teng worked for Yinlong
from 1994 to 2000 as the General Manager. She worked for Harbin Post &
Telecommunication Bureau from 1992 to 1994.

Tao Liang: Mr. Liang has served as our director since
June, 2005. Mr. Liang has also served as the Vice General Manager of Pacific
Dragon since 2000. Mr. Liang has served as the Vice General Manager of Yinlong
from 1997 to the end of 1999. From 1993 to 1996, Mr. Liang served as the General
Manager of Tainan Food Processing Factory in Harbin, China. From 1989 to 1992,
Mr. Liang served as the Vice General Manager of Taibao Company in Harbin China.
Mr. Liang graduated from Renwen Correspondence University.

Li Jun Peng: Ms. Peng has been our Chief Financial
Officer and Controller since February 3, 2005. Ms. Peng has been working for
Pacific Dragon and later Tailong as the Chief Accountant since August 1997. Ms.
Peng graduated from Harbin Institute of Technology in 1968.

Mingfang Zhu: Mr. Zhu has been our Vice President of
Strategic Development since January, 2006. He has served as a General Manager of
Gateguard Information Security Co, Ltd in 2005, Mr. Zhu served as a Deputy
General Manager of Hanbang Group. He has also served as a Part-time lawyers of
Foreign law firms since May , 2001.

Jiwei Zhang : Mr. Zhang has been our Vice President of
Administration since August, 2005. Mr. Zhang has served as the Managing Director
of Wusu-Salken beer Inc, in The Kyrgyz Republic from 2003 to 2005. From 2001 to
2003, Mr. Zhang served as the Chief accountant and Company Manager of Wusu Beer
Group Company in Xinjiang China. From 1995 to 2001, Mr. Zhang served as the
Manager and Deputy Director of Accounting Firm in Xinjiang China.

Wen Sheng Chen: Mr. Chen has been our Vice
President of Sales since September, 2006. He has served as the General Manager
of Fortune Ng Fung Foot Co.,Ltd , in Hebei China, from 2001 to 2006. He has also
served asthe Deputy General Manager of Xinjiang Hops Co.,Ltd , in
Xinjiang China, from 1995 to 2001. From 1992 to 1995, He has also served as a
officer of the Department of Trade and Foreign in Chinese government. Mr. Chen
graduated from Renmin University China.

Board Composition and Meetings of the Board of Directors

The Board of Directors is currently composed of three
members: Yu Chang, Xiaorong Teng and Tao Liang. All actions of the Board of
Directors require the approval of a majority of the directors in attendance at a
meeting at which a quorum is present. During 2006, our Board of Directors met in
person 3 times and acted by unanimous written consent 3 times.

35

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Committees and Audit Committee Financial Expert

We do not have a standing audit, nominating or compensation
committee or any committee performing a similar function, although we may form
such committees in the near future. Since we do not currently have an audit
committee, we have no audit committee financial expert. Our entire Board of
Directors handles the functions that would otherwise be handled by an audit
committee.

In the future, we may search for a qualified independent
expert who would be willing to serve on our Board of Directors and who would be
willing to act as an audit committee financial expert. Before retaining any such
expert, our Board of Directors would make a determination as to whether such
person is both qualified and independent.

Independent Directors

No member of our Board of Directors qualifies as an
"independent director" under the listing requirements of NASDAQ.

As we increase the membership of our Board of Directors, we
may add directors who qualified as "independent directors," establish Board
committees on which such independent directors may serve and adopt written Board
committee charters, as appropriate, to assist in corporate governance.

Policy Regarding Board Attendance

Our directors are expected to attend Board meetings as
frequently as necessary to properly discharge their responsibilities and to
spend the time needed to prepare for each such meeting. Our directors are
expected to attend annual meetings of stockholders, but we do not have a formal
policy requiring them to do so.

Director Compensation

No cash compensation or other compensation was paid to any
member of our Board of Directors for services as a director during the fiscal
year ended December 31, 2006 and we have no standard arrangement pursuant to
which any director is compensated for his or her services in such capacity.

The Board of Directors may award special remuneration to any
director undertaking any special services on our behalf other than those
services ordinarily required of a director. In 2006, no such special
remuneration was paid to any of our directors.

