UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549

FORM 10-K

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

For the fiscal year
ended: December 31, 2008

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

For the transition period from __________
to ____________

Commission File Number: 000-50883

AMERICAN LORAIN CORPORATION(Exact name of registrant as
specified in its charter)

|Delaware                                                                                                                                                                         | 87-0430320                              
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------
|(State or other jurisdiction of incorporation
    or organization)                                                                                                               | (I.R.S.  Employer Identification Number)
|                                                                                                                                                                                
|Beihuan Zhong Road
    Junan County
    Shandong, Peoples Republic of China, 276600                                                                                            
|(Address of principal executive office and zip
    code)                                                                                                                        
|                                                                                                                                                                                
|(86) 539-7318818                                                                                                                                                                
|(Registrants telephone number, including area
    code)                                                                                                                        
|(Former name, former address and former fiscal
    year, if changed since last report)                                                                                          
|Securities registered pursuant to
    Section 12(b) of the Act: None
    Securities registered pursuant to Section 12(g) of the Act: Common Stock,
    par value 0.001 per share

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

Yes£No Q

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£No Q

---

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.

YesQNo £

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.Q

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

|Large accelerated filer
    £ | Accelerated filer
    £ | Non-accelerated filer
    £ | Smaller reporting company
    Q
|----------------------------- | ----------------------- | --------------------------- | -------------------------------

Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Act).

Yes£No Q

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 were 8,627,549 and $28,039,534.25,
respectively.

There were 25,177,640 shares of common stock outstanding as of April 9, 2009.

DOCUMENTS INCORPORATED BY REFERENCE:

Information required by Part III will either be included in
the registrants definitive information statement filed with the Securities and
Exchange Commission or filed as an amendment to this Form 10-K no later than 120
days after the end of the registrants fiscal year, to the extent required by
the Securities Exchange Act of 1934, as amended.

---

|AMERICAN LORAIN CORPORATION                      
|-------------------------------------------------
|                                                 
|FORM 10-K                                        
|                                                 
|For the Fiscal Year Ended December 31,
      2008
|                                                 
|TABLE OF CONTENTS                                
|                                                 
|                                                 
|Part I                                           
|                                                 
|Item 1.                                          
|Item 1A.                                         
|Item 1B.                                         
|Item 2.                                          
|Item 3.                                          
|Item 4.                                          
|                                                 
|Part II                                          
|                                                 
|Item 5.                                          
|Item 6.                                          
|Item 7.                                          
|Item 7A.                                         
|Item 8.                                          
|Item 9.                                          
|Item 9A                                          
|Item 9B.                                         
|                                                 
|Part III                                         
|                                                 
|Item 10.                                         
|Item 11                                          
|Item 12.                                         
|Item 13.                                         
|Item 14.                                         
|                                                 
|Part IV                                          
|                                                 
|Item 15.                                         

i

---

PART I

Item 1. BUSINESS

Conventions

In this annual report on Form 10-K:

- We, us and our refer to the combined business of ALC, ILH and their
  direct and indirect Chinese operating subsidiaries.
- ALC refers to American Lorain Corporation, a Delaware corporation
  (formerly known as Millennium Quest, Inc.).
- ILH refers to International Lorain Holding, Inc., a Cayman Islands
  company that is wholly- owned by ALC.
- Junan Hongrun refers to Junan Hongrun Foodstuff Co., Ltd.
- Luotian Lorain refers to Luotian Green Foodstuff Co., Ltd.
- Beijing Lorain refers to Beijing Green Foodstuff Co., Ltd.
- Shandong Lorain refers to Shandong Green Foodstuff Co., Ltd.
- RMB refers to Renminbi, the legal currency of China.
- U.S. dollar, $ and US$ refer to the legal currency of the United
  States.
- China and PRC refer to the Peoples Republic of China.

Overview of Our Business

We are an integrated food manufacturing company with
headquarters in Shandong Province, China. We develop, manufacture and sell the
following types of food products:

- chestnut products,
- convenience foods (including  ready-to-cook, or RTC, meals, ready-to-eat, or RTE, meals and
  meals ready-to-eat, or MRE); and
- frozen, canned, and bulk food.

We conduct our production activities in China. Our products are
sold in 26 provinces and administrative regions in China and 43 foreign
countries. We derive most of our revenues from sales in China, Japan and South
Korea. Our primary strategy for 2009 is to expand our brand equity in the
Chinese market for our chestnut products. We are also working to expand our
brand recognition in China for our convenience products and frozen, canned and
bulk products. In addition, we are working to expand our marketing efforts in
Asia, Europe and the Middle East. We currently have limited sales and marketing
activity in the United States, although our long-term plan is to significantly
expand our activities there.

Organizational Structure

ALC is a Delaware corporation that was incorporated on February
4, 1986 and was formerly known as Millennium Quest, Inc. Prior to May 3, 2007,
when ALC completed a recapitalization, or reverse merger, with ILH, ALC did not
engage in active business operations other than to search for a potential
acquisition target.

ALC owns 100% of ILH. ILH wholly owns two Chinese operating
subsidiaries, Luotian Lorain and Junan Hongrun, directly. In addition, together
with Junan Hongrun, ILH wholly owns Beijing Lorain and owns approximately 80% of Shandong Lorain (Shandong Economic
Development Investment Co. Ltd. owns approximately 20%). We sometimes refer to
our four Chinese operating subsidiaries throughout this annual report on Form
10-K as the Lorain Group Companies. Below is an organizational chart of ALC, ILH
and the Lorain Group Companies:

1

---



Products

Our products are categorized into the following three
segments:

- chestnut products,
- convenience foods, and
- frozen, canned and bulk food.

We produced 234 products in 2008, including 52 new products in
our convenience foods segment. We also discontinued 10 products in 2008,
primarily in our frozen, canned and bulk food segment.

Our chestnut products and convenience foods were our main
profit centers in 2008. Our convenience foods segment has been the fastest
growing portion of our business and was one of the main catalysts of our growth
during 2008. Frozen, canned and bulk food products accounted for a substantial
portion of our revenues in 2008 but generated lower profit margins than our
chestnut and convenience products.

2

---

Chestnut Products

We believe that we are the largest chestnut processing
manufacturer in China. We have developed brand equity for our chestnut products
in China, Japan and South Korea over the past 10 to 15 years. We produced 53
high value-added processed chestnut products in 2008. In 2008, this segment
contributed 63% of our total revenues.

Our best selling products in 2008 included our aerated
open-bottom chestnuts, which are chestnuts packaged with nitrogen; sweetheart
chestnuts, which are sweet preserved chestnuts; chestnuts in syrup, which are
very popular in Japan and South Korea; and chopped chestnut kernels. The
majority of our chestnut products are natural and do not contain chemical
additives.

The chestnut, in contrast to many other tree nuts, contains
small quantities of oil and is very high in complex carbohydrates. This makes
them useful for a wider food range than other common nuts. Chestnuts are
commonly steamed, boiled, sugar stir-fried, roasted or added into dishes or
desserts as an ingredient.

China is the largest grower of chestnuts, followed by South
Korea and Japan. In recent years, the chestnut production in South Korea and
Japan has declined. This has been attributed to the increasing labor costs and
operational costs incurred in growing chestnuts. Because of the declining
domestic production, South Korean and Japanese customers have grown to rely more
on imported chestnut products. Our strategy is to take advantage of these
trends.

We differentiate our chestnut products based on flavor, size
and method of packaging. For instance, some of our chestnut products that are
sold in Japan are packaged in plastic bags or tin cans, each considered a
different product. Similarly, some of our chestnut products are processed with
hot water or cold water, each considered a different product.

Chestnut season in China lasts from September to January. We
purchase and produce raw chestnuts during these months and store them in our
refrigerated storage facilities throughout the year. Once we obtain a purchase
order during the rest of the year, we remove the chestnuts from storage, process
them and ship them within one day of production.

Convenience Foods

Our convenience food products are characterized as follows:

- Ready-to-cook, or RTC, food products,
- Ready-to-eat, or RTE, food products and
- Meals ready-to-eat, or MRE, food products.

These products are intended to meet the current demands of our
customers for safe, wholesome and tasty foods that are easily prepared.

RTCs can be served after a few easy cooking procedures.
Typically, when preparing a RTC, customers need only to heat the food in a
microwave or boil it for several minutes before eating. Our best selling RTCs in
2008 were cattle bone soup, beef and lamb.

3

---

RTEs can be served without any cooking. Our best selling RTEs
in 2008 were smoked fish and stewed beef with sauce. Other RTEs include spiced
belt fish, cherry tomato, spicy pork fillet, pork and egg roll, pears and
pineapples.

MREs are meal kits with self-heating devices. Our MREs are used
in both military and civilian uses, such as camping, traveling and other
situations in which a person does not have access to traditional cooking
supplies and equipment, such as a stove or microwave.

We produce various MREs based on Chinese cuisine, the best
sellers of which were our stir fried rice and stir fried noodles in 2008. Other
MREs are based on other styles of food, such as Italian cuisine. Many of our
convenience products are natural and do not contain chemical additives.

We produced 113 convenience food products in 2008, including 52
new products such as red bean paste products and ready-to-eat meal combo
products. In 2008, this segment contributed 19% of our total revenues.

Our convenience foods segment has been the fastest growing
portion of our business and was one of the main catalysts of our growth during
2008. We expect our convenience foods segment to continue to be an important
area of growth for our business in the future.

Frozen, Canned and Bulk Food

We produce a variety of frozen, canned and bulk foods,
including frozen vegetables, frozen fruits, frozen fish, and frozen meats. We
produced 68 frozen, canned and bulk food products in 2008. Our best selling
frozen, canned and bulk foods in 2008 were frozen peas, frozen corn and frozen
mixed vegetables. Many of our bulk food products are natural and do not contain
chemical additives.

Our frozen, canned and bulk food business allows us to mitigate
the significant production seasonality of chestnut products and to increase the
utilization rate of our production capacity. Historically, our frozen, canned
and bulk food division has been a significant portion of our business. In 2008,
this segment contributed 18% of our total revenues. Gross margins in this
segment are lower than the margins for chestnut products and convenience foods,
however. Because of this, we expect that the proportionate contribution of this
business segment to our total revenues will gradually decline.

Our Manufacturing Facilities

General

We currently manufacture our products in five facilities in
China, two of which are located in Junan County, Shandong Province, one in
Luotian County, Hubei Province, one in Miyun County, Beijing Province and one
leased facility in Dongguan, Guandong Province. The following table indicates
the year that operations commenced at each of the facilities and the size of the
facilities.

|                | Year Operations | Construction Size
|--------------- | --------------- | -----------------
|Facility        | Commenced       | (square meters)  
|Junan Hongrun   | 2002            | 25,665           
|Shandong Lorain | 1995            | 15,392           
|Luotian Lorain  | 2003            | 9,558            
|Beijing Lorain  | 2003            | 21,000           
|Dongguan        | 2008            | 5,500            

4

---

Production Lines

We currently manufacture our products using 21 production
lines. Each production line is used to produce between 10 and 50 products. We
currently run three types of product lines:

- deep-freezing lines, which are used to freeze raw materials for year-round
  production and to produce frozen food;
- canning lines, which are used to produce canned products, including
  chestnut products; and
- convenience food lines, which are used for producing RTCs, RTEs and MREs,
  all of which have nitrogen preservation capacity.

The production process for our chestnut products initially
involves sorting and cleaning the raw chestnuts purchased during the chestnut
season. We then store the raw chestnuts in our refrigerated storage facilities
throughout the year. Once we obtain a purchase order, we remove the chestnuts
from storage and process them by steaming, decladding and deep-freezing the
chestnuts, depending on the particular product. We then package and ship the
processed chestnuts within one day of production.

The production process of our convenience products generally
involves various steps, including soaking, boiling, coating, drying, deep
freezing, packing, sealing and sterilizing.

The following table shows the number and types of production
lines, the types of products produced and the production capacity at each
facility:

|Facility         | Production Lines               | Products                     
|---------------- | ------------------------------ | -----------------------------
|Shandong Lorain  | 1 Deep-freezing line           | Chestnut Products            
|                 | 1 Convenience
      food line  | Convenience Foods            
|                 |                                | Frozen, Canned and Bulk Foods
|Junan Hongrun    | 1 Deep-freezing line           | Chestnut Products            
|                 | 4 Canning lines                | Frozen, Canned and Bulk Foods
|Beijing Lorain   | 6 Convenience
      food lines | Chestnut Products            
|                 | 1 Deep-freezing line           | Convenience Foods            
|                 |                                | Frozen, Canned and Bulk Foods
|Luotian Lorain   | 3 Convenience
      food lines | Chestnut Products            
|                 | 2 Deep-freezing lines          | Convenience Foods            
|                 |                                | Frozen, Canned and Bulk Foods
|Dongguan factory | 2 Convenience food lines       | Convenience Foods            

We allocate our production lines based upon the location of our
facilities to take advantage of efficiencies in the transportation of required
raw materials. For example, Junan Hongrun and Shandong Lorain, which manufacture
primarily chestnut and frozen, canned and bulk products, are located in Shandong
Province, which is Chinas largest supplier of fresh produce by volume. Shandong
Providence is also a major chestnut producing region. Likewise, all of our fish products
are manufactured by Luotian Lorain, because the Luotian region is an area that
has an abundance of the fish that we use as raw material.

5

---

Our production lines and facilities have all been designed to
meet the standards and requirements of our largest customers in Japan, which is
our largest export market. We employ advanced methods of quality control and
have obtained various certifications for many of our products, packages and
processes, including ISO 9000 or ISO 9001 certification for certain of our
chestnut and frozen vegetable products, BRC certification for certain of our
frozen fruit and vegetable products and HACCP certification for certain of our
frozen vegetable, fruit and chestnut products and our bottom-open chestnuts. We
believe that our quality controls and standards of products distinguish our
products both in domestic and international markets. The import approvals that
we have obtained from the Japanese government for our chestnuts and other
convenience foods have been helpful in advocating with the Chinese government
for domestic approvals to increase our product offerings.

With limited exception, we operate our production lines year
round. In the past, when our production was focused almost exclusively on
chestnuts, we experienced seasonal underutilization of our product lines.
However, our current facilities have a multiple-function design, allowing us to
use our production lines for our convenience and frozen, canned and bulk
products when we are not producing chestnuts at full capacity. Consequently, as
we have increased our processed and convenience food offerings over the last
several years, we have generally been able to run our production lines at full
capacity throughout the year.

Currently, most of our processed and convenience foods are
produced at our Beijing Lorain plant. In 2008, we expanded this facility with
the addition of four convenience foods production lines, which increased
production capacity by approximately 6,000 metric tons per year.

We believe our facilities are adequate for our current levels
of production. We anticipate, however, that we will require additional
facilities and/or product lines as our business grows. We are exploring the
possibility of alliances with one or more OEM partners for the production, in
the short-term, of some of our convenience food products should our facilities
be inadequate to meet increasing demand. In 2008, we leased two new convenience
foods production lines in Dongguan, Guangdong Province, which increased
production capacity by approximately 1,250 metric tons per year to meet our
short-term needs. If needed, we may lease additional facilities in 2009. In the
long-term, we plan to increase our own production capacity by acquiring or
building new facilities, subject to the availability of adequate sources of
funding.

Storage Capacity

Storage of our raw materials and inventory is a critical
element of our business. Our raw materials and partially finished products need
to be preserved in frozen storages (-18oC to -20oC) or constant temperature
storages (-5oC to 5oC). Storage is particularly critical for our
chestnut products because chestnuts are a seasonal fruit.



6

---

The following table illustrates on a facility by facility basis
the type and capacity of our storage resources:

|Facility      | Storage Type   | Number of     | Capacity     
|------------- | -------------- | ------------- | -------------
|              |                | Storage Units | (metric tons)
|Junan Hongrun | Frozen Storage | 7             | 3,000        

|                | Constant Temperature | 8  | 4,800 
|--------------- | -------------------- | -- | ------
|Shandong Lorain | Frozen Storage       | 5  | 2,000 
|                | Constant Temperature | 3  | 1,500 
|Luotian Lorain  | Frozen Storage       | 8  | 4,500 
|                | Constant Temperature | 4  | 2,000 
|Beijing Lorain  | Frozen Storage       | 6  | 2,850 
|                | Constant Temperature | 3  | 1,800 
|Dongguan        | Frozen Storage       | 2  | 800   
|                | Constant Temperature | 1  | 450   
|TOTAL           |                      | 47 | 23,700

As we have expanded our production capacity, we have also
expanded our storage capacity. All of our storage facilities, other than the
facility in Dongguan, are owned by us. In 2008, we increased our storage
capacity by leasing a warehouse in Dongguan with a storage capacity of 1,250
metric tons. Subject to our ability to obtain construction financing, we plan to
expand storage capacity in 2009 by an additional 6,000 metric tons.

Agricultural Operations

We grow and self-supply a portion of our chestnut, fruit and
vegetable products. We self-supplied approximately 1% of our raw materials
needed in 2008. (See Raw Materials below.) We believe, however, that
development of agricultural facilities is a good strategy for the long-term. We
anticipate that self grown agricultural products will enable us to assure
adequacy of supply, promote quality and reduce cost, particularly for our high
margin offerings. For example, by growing Korean cultivar chestnuts
domestically, we expect to significantly reduce our supply costs for this
premium product, while ensuring superior quality.

Lands in which we grow our agricultural products for such
products are shown in the following table.

|                                                             | Area    | Location      
|------------------------------------------------------------ | ------- | --------------
|Harvest                                                      | (acres) | (PRC)         
|Chestnut (South Korean, Japanese,
      Australian cultivar) | 329     | Shandong      
|Chestnut (Japanese cultivar)                                 | 165     | Beijing       
|Sticky Corn                                                  | 329     | Beijing       
|Green Pea & Sweet Corn                                       | 297     | Beijing       
|Pumpkin                                                      | 82      | Heilongjiang  
|Organic Chestnut                                             | 165     | Beijing       
|Mixed Vegetables                                             | 494     | Hebei         
|Japanese Pumpkin                                             | 329     | Inner Mongolia
|Strawberry                                                   | 261     | Shandong      

We began growing chestnuts in 2003. Unlike most vegetables and
fruits, chestnut trees have a 3-5 year growing phase before they can be
harvested. Our current chestnut planting base has been self-supplying some
chestnuts to our production since 2007. By 2010, our current chestnut
agricultural operations are projected to harvest approximately 700 metric tons
of high-end chestnuts based on the number of trees currently planted and our
planned expansion.

We began growing strawberries in 2008 in Shandong. We use these
strawberries in some of our frozen fruit products. We plan to continue to expand
our agricultural operations over the next few years. Among other things, we plan
to increase our self-production in China of Korean cultivar chestnuts. We expect
to obtain funding for this expansion through a combination of
commercial and government loans, including loans under Chinese government
programs to promote agricultural industrialization. There is no assurance,
however, that adequate funding for these purposes will be available to us.

7

---

Raw Materials

In 2008, approximately 94% of our raw materials consisted of
agricultural products, including primarily chestnuts and vegetables,
approximately 4% consisted of packaging materials and approximately 2% consisted
of condiments such as sugar, salt and flour.

Our Supply Sources

Our business depends on obtaining a reliable supply of various
agricultural products, including chestnuts, vegetables, red meat, fish, eggs,
rice and flour. Because of the diversity of available sources of these raw
materials, we believe that our raw materials are currently in adequate supply
and will continue to be so in the future.

We obtain our agricultural raw materials from three sources:
domestic procurement (excluding self-supply), overseas markets, and self-supply.
Domestic procurement accounted for 93.8% of our total raw material costs in
2008, overseas procurement accounted for 5.2% and self-supply accounted for the
remaining 1%.

In 2008, we procured approximately 55,643 metric tons of
chestnuts and approximately 28,773 metric tons of vegetables and other raw
materials from a number of third party suppliers, domestic and overseas, and
produced approximately 693 metric tons of chestnuts from our own agricultural
operations.

We select suppliers based on price and product quality. We
typically rely on numerous domestic and international suppliers, including some
with whom we have a long-term relationship. Our top 10 suppliers accounted for
21.3% of the total procurement in 2008 in value terms. We purchase from
suppliers and farmers pursuant to supply contracts and underlying purchase
orders. We have not entered into any long-term contracts with any of our
suppliers.

Our suppliers generally include wholesale agricultural product
companies, agricultural associations and distributors. Some raw materials must
be imported at higher costs, however. Occasionally, we also work directly with
farmers. For instance, we operate an initiative which involves a series of
cooperation and lease agreements between Shandong Lorain, Beijing Lorain and
local farmers. This initiative involves approximately 1,000 acres of land which
is used primarily to produce Japanese and Korean style chestnuts, sticky corn
and pumpkins for our operations.

Procurement Cost and Quality Control

To control procurement costs, we have located our facilities
near domestic sources of agricultural raw materials. For example, Junan Hongrun
and Shandong Lorain are located in Shandong Province, which is Chinas largest
supplier of fresh produce by volume. Shandong Providence is also a major
chestnut producing region. Likewise, all of our fish products are manufactured
by Luotian Lorain, because the Luotian region is an area that has an abundance
of the fish that we use as raw material. Local procurement reduces our costs,
especially transportation costs. It also gives us first-hand harvest and market
information, which provides us with an advantage in price negotiations with
suppliers.

8

---

Some raw materials must be imported at higher cost. As
discussed, we have begun to develop our agricultural capabilities in order to
control costs, particularly with respect to imported raw materials such as
Korean-style chestnuts.

Pricing for agricultural products reflects several external
factors, such as weather conditions and commodity market fluctuations, which are
beyond our control. We obtain contemporaneous information on local harvests and
collect daily reported price information on harvests in other markets from which
we procure our products. We also attempt to predict harvest yields in advance
based on our information gathering. We use this harvest information to negotiate
best pricing with our suppliers.

We impose strict standards on our suppliers. During the harvest
season, our internal procurement function may visit our sources of supply to
assure that the produce we are purchasing complies with our standards.

Our Customers

We sell our products in 26 provinces and administrative regions
in China and 43 foreign countries globally. In 2008, approximately 67% of our
sales were made domestically and approximately 33% were to international
customers, primarily Japan and South Korea.

Our top ten customers contributed 29.3% of our total revenues
in 2008. Approximately 12% and 6.1% of total revenues in 2008 were attributable
to revenues from Shandong Lvan Import & Export Co., Ltd., a food trading
company in China that distributes a significant portion of our exported
products, and Shinsei Foods, a Japanese company and our top customer,
respectively.

Domestic

In China, we sell our products through our own sales team and
through third-party distributors. We have 36 sales offices in 26 provinces
in China. In 2008, we sold approximately 87% of our products directly to our
Chinese customers and approximately 13% through third-party distributors.

We sell our products in 30 first-tier cities, including
Beijing, Shanghai and Guangzhou, through our own sales efforts in order to
capture the profit margin that would otherwise go to intermediate wholesalers
and to enhance our brand recognition. Our sales team sells our products directly
to supermarket chains, other mass merchandisers, large wholesalers and others in
these markets. In second-tier and third-tier cities, we currently sell our
products to third-party distributors, such as food companies or trading
companies with established distribution channels in such regions, rather than
through our own sales team, in order to enable us to penetrate such markets more
quickly without spending significant capital. We also sell to small customers
through independent sales representatives.

Generally, our direct sales customers are required to pay us on
30 to 60 day credit terms. Third-party distributors, however, generally do not
pay on credit, allowing us to obtain quicker payment terms and thereby decrease
our accounts receivables.

The terms of a typical sales contract between us and our
distributors provide that we are responsible for transportation costs and the
distributors are responsible for storage costs. Furthermore, the distributors
have the right to return produce that fails to satisfy specified quality
standards, at our cost. The majority of such contracts require the distributors
to pay us in cash in full upon delivery, and the remaining contracts provide for
short-term credit, usually two to three weeks. In addition, we typically offer
a distributor performance-based incentives, such as a cash bonus
equal to 1% of total revenues generated by such distributor which exceed
previously established sales targets.

9

---

We plan to gradually increase the portion of sales to our
direct sales customers in order to capture the profit margin that would
otherwise go to intermediate wholesalers and to enhance our brand recognition.
Such plans are subject to our customers ability to make timely payments, which
has been a concern for us. (See Risk Factors below.)

International

Our export sales destinations include:

- Asia, primarily Japan, South Korea and Malaysia, but also Singapore and
  Taiwan.
- Europe, primarily Belgium and the United Kingdom, but also France,
  Germany, the Netherlands, Spain, and Sweden;
- the Middle East, primarily Saudi Arabia, Kuwait and the United Arab
  Emirates; and
- North America, including the United States and Canada.

In 2008, approximately 93.5% of our international sales were in
Asia and approximately 6% were in Europe.

We sell our products to international markets through Shandong
Lvan, a food trading company in China, other export companies in China, and our
own sales team located in China. Our sales team sells directly to wholesalers,
food processors and mass merchandisers. Many of our customers are well known in
their local food market. We have established long-term relationships with many
international customers, especially in Japan and South Korea. We currently have
no sales offices outside of China and do not currently use alternative methods
to sell our products outside of China. We attend trade shows in Europe and other
international markets in order to promote our products.

Prior to our reorganization into a U.S. entity, we had sales to
several countries that are the subject of trade sanctions imposed by the United
States government. Following our reorganization, we ceased all sales activities
to these countries. We actively review the destination countries for our
products, including products resold by our customers, to assure that we are not
in violation of applicable U.S. trade sanctions.

Our Sales and Marketing Efforts We seek to
expand our customer base by:

- direct sales communications with our larger customers;
- sales through distributors to new customer bases;
- referrals from existing customers; and
- participation in domestic and international food exhibitions and trade
  conferences.

We have not spent a significant amount of capital on
advertising in the past, and our advertising budget continues to be limited. As
more capital becomes available for these purposes, we intend to increase our
advertising and branding efforts. For the near future, our marketing efforts
will continue to focus primarily on the domestic Chinese market for our chestnut
products.

10

---

Competition and Market Position

The overall food market is diverse, both globally and in China.
We do not have a significant market share in any of our business segments.

Chestnut Products

We compete in the chestnut market primarily on the basis of the
uniqueness of our products, quality, price and brand recognition. We also
utilize our proprietary, patented and patent-pending technology in the
production of our chestnut products to our competitive advantage.

The world market for chestnut products is highly fragmented.
Our principal competitors in the chestnut product market are currently Hebei
Liyun, a Chinese company, and Foodwell Corporation, a South Korean company.

Convenience Food Products

Convenience food products market competition is based mostly
upon quality and product variety. We attempt to use our modern food processing
technology, such as nitrogen preservation, to produce a wide variety of high
quality convenience foods.

The convenience food market in China is highly fragmented and
we do not face competitive pressure from any particular competitor or small
group of competitors.

Frozen, Canned and Bulk Food Products

In the frozen, canned and bulk food product market, competition
is based primarily upon quality, ability to provide a reliable product supply
and customer relationships.

Our strongest competitors in the frozen, canned and bulk food
products market are currently Weitang Langdong, Yuyao Hongji Food Co. Ltd. and
Yantai Pengshun Food Co. Ltd., all of which are located in China.

Competitive Advantages

We believe that we enjoy a number of competitive advantages,
both domestically and internationally.

We have developed brand equity for our chestnut products in
China, Japan and South Korea over the past 10 to 15 years. Our customers are
willing to pay a premium for some of our chestnut products because of our brand
equity. In addition, we believe that we have a strong distribution channel for
our products in the markets in which we currently operate.

We believe that we are able to provide our customers with
greater selection and a more reliable supply than many of our competitors, which
is especially important for our supermarket chain and large wholesaler
customers. We produced 234 products in 2008. We believe that we are the sole
provider of certain bottom-open chestnut and sweetheart chestnut products in
China.

Labor is a large portion of total operating costs for food
companies. We believe that we have a lower labor cost structure and a more
abundant labor supply than many of our international competitors.

11

---

We are focused on managing our costs in other ways as well. We
seek to locate our production facilities in close proximity to our main domestic
sources of raw materials supply to reduce transportation costs and give us
first-hand knowledge of market factors affecting our cost of raw material
supply. Our agricultural self-supply program, while modest at present, is
expected to grow and to become a significant element of our cost containment
efforts.

We use modern food processing technology and innovation in our
formulations and manufacturing processes to create high quality products.
Nitrogen preservation in particular, used in the production of convenience
foods, is an innovative technology which has not been widely applied in China.

In 2008, our patent application for our technology used to
produce sweetheart chestnuts was approved by the State Intellectual Property
Office of the PRC. In addition, we are currently in the process of applying for
patent protection in the PRC for two of our technologies which support the
production of our chestnut and convenience food products. (See Intellectual
Property below.) We believe that this technology gives us an advantage over our
Chinese competitors, allowing us to produce chestnut and convenience food
products that are superior in quality and to offer more products varieties.

We believe that our reputation for quality also contributes to
our competitiveness. We maintain high food safety standards, in order to satisfy
both domestic and international requirements. We regularly test our products for
quality and compliance with standards.

Intellectual PropertyTrademarks

We use the trademarks
TM and
TMon all of
our  products sold in China.

Patents

We have developed the following three proprietary technologies
to support our chestnut and convenience food production:

- The sweetheart chestnut is a premium product that is more expensive, and
  which yields greater profit margins, than our other chestnut products. Our
  proprietary technology relates to the process for evenly distributing
  throughout the chestnuts the syrup used to preserve the chestnuts. This
  technology enhances the texture of the chestnuts, preserves the natural form
  of the chestnuts and promotes the stability and uniformity of the chestnuts
  sweetness. In 2008, our patent application for this technology was approved by
  the State Intellectual Property Office of the PRC and is protected by PRC
  patent law for 20 years. We expect this technology to contribute to the growth
  of our sales of sweetheart chestnuts, which had been increasing at an annual
  rate of 60% over the past several years and which increased at an annual rate
  of 84% in 2008.

12

---

- Oden is a popular traditional Japanese dish, typically consisting of
  boiled eggs, daikon radish, konnyaku and processed fish cakes stewed in a
  light, soy-flavored dashi broth. Our technology relates to the process used to
  control the sterilization of the packaging for oden eggs. Our technology
  enables us to deliver convenience food products with unique freshness and
  authentic taste. This technology has been an important factor in expanding the
  market for our convenience foods, particularly in Japan. We are currently in
  the process of applying for patent protection in the PRC for this technology.
- We have developed technology that allows us to produce an extract from the
  chestnuts inner skin. In the past, the chestnuts inner skin had been
  discarded as a waste product. Our technology allows us to produce an extract
  that can then be sold to other food processors, all of whom are currently
  based in Japan where the chestnut is popular as a nutritional supplement.
  These processors package and sell the extract for use as a food and drink
  additive. We are currently in the process of applying for patent protection in
  the PRC for this technology.

We take reasonable steps to protect our proprietary information
and trade secrets, such as limiting disclosure of proprietary plans, methods and
the like on a need-to-know basis and requiring employees with access to our
proprietary technology to enter into confidentiality arrangements. We believe
that our proprietary technology and trade secrets are adequately protected.

Our Employees

As of December 31, 2008, we had a total of 1,353 full-time
employees and 260 part-time employees. 362 of our full-time employees are
directly employed by our Shandong Lorain subsidiary and the remainder are
employed by Linyi Zhifu Labor Service Company, an outside company that leases
employees to us to meet our staffing needs. As required by Chinese law, all
employees are party to a written employment contract. We compensate the
employees leased from Linyi Zhifu directly and pay Linyi Zhifu a service fee.
Linyi Zhifu is responsible for the pension and social insurance benefits of the
leased employees, as described below.

The following table sets forth the allocation of employees,
both direct and leased, by job function.

|Department               | Number of Employees
|------------------------ | -------------------
|                         |                    
|Production               | 1,171              
|Quality Control          | 28                 
|Domestic Sales           | 26                 
|Human Resources          | 5                  
|Research and Development | 26                 
|International Sales      | 20                 
|Finance                  | 19                 
|Sourcing                 | 14                 
|Administration           | 25                 
|Strategic planning       | 4                  
|Storage and Distribution | 13                 
|Employee Relations       | 2                  
|Total                    | 1,353              

13

---

We believe that the relationship between management and our
employees is good. We have not experienced any significant problems or
disruption to our operations due to labor disputes, nor have we experienced any
difficulties in recruitment and retention of experienced staff.

Our Shandong Lorain subsidiary has an employee relations
department for the purpose of advancing employee welfare, encouraging employee
participation in decision making and enhancing relations among employees and
between employees and our management team.

We compensate our production line employees by unit produced
(piece work) and compensate other employees with a base salary and bonus based
on performance. We also provide training for our staff from time to time to
enhance their technical and product knowledge, including knowledge of industry
quality standards.