All authorized out-of-pocket expenses incurred by a director
on our behalf will be subject to reimbursement upon our receipt of required
supporting documentation of such expenses.

Family Relationships

There are no family relationships among our directors or
officers.

36

---



Code of Ethics

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

The Code of Ethics does not indicate the consequences of a
breach of the code. If there is a breach, the Board of Directors would review
the facts and circumstances surrounding the breach and take action that it deems
appropriate, which action may include dismissal of the employee who breached the
code. Currently, since Mr. Chang serves as a director and since he is a
controlling stockholder he is largely responsible for evaluating his own conduct
under the Code of Ethics and determining what action to take in the event of his
own breach of the Code of Ethics.

Item 11. Executive Compensation

The following table sets forth information concerning all
cash and non-cash compensation awarded to, earned by or paid to our Chief
Executive Officer and Chief Financial Officer and Controller, for services
performed for us and our subsidiaries during the last three fiscal years in all
capacities. Except for compensation paid to Mr. Chang, no executive officer received compensation of $100,000 or more in
any of the last three fiscal years.

SUMMARY COMPENSATION TABLE

|Name          | Year | Salary  | Bonus | Stock  | Option | Non-Equity       | Change in Pension | All Other    | Total
|------------- | ---- | ------- | ----- | ------ | ------ | ---------------- | ----------------- | ------------ | -----
|and           |      | ($)     | ($)   | Awards | Awards | Incentive Plan   | Value and         | Compensation | ($)  
|Principal     |      |         |       | ($)    | ($)    | Compensation ($) | Nonqualified      | ($)          |      
|Position      |      |         |       |        |        |                  | Deferred          |              |      
|              |      |         |       |        |        |                  | Compensation      |              |      
|              |      |         |       |        |        |                  | Earnings          |              |      
|              |      |         |       |        |        |                  | ($)               |              |      
|              |      |         |       |        |        |                  |                   |              |      
|(a)           | (b)  | (c)     | (d)   | (e)    | (f)    | (g)              | (h)               | (I)          | (j)  
|Yu Chang,     | 2006 | 120,000 |       |        |        |                  |                   |              |      
|Chief         |      |         |       |        |        |                  |                   |              |      
|Executive     | 2005 | 120,000 |       |        |        |                  |                   |              |      
|Officer,      |      |         |       |        |        |                  |                   |              |      
|President,    | 2004 | 0       |       |        |        |                  |                   |              |      
|Secretary and |      |         |       |        |        |                  |                   |              |      
|Director      |      |         |       |        |        |                  |                   |              |      
|              |      |         |       |        |        |                  |                   |              |      
|Lijun Peng,   | 2006 | 0       |       |        |        |                  |                   |              |      
|Chief         |      |         |       |        |        |                  |                   |              |      
|Financial     | 2005 | 0       |       |        |        |                  |                   |              |      
|Officer and   |      |         |       |        |        |                  |                   |              |      
|Controller    | 2004 | 0       |       |        |        |                  |                   |              |      
|              |      |         |       |        |        |                  |                   |              |      

Bonuses and Deferred Compensation

In 2006, we had no established bonus, deferred compensation
or retirement plan.

37

---



Options and Stock Appreciation Rights

We do not have a stock option or other equity incentive plan
for the benefit of our named executive officers and directors,
although we may adopt such equity based compensation plans in the future.

Employment Contracts

On January 6, 2005, our subsidiary Pacific Dragon entered
into an employment agreement with Mr. Yu Chang pursuant to which Mr. Chang was
hired as the General Manager of Pacific Dragon. The agreement has a three year
term and is renewable upon mutual agreements between the parties. Under the
agreement, Mr. Chang's annual salary will be determined based on his
performance, but shall in no event be less than approximately $15,000
(RMB120,000). Mr. Chang does not receive any change in control or severance
benefits under the Agreement.

Payment of Post-Termination Compensation

The Company does not have change-in-control agreements with
any of its executive officers, and the Company is not obligated to pay severance
or other enhanced benefits to executive officers upon termination of their
employment.

Limitation of Liability and Indemnification of Officers and
Directors

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

Compensation Discussion and Analysis

Background and
Compensation Philosophy

We currently have two named executive officers, Yu Chang, our
Chief Executive Officer, President and Secretary and the beneficial owner of
56.8% of our stock, and Lijun Peng, Chief Financial Officer and

Our Board of Directors has not adopted or established a
formal policy or procedure for determining the amount of compensation paid to
our executive officers. No pre-established, objective performance goals or
metrics have been used by the Board of Directors in determining the compensation
of our executive officers. Mr. Chang is involved in the Board's deliberations
regarding executive compensation and provides recommendations with respect to
his and Ms. Peng's compensation.

38

---



As our executive leadership and Board of Directors grows, our
Board of Directors may decide to form a compensation committee charged with the
oversight of executive compensation plans, policies and programs, but we have no
current plans to establish a compensation committee.

Elements of Compensation

We provide our executive officers solely with a base salary
to compensate them for services rendered during the year. Our policy of
compensating our executives with a cash salary has served the Company well.
Because of our history of attracting and retaining executive talent, we do not
believe it is necessary at this time to provide our executives discretionary
bonuses, equity incentives, or other benefits for the Company to continue to be
successful.

Base Salary. The base salary paid to Mr. Chang and Ms.
Peng during 2006 was $120,000 and $0 respectively. All such amounts were paid in cash. The
value of base salary reflects each executive's skill set and the market value of
that skill set in the sole discretion of the Board of Directors.

Discretionary Bonus. Historically, we have not paid bonus
compensation to our executive officers and no bonus compensation was paid to our
executive officers in 2006. If the Board of Directors determines to do so in the
future, it will be on an ad hoc basis to recognize superior performance by
executive officers as determined in the sole discretion of the Board of
Directors.

Equity Incentives.
The Company and its subsidiaries have not established an equity based incentive
program and have not granted stock based awards as a component of compensation.
In the future, we may adopt and establish an equity incentive plan pursuant to
which awards may be granted if our Board of Directors determines that it is in
the best interest of the Company and its stockholders to do so.

Retirement Benefits.Our executive officers are not presently entitled to company-sponsored
retirement benefits.

Perquisites.We
have not provided our executive officers with any material perquisites and other
personal benefits and, therefore, we do not view perquisites as a significant or
necessary element of our executive's compensation.

Deferred
Compensation.We do not provide our executives the opportunity to defer
receipt of annual compensation.

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

The following table sets forth information regarding
beneficial ownership of our common stock as of March 29, 2007 (i) by each person
who is known by us to beneficially own more than 5% of our common stock; (ii) by
each of our officers and directors; and (iii) by all of our officers and
directors as a group. Unless otherwise stated, the address of all persons in the
table is c/o China Agritech, Inc., A# Room 0706-0707, The Spaces International
Center, No. 8 Dongdaqiao Road, Chaoyang District, Beijing, China 100020.

39

---

Title of
    Name & Address of Beneficial
    Office
    Amount and Nature of
    Percent ofClass
    Owner
    
    Beneficial Ownership(1)
    Class(2)Common
    Yu Chang (3), (4)
    Director, Chief Executive Officer,
    10,881,918
    56.84%Stock
    
    President and SecretaryCommon
    Xiaorong Teng
    Chief Operating Officer
    604,552
    3.16%Stock
    
    and DirectorCommon
    Tak Shing Wong
    Vice President of Sales
    -0-
    *StockCommon
    Tao Liang(5)
    Director
    -0-
    *StockCommon
    Lijun Peng
    CFO and Controller
    -0-
    *StockCommon
    Tik Man Tsoi(6)
    Vice President of Administration
    -0-
    *StockCommon
    China Tailong Group Limited(3), (5) (6)
    
    10,881,918
    60%StockAll officers and directors as a group(6 persons named above)
    