Our employees in China participate in a state pension scheme
organized by Chinese municipal and provincial governments. We were required to
contribute to the scheme on behalf of our direct employees at a rate of 24%, 24%
and 20% of the average monthly salary for the years ended December 31, 2008,
2007 and 2006, respectively. In addition, we are required by Chinese law to
cover our employees with various types of social insurance. We made
contributions to the social insurance scheme on behalf of our direct employees
at a rate of 4% of the average monthly salary for each employee for the years
ended December 31, 2008, 2007 and 2006. As indicated above, Linyi Zhifu is
responsible for contributions on behalf of the leased employees.

Our Research and Development Activities

Our research and development efforts are focused on three
objectives:

- Superior product safety and quality;
- Reduction of operating costs; and
- Sustaining growth through the development of new products.

We have research and development staff at each of our
facilities. In total, 26 employees are dedicated to research and development.

We rely heavily on customer feedback to assist us in the
modification and development of our products. We also utilize customer feedback
to assist us in the development of new products. Over the past several years, on
average, we added 10 to 20 new varieties to our product portfolio each year. In
2008, we added 52 new products, all in our convenience foods segment. Over the
past several years, on average, we discontinued approximately three to five
products each year. In 2008, we discontinued 10 products, primarily in our
frozen, canned and bulk food segment.

The amount we spent on research and development activities
during the years ended December 31, 2008, 2007 and 2006 was not a material
portion of our total expenses for those years.

Government Regulation

As a manufacturer and distributor of food products, we are
subject to regulations of Chinas Agricultural Ministry. This regulatory scheme
governs the manufacture (including composition and ingredients), labeling,
packaging and safety of food. It also regulates manufacturing practices,
including quality assurance programs, for foods through its current good
manufacturing practices regulations, and specifies the standards of identity for
certain foods, including the products sold by us, and prescribes the format and content of many of the products sold by us, prescribes the
format and content of certain nutritional information required to appear on food
products labels and approves and regulates claims of health benefits of food
products.

14

---

We have obtained approvals from Chinese authorities for the
production of certain categories of products, including chestnuts, frozen
vegetables and fruits, fish, and canned products. Production of new products
that do not fall into approved categories of products would require separate
approval from the appropriate Chinese authorities. We have consistently obtained
such approvals for our newly developed products in the past and do not
anticipate any difficulties in obtaining new approvals in the future if
needed.

In addition, we are required to obtain governmental approval,
and to register with the State Administration for Industry and Commerce, in
order to open a new facility in China. We have consistently obtained such
approvals, and made such registrations, for our new facilities in the past and
do not anticipate any difficulties in obtaining new approvals, filing new
registrations, in the future if needed.

Under the relevant Provisions of the PRC on Sanitation of Food
for Export (for Trial Implementation), unless an exporters products are
exempted from inspection, products must be inspected in accordance with the Law
of the PRC on Import and Export Commodity Inspection. We have not been exempted
from inspection. In the past, we were authorized by the relevant authorities to
conduct self-inspection of certain of our export products. However, currently,
the relevant authorities have imposed tighter food safety control in China, and
as a result, all of our exported food products must be inspected by qualifying
government agencies. We believe that all of our exported products are currently
in compliance with such requirements and we do not anticipate any difficulties
in complying with such rules in the future.

In addition, we are required to obtain a license from the local
branch of the Entry-Exit Inspection and Quarantine Bureau of China for our
exported products. We have consistently obtained such licenses in the past and
we do not anticipate any difficulties in obtaining such licenses in the future.

Item 1A. RISK FACTORS

RISK FACTORS

From time to time, information provided by us, including but
not limited to statements in this report, or other statements made by or on our
behalf, may contain forward-looking information within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements involve a
number of risks, uncertainties, and contingencies, many of which are beyond our
control, which may cause actual results, performance, or achievements to differ
materially from those anticipated. Set forth below are important factors that
could cause our results, performance, or achievements to differ materially from
those in any forward-looking statements made by us or on our behalf.

Business Risks

We may not be able to obtain an adequate supply of high
quality raw materials.

Our business depends on obtaining a reliable supply of various
agricultural products, including chestnuts, vegetables, fruits, red meat, fish,
eggs, rice, flour and packaging products. During 2008, the cost of our raw
materials increased from $36,920,585 to $64,980,230, for an increase of
approximately 76%. We may have to increase the number of our suppliers of raw
materials and expand our own agricultural operations in the future to meet
growing production demands. Despite our efforts to control our supply of raw
materials and maintain good relationships with our suppliers, we could lose one
or more of our suppliers at any time. The loss of several suppliers may be
difficult to replace and could increase our reliance on higher cost or lower
quality suppliers, which could negatively affect our profitability. In addition,
if we have to increase the number of our suppliers of raw materials in the
future to meet growing production demands, we may not be able to locate new
suppliers who could provide us with sufficient materials to meet our needs. Any
interruptions to, or decline in, the amount or quality of our raw materials
supply could materially disrupt our production and adversely affect our business
and financial condition and financial prospects.

15

---

The prices that we have paid for our raw materials
recently have experienced significant fluctuation. If these price fluctuations
continue, our profit margins may be materially adversely affected.

The average price that we paid for chestnuts in 2007 and 2008
was approximately $787 per metric ton and $727 per metric ton, respectively,
excluding value added taxes. We do not currently hedge against changes in our
raw material prices. Consequently, if the costs of our raw materials increase
further, and we are unable to offset these increases by raising the prices of
our products, our profit margins and financial condition could be adversely
affected.

Our sales and reputation may be affected by product
liability claims, litigation or, product recalls in relation to our products.

The sale of products for human consumption involves an inherent
risk of injury to consumers. We face risks associated with product liability
claims, litigation, or product recalls, if our products cause injury or become
adulterated or misbranded. Our products are subject to product tampering and
contamination, such as mold, bacteria, insects, shell fragments and off-flavor
contamination, during any of the procurement, production, transportation and
storage processes. If any of our products were to be tampered with, or become
tainted in any of these respects, and we were unable to detect this, our
products could be subject to product liability claims or product recalls. Our
ability to sell products could be reduced if certain pesticides, herbicides or
other chemicals used by growers have left harmful residues on portions of our
raw materials or if our raw materials have been contaminated by other agents.

We have never had a product recall in the past but we have
experienced product liability claims that were made by our customers. The
amounts of such claims were immaterial. However, claims of product defect or
product liability for material amounts, individually or in the aggregate, may be
made in the future.

We have not procured a product liability or general liability
insurance policy for our business, as the insurance industry in China is still
in an early stage of development. To the extent that we suffer a loss of a type
which would normally be covered by product liability or general liability
insurance in the United States, we would incur significant expenses in defending
any action against us and in paying any claims that result from a settlement or
judgment against us. Product liability claims and product recalls could have a
material adverse effect on the demand for our products and on our business
goodwill and reputation. Adverse publicity could result in a loss of consumer
confidence in our products.

We may be unable to manage future rapid
growth.

We have grown rapidly over the last few years. Our sales
increased by 377% from $27,735,833 in 2004 to $132,360,317 in 2008. The number
of product types we sold increased from approximately 100 in 2004 to
approximately 234 in 2008. We intend to continue to expand the volume and
variety of products we offer, as well as the geographical scope of our sales and
production facilities. Our business growth could place a significant strain on
our managerial, operational and financial resources. Our ability to manage
future growth will depend on our ability to continue to implement and improve
operational, financial and management information systems on a timely basis and
to expand, train, motivate and manage our workforce. Our personnel, systems,
procedures and controls may not be adequate to support our future growth.
Failure to effectively manage our expansion may lead to increased costs, a
decline in sales and reduced profitability.

16

---

Our expansion strategy may not prove successful and could
adversely affect our existing business.

Our growth strategy includes the expansion of our manufacturing
operations, including new production lines and agricultural operations. We plan
to expand our sales in China and internationally. We will need to engage in
various forms of promotional and marketing activities in order to further
develop the branding of our products and to increase our market share in new and
existing markets. The implementation of this strategy may involve large
transactions and present financial, managerial and operational challenges. We
could also experience financial or other setbacks if any of our growth
strategies incur problems of which we are not presently aware. If we fail to
generate sufficient sales in new markets or increase our sales in existing
markets, we may not be able to recover the production, distribution, promotional
and marketing expenses, as well as administrative costs we have incurred in
developing such markets.

The acquisition of other businesses could pose risks to
our profitability.

We may try to grow through acquisitions in the future. Any
proposed acquisition could result in accounting charges, potentially dilutive
issuances of equity securities, and increased debt and contingent liabilities,
any of which could have a material adverse effect on our existing business and
the market price of our common stock. Acquisitions, in general, entail many
risks, including risks relating to the failed integration of the acquired
operations, diversion of managements attention, and the potential loss of key
employees of the acquired organizations. We may be unable to successfully
integrate businesses or the personnel of any business that might be acquired in
the future, and our failure to do so could have a material adverse effect on our
business and on the market price of our common stock.

We are subject to risks of doing business
internationally. If the international market does not grow as we expect, our
business and financial condition may be adversely affected.

We conduct a substantial amount of business internationally.
Our export sales destinations include countries in Asia, Europe, the Middle East
and North America. Our international operations are subject to a number of
inherent risks, including:

- chestnut products may not be widely recognized internationally, especially
  in Western countries;
- local economic and political conditions, including disruptions in trading
  markets;
- restrictive foreign governmental actions, including restrictions on
  transfers of funds and trade;
- protection measures, including export duties and quotas and customs
  tariffs;
- currency exchange rate fluctuations;
- earthquakes, tsunamis, floods or other major disasters may limit the
  imported food products; and
- unexpected incidents related to food safety.

17

---

Any of the foregoing risks could have a material and adverse
effect on our operating results.

A significant amount of our revenues is dependent on a
limited number of customers and the loss of any one of our major customers could
materially and adversely affect our growth and our revenues.

A significant portion of our revenues has historically been
derived from a limited number of customers, particularly in our chestnut
products segment. Sales to our five largest customers accounted for
approximately 43%, 31% and 25% of our total revenues in 2006, 2007 and 2008,
respectively. The loss of any one of these customers, or a material decrease in
purchases by any one of these customers, could adversely impact our
revenues.

We rely primarily on distributors to sell our products.
Any delays in delivery or poor handling by our distributors or third-party
transport operators may affect our sales and damage our reputation.

In 2008, we sold our products through over 30 distribution
service providers. The services provided by these providers could be suspended
and could cause interruption to the supply of our products to domestic or
overseas customers. Delivery disruptions may occur for various reasons beyond
our control, including poor handling by service providers or third party
transport operators, transportation bottlenecks, natural disasters and labor
strikes, and could lead to delayed, damaged or lost deliveries. If our products
are not delivered in a timely manner, our reputation could be harmed. If our
products are damaged in the process of being delivered, we may be liable to pay
for such damages incurred.

Failure of the market to accept our new products, or
failure to obtain regulatory approval for our new products, may cause us to lose
our competitive position in the food industry.

We introduced 20 new products in 2007 and 52 new products in
2008. We plan to introduce about 20 new products in 2009. The success of the new
products we introduce depends on our ability to anticipate the tastes and
dietary habits of consumers and to offer products that appeal to their
preferences. We intend to introduce new products as well as alternative flavors,
sizes and packaging for our existing products. We may not be able to gain market
acceptance for our new products. Consumer preferences change, and any new
products that we introduce may fail to meet the particular tastes or
requirements of consumers, or may be unable to replace their existing
preferences. Our failure to anticipate, identify or react to these particular
tastes or changes could result in reduced demand for our products, which could
in turn cause us to be unable to recover our development, production and
marketing costs.

We are dependent on certain key personnel and loss of
these key personnel could have a material adverse effect on our research and
development, operations and revenue.

The Lorain Group Companies were founded in 1995 by Si Chen, our
Chairman and Chief Executive Officer. Mr. Chen, together with other senior
management, has been a key driver of our strategy and has been fundamental to
our achievements to date. The successful management of our business is, to a
considerable extent, dependent on the services of Mr. Chen and other senior
management. We compete for qualified personnel with other food processing
companies, food retailers and research institutions. Consequently, we may either
lose key employees to our competitors or we may need to significantly increase
the compensation of such employees in order to retain them. The loss of the
services of any key management employee or failure to recruit a suitable or
comparable replacement could have a significant impact upon our ability to manage our business effectively, and
our business and future growth may be adversely affected.

18

---

We face increasing competition from domestic and foreign
companies.

The food industry in China is fragmented. Our ability to
compete against other national and international enterprises is, to a
significant extent, dependent on our ability to distinguish our products from
those of our competitors by providing large volumes of high quality products
that appeal to consumers tastes and preferences at reasonable prices. Some of
our competitors have been in business longer than we have and are more
established. Our competitors may provide products comparable or superior to
those we provide or adapt more quickly than we do to evolving industry trends or
changing market requirements. Increased competition may result in price
reductions, higher raw materials prices, reduced margins and loss of market
share, any of which could materially adversely affect our profit margins.

An increase in the cost of energy could affect our
profitability.

Recently, we have experienced significant increases in energy
costs, and energy costs could continue to rise, which would result in higher
distribution, freight and other operating costs. Our future operating expenses
and margins will be dependent on our ability to manage the impact of cost
increases.

Our products are subject to counterfeiting or imitation,
which could impact our reputation.

To date, we have experienced limited counterfeiting and
imitation of our products. However, counterfeiting or imitation of our products
may occur in the future and we may not be able to detect it and deal with it
effectively. Any occurrence of counterfeiting or imitation could impact
negatively upon our reputation, particularly if the counterfeit or imitation
products cause sickness, or injury to consumers. In addition, counterfeit or
imitation products could result in our need to incur costs with respect to the
detection or prosecution of such activities.

We rely on an outside contractor to provide a majority of
our labor.

We have hired Linyi Zhifu Labor Service Company to provide
employees to our production facilities. Should Linyi Zhifu Labor Service Company
be unable to continue to provide the number of employees we need, our production
could be disrupted. In addition, Linyi Zhifu Labor Service Company could raise
their service fees or terminate their relationship with us in the future, which
may result in increased production costs.

Regulatory Risks

We are subject to extensive regulations by the Chinese
government.

The food industry is subject to extensive regulations by
Chinese government agencies. Among other things, these regulations govern the
manufacturing, importation, processing, packaging, storage, exportation,
distribution and labeling of our products. New or amended statutes and
regulations, increased production at our existing facilities, and our expansion
into new operations and jurisdictions may require us to obtain new licenses and
permits and could require us to change our methods of operations at costs that
could be substantial.

19

---

Our failure to comply with PRC environmental laws may
require us to incur significant costs.

We carry on our business in an industry that is subject to PRC
environmental protection laws and regulations. These laws and regulations
require enterprises engaged in manufacturing and construction that may cause
environmental waste to adopt effective measures to control such waste. In
addition, such enterprises are required to pay fines, or to cease operations
entirely under extreme circumstances, should they discharge waste substances.
The Chinese government may also change the existing laws or regulations or
impose additional or stricter laws or regulations, compliance with which may
cause us to incur significant capital expenditures, which we may be unable to
pass on to our customers through higher prices for our products.

Our failure to comply with PRC hygiene laws may require
us to incur significant costs.

Manufacturers in the Chinese food industry are subject to
compliance with PRC food hygiene laws and regulations. These food hygiene laws
require all enterprises engaged in the production of chestnuts and various
vegetables and fruits to obtain a hygiene license for each of their production
facilities. Such laws also require manufacturers to comply with regulations with
respect to food, food additives, packaging, and food production sites,
facilities and equipment. Failure to comply with PRC food hygiene laws may
result in fines, suspension of operations, loss of hygiene licenses and, in more
extreme cases, criminal proceedings against an enterprise and its management.
The Chinese government may also change the existing laws or regulations or
impose additional or stricter laws or regulations, compliance with which may
cause us to incur significant capital expenditures, which we may be unable to
pass on to our customers through higher prices for our products.

Financial Risks

Our operations are cash intensive, and our business could
be adversely affected if we fail to maintain sufficient levels of working
capital.

We spend a significant amount of cash on our operations,
principally to procure raw materials for our products. Many of our suppliers,
including chestnut, vegetable and fruit farmers, and suppliers of packaging
materials, do not allow us to pay on credit. However, some of the suppliers with
whom we have a long-standing business relationship allow us to pay on credit. In
2008, we paid for approximately 10% of our raw materials on credit. We fund the
majority of our working capital requirements out of cash flow generated from
operations. If we fail to generate sufficient sales, or if our suppliers stop
offering us credit terms, we may not have sufficient liquidity to fund our
operating costs and our business could be adversely affected.