    11,486,470
    60%* Less than 1%.(1)
    Beneficial Ownership is determined in accordance with the rules of the
    Securities and Exchange Commission and generally includes
    voting or investment power with respect to securities. Each of the
    beneficial owners listed above has direct ownership of and sole voting
    power and investment power with respect to the shares of our common stock.(2)
    A
    total of 19,143,615 shares of our Common Stock are considered to be
    outstanding pursuant to SEC Rule 13d-3(d)(1).(3)
    Including 9,188,935 shares of our common stock held by China Tailong Group
    Limited of which Mr. Chang has 65% ownership.(4)
    Including 1,692,983 shares of our common stock held by Mr. Yu Chang who has
    65% ownership of China Tailong Group Limited.(5)
    Mr.
    Liang is a 5% owner of China Tailong Group Limited.(6)
    Mr.
    Tsoi is a 30% owner of China Tailong Group Limited.Item 13. Certain Relationships and Related Transactions and Director
Independence
Related Parties Transactions
On January 1, 2004, our subsidiary Pacific Dragon entered
into a lease agreement with Yinlong pursuant to which Pacific Dragon leases
certain factory and office premises from Yinlong. The current annual rental
payment is approximately $450,000 (RMB3,600,000). Our CEO, President, Secretary
and Director Yu Chang and our Vice President and director Xiaorong Teng, is the
85% and 15% owner of Yinlong, respectively.
On January 6, 2005, our subsidiary Pacific Dragon entered
into a license agreement with Mr. Chang. Under this license agreement, Mr. Chang
granted an exclusive license to Pacific Dragon for the use of know-how in
manufacturing organic liquid compound fertilizer on a royalty-free basis. On
December 3, 2005, Mr. Chang and Pacific Dragon entered into another license
agreement pursuant to which the term of the license was extended to a permanent
license.
Director Independence Standards

The Company's Board of Directors has determined that no
member of the Board of Directors qualifies as an "independent director" in
accordance with the listing requirements of NASDAQ.

40Item 14. Principal Accounting Fees and Services.

Kabani & Co. LLP, Certified Public Accountants, was the
Company's independent registered public accounting firm engaged to examine the
Company's consolidated financial statements for the fiscal year ended December
31, 2006 and 2005. Weinberg & Co., P.A. was the Company's independent registered
public accounting firm engaged to examine the financial statements of the
Registrant for the fiscal years ended January 31, 2004, 2003 and 2002.

Fees for the fiscal years ended December 31, 2006 and 2005

Audit Fees

The aggregate fees billed for each of the fiscal years ended
December 31, 2005 and 2004 for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements and
review of the financial statements included in the registrant's Form 10-QSB or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those fiscal years were
approximately $227,688 and $81,311, respectively.

Audit Related Fees

The aggregate fees billed in the fiscal years ended December
31, 2005 and 2004 for assurance and related services by the principal accountant
that are reasonably related to the performance of the audit or review of the
registrant's financial statements and are not reported under the paragraph
captioned "Audit Fees" above are $0 and $0, respectively.

Tax Fees

The aggregate fees billed in the fiscal years ended December
31, 2005 and 2004 for professional services rendered by the principal accountant
for tax compliance, tax advice and tax planning were approximately $1,100 (RMB
86,400) and $1,000 (RMB 79,200), respectively.

All Other Fees

The aggregate fees billed in the fiscal years ended December
31, 2005 and 2004 for products and services provided by the principal
accountant, other than the services reported above under other captions of this
Item 14 are $0 and $0, respectively.

Board of Directors Pre-Approval Policies and Procedures

Our Board of Directors has not adopted a policy to
pre-approve audit and permissible non-audit services provided by our independent
auditors.

Part IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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.

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

41

---

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 Executive Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 *
* Filed herewith 
** Previously filed
42

---

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.                             
|------------- |  | -----------------------------------------------------
|              |  |                                                      
|April 2, 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      | Chief Executive Officer, President, Secretary | April 2, 2007
|Yu
    Chang      | and
    Director                              |              
|                  |                                               |              
|                  |                                               |              
|                  |                                               |              
|/s/ Li Jun Peng   | Chief Financial Officer and Controller        | April 2, 2007
|Li
    Jun Peng   |                                               |              
|                  |                                               |              
|                  |                                               |              
|/s/ Xiaorong Teng | Chief Operating Officerand Director           | April 2, 2007
|Xiaorong Teng     |                                               |              
|                  |                                               |              
|                  |                                               |              
|                  |                                               |              
|/s/ Tao Liang     | Director                                      | April 2, 2007
|Tao
    Liang     |                                               |              

---

Report of Independent Registered Public Accounting FirmBoard of Directors and Stockholders of 
China Agritech and Subsidiaries
We have audited the accompanying consolidated balance sheet
of China Agritech Inc. and Subsidiaries as of December 31, 2006, and the related
consolidated statements of income, stockholders' deficit, and cash flows for the
two year periods ended December 31, 2006. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our 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 the consolidated results of their operations and their consolidated
cash flows for the two year periods ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles.
/s/ Kabani & Company, Inc. Certified Public Accountants

Los Angeles, California 
March 10, 2007

---



|CHINA AGRITECH, INC. AND
    SUBSIDIARIES                                                  
|-------------------------------------------------------------------------------------------
|CONSOLIDATED BALANCE SHEETS AS OF
    DECEMBER 31, 2006 AND 2005                           
|                                                                                           
|                                                                                           
|ASSETS                                                                                     
|Current Assets                                                                             
|Cash and cash
    equivalents                                                              
|Restricted cash                                                                            
|Accounts receivable,
    net                                                               
|Inventories                                                                                
|Advances to suppliers                                                                      
|Prepayments and other
    receivables                                                      
|                                                                                           
|Total Current
    Assets                                                                   
|                                                                                           
|Property, Plant and
    Equipment, net                                                     
|                                                                                           
|Total Assets                                                                               
|                                                                                           
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                       
|Current Liabilities                                                                        
|Accounts payable                                                                           
|Accrued expenses and
    other payables                                                    
|Amount due to related
    parties                                                          
|Tax payables                                                                               
|Total Current
    Liabilities                                                              
|Minority Interests                                                                         
|Commitments                                                                                
|Stockholders'
    Equity                                                                   
|Common stocks; $0.001
    par value, 100,000,000                                           
|shares authorized,
    shares issued and outstanding                                       
|19,143,615 and
    14,343,615                                                              
|                                                                                           
|Additional paid-in
    capital                                                             
|Statutory reserves                                                                         
|Accumulated other
    comprehensive income                                                 
|Retained earnings                                                                          
|Total Stockholders'
    Equity                                                             
|Total Liabilities
    and Stockholders' Equity                                             
|The accompanying notes are an integral part of these
    consolidated financial statements.

F-1

---



|CHINA AGRITECH,
    INC. AND SUBSIDIARIES                                                                 
|----------------------------------------------------------------------------------------------------------
|CONSOLIDATED
    INCOME STATEMENTS                                                                        
|FOR THE YEARS
    ENDED DECEMBER 31, 2006, 2005 AND 2004                                                  
|                                                                                                          
|                                                                                                          
|Net revenue                                                                                               
|Cost of revenue                                                                                           
|Gross profit                                                                                              
|Operating expenses                                                                                        
|Selling expenses                                                                                          
|Operating and administrative
    expenses                                                                 
|Total operating expenses                                                                                  
|Income from operations                                                                                    
|Other income (expense)                                                                                    
|Merger costs                                                                                              
|Other (expense) income                                                                                    
|Finance costs                                                                                             
|Total other income (expense)                                                                              
|Income before income taxes and
    minority interests                                                     
|Provision for income taxes                                                                                
|Income before minority
    interests                                                                      
|Minority interests                                                                                        
|Net income                                                                                                
|Other comprehensive income                                                                                
|Foreign currency translation
    adjustment                                                               
|Other comprehensive income                                                                                
|Basic and diluted weighted
    average shares outstanding                                                 
|Basic and diluted net earnings
    per share                                                              
|                                                                                                          
|Basic and diluted weighted average shares outstanding are the same as there
    is no antidilutive effect.
|                                                                                                          
|The accompanying notes are an integral part of these consolidated financial
    statements.               