We also fund approximately 40% of our working capital
requirements from the proceeds of short-term loans from Chinese banks. We expect
to continue to do so in the future. Such loans are generally secured by our
fixed assets, receivables and/or guarantees by third parties. Our average loan
balance from short-term bank loans in 2008 was approximately $24 million. The
term of almost all such loans is one year or less. Historically, we have rolled
over such loans on an annual basis. However, we may not have sufficient funds
available to pay all of our borrowings upon maturity. Failure to roll over our
short-term borrowings at maturity or to service our debt could result in the
imposition of penalties, including increases in rates of interest, legal actions
against us by our creditors, or even insolvency. In addition, in 2007 and 2008,
we funded approximately $3.8 million, in the aggregate, of our working capital
requirements from the proceeds of a private placement transaction conducted in
May 2007. We can provide no assurances that we will be able to enter into any
future financing or refinancing agreements on terms favorable to us, especially
considering the current instability of the capital markets.

20

---

Management anticipates that our existing capital resources and
cash flows from operations and current and expected short-term bank loans will
be adequate to satisfy our liquidity requirements through 2009. However, if
available liquidity is not sufficient to meet our operating and loan obligations
as they come due, our plans include considering pursuing alternative financing
arrangements or further reducing expenditures as necessary to meet our cash
requirements. However, there is no assurance that, if required, we will be able
to raise additional capital or reduce discretionary spending to provide the
required liquidity. Currently, the capital markets for small capitalization
companies are extremely difficult and banking institutions have become stringent
in their lending requirements. Accordingly, we cannot be sure of the
availability or terms of any third party financing.

The current economic and financial crisis may have a
material adverse effect on our results.

The crisis of the financial and credit markets worldwide in the
second half of 2008 has led to a severe economic recession worldwide, and the
outlook for 2009 is uncertain. A continuation or worsening of unfavorable
economic conditions, including the ongoing credit and capital markets
disruptions, could have an adverse impact on our business, operating results or
financial condition in a number of ways. For example, we may experience declines
in revenues, profitability and cash flows as a result of reduced orders, delays
in receiving orders, delays or defaults in payment or other factors caused by
the economic problems of our customers and prospective customers. We may
experience supply chain delays, disruptions or other problems associated with
financial constraints faced by our suppliers and subcontractors. In addition,
changes and volatility in the equity, credit and foreign exchange markets and in
the competitive landscape make it increasingly difficult for us to predict our
revenues and earnings into the future.

We are subject to credit risk in respect of account
receivables.

In 2007 and 2008, some of our customers, including some of our
large supermarket customers, delayed their payments for up to 60 to 90 days
beyond their term. Our cash flow suffered while waiting for such payments.
Consequently, at times we had to delay payments to our suppliers and to postpone
business expansion as a result of these delayed payments. In 2008, we shortened
credit terms for many of our international and domestic distributors from
between 30 and 180 days to between 30 and 60 days. Our large customers may fail
to meet these shortened credit terms, in which case we may not have sufficient
cash flow to fund our operating costs and our business could be adversely
affected.

The discontinuation of any preferential tax treatment or
other incentives currently available to us in the PRC could materially and
adversely affect our business, financial condition and results of
operations.

Our subsidiaries are entitled to certain special or
preferential tax treatments regarding foreign enterprise income tax in
accordance with the Income Tax Law of the PRC for Enterprises with Foreign
Investment and Foreign Enterprises and related rules.

Accordingly, we have been entitled to tax concessions whereby
the profit for the first two financial years beginning with the first
profit-making year (after setting off tax losses carried forward from prior
years) is exempt from income tax in the PRC and the profit for each of the
subsequent three financial years is taxed at 50% of the prevailing tax rates set
by the relevant tax authorities. However, on March 16, 2007, the PRCs National
Peoples Congress passed a new corporate income tax law, which became effective
on January 1, 2008. This new corporate income tax unifies the corporate income
tax rate, cost deduction and tax incentive policies for both domestic and
foreign-invested enterprises. According to the new corporate income tax law, the
applicable corporate income tax rate of our operating subsidiaries has been
increased to a rate of 25% over a five-year grandfather period. This tax
rate increase applies across the board, for all enterprises whether domestic or
foreign. The PRC government has established a set of transition rules to allow
enterprises that already started tax holidays before January 1, 2008, to
continue utilizing the tax holidays until fully utilized. The discontinuation of
any such special or preferential tax treatment or other incentives could have an
adverse affect on our business, financial condition and results of operations.

21

---

In addition, under current PRC tax law, regulations and
rulings, dividends from our operations in China paid to us are not currently
subject to PRC income tax. If these distributions become subject to tax in the
future, our net income would be adversely affected.

We may enter into additional financing agreements which
may have a dilutive effect to our earnings per share and the rights of certain
stockholders.

Additional financings could result in significant dilution to
our earnings per share or the issuance of securities with rights superior to our
current outstanding securities. For instance, we may grant registration rights
to investors purchasing our equity or debt securities in the future.

We may be unable to raise additional
capital.

If we are unable to raise additional financing, we may be
unable to implement our long-term business plan, develop or enhance our products
and services, take advantage of future opportunities or respond to competitive
pressures on a timely basis, if at all. In addition, a lack of additional
financing could force us to substantially curtail or cease operations.

We may be exposed to potential risks relating to our
internal control over financial reporting and our ability to have such controls
attested to by our independent auditors.

The SEC, under Section 404 of the Sarbanes-Oxley Act of 2002,
adopted rules requiring public companies to provide in their annual reports on
Form 10-K a report by management with respect to the companys disclosure
controls and procedures and internal control over financial reporting. We are
currently required to comply with this requirement. In addition, such rules
require the independent registered public accounting firm auditing a companys
financial statements to attest to the operating effectiveness of such companys
internal controls. However, we are not subject to the requirements of SOX 404(b)
until our fiscal year ended December 31, 2009. We can provide no assurance that
we will comply with all of the requirements imposed thereby. Further, we cannot
assure that we will receive a positive attestation from our independent
auditors. Investors and others may lose confidence in the reliability of our
financial statements in the event we identify significant deficiencies or
material weaknesses in our internal controls that we cannot remediate in a
timely manner or if we are unable to receive a positive attestation from our
independent auditors with respect to our internal controls.

Risks Related To Doing Business In China

Changes in Chinas political or economic situation could
harm us and our operating results.

Economic reforms adopted by the Chinese government have had a
positive effect on the economic development of the country. However, the Chinese
government could change these economic reforms at any time. Such changes could
negatively impact our operations and profitability.

22

---

The structure of the Chinese economy may inhibit our
ability to expand our business.

The Chinese economy differs from the economies of most
countries belonging to the Organization for Economic Cooperation and
Development, or OECD, in several ways. For example, state-owned enterprises
constitute a large portion of the Chinese economy. In addition, weak corporate
governance practices and the lack of flexible currency exchange policies
continue to persist. 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.

Our business is largely subject to the uncertain legal
environment in China.

The Chinese legal system is 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. Laws, regulations and legal
requirements relating to foreign investments in China are still evolving, and
their interpretation and enforcement involve uncertainties. These uncertainties
could limit the legal protections available to foreign investors, such as the
right of foreign enterprises to hold required business licenses and permits.

It may be difficult for our stockholders to affect
service of process against our subsidiaries or our officers and directors.

Our operating subsidiaries were organized under the laws of
China and substantially all of their assets are located outside the U.S. In
addition, our executive officers and directors are residents of China and
substantially all of their assets are located outside the U.S. As a result, it
could be difficult for our stockholders to affect service of process in the
U.S., or to enforce a judgment obtained in the U.S., against our officers and
directors.

Inflation in China may inhibit our ability to conduct
business profitably in China.

In recent years, the Chinese economy has experienced periods of
rapid expansion. During the past ten years, the rate of inflation in China has
been as high as 5.8% and as low as -1.4% . These factors have led to the
adoption by the Chinese government, from time to time, of various corrective
measures designed to limit inflation. High inflation in the future may cause the
Chinese government to impose controls on credit or prices, or to take other
actions which could inhibit economic activity in China, and thereby harm the
market for our products.

Likewise, negative inflation could have an unfavorable effect
on our business profitability in China. Negative inflation may cause a period
where consumers are reluctant to spend, as consumers anticipate lower prices for
products in the future. In the event of negative inflation, the Chinese
government may impose controls on credit or prices, or take other actions which
could inhibit economic activity, harming the market for our products.

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

The majority of our revenues are settled in Renminbi and U.S.
dollars, 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 dividends 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. For instance, foreign enterprises may only buy, sell
or remit foreign currencies after providing valid commercial documents at 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. The Chinese regulatory authorities
may impose more stringent restrictions on the convertibility of the Renminbi in
the future.

23

---

Failure to comply with PRC regulations relating to the
establishment of offshore special purpose companies by PRC residents may have
negative effects on our company.

In October 2005, the PRC State Administration of Foreign
Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange
Control over Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 75, which required
PRC residents to register with the local SAFE branch before establishing or
acquiring control over an offshore special purpose company, or SPV, for the
purpose of engaging in an equity financing outside of China on the strength of
domestic PRC assets originally held by those residents. Internal implementing
guidelines issued by SAFE, which became public in June 2007 (known as Notice
106), further expanded the reach of Circular 75.

ILH acquired certain interests in the Lorain Group Companies
controlled by Si Chen, our Chairman and Chief Executive Officer. Pursuant to
Notice No. 75 and Notice 106, if a PRC resident has completed a round-trip
investment through its established SPV but has not yet completed the required
procedures of SAFE registration for offshore investment of the SPV, he must
retroactively register the SPV with SAFE.

In order to avoid such SAFE registration requirements, a
Japanese individual, Hisashi Akazawa, was designated as a nominee holder of ILH
when ILH was established. Mr. Akazawa granted an option to our Chairman and
Chief Executive Officer, Mr. Chen, allowing Mr. Chen to buy 90% of Mr. Akazawas
interest in the Company at a fixed price at a future time in accordance with the
terms of an option agreement between the two parties. On December 22, 2008, Mr.
Chen exercised this option. In addition, on that date, Mr. Chen acquired all of
the remaining shares of our company held by Mr. Akazawa. As a result, Mr. Chen
is the beneficiary of ILH and may be required to register with and obtain
approvals from SAFE or its agency in connection with respect to the direct
offshore investment activities related to the acquisition of the Lorain Group
Companies.

If the failure to identify and characterize Mr. Chen as a
beneficial owner of ILH is determined by the PRC authorities to be a serious
violation of the requirements of the PRC Company Law and the PRC Regulation of
Registration of Companies, the Lorain Group Companies may be ordered by the
company registration authority in the PRC to make corrections on its filed
registration, to be fined an amount no less than RMB 5,000 and no more than RMB
50,000 or, in the worse scenario, to have its company registration certificate
revoked or its business licenses canceled.

Moreover, because of uncertainty over how Circular 75 will be
interpreted and implemented, and how or whether SAFE will apply it to us, we
cannot predict how it will affect our business operations or future strategies, such as our present and prospective PRC subsidiaries ability to conduct
foreign exchange activities including the remittance of dividends and foreign
currency-denominated borrowings. In addition, our PRC resident beneficial
holders may be subject to compliance with Circular 75. Such holders may not be
able to complete the necessary registration procedures required by Circular
75.

Our financial condition is affected by the foreign
exchange rate between the U.S. dollar and the Renminbi.

Our financial condition is affected by the foreign exchange
rates, primarily the rate between the U.S. dollar and the Renminbi.  In the
event that the Renminbi appreciates against the U.S. dollar, our costs will
increase.

24

---

Risks Related To the Market For Our Stock

Certain of our stockholders have the ability to delay or
prevent adoption of important business decisions based on their ownership of a
significant percentage of our outstanding voting securities.

Mr. Chen is the record owner of approximately 64.8% of our
outstanding voting securities. As a result, he possesses significant influence
over our business. For instance, Mr. Chen may elect our board of directors,
authorize significant corporate transactions or prevent a future change in
control of our company.

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. Liquidity
in the OTC Bulletin Board is significantly more limited than U.S. national
exchanges. 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 penny
stocks to be an equity security that has a market price of less than $5.00 per
share. As of April 1, 2009, the closing price for our common stock was $0.88 per
share and our recent trading history has also shown prices below $5.00 per
share. As a penny stock, our common stock is 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.

For any transaction involving a penny stock, unless exempt, 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 penny stock.

Our common stock may not qualify for exemption from the Penny
Stock Rule at all times. 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
Securities Exchange Act of 1934, which gives the SEC the authority to restrict
any person from participating in a distribution of penny stock, if the SEC finds
that such a restriction would be in the public interest.

25

---

Certain provisions of our Certificate of Incorporation
may make it more difficult for a third party to effect a change-
in-control.

Our Certificate of Incorporation authorizes our board of
directors to issue up to 5,000,000 shares of preferred stock without stockholder
approval. The preferred stock may be issued in one or more series, the terms of
which may be determined at the time of issuance by the board of directors
without further action by the stockholders. These terms may contain voting
rights, including the right to vote as a series on particular matters,
preferences as to dividends and liquidation, conversion rights and redemption
rights provisions. The issuance of any preferred stock could diminish the rights
of holders of our common stock, and therefore could reduce the value of such
common stock. In addition, specific rights granted to future holders of
preferred stock could be used to restrict our ability to merge with, or sell
assets to, a third party. The ability of our board of directors to issue
preferred stock could make it more difficult to acquire our company and could
negatively affect the market price of our common stock.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

Our primary facilities, which are owned except where otherwise
indicated, are as follows:

|                |                                               |                  |                
|--------------- | --------------------------------------------- | ---------------- | ---------------
|Facility        | Location                                      | Approximate Size | Owned or Leased
|                |                                               | (Square Meters)  |                
|                |                                               |                  |                
|Shandong Lorain | Junan County, Shandong
      Province, PRC    | 31,459           | Owned          
|Junan Hongrun   | Junan County, Shandong Province, PRC          | 171,931          | Owned          
|Luotian Lorain  | Luotian County, Hubei Province,
      PRC     | 54,251           | Owned          
|Beijing Lorain  | Miyun County, Beijing Province, PRC           | 22,677           | Owned          
|Dongguan Lorain | Dongguan County, Guandong
      Province, PRC | 5,472            | Leased         

We also own or lease space for additional facilities, including
refrigerated storage facilities, and smaller offices, including sales offices,
located in China.

In the aggregate, we currently have land use rights to, or
lease, 72 properties with approximately 285,791 square meters in the aggregate,
consisting of manufacturing facilities, office buildings and land reserved for
future expansion. We believe our current facilities provide adequate capacity
for our current and projected needs.

All land in China is owned by the State. Individuals and
companies are permitted to acquire rights to use land or land use rights for
specific purposes. In the case of land used for industrial purposes, the land
use rights are granted for a period of up to 50 years. This period may be
renewed at the expiration of the initial and any subsequent terms. Granted land
use rights are transferable and may be used as security for borrowings and other
obligations.

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

26

---

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders
during the fourth quarter of 2008.

PART II

Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market for our Common Stock

Our common stock is quoted on the FINRA Over-the-Counter
Bulletin Board under the symbol ALRC.OB. As of April 1, 2009, the closing
price for our common stock was $0.88 per share.

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. In the third quarter of 2007, we effected a one-for-32.84
reverse split of our common stock, reflected in the table below beginning with
such quarter. Shares of our common stock were sparsely traded until May 2008.

|                                    |   | Bid Prices | 
|----------------------------------- | - | ---------- | 
|                                    |   | High       | 
|Fiscal Year Ended December 31, 2008 |   |            | 
|First Quarter                       | $ | 23.00      | 
|Second Quarter                      |   | 19.50      | 
|Third Quarter                       |   | 3.25       | 
|Fourth Quarter                      |   | 2.15       | 
|                                    |   |            | 
|Fiscal Year Ended December 31, 2007 |   |            | 
|First Quarter                       |   | N/A        | 
|Second Quarter                      |   | 0.95       | 
|Third Quarter                       |   | 9.00       | 
|Fourth Quarter                      |   | 8.00       | 

Approximate Number of Holders of Our Common
Stock

On April 9, 2009, there were 155 stockholders of record of our
common stock.

Dividend Policy

Pursuant to a Preferred Stock Purchase Agreement with Halter
Financial Investments, L.P., dated April 5, 2007, we paid a special cash
dividend in the aggregate amount of $415,000, or $0.18 per share, to holders of
common stock outstanding on April 16, 2007.