F-2

---



|CHINA AGRITECH, INC. AND SUBSIDIARIES                                                     
|------------------------------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF
    STOCKHOLDERS' EQUITY                                        
|FOR THE YEARS ENDED DECEMBER 31, 2006,
    2005 AND 2004                                  
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Balance at
    January 1, 2004                                                            
|Stock issued
    for cash                                                                 
|Changes due
    to merger between entities under common control                           
|Net income
    for the year                                                               
|Dividend paid
    during the year                                                         
|Transfer to
    statutory reserves                                                        
|Balance at
    December 31, 2004                                                          
|                                                                                          
|Recapitalization on reverse acquisition                                                   
|Stock issued
    for cash                                                                 
|Reclassification and adjustment to minority interest                                      
|Foreign
    currency translation                                                          
|Net income
    for the year                                                               
|Transfer to
    statutory reserves                                                        
|Balance at
    December 31, 2005                                                          
|Stock issued
    for cash                                                                 
|Stock option
    expenses                                                                 
|                                                                                          
|Foreign
    currency translation                                                          
|Net income
    for the year                                                               
|Transfer to
    statutory reserves                                                        
|Balance at
    December 31, 2006                                                          
|                                                                                          
|The 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                                       
|                                                                                               
|                                                                                               
|                                                                                               
|Cash flows from operating
    activities:                                                      
|Net income                                                                                     
|Adjustments to reconcile net
    income to net cash provided by (used in) operating activities:
|Stock based compensation                                                                       
|Minority Interest                                                                              
|Depreciation                                                                                   
|Loss on disposal of fixed
    assets                                                           
|Delivery charges                                                                               
|Decrease / (Increase) in
    current assets:                                                   
|Restricted cash                                                                                
|Accounts receivable                                                                            
|Prepayments and other
    receivables                                                          
|Inventory                                                                                      
|Advances to suppliers                                                                          
|(Decrease) / Increase in
    current liabilities:                                              
|Accounts payable                                                                               
|Tax payables                                                                                   
|Accrued expenses and other
    payables                                                        
|Net cash provided by (used in)
    operating activities                                        
|                                                                                               
|Cash flows from investing
    activities:                                                      
|Acquisition of property &
    equipment                                                        
|Proceeds from disposal of fixed
    assets                                                     
|Net cash used in investing
    activities                                                      
|                                                                                               
|Cash flows from financing
    activities:                                                      
|Repayment of instalment loan                                                                   
|Payments to shareholders /
    related parties                                                 
|Capital contributed                                                                            
|Dividend paid                                                                                  
|Net cash provided by (used in)
    financing activities                                        
|                                                                                               
|Effect of exchange rate change
    on cash and cash equivalents                                
|                                                                                               
|Net increase in cash and cash
    equivalents                                                  
|                                                                                               
|Cash and cash equivalents,
    beginning of year                                               
|                                                                                               
|Cash and cash equivalents, end
    of year                                                     
|                                                                                               
|Supplement disclosure of cash
    flow information:                                            
|Income taxes paid                                                                              
|Cash from issue of common stock
    placed in escrow account                                   
|                                                                                               
|The accompanying notes are an integral part of these
    consolidated financial statements.    

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.

F-5

---

1. ORGANIZATION AND DESCRIPTION
OF BUSINESS (CONT'D)
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.
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 transferred 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 "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.
F-6
e.     Advances to suppliersThe 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.
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-72.     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.     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.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONT'D)

q.     Recent accounting pronouncements

In December 2004, the FASB issued
FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement
No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the
statement of operations the grant- date fair value of stock options and other
equity-based compensation issued to employees. FAS No. 123R is effective
beginning in the Company's second quarter of fiscal 2006. The Company does not
expect the adoption of FAS No. 123R to have a material impact on its
consolidated financial position, results of operations or cash flows.

In May 2005, the FASB issued FASB
Statement No. 154, "Accounting Changes and Error Corrections  a replacement of
APB Opinion No. 20 and FASB Statement No. 3". This statement replaces APB
Opinion No. 20, "Accounting Changes", and FASB Statement No. 3, "Reporting
Accounting Changes in Interim Financial Statements", and changes the
requirements for the accounting for and reporting of a change in accounting
principle. This statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. This statement is effective for accounting changes and correction of
errors made in fiscal years beginning after December 15, 2005. Management
believes the adoption of this pronouncement will not have a material effect on
our consolidated financial statements.