Other than noted above, we have never declared or paid cash
dividends. Any future decisions regarding dividends will be made by our board of
directors. 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.

27

---

Item 6. SELECTED FINANCIAL DATA

Not applicable.

Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Overview

We are an integrated food manufacturing company with
headquarters in Shandong Province, China. We develop, manufacture and sell the
following types of food products:

- chestnut products,
- convenience foods (including  ready-to-cook, or RTC, meals, ready-to-eat, or RTE, meals and
  meals ready-to-eat, or MRE); and
- frozen, canned, and bulk food.

We conduct our production activities in China. Our products are
sold in 26 provinces and administrative regions in China and 42 foreign
countries. We believe that we are the largest chestnut processing manufacturer
in China. We have developed brand equity for our chestnut products in China,
Japan and South Korea over the past 10 to 15 years. We produced 53 high
value-added processed chestnut products in 2008. We derive most of our revenues
from sales in China, Japan and South Korea. Our primary strategy for 2009 is to
expand our brand equity in the Chinese market for our chestnut products. We are
also working to expand our brand recognition in China for our convenience food
products and frozen, canned and bulk food products. In addition, we are working
to expand our marketing efforts in Asia, Europe and the Middle East. We
currently have limited sales and marketing activity in the United States,
although our long-term plan is to significantly expand our activities there.

Production Factors that Affect our Financial and
Operational Condition

Our business depends on obtaining a reliable supply of various
agricultural products, including chestnuts, vegetables, fruits, red meat, fish,
eggs, rice, flour and packaging products. During 2008, the cost of our raw
materials increased from $36,920,585 to $64,980,230, for an increase of
approximately 76%. We may have to increase the number of our suppliers of raw
materials and expand our own agricultural operations in the future to meet
growing production demands. Despite our efforts to control our supply of raw
materials and maintain good relationships with our suppliers, we could lose one
or more of our suppliers at any time. The loss of several suppliers may be
difficult to replace and could increase our reliance on higher cost or lower
quality suppliers, which could negatively affect our profitability. In addition,
if we have to increase the number of our suppliers of raw materials in the
future to meet growing production demands, we may not be able to locate new
suppliers who could provide us with sufficient materials to meet our needs. Any
interruptions to, or decline in, the amount or quality of our raw materials
supply could materially disrupt our production and adversely affect our business
and financial condition and financial prospects.

The average price that we paid for chestnuts in 2007 and 2008
was approximately $787 per metric ton and $727 per metric ton, respectively,
excluding value added taxes. We do not currently hedge against changes in our
raw material prices. Consequently, if the costs of our raw materials increase
further and we are unable to offset these increases by raising the prices of
our products, our profit margins and financial condition could be adversely
affected.

28

---

Uncertainties that Affect our Financial
Condition

We spend a significant amount of cash on our operations,
principally to procure raw materials for our products. Many of our suppliers,
including chestnut, vegetable and fruit farmers, and suppliers of packaging
materials, require us to pay for their supplies in cash on the same day that
such supplies are delivered to us. However, some of the suppliers with whom we
have a long-standing business relationship allow us to pay on credit. In 2008,
we paid for approximately 10% of our raw materials on credit. We fund the
majority of our working capital requirements out of cash flow generated from
operations. If we fail to generate sufficient sales, or if our suppliers stop
offering us credit terms, we may not have sufficient liquidity to fund our
operating costs and our business could be adversely affected.

We also fund approximately 40% of our working capital
requirements from the proceeds of short-term loans from Chinese banks. We expect
to continue to do so in the future. Such loans are generally secured by our
fixed assets, receivables and/or guarantees by third parties. Our average loan
balance from short-term bank loans in 2008 was approximately $24 million. The
term of almost all such loans is one year or less. Historically, we have rolled
over such loans on an annual basis. However, we may not have sufficient funds
available to pay all of our borrowings upon maturity. Failure to roll over our
short-term borrowings at maturity or to service our debt could result in the
imposition of penalties, including increases in rates of interest, legal actions
against us by our creditors, or even insolvency. In addition, in 2007 and 2008,
we funded approximately $3.8 million, in the aggregate, of our working capital
requirements from the proceeds of a private placement transaction conducted in
May 2007. We can provide no assurances that we will be able to enter into any
future financing or refinancing agreements on terms favorable to us, especially
considering the current instability of the capital markets.

We anticipate that our existing capital resources and cash
flows from operations and current and expected short-term bank loans will be
adequate to satisfy our liquidity requirements through 2009. However, if
available liquidity is not sufficient to meet our operating and loan obligations
as they come due, our plans include considering pursuing alternative financing
arrangements or further reducing expenditures as necessary to meet our cash
requirements. However, there is no assurance that, if required, we will be able
to raise additional capital or reduce discretionary spending to provide the
required liquidity. Currently, the capital markets for small capitalization
companies are extremely difficult and banking institutions have become stringent
in their lending requirements. Accordingly, we cannot be sure of the
availability or terms of any third party financing.

The crisis of the financial and credit markets worldwide in the
second half of 2008 has led to a severe economic recession worldwide, and the
outlook for 2009 is uncertain. A continuation or worsening of unfavorable
economic conditions, including the ongoing credit and capital markets
disruptions, could have an adverse impact on our business, operating results or
financial condition in a number of ways. For example, we may experience declines
in revenues, profitability and cash flows as a result of reduced orders, delays
in receiving orders, delays or defaults in payment or other factors caused by
the economic problems of our customers and prospective customers. We may
experience supply chain delays, disruptions or other problems associated with
financial constraints faced by our suppliers and subcontractors. In addition,
changes and volatility in the equity, credit and foreign exchange markets and in
the competitive landscape make it increasingly difficult for us to predict our
revenues and earnings into the future.

29

---

In 2007 and 2008, some of our customers, including some of our
large supermarket customers, delayed their payments for up to 60 to 90 days
beyond their term. Our cash flow suffered while waiting for such payments.
Consequently, at times we had to delay payments to our suppliers and to postpone
business expansion as a result of these delayed payments. In 2008, we shortened
credit terms for many of our international and domestic distributors from
between 30 and 180 days to between 30 and 60 days. Our large customers may fail
to meet these shortened credit terms, in which case we may not have sufficient
cash flow to fund our operating costs and our business could be adversely
affected.

Results of Operations

The following tables set forth key components of our results of
operations for the periods indicated, and the differences between the two
periods expressed in dollars and percentages:

|(in thousands of U.S.             |  |          |   |  |         |   |  | Increase/Decrease |   |  | Increase/Decrease | 
|--------------------------------- |  | -------- | - |  | ------- | - |  | ----------------- | - |  | ----------------- | 
|dollars)                          |  | 2008     |   |  | 2007    |   |  | ($)               |   |  | (%)               | 
|Revenue                           |  | 132,360  |   |  | 82,094  |   |  | 50,266            |   |  | 61%               | 
|Cost of Revenue                   |  | (101,213 | ) |  | (61,932 | ) |  | (39,281           | ) |  | 63%               | 
|                                  |  |          |   |  |         |   |  |                   |   |  |                   | 
|Gross profit                      |  | 31,147   |   |  | 20,162  |   |  | 10,985            |   |  | 54%               | 
|                                  |  |          |   |  |         |   |  |                   |   |  |                   | 
|Operating Expenses:               |  |          |   |  |         |   |  |                   |   |  |                   | 
|Selling and Marketing             |  | (6,166   | ) |  | (2,623  | ) |  | (3,543            | ) |  | 135%              | 
|General and administrative        |  | (4,048   | ) |  | (2,865  | ) |  | (1,183            | ) |  | 41%               | 
|                                  |  |          |   |  |         |   |  |                   |   |  |                   | 
|Income from continuing operations |  | 20,933   |   |  | 14,674  |   |  | 6,259             |   |  | 43%               | 
|                                  |  |          |   |  |         |   |  |                   |   |  |                   | 
|Non-operating Income (Expenses):  |  |          |   |  |         |   |  |                   |   |  |                   | 
|Investment Income                 |  |          |   |  | 5       |   |  | (5                | ) |  | -100%             | 
|Government grant                  |  | 329      |   |  | 1,373   |   |  | (1,044            | ) |  | -76%              | 
|Interest income                   |  | 99       |   |  | 209     |   |  | (110              | ) |  | -53%              | 
|Other
      income                |  | 251      |   |  | 155     |   |  | 96                |   |  | 62%               | 
|Other expense                     |  | (162     | ) |  | (1,446  | ) |  | 1,284             |   |  | -89%              | 
|Interest Expense                  |  | (2,770   | ) |  | (2,376  | ) |  | (394              | ) |  | 17%               | 
|                                  |  |          |   |  |         |   |  |                   |   |  |                   | 
|Income before taxes               |  | 18,681   |   |  | 12,595  |   |  | 6,086             |   |  | 48%               | 
|Income Taxes                      |  | (3,003   | ) |  | (2,135  | ) |  | (868              | ) |  | 41%               | 
|Income before Minority Interest   |  | 15,678   |   |  | 10,460  |   |  | 5,218             |   |  | 50%               | 
|Minority Interest                 |  | (974     | ) |  | (715    | ) |  | (259              | ) |  | 36%               | 
|                                  |  |          |   |  |         |   |  |                   |   |  |                   | 
|Net Income                        |  | 14,703   |   |  | 9,745   |   |  | 4,958             |   |  | 51%               | 

30

---

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

Revenue

Net Revenues. Net revenues increased by $50.3 million,
or approximately 61.2%, to $132.4 million in 2008 from $82.1 million in 2007.
This increase was attributable to the increased revenues generated from sales of
each of our product segments, as reflected in the following table:

|(in thousands of U.S.
      **dollars)** | 2008 Revenues | 2007 Revenues | Increase | Increase
|---------------------------------------- | ------------- | ------------- | -------- | --------
|                                         | ($)           | ($)           | ($)      | (%)     
|Chestnut Products                        | 83,028        | 45,799        | 37,228   | 81.3%   
|Convenience Products                     | 25,737        | 15,289        | 10,448   | 68.3%   
|Frozen, Canned and Bulk                  | 23,596        | 21,007        | 2,589    | 12.3%   
|Products                                 |               |               |          |         
|Total                                    | 132,360       | 82,095        | 50,265   | 61.2%   

We believe that the increases reflected in the table above are
attributable to the following factors, by percentage:

|Category                             | Chestnut Products | Convenience Products | Frozen, Canned and
|------------------------------------ | ----------------- | -------------------- | ------------------
|                                     |                   |                      | Bulk Products     
|Increase in volume sold              | 62.8%             | 84.1%                | -75.6%            
|Increase in average sales price      | 18.0%             | -5.3%                | 154.0%            
|Increase in value of the U.S. dollar | 19.2%             | 21.2%                | 21.6%             

The greatest increase in volume sold in 2008, as compared to
2007, was in the domestic PRC market. Revenues from sales in this market
increased by approximately $42.9 million, or approximately 88%, in 2008. As a
percentage of total revenues, revenues from sales in the domestic PRC market
increased to approximately 69% from approximately 59% in 2007.

In addition, in 2008, revenues from sales to Japan, South
Korea, France and the UK increased, in the aggregate, approximately $10.1, or
42%, compared to 2007, partially offset by a decrease of an aggregate of $0.57
million, or 54%, of sales to the United States compared to 2007. See Note 16 to
the financial statements contained elsewhere in this report for more information
on the breakdown of our sales per geographic region.

Cost of Revenues.Our cost of revenues increased $39.3
million, or approximately 63%, to $101.2 million in 2008 from $61.9 million in
2007. This increase was attributable to the following factors, by
percentage:

|              | Allocation of      
|------------- | -------------------
|              | Increase in Cost of
|              | Revenues           
|              |                    
|Category      | (%)                
|Raw Materials | 76                 

|Currency (RMB) Appreciation                                          | 11
|-------------------------------------------------------------------- | --
|Other Allocated Overhead (utilities, freight, equipment consumables) | 6 
|Wages                                                                | 6 
|Depreciation                                                         | 1 

31

---

Raw material costs increased to $64,980,230, or approximately
76%, in 2008 from $36,920,585 in 2007. This increase was attributable to the
increase by approximately 40% and 472%, respectively, in the volume of raw
chestnuts and meats purchased in 2008, when compared to 2007. This increase was
offset by a decrease of approximately 50% in the volume of raw vegetables and
fruits purchased in 2008, when compared to 2007. We purchased a significantly
higher volume of raw meat for use in our convenience products because our sales
of such products increased significantly in 2008. We purchased a significantly
lower volume of raw fruits and vegetables for use in our frozen, canned and bulk
products because the price of fruits and vegetables increased significantly in
2008, resulting in less demand for such products.

The following table reflects the changes in our cost of
revenues in 2008 as compared to 2007 among our different segments:

|(thousands of U.S. **dollars)** | 2008 Cost of Revenues | 2007 Cost of Revenues | Increase/ (Decrease)
|------------------------------- | --------------------- | --------------------- | --------------------
|                                | ($)                   | ($)                   | (%)                 
|Chestnut Products               | 62,092                | 33,455                | 85.6%               
|Convenience Products            | 20,258                | 11,837                | 71.1%               
|Frozen, Canned and Bulk         | 18,863                | 16,640                | 13.4%               
|Products                        |                       |                       |                     
|Total                           | 101,213               | 61,932                | 63.4%               

Gross Profit. Our gross profit increased $10.9 million,
or 54.5%, to $31.1 million in 2008 from $20.2 million in 2007 as a result of
higher net revenues, partially offset by higher cost of revenues, for the
reasons indicated above.

Operating Expenses

Selling and Marketing Expenses. Our selling and
marketing expenses increased approximately $3.6 million, or 135%, to $6.2
million in 2008 from $2.6 million in fiscal year 2007. The following table
reflects the main factors that contributed to this increase as well as the
dollar amount that each factor contributed to this increase:

|(in thousands of U.S. dollars) | Increase in costs in 2008 over 2007
|------------------------------ | -----------------------------------
|Shipping and inspection fees   | 1,437                              
|Port surcharges                | 1,373                              
|Tariffs                        | 288                                
|Supermarket fees               | 161                                
|Wages (sales personnel)        | 59                                 

The increases listed in the table above were partially offset
by an aggregate of $114,834 of decreases of other factors, including customer
lodging, phone, postage and courier charges, toll road expense, warehousing
costs and expenses for professional movers.

32

---

General and Administrative Expenses.Our general and
administrative expenses increased approximately $1.1 million, or 41.3%, to $4.0
million in 2008 from $2.9 million in 2007. The following table reflects the main
factors that contributed to this increase as well as the dollar amount that each
factor contributed to this increase:

|(in thousands of U.S. dollars)         | Increase in costs in 2008 over 2007
|-------------------------------------- | -----------------------------------
|Personnel Benefits (non-wage benefits) | 1,437                              
|Consultation fees                      | 1,373                              
|Entertainment                          | 288                                
|Insurance fees                         | 161                                
|Research and development fees          | 59                                 

Government Subsidy Income

Government subsidy income decreased from approximately $1.4
million in 2007 to approximately $329,000 in 2008, representing grants received
from the local Beijing County, Junan County and Miyun County governments to
assist us in our reconstruction of our Beijing facility following the outbreak
of a fire in that facility in May 2007.

Income Before Taxation and Minority
Interest

Income before taxation and minority interest increased $6.1
million, or 48.3%, to $18.7 million in 2008 from $12.6 million in 2007 as a
result of higher revenues, partially offset by higher costs of revenues and
operating expenses, for the reasons indicated above.

Income Taxes

Income taxes increased $0.87 million, or 40.7%, to $3.0 million
in 2008, as compared to $2.1 million in 2007. This increase was attributable to
the higher income earned in 2008 as compared to 2007.

Effective January 1, 2008, the PRC government implemented a new
25% tax rate across the board for all enterprises, without any tax holiday.
However, the PRC government has established a set of transition rules to allow
enterprises that already started tax holidays before January 1, 2008 to continue
utilizing such tax holidays until they are fully utilized.

The income tax rates applicable to our Chinese operating
subsidiaries in 2007, 2008, and 2009 are depicted in the following table:

|Income Tax      | 2007 | 2008 | 2009
|--------------- | ---- | ---- | ----
|Junan Hongrun   | 15%  | 15%  | 25% 
|Luotian Lorain  | 0%   | 15%  | 15% 
|Beijing Lorain  | 0%   | 0%   | 15% 
|Shandong Lorain | 30%  | 25%  | 25% 

Minority Interest.The Company holds 80.2% of the
equity of its subsidiary Shandong Lorain, which is reflected in the minority
interest of $0.97 million in 2008 and $0.72 million in 2007.

33

---

Net Income.

Net income increased $4.9 million, or 50.9%, to $14.7 million
in 2008 from $9.7 million in fiscal year 2007, as a result of the factors
described above.

Liquidity and Capital Resources

General

Our primary capital needs have been to fund the working capital
requirements necessitated by our sales growth, adding new products and expansion
of our facilities. In the past, our primary sources of financing have been cash
generated from operations and short-term loans from banks in China. In 2007, we
obtained approximately $19 million from a private placement transaction.
Proceeds from such transaction, together with cash generated from operations and
short-term bank loans, have been used to fund our working capital needs. We used
most of the proceeds of the private placement to build infrastructure at several
of our facilities. At December 31, 2008, total unused proceeds from the private
placement were $0, as compared to approximately $6.5 million at December 31,
2007. At December 31, 2008, cash and cash equivalents (including restricted
cash) were $6.6 million, as compared to $8.8 million at December 31, 2007.

We expect to continue to finance our operations and working
capital needs in 2009 from cash generated from operations and short-term bank
loans. In addition, we currently plan to finance or refinance approximately $23
million in the form of short-term bank loans in 2009. Currently, we have
negotiated loans with certain banks in China for an aggregate of $25 million. We
expect that anticipated cash flows from operations and short-term bank loans
will be sufficient to fund our operations through at least the next twelve
months.

If available liquidity is not sufficient to meet our operating
and loan obligations as they come due, our plans include pursuing alternative
financing arrangements or reducing expenditures as necessary to meet our cash
requirements. However, there is no assurance that we will be able to raise
additional capital or reduce discretionary spending to provide required
liquidity. Currently, the capital markets for small capitalization companies are
extremely difficult. Accordingly, we cannot be sure of the availability or terms
of any alternative financing arrangements.

The following table provides detailed information about our net
cash flow for all financial statements periods presented in this report.

|Cash Flows Data:                                                |  |                             |   |  |         |  
|--------------------------------------------------------------- |  | --------------------------- | - |  | ------- | -
|(in thousands of
      U.S. dollars)                            |  | For year ended December 31, |  
|                                                                |  | 2008                        |   |  | 2007    |  
|Net cash flows provided by (used in) operating activities       |  | 19,508                      |   |  | (3,585  | )
|Net cash flows
      provided by (used in) investing activities |  | (20,316                     | ) |  | (12,440 | )
|Net cash flows provided by (used in)
      financing activities |  | (8,134                      | ) |  | 19,664  |  

Operating Activities

Net cash provided by operating activities for 2008 was $19.5
million and net cash used in operating activities for 2007 was $3.6 million. The
increase of approximately $23.1 million in net cash flows provided by operating activities resulted primarily from an
increase in net income of approximately $5.0 million, a decrease in accounts
receivable of approximately $38.4 million and a decrease in inventories of
approximately $1.6 million, partially offset by a decrease in accounts payable
of approximately $21.2 million. In 2008, we increased our direct sales to
third-party distributors, who generally do not pay on credit, thereby decreasing our
accounts receivables. In addition, we were required to pay our suppliers on
shorter terms, thereby decreasing our accounts payable.

34

---

Investing Activities

Our uses of cash for investment activities are primarily
payments for the acquisition and construction of property, plants and equipment.

Net cash used in investing activities for 2008 was $20.3
million and $12.4 million, respectively, for 2008 and 2007. The increase of
approximately $7.9 million resulted primarily from an increase of $7.5 million
in the construction of refrigerated storage, vegetable tents and of
comprehensive workshops for the processing of chestnut and other food products
in 2008.

Financing Activities

Net cash used in financing activities for 2008 was $8.1 million
and net cash provided by financing activities for 2007 was $19.7 million. The
increase of approximately $27.8 million in net cash used by financing activities
resulted primarily from a decrease of $17.3 million in paid-in capital provided
in connection with a private placement in 2007 and an increase of approximately
$22.6 million in bank repayments, partially offset by an increase of
approximately $9.7 in bank borrowings and $2.5 million in proceeds from
notes.

35

---

Loan Facilities

As of December 31, 2008, the amounts and maturity dates for our
bank loans were as follows:

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

|Banks                                                          | Amounts   | Beginning  | Ending     | Interest Rate | Duration 
|-------------------------------------------------------------- | --------- | ---------- | ---------- | ------------- | ---------
|Beijing Miyun County Shilipu Rural Financial
      Institution | 2,772.02  | 9/30/2008  | 9/30/2009  | 8.54%         | 12 months
|Bank
      of Beijing                                          | 291.79    | 7/28/2008  | 7/28/2009  | 7.72%         | 12 months
|Junan County Industrial and Commercial Bank                    | 145.90    | 1/11/2008  | 1/10/2009  | 6.12%         | 12 months
|Junan
      County Industrial and Commercial Bank              | 240.04    | 11/21/2008 | 2/19/2009  | 3.17%         | 3 months 
|Junan County Industrial and Commercial Bank                    | 393.92    | 9/12/2008  | 3/4/2009   | 8.54%         | 4 months 
|Junan
      County Industrial and Commercial Bank              | 120.76    | 11/28/2008 | 2/26/2009  | 10.18%        | 3 months 
|Junan County Industrial and Commercial Bank                    | 173.67    | 12/5/2008  | 3/5/2009   | 10.18%        | 3 months 
|Junan
      County Industrial and Commercial Bank              | 118.16    | 11/21/2008 | 2/19/2009  | 3.17%         | 3 months 
|Junan County Construction Bank                                 | 25.17     | 9/25/2008  | 12/24/2008 | 7.45%         | 3 months 
|Junan
      County Construction Bank                           | 102.13    | 9/25/2008  | 2/24/2009  | 7.45%         | 5 months 
|Junan County Construction Bank                                 | 1,575.68  | 10/22/2008 | 1/22/2009  | 10.45%        | 3 months 
|Junan
      County Construction Bank                           | 116.72    | 11/5/2008  | 2/3/2009   | 7.24%         | 3 months 
|Junan County Agriculture Bank                                  | 583.58    | 8/7/2008   | 8/6/2009   | 12.70%        | 12 months
|Junan
      County Agriculture Bank                            | 656.53    | 8/22/2008  | 8/18/2009  | 12.70%        | 12 months
|Junan County Agriculture Bank                                  | 364.74    | 9/3/2008   | 8/18/2009  | 12.70%        | 12 months
|Junan
      County Agriculture Bank                            | 1,458.96  | 9/27/2008  | 3/27/2009  | 10.56%        | 6 months 
|Union Bank (China) Co., Ltd.                                   | 1,156.96  | 1/28/2008  | 1/14/2009  | 5.49%         | 12 months
|Linyi
      Commercial Bank                                    | 685.71    | 2/1/2008   | 1/5/2009   | 13.07%        | 11 months
|Linyi Commercial Bank                                          | 656.53    | 2/2/2008   | 1/12/2009  | 13.07%        | 11 months
|Linyi
      Commercial Bank                                    | 1,458.96  | 9/28/2008  | 1/12/2009  | 8.58%         | 4 months 
|Linyi Commercial Bank                                          | 116.72    | 9/28/2008  | 1/12/2009  | 8.58%         | 4 months 
|China
      Agricultural Bank, Luotian Square Branch           | 817.02    | 9/8/2008   | 9/7/2009   | 7.47%         | 12 months
|China Agricultural Bank, Luotian Square
      Branch           | 291.79    | 9/8/2008   | 9/7/2009   | 7.47%         | 12 months
|Bank
      of China, Junan Branch                              | 4.01      | 9/19/2006  | 5/19/2009  | 7.50%         | 36 months
|Credit union, Junan                                            | 43.77     | 8/6/2008   | 1/7/2009   | 8.58%         | 4 months 
|Credit union, Junan                                            | 43.77     | 9/11/2008  | 1/12/2009  | 8.58%         | 3 months 
|Agricultural Development Lutian Government                     | 25.53     | 1/11/2008  | 12/11/2011 | 2.10%         | 4 years  
|Union
      Commercial Bank (China)                            | 551.44    | 1/29/2008  | 1/14/2011  | 5.49%         | 3 years  
|Total                                                          | 14,991.98 |            |            |               |          

Loans listed in the table above whose maturity dates are prior
to the date hereof have either been repaid or have been extended by the lending
banks for either 6 months or 1 year.

Critical Accounting Policies

The preparation of financial statements in conformity with
United States generally accepted accounting principles 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:

- Method of Accounting --We maintain our general ledger and journals
  with the accrual method accounting for financial reporting purposes. The
  financial statements and notes are representations of management. Accounting
  policies adopted by us conform to generally accepted accounting principles in the United States of
  America and have been consistently applied in the presentation of financial
  statements, which are compiled on the accrual basis of accounting.

36

---

- Use of estimates --The preparation of the financial statements in
  conformity with generally accepted accounting principles 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 financial statements and the
  reported amounts of revenues and expenses during the reporting periods.
  Management makes these estimates using the best information available at the
  time the estimates are made; however, actual results could differ materially
  from those estimates.
- Principles of consolidation --The consolidated financial
  statements are presented in US Dollars and include the accounts of the Company
  and its commonly controlled entity. All significant inter-company balances and
  transactions are eliminated in combination.

As of December 31, 2008, the particulars of the commonly
controlled entities are as follows:

|                                        |  | Place of      |  |  | Attributable
      equity |  |   |                    |  |  |                  | 
|--------------------------------------- |  | ------------- |  |  | ------------------------- |  | - | ------------------ |  |  | ---------------- | 
|Name of Company                         |  | Incorporation |  |  | interest %                |  |   | Registered Capital |  |  |                  | 
|Shandong Lorain Co., Ltd.               |  | PRC           |  |  | 80.20%                    |  | $ | 12,901,823         |  |  | RMB 1008,860,000 | 
|Luotian Lorain Co., Ltd.                |  | PRC           |  |  | 100%                      |  |   | 1,279,181          |  |  | RMB 10,000,000   | 
|Junan Hongrun Foodstuff Co.,
      Ltd. |  | PRC           |  |  | 100%                      |  |   | 2,430,445          |  |  | RMB 19,000,000   | 
|Beijing Lorain Co., Ltd.                |  | PRC           |  |  | 100%                      |  |   | 1,279,181          |  |  | RMB 10,000,000   | 

- Accounting for the Impairment of Long-Lived Assets-- The
  long-lived assets held and used by us are reviewed for impairment whenever
  events or changes in circumstances indicate that the carrying amount of assets
  may not be recoverable. It is reasonably possible that these assets could
  become impaired as a result of technology or other industry changes.
  Determination of recoverability of assets to be held and used is by comparing
  the carrying amount of an asset to future net undiscounted cash flows to be
  generated by the assets.

If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.

During the reporting years, there was no impairment loss.

- 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, we have
  no other significant obligations and collectability 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.

Recent accounting pronouncements

In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133" ("SFAS 161"). SFAS 161 applies to all derivative instruments and related hedged items accounted for under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 161 requires entities to provide greater transparency about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity's financial position, results of operations and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008.

37

---

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of
Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). Statement 162 will become effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, "The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles."

In May 2008, the FASB issued FSP Accounting Principles Board
("APB") 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in
Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP
APB 14-1 requires the issuer of certain convertible debt instruments that may be
settled in cash (or other assets) on conversion to separately account for the
liability (debt) and equity (conversion option) components of the instrument in
a manner that reflects the issuer's non-convertible debt borrowing rate. FSP APB
14-1 is effective for fiscal years beginning after December 15, 2008 on a
retroactive basis.

In September 2008, FASB issued FSP No. 133-1 and FIN 45-4,
Disclosures about Credit Derivatives and Certain Guarantees, an amendment of
FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161. This FSP is intended to improve
disclosures about credit derivatives by requiring more information about the
potential adverse effects of changes in credit risk on the financial position,
financial performance, and cash flows of the sellers of credit derivatives. The
provisions of the FSP that amend Statement 133 and FIN 45 are effective for
reporting periods (annual or interim) ending after November 15, 2008.

This FSP amends FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, to require disclosures by sellers
of credit derivatives, including credit derivatives embedded in hybrid
instruments. This FSP also amends FASB Interpretation (FIN) No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, to require an additional disclosure about
the current status of the payment/performance risk of a guarantee. The
provisions of the FSP that amend Statement 133 and FIN 45 are effective for
reporting periods (annual or interim) ending after November 15, 2008.

Finally, this FSP clarifies the effective date in FASB
Statement No. 161, Disclosures about Derivative Instruments and Hedging
Activities. The disclosures required by Statement 161 should be provided for any
reporting period (annual or quarterly interim) beginning after November 15,
2008. For example, an entity with a March 31 fiscal year-end should provide the
disclosures for its fourth quarter interim period ending March 31, 2009, in its
2009 annual financial statements. This clarification of the effective date of
Statement 161 is effective upon issuance of the FSP.

We are currently evaluating the potential impact, if any, of
the adoption of the above recent accounting pronouncements on our consolidated
results of operations and financial condition.

38

---

Off-Balance Sheet Arrangements

We do not have any off-balance arrangements.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK

Not applicable.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL
DATA

The full text of our audited consolidated financial statements
as of December 31, 2008 begins on page F-2 of this Annual Report on Form 10-K.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

Item 9A CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

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

As required by Rule 13a-15 under
the Exchange Act, our management, including our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as of December 31, 2008. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that as of December 31, 2008, and as of the date that the evaluation of the
effectiveness of our disclosure controls and procedures was completed, our
disclosure controls and procedures were effective to satisfy the objectives for
which they are intended.

Internal Controls Over Financial Reporting

Managements Annual Report on Internal Control over
Financial Reporting.

Our management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based upon the
framework in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on that
evaluation, our management concluded that our internal control over financial
reporting is effective, as of December 31, 2008.

39

---

Changes in Internal Controls over Financial Reporting.

During the fiscal year ended
December 31, 2008, there were no changes in our internal control over financial
reporting identified in connection with the evaluation performed during the
fiscal year covered by this report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

Attestation Report

This annual report does not
include an attestation report of our independent registered public accounting
firm regarding internal control over financial reporting. Managements report
was not subject to attestation by our registered public accounting firm pursuant
to temporary rules of the Securities and Exchange Commission that permit us to
provide only managements report in this annual report.

Item 9B. OTHER INFORMATION.

None.

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS OF AND
CORPORATE GOVERNANCE

Information required under this Item will be contained in our
definitive information statement or in an amendment to this Annual Report on
Form 10-K, which will be filed within 120 days of December 31, 2008, our most
recent fiscal year end, and is incorporated herein by reference.

Item 11 EXECUTIVE COMPENSATION

Information required under this Item will be contained in our
definitive information statement or in an amendment to this Annual Report on
Form 10-K, which will be filed within 120 days of December 31, 2008, our most
recent fiscal year end, and is incorporated herein by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Information required under this Item will be contained in our
definitive information statement or in an amendment to this Annual Report on
Form 10-K, which will be filed within 120 days of December 31, 2008, our most
recent fiscal year end, and is incorporated herein by reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Information required under this Item will be contained in our
definitive information statement or in an amendment to this Annual Report on
Form 10-K, which will be filed within 120 days of December 31, 2008, our most
recent fiscal year end, and is incorporated herein by reference.

40

---

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

Information required under this Item will be contained in our
definitive information statement or in an amendment to this Annual Report on
Form 10-K, which will be filed within 120 days of December 31, 2008, our most
recent fiscal year end, and is incorporated herein by reference.

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

1. The financial statements contained in the Audited Financial
Statements beginning on page F-2 of this Annual Report on Form 10-K.