In June 2005, the FASB ratified the
EITF consensus to amend EITF No. 96-16, "Investor's Accounting for an Investee
When the Investor Has a Majority of the Voting Interest but the Minority
Shareholders Have Certain Approval or Veto Rights". The EITF agreed to amend the
Protective Rights section of this consensus, as well as Example of Exhibit
96-16A, to be consistent with the consensus reached in Issue No. 04-5,
"Determining Whether a General Partner, or the General Partners as a Group,
Controls a Limited Partnership or Similarly Entity When the Limited Partners
Have Certain Rights." The provisions of this amendment should be applied
prospectively to new investments and to investment agreements that are modified
after June 29, 2005. Management believes the adoption of this pronouncement will
not have a material effect on our consolidated financial statements.

In June 2005, the EITF reached
consensus on Issue No. 05-6, Determining the Amortization Period for Leasehold
Improvements ("EITF 05-6.") EITF 05-6 provides guidance on determining the
amortization period for leasehold improvements acquired in a business
combination or acquired subsequent to lease inception. The guidance in EITF 05-6
will be applied prospectively and is effective for periods beginning after June
29, 2005. EITF 05-6 is not expected to have a material effect on its
consolidated financial position or results of operations.

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:

F-10

---



2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONT'D)

q.     Recent Accounting Pronouncements (cont'd)

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 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.

F-11

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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. 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.

4. INVENTORIES

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

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

5. 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.

6. PROPERTY, PLANT AND EQUIPMENT

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

|                               |   | 2006      |   | 2005     
|------------------------------ | - | --------- | - | ---------
|                               |   |           |   |          
|Manufacturing machinery        | $ | 2,388,716 | $ | 1,171,266
|Leasehold improvements         |   | 57,706    |   | 1,471    
|Office equipment               |   | 228,172   |   | 84,155   
|Motor vehicles                 |   | 342,570   |   | 142,095  
|                               |   | 3,017,164 |   | 1,398,987
|Less: Accumulated depreciation |   | (503,041) |   | (333,841)
|                               |   |           |   |          
|                               | $ | 2,514,123 | $ | 1,065,146

F-12

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

7. 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.

8.

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

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

9.

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

|                                                |   | 2006    |   | 2005   
|----------------------------------------------- | - | ------- | - | -------
|                                                |   |         |   |        
|Accrued liabilities for normal business purpose | $ | 685,249 | $ | 590,440
|Other payables for normal business purpose      |   | 186,246 |   | 25,923 
|                                                | $ | 871,495 | $ | 616,363

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.

F-13

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10.   TAX PAYABLES

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

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

11.  OTHER INCOME (EXPENSES)

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

|                     |   | 2006     |   | 2005      |   | 2004 
|-------------------- | - | -------- | - | --------- | - | -----
|                     |   |          |   |           |   |      
|Merger cost          | $ | -        | $ | (640,000) | $ | -    
|Interest income      |   | 115,162  |   | 252       |   | 933  
|Listing fees         |   | (2,852)  |   | -         |   | -    
|Exchange gain (loss) |   | (13,693) |   | -         |   | -    
|Financial cost       |   | (3,590)  |   | (412)     |   | (115)
|                     | $ | 95,027   | $ | (640,160) | $ | 818  

As of December 31, 2005, the Company
incurred merger cost of $640,000 on the acquisition by the Company from the
Tailong stockholders.

12. 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.

F-14

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

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.

13.   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.

14.   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.

15.   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.

16.   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.

F-15

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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.

17.   STOCKHOLDERS' EQUITY

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.

18.   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:

F-16

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|                               |             |  | Weighted         |  |                    
|------------------------------ | ----------- |  | ---------------- |  | -------------------
|                               | Options     |  | Average Exercise |  | Aggregate Intrinsic
|                               | outstanding |  | Price            |  | Value              
|Outstanding, December 31, 2005 | 0           |  | $0.00            |  | $0.00              
|Granted                        |             |  |                  |  |                    
|                               |             |  | $3.50            |  | $0.00              
|                               | 125,000     |  |                  |  |                    
|Forfeited                      | -           |  | -                |  | -                  
|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
    Options
|------------------- | -----------------------
|                    |                        
|                    |                        
|                    |                        
|Exercise Price      | Number                 
|$3.50               | 125,000                

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 years
|Expected volatility          | 80%       
|Expected dividend yield      | 0         

19.   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.

20.   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:

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

F-17

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