3. Exhibits

|Exhibit No. | **Description**                                                                                                                                                                                                                                                                                                                       
|----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                                                                                                                                                                                                                                                                                                                                       
|2.1         | Share Exchange Agreement, dated May 3, 2007,
      among the registrant, International Lorain Holding, Inc. and its
      stockholders. Incorporated by reference to Exhibit 2.1 to the registrants
      current report on Form 8-K filed on May 9, 2007 in commission file number
      0-31619.                                   
|            |                                                                                                                                                                                                                                                                                                                                       
|3.1         | Restated Certificate of Incorporation of the
      registrant as filed with the Secretary of State of Delaware. Incorporated
      by reference to Exhibit 3.1 to the registrants current on Form 8-K filed
      on May 9, 2007 in commission file number 0-31619.                                                                  
|            |                                                                                                                                                                                                                                                                                                                                       
|3.2         | Bylaws of the registrant, adopted on March 31,
      2000. Incorporated by reference to Exhibit 3.2 to the registrants
      Registration Statement on Form 10SB12G filed October 19, 2001, in
      commission file 0-31619.                                                                                                        
|            |                                                                                                                                                                                                                                                                                                                                       
|4.1         | Certificate of Designation of Series A Voting
      Convertible Preferred Stock of the registrant as filed with the Secretary
      of State of Delaware on April 9, 2007. Incorporated by reference to
      Exhibit 4.1 to the registrants current report on Form 8-K filed on May 9,
      2007 in commission file number 0-31619.
|            |                                                                                                                                                                                                                                                                                                                                       
|4.2         | Certificate of Designation of Series B Voting
      Convertible Preferred Stock of registrant as filed with the Secretary of
      State of Delaware on April 30, 2007. Incorporated by reference to Exhibit
      4.2 to the registrants current report on Form 8-K filed on May 9, 2007 in
      commission file number 0-31619.   
|            |                                                                                                                                                                                                                                                                                                                                       
|4.3         | Option Agreement, dated May 3, 2007, between
      Mr. Hisashi Akazawa and Mr. Si Chen. Incorporated by reference to Exhibit
      4.3 to the registrants current report on Form 8-K filed on May 9, 2007 in
      commission file number 0-31619.                                                                                   
|            |                                                                                                                                                                                                                                                                                                                                       
|4.4         | Form of Registration Rights Agreement, dated
      May 3, 2007. Incorporated by reference to Exhibit to the registrants
      current report on Form 8-K filed on May 9, 2007 in commission file number
      0-31619.                                                                                                               
|            |                                                                                                                                                                                                                                                                                                                                       
|4.5         | Form of Common Stock Purchase Warrants issued
      to investors, dated May 3, 2007. Incorporated by reference to Exhibit 4.5
      to the registrants current report on Form 8-K filed on May 9, 2007 in
      commission file number 0-31619.                                                                                      
|            |                                                                                                                                                                                                                                                                                                                                       
|4.6         | Form of Common Stock Purchase Warrants issued
      to Sterne Agee & Leach, Inc. and its designee, dated May 3, 2007.
      Incorporated by reference to Exhibit 4.5 to the registrants current
      report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.                                                     

41

---

|10.1  | Form of the Securities Purchase Agreement,
      dated May 3, 2007, by and among the registrant and the investors named
      therein, and joined by Mr. Akazawa and Mr. Chen as to certain sections.
      Incorporated by reference to Exhibit 10.1 to the registrants current
      report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                                   
|10.2  | Make Good Escrow Agreement, dated May 3, 2007,
      by and among the registrant, Sterne Agee & Leach, Inc., Mr. Hisashi
      Akazawa, Mr. Si Chen and Securities Transfer Corporation. Incorporated by
      reference to Exhibit 10.2 to the registrants current report on Form 8-K
      filed on May 9, 2007 in commission file number 0-31619.             
|      |                                                                                                                                                                                                                                                                                                                                                                   
|10.3  | Closing Escrow Agreement, dated May 3, 2007, by
      and among the registrant, Sterne Agee & Leach, Inc. and Thelen Reid
      Brown Raysman & Steiner LLP. Incorporated by reference to Exhibit 10.3
      to the registrants current report on Form 8-K filed on May 9, 2007 in
      commission file number 0-31619.                                         
|      |                                                                                                                                                                                                                                                                                                                                                                   
|10.4  | Cancellation and Escrow Agreement, dated May 3,
      2007, by and among the registrant, Halter Financial Investments, L.P.,
      Halter Financial Group, L.P. and Security Transfer Corporation.
      Incorporated by reference to Exhibit 10.4 to the registrants current
      report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.   
|      |                                                                                                                                                                                                                                                                                                                                                                   
|10.5  | Employment Agreement, dated March 2, 2005, by
      and between Shandong Green Foodstuff CO., LTD and Si Chen. Incorporated by
      reference to Exhibit 10.5 to the registrants current report on Form 8-K
      filed on May 9, 2007 in commission file number 0-31619.                                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                                   
|10.6  | Employment Agreement, dated July 2, 2002, by
      and between Shandong Green Foodstuff CO., LTD and Xiandong Zhou.
      Incorporated by reference to Exhibit 10.6 to the registrants current
      report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.                                                                                  
|      |                                                                                                                                                                                                                                                                                                                                                                   
|10.7  | Employment Agreement, dated November 20, 2007,
      by and between Shandong Green Foodstuff CO., LTD and Jing Thomas Wu.
      Incorporated by reference to Exhibit 10.1 to the Registrants Current
      Report on Form 8-K filed on November 21, 2007 in commission file number
      0-31619.                                                                
|      |                                                                                                                                                                                                                                                                                                                                                                   
|10.8  | Cooperation Agreement, dated May 18, 2006, by
      and between Beijing Green Foodstuff Co., Ltd. and the Chestnut Cooperation
      of Zhenzhai Village, Gaoling town, Miyun County. Incorporated by reference
      to Exhibit 10.8 to the registrants current report on Form 8-K filed on
      May 9, 2007 in commission file number 0-31619.                
|      |                                                                                                                                                                                                                                                                                                                                                                   
|10.9  | Equity Transfer Agreement, dated August 15,
      2006, by and between International Lorain Co., Ltd and International
      Lorain Holding, Inc. Incorporated by reference to Exhibit 10.9 to the
      registrants current report on Form 8-K filed on May 9, 2007 in commission
      file number 0-31619.                                                    
|      |                                                                                                                                                                                                                                                                                                                                                                   
|10.10 | Credit Facility Agreement, dated September 28,
      2006, by and between Beijing Green Foodstuff Co., Ltd. and the Shilibao
      Branch of Beijing Rural Commercial Bank Co., Ltd. Incorporated by
      reference to Exhibit 10.10 to the registrants current report on Form 8-K
      filed on May 9, 2007 in commission file number 0-31619.                
|      |                                                                                                                                                                                                                                                                                                                                                                   
|10.11 | Sales contract, dated May 13, 2006, by and
      between Shandong Green Foodstuff Co., Ltd. and the Shandong Lu An Import
      & Export Co., Ltd. Incorporated by reference to Exhibit 10.11 to the
      registrants current report on Form 8-K filed on May 9, 2007 in commission
      file number 0-31619.                                                  
|      |                                                                                                                                                                                                                                                                                                                                                                   
|10.12 | Sales contract, dated September 5, 2006, by and
      between Shandong Green Foodstuff Co., Ltd. and the Shinsei Foods Co., Ltd.
      Incorporated by reference to Exhibit 10.12 to the registrants current
      report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.                                                                    

42

---

|10.13           | Sales Contract, dated September 10, 2006, by
      and between Junan Hongrun Foodstuff Co., Ltd. and the Shinsei Foods Co.,
      Ltd. Incorporated by reference to Exhibit 10.13 to the registrants
      current report on Form 8-K filed on May 9, 2007 in commission file number
      0-31619.             
|--------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                |                                                                                                                                                                                                                                                                                                                  
|10.14           | Financial Advisory Agreement, dated February
      14, 2007, by and between HFG International, Limited and Shandong Green
      Foodstuff Co., Ltd. Incorporated by reference to Exhibit 10.14 to the
      registrants current report on Form 8-K filed on May 9, 2007 in commission
      file number 0-31619.
|                |                                                                                                                                                                                                                                                                                                                  
|10.15           | Consulting Agreement, dated March 8, 2007, by
      and between Heritage Management Consultants, Inc. and International Lorain
      Holding, Inc. Incorporated by reference to Exhibit 10.15 to the
      registrants current report on Form 8-K filed on May 9, 2007 in commission
      file number 0-31619. 
|                |                                                                                                                                                                                                                                                                                                                  
|10.16           | Equity Transfer Agreement dated September 5,
      2006, by and between Junan Hongrun Foodstuff Co., Ltd. and International
      Lorain Holding, Inc.                                                                                                                                                           
|                |                                                                                                                                                                                                                                                                                                                  
|10.17           | Equity Transfer Agreement, dated August 19,
      2006, by and between Lihua Liu, Junxia Wang, Shixiang Wang, Yuan Tian,
      Lantao Li, Yubo Liu, Zhixu Sun, Guangxing Han, Linying Wang, International
      Lvan Co., as transferors and International Lorain Holding, Inc. as
      transferee              
|                |                                                                                                                                                                                                                                                                                                                  
|10.18           | Equity Transfer Agreement, dated August 27,
      2006, by and between Si Chen, Xiaodong Zhou, Shixiang Wang, and
      International Lvan Co., Ltd., as transferors and International Lorain
      Holding, Inc. as transferee                                                                                  
|                |                                                                                                                                                                                                                                                                                                                  
|10.19           | Equity Transfer Agreement, dated August 15,
      2006, by and between International Lvan Co., Ltd. and International Lorain
      Holding, Inc.                                                                                                                                                                 
|                |                                                                                                                                                                                                                                                                                                                  
|10.20           | Employment Agreement, effective September 22,
      2008, by and between American Lorain Corporation and Yilun Alan Jin.
      Incorporated by reference to Exhibit 10.1 to the Registrant's Current
      Report on Form 8-K filed on September 18, 2008 in commission file number
      0-31619.               
|                |                                                                                                                                                                                                                                                                                                                  
|10.21           | Form of Sales Agreement by and between Shandong
      Lorain Foodstuff Co., Ltd. and Shandong Lvan Import & Export Co., Ltd.                                                                                                                                                                                     
|                |                                                                                                                                                                                                                                                                                                                  
|14              | Business Ethics Policy and Code of Conduct,
      adopted on April 30, 2007. Incorporated by reference to Exhibit 14 to the
      registrants current report on Form 8-K filed on May 9, 2007 in commission
      file number 0-31619.                                                                          
|                |                                                                                                                                                                                                                                                                                                                  
|21              | List of subsidiaries of the registrant.
      Incorporated by reference to Exhibit 21 to the registrants current report
      on Form 8-K filed on May 9, 2007 in commission file number 0-31619.                                                                                                               
|                |                                                                                                                                                                                                                                                                                                                  
|24              | Power of Attorney (included on the signature
      page of this annual report).                                                                                                                                                                                                                                  
|                |                                                                                                                                                                                                                                                                                                                  
|31.1            | Certification of Chief Executive Officer,
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *                                                                                                                                                                                                      
|                |                                                                                                                                                                                                                                                                                                                  
|31.2            | Certification of Chief Financial Officer,
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *                                                                                                                                                                                                      
|                |                                                                                                                                                                                                                                                                                                                  
|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

43

---

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.

|               | AMERICAN LORAIN CORPORATION                    
|-------------- | -----------------------------------------------
|               |                                                
|               | By:/s/ Si Chen                                 
|April 13, 2009 | Si Chen                                        
|(Date Signed)  | President, Director and Chief Executive Officer
|               |                                                

Pursuant to the requirements of the Securities Exchange Act of
1934, this annual report has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
constitutes and appoints Si Chen, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him or her and in
his or her name, place and stead, in any and all capacities, to sign any and all
amendments to this annual report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the SEC, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

|Signature                | Capacity                                       | Date          
|------------------------ | ---------------------------------------------- | --------------
|                         |                                                |               
|                         |                                                |               
|                         | President , Director
      and Chief Executive |               
|/s/ Si Chen              | Officer (Principal
      Executive Officer)    | April 13, 2009
|Si Chen                  |                                                |               
|                         |                                                |               
|                         |                                                |               
|                         | Chief Financial
      Officer (Principal       |               
|                         | Financial Officer and
      Principal          |               
|/s/ Yilun Jin            | Accounting Officer)                            | April 13, 2009
|Yilun Jin                |                                                |               
|                         |                                                |               
|                         |                                                |               
|/s/ Yundong Lu           | Chief Operating
      Officer and Director     | April 13, 2009
|Yundong Lu               |                                                |               
|                         |                                                |               
|                         |                                                |               
|/s/ Hao Chen             | Director                                       | April 13, 2009
|Hao Chen                 |                                                |               
|                         |                                                |               
|                         |                                                |               
|/s/ Yaudoon
      Chiang | Director                                       | April 13, 2009
|Yaudoon Chiang           |                                                |               
|                         |                                                |               
|                         |                                                |               
|/s/ Maoquan Wei          | Director                                       | April 13, 2009
|Maoquan Wei              |                                                |               

44

---

AMERICAN LORAIN CORPORATION

AUDITED FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007

(Stated in US Dollars)

---

AMERICAN LORAIN CORPORATION

|CONTENTS                                        | PAGES   
|----------------------------------------------- | --------
|REPORT OF INDEPENDENT REGISTERED PUBLIC         |         
|ACCOUNTING FIRM                                 | F1      
|CONSOLIDATED BALANCE SHEETS                     | F2  F3 
|CONSOLIDATED STATEMENTS OF INCOME               | F4      
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY | F5      
|CONSOLIDATED STATEMENTS OF CASH FLOWS           | F6      
|NOTES TO FINANCIAL STATEMENTS                   | F7  F23

---

REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING
FIRM

To:  The Board of Directors and Stockholders of
        American Lorain Corporation

We have audited the accompanying consolidated balance sheets of
American Lorain Corporation as of December 31, 2008 and 2007 and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall 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 financial position of
American Lorain Corporation as of December 31, 2008 and 2007 and the results of
its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.

|South San Francisco, California | Samuel H. Wong & Co., LLP   
|------------------------------- | ----------------------------
|February 18, 2009               | Certified Public Accountants

F-1

---

AMERICAN LORAIN CORPORATION CONSOLIDATED BALANCE
SHEETS AS OF DECEMBER 31, 2008 AND 2007 (Stated in US
Dollars)

|                                             |  | Note |  |   | 2008        |  |   | 2007        | 
|-------------------------------------------- |  | ---- |  | - | ----------- |  | - | ----------- | 
|ASSETS                                       |  |      |  |   |             |  |   |             | 
|Current assets                               |  |      |  |   |             |  |   |             | 
|Cash and Cash
      equivalents              |  |      |  | $ | 2,841,339   |  | $ | 6,769,973   | 
|Restricted Cash                              |  | 3    |  |   | 3,715,998   |  |   | 2,021,839   | 
|Short-term Investment                        |  |      |  |   | 113,069     |  |   | 7,246       | 
|Trade accounts receivable                    |  | 4    |  |   | 25,293,326  |  |   | 32,859,688  | 
|Other
      receivables                      |  | 5    |  |   | 5,107,719   |  |   | 7,552,976   | 
|Inventory                                    |  | 6    |  |   | 24,827,922  |  |   | 17,903,344  | 
|Advance to
      Suppliers                   |  |      |  |   | 415,009     |  |   | 5,357,951   | 
|Prepaid Expenses and Taxes                   |  |      |  |   | 1,228,648   |  |   | 916,774     | 
|                                             |  |      |  |   |             |  |   |             | 
|Total current assets                         |  |      |  | $ | 63,543,030  |  | $ | 73,389,790  | 
|                                             |  |      |  |   |             |  |   |             | 
|Property, plant and equipment,
      net     |  | 7    |  |   | 40,201,686  |  |   | 24,022,181  | 
|Land use rights,
      net                   |  | 8    |  |   | 3,950,927   |  |   | 3,047,021   | 
|                                             |  |      |  |   |             |  |   |             | 
|TOTAL ASSETS                                 |  |      |  | $ | 107,695,643 |  | $ | 100,458,992 | 
|                                             |  |      |  |   |             |  |   |             | 
|                                             |  |      |  |   |             |  |   |             | 
|LIABILITIES AND STOCKHOLDERS EQUITY         |  |      |  |   |             |  |   |             | 
|Current liabilities                          |  |      |  |   |             |  |   |             | 
|Short-term bank loans                        |  | 9    |  | $ | 14,414,996  |  | $ | 24,077,504  | 
|Notes payable                                |  | 10   |  |   | 5,208,485   |  |   | 2,734,444   | 
|Accounts payable                             |  |      |  |   | 6,072,883   |  |   | 6,251,833   | 
|Income tax
      payable                     |  |      |  |   | 2,682,658   |  |   | 1,121,528   | 
|Current maturities of long term
      debts  |  | 12   |  |   | -           |  |   | -           | 
|Accrued
      liabilities and other payables |  | 11   |  |   | 10,291,237  |  |   | 16,784,108  | 
|Customers deposits                           |  |      |  |   | 748,732     |  |   | 957,642     | 
|                                             |  |      |  |   |             |  |   |             | 
|Total current liabilities                    |  |      |  | $ | 39,418,991  |  | $ | 51,927,058  | 
|                                             |  |      |  |   |             |  |   |             | 
|Long-term bank loans                         |  | 12   |  |   | 576,975     |  |   | 102,542     | 
|                                             |  |      |  |   |             |  |   |             | 
|TOTAL LIABILITIES                            |  |      |  | $ | 39,995,966  |  | $ | 52,029,600  | 

See Accompanying Notes to the Financial Statements and
Accountants Report

F-2

---

AMERICAN LORAIN CORPORATION CONSOLIDATED BALANCE
SHEETS (Continued) AS OF DECEMBER 31, 2008 AND 2007
(Stated in US Dollars)

|                                                       |  | Note |  |   | 2008        |  |   | 2007        | 
|------------------------------------------------------ |  | ---- |  | - | ----------- |  | - | ----------- | 
|                                                       |  |      |  |   |             |  |   |             | 
|Minority interests                                     |  | 13   |  | $ | 5,122,021   |  | $ | 3,887,021   | 
|                                                       |  |      |  |   |             |  |   |             | 
|STOCKHOLDERS EQUITY                                   |  |      |  |   |             |  |   |             | 
|Common Stock, $0.001 par value, 200,000,000            |  |      |  |   |             |  |   |             | 
|shares authorized;
      25,172,640 and 24,923,178     |  |      |  |   |             |  |   |             | 
|shares issued and
      outstanding as of December 31, |  |      |  |   |             |  |   |             | 
|2008 and 2007,
      respectively                      |  |      |  |   |             |  |   |             | 
|                                                       |  | 14   |  |   | 25,172      |  |   | 24,923      | 
|Additional paid-in-capital                             |  |      |  |   | 24,187,019  |  |   | 24,187,268  | 
|Statutory reserves                                     |  |      |  |   | 5,438,723   |  |   | 4,497,647   | 
|Retained earnings                                      |  |      |  |   | 27,748,126  |  |   | 13,985,824  | 
|Accumulated other comprehensive Income                 |  |      |  |   | 5,178,616   |  |   | 1,846,708   | 
|                                                       |  |      |  |   |             |  |   |             | 
|                                                       |  |      |  | $ | 62,577,656  |  | $ | 44,542,370  | 
|                                                       |  |      |  |   |             |  |   |             | 
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY             |  |      |  | $ | 107,695,643 |  | $ | 100,458,992 | 

See Accompanying Notes to the Financial Statements and
Accountants Report

F-3

---

AMERICAN LORAIN CORPORATION CONSOLIDATED
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2008 AND
2007 (Stated in US Dollars)

|                                    |   | Note |  |  | 2008         |   |   | 2007        |  
|----------------------------------- | - | ---- |  |  | ------------ | - | - | ----------- | -
|                                    |   |      |  |  |              |   |   |             |  
|Net revenues                        | $ |      |  |  | 132,360,317  |   | $ | 82,094,963  |  
|Cost of revenues                    |   |      |  |  | (101,213,340 | ) |   | (61,932,474 | )
|                                    |   |      |  |  |              |   |   |             |  
|Gross profit                        | $ |      |  |  | 31,146,977   |   | $ | 20,162,490  |  
|                                    |   |      |  |  |              |   |   |             |  
|Operating expenses                  |   |      |  |  |              |   |   |             |  
|Selling and marketing expenses      |   |      |  |  | (6,166,248   | ) |   | (2,623,138  | )
|General and administrative expenses |   |      |  |  | (4,047,988   | ) |   | (2,864,813  | )
|                                    |   |      |  |  |              |   |   |             |  
|Operating Income                    | $ |      |  |  | 20,932,741   |   | $ | 14,674,539  |  
|                                    |   |      |  |  |              |   |   |             |  
|Investment income                   |   |      |  |  | -            |   |   | 4,769       |  
|Government subsidy income           |   |      |  |  | 328,687      |   |   | 1,373,280   |  
|Interest income                     |   |      |  |  | 99,411       |   |   | 209,010     |  
|Other income                        |   |      |  |  | 251,317      |   |   | 155,467     |  
|Other expenses                      |   |      |  |  | (161,726     | ) |   | (1,445,780  | )
|Interest Expense                    |   |      |  |  | (2,769,597   | ) |   | (2,376,088  | )
|                                    |   |      |  |  |              |   |   |             |  
|Earnings before tax                 | $ |      |  |  | 18,680,833   |   | $ | 12,595,196  |  
|Income tax                          |   | 15   |  |  | (3,003,265   | ) |   | (2,134,916  | )
|                                    |   |      |  |  |              |   |   |             |  
|Income before minority interests    | $ |      |  |  | 15,677,568   |   | $ | 10,460,279  |  
|Minority interests                  |   |      |  |  | (974,190     | ) |   | (715,359    | )
|Net income                          |   |      |  |  | 14,703,378   |   |   | 9,744,920   |  
|                                    |   |      |  |  |              |   |   |             |  
|                                    |   |      |  |  |              |   |   |             |  
|Earnings per share                  |   |      |  |  |              |   |   |             |  
|basic                               | $ |      |  |  | 0.58         |   | $ | 0.43        |  
|diluted                             |   |      |  |  | 0.58         |   |   | 0.42        |  
|Weighted average shares outstanding |   |      |  |  |              |   |   |             |  
|basic                               |   |      |  |  | 25,172,640   |   |   | 22,554,210  |  
|diluted                             |   |      |  |  | 25,172,640   |   |   | 23,177,268  |  

See Accompanying Notes to the Financial Statements and
Accountants Report

F-4

---

AMERICAN LORAIN CORPORATION STATEMENT OF
STOCKHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 2008 AND
2007 (Stated in US Dollars)

|                                         |  |            |  |   |        |  |   |            |   |   |           |  |   |            |   |   | Accumulated   |  |   |            | 
|---------------------------------------- |  | ---------- |  | - | ------ |  | - | ---------- | - | - | --------- |  | - | ---------- | - | - | ------------- |  | - | ---------- | 
|                                         |  | Number     |  |   |        |  |   | Additional |   |   |           |  |   |            |   |   | Other         |  |   |            | 
|                                         |  | of         |  |   | Common |  |   | Paid-in    |   |   | Statutory |  |   | Retained   |   |   | Comprehensive |  |   |            | 
|                                         |  | Shares     |  |   | Stock  |  |   | Capital    |   |   | Reserves  |  |   | Earnings   |   |   | Income        |  |   | Total      | 
|Balance, January 1, 2007                 |  | 17,932,777 |  | $ | 17,933 |  | $ | 6,846,620  |   | $ | 4,439,604 |  | $ | 4,298,947  |   | $ | 1,006,195     |  | $ | 16,609,299 | 
|Issuance of Common Stock for Cash        |  | 6,990,401  |  |   | 6,990  |  |   | 17,340,648 |   |   | -         |  |   | -          |   |   | -             |  |   | 17,347,638 | 
|Net Income                               |  | -          |  |   | -      |  |   | -          |   |   | -         |  |   | 9,744,920  |   |   | -             |  |   | 9,744,920  | 
|Appropriations to Statutory Reserves     |  | -          |  |   | -      |  |   | -          |   |   | 58,043    |  |   | (58,043    | ) |   | -             |  |   | -          | 
|Foreign Currency Translation Adjustment  |  | -          |  |   | -      |  |   | -          |   |   | -         |  |   | -          |   |   | 840,513       |  |   | 840,513    | 
|Balance, December 31, 2007               |  | 24,923,178 |  | $ | 24,923 |  | $ | 24,187,268 |   | $ | 4,497,647 |  | $ | 13,985,824 |   | $ | 1,846,708     |  | $ | 44,542,370 | 
|                                         |  |            |  |   |        |  |   |            |   |   |           |  |   |            |   |   |               |  |   |            | 
|Balance, January 1, 2008                 |  | 24,923,178 |  | $ | 24,923 |  | $ | 24,187,268 |   | $ | 4,497,647 |  | $ | 13,985,824 |   | $ | 1,846,708     |  | $ | 44,542,370 | 
|Issuance of Common Stock                 |  | 249,455    |  |   | 249    |  |   | (249       | ) |   | -         |  |   | -          |   |   | -             |  |   | -          | 
|Share Adjustment to Match Transfer Agent |  | 7          |  |   | -      |  |   | -          |   |   | -         |  |   | -          |   |   | -             |  |   | -          | 
|Net Income                               |  | -          |  |   | -      |  |   | -          |   |   | -         |  |   | 14,703,378 |   |   | -             |  |   | 14,703,378 | 
|Appropriations to Statutory Reserves     |  | -          |  |   | -      |  |   | -          |   |   | 941,076   |  |   | (941,076   | ) |   | -             |  |   | -          | 
|Foreign Currency Translation Adjustment  |  | -          |  |   | -      |  |   | -          |   |   | -         |  |   | -          |   |   | 3,331,908     |  |   | 3,331,908  | 
|Balance, December 31, 2008               |  | 25,172,640 |  | $ | 25,172 |  | $ | 24,187,019 |   | $ | 5,438,723 |  | $ | 27,748,126 |   | $ | 5,178,616     |  | $ | 62,577,656 | 

|                                        |   | Comprehensive |  |   | Comprehensive |  |   |            | 
|--------------------------------------- | - | ------------- |  | - | ------------- |  | - | ---------- | 
|                                        |   | Income        |  |   | Income        |  |   |            | 
|                                        |   | 2008          |  |   | 2007          |  |   | Total      | 
|Net Income                              | $ | 14,703,378    |  | $ | 9,744,920     |  | $ | 30,376,788 | 
|Foreign Currency Translation Adjustment |   | 3,331,908     |  |   | 840,513       |  |   | 4,680,852  | 
|                                        | $ | 18,035,286    |  | $ | 10,585,433    |  | $ | 34,057,640 | 

See Accompanying Notes to the Financial Statements and
Accountants Report

F-5

---

AMERICAN LORAIN CORPORATIONCONSOLIDATED
STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2008
AND 2007 (Stated in US Dollars)

|                                                                          |   | 2008        |   |   | 2007        |  
|------------------------------------------------------------------------- | - | ----------- | - | - | ----------- | -
|Cash flows from operating activities                                      |   |             |   |   |             |  
|Net income                                                                | $ | 14,703,377  |   | $ | 9,744,920   |  
|Minority interest                                                         |   | 974,191     |   |   | 964,666     |  
|Fire Loss                                                                 |   |             |   |   | 1,392,379   |  
|Depreciation                                                              |   | 1,273,935   |   |   | 802,927     |  
|Amortization                                                              |   | 158,428     |   |   | 17,798      |  
|(Increase)/decrease in
      accounts & other receivables                 |   | 14,642,687  |   |   | (23,809,252 | )
|(Increase)/decrease in inventories                                        |   | (6,924,578  | ) |   | (8,560,781  | )
|Increase/(decrease) in
      accounts and other payables                  |   | (5,319,600  | ) |   | 15,862,094  |  
|                                                                          |   |             |   |   |             |  
|Net cash (used in)/provided by operating
      activities                 | $ | 19,508,440  |   | $ | (3,585,249  | )
|Cash flows from investing activities                                      |   |             |   |   |             |  
|Purchase of plant and equipment                                           |   | (13,928,921 | ) |   | (7,657,346  | )
|Purchase of biological assets                                             |   |             |   |   | (2,784,136  | )
|Increase of construction in progress                                      |   | (3,524,520  | ) |   | (2,258,097  | )
|(Increase)/decrease in
      restricted cash                              |   | (1,694,159  | ) |   | 527,482     |  
|Payment of land use rights                                                |   | (1,062,334  | ) |   | (287,344    | )
|Investments in securities                                                 |   | (105,823    | ) |   | 19,374      |  
|Net cash used in investing activities                                     | $ | (20,315,757 | ) | $ | (12,440,067 | )
|Cash flows from financing activities                                      |   |             |   |   |             |  
|Issue of common stock                                                     |   | -           |   |   | 17,347,638  |  
|Dividend paid                                                             |   |             |   |   | -           |  
|Proceeds from notes                                                       |   | 2,474,041   |   |   |             |  
|Bank borrowings                                                           |   | 35,327,917  |   |   | 25,645,795  |  
|Bank repayment                                                            |   | (45,936,138 | ) |   | (23,329,333 | )
|Net cash provided by/(used in)
      financing                            |   |             |   |   |             |  
|Activities                                                                | $ | (8,134,180  | ) | $ | 19,664,100  |  
|Net in cash and cash equivalents
      (used)/sourced                     |   | (8,941,497  | ) |   | 3,638,784   |  
|Effect of foreign currency translation on
      cash and cash equivalents |   | 5,012,863   |   |   | 840,513     |  
|Cash and cash equivalentsbeginning of year                               |   | 6,769,973   |   |   | 2,290,676   |  
|Cash and cash equivalentsend of year                                     | $ | 2,841,339   |   | $ | 6,769,973   |  
|                                                                          |   |             |   |   |             |  
|Supplementary cash flow information:                                      |   |             |   |   |             |  
|Interest received                                                         | $ | 99,411      |   | $ | 209,010     |  
|Interest paid                                                             |   | 2,769,597   |   |   | 2,293,442   |  
|Taxes Paid                                                                |   | 3,003,265   |   |   | 740,943     |  

See Accompanying Notes to the Financial Statements and
Accountants Report

F-6

---

|1. | ORGANIZATION, BASIS OF PRESENTATION, AND PRINCIPAL
      ACTIVITIES
|-- | -------------------------------------------------------------------
|   |                                                                    
|   | (a)                                                                
|   |                                                                    
|   |                                                                    
|   |                                                                    
|   | (b)                                                                
|   |                                                                    
|   |                                                                    
|   |                                                                    
|   |                                                                    
|   |                                                                    
|   | (c)                                                                
|   |                                                                    
|   |                                                                    
|   |                                                                    
|   |                                                                    
|   |                                                                    
|   |                                                                    
|   |                                                                    
|   | (d)                                                                

The Company develops, manufactures,
and sells convenience foods (such as  ready-to-cook (or RTC) meals; ready-to-eat (or RTE)
meals and meals ready-to-eat (or MRE); chestnut products; and frozen, canned,
and bulk foods, in hundreds of varieties. The Company operates through indirect
Chinese subsidiaries. The products are sold in 26 provinces and
      administrative regions in China and 42 foreign countries. Food products
      are categorized into three types: (1) chestnut products, (2) convenience
      food, and (3) frozen, canned, and bulk food (FCB food).

F-7



---

|   |                                             
|-- | --------------------------------------------
|2. | SUMMARY OF SIGNIFICANT ACCOUNTING
  POLICIES
|   |                                             
|   | (a)                                         
|   |                                             
|   |                                             
|   |                                             
|   | (b)                                         
|   |                                             
|   |                                             
|   |                                             
|   |                                             

| |                                        |  |                      |  |  |                             |  |   |                  |  |  |                        |  
| | -------------------------------------- |  | -------------------- |  |  | --------------------------- |  | - | ---------------- |  |  | ---------------------- | -
| | Name of Company                        |  | ***Place
      of*** |  |  | ***Attributable***          |  |   | ***Registered*** |  |  |                        |  
| |                                        |  | incorporation        |  |  | ***equity
      interest*** |  |   | capital          |  |  |                        |  
| |                                        |  |                      |  |  | %                           |  |   |                  |  |  |                        |  
| | Shandong Lorain Co., Ltd               |  | PRC                  |  |  | 80.2                        |  | $ | 12,901,823       |  |  | (RMB
      100,860,000 | )
| | Luotian Lorain Co., Ltd                |  | PRC                  |  |  | 100                         |  | $ | 3,240,013        |  |  | (RMB 25,328,800        | )
| | Junan Hongrun Foodstuff Co.,
      Ltd |  | PRC                  |  |  | 100                         |  | $ | 16,245,603       |  |  | (RMB
      127,000,000 | )
| | Beijing Lorain Co., Ltd                |  | PRC                  |  |  | 100                         |  | $ | 1,279,181        |  |  | (RMB 10,000,000        | )

| | (c) | Use of estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | The preparation of the financial statements in conformity
      with generally accepted accounting principles 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 financial statements
      and the reported amounts of revenues and expenses during the reporting
      period. Management makes these estimates using the best information
      available at the time the estimates are made; however actual results could
      differ materially from those estimates
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (d) | Economic and political risks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | The Companys operations are conducted in the PRC.
      Accordingly, the Companys business, financial condition and results of
      operations may be influenced by the political, economic and legal
      environment in the PRC, and by the general state of the PRC
  economy.                                                                                                                                                                                                                                                                                                                                                                            

The Companys operations in the PRC
are subject to special considerations and significant risks not typically
associated with companies in North America and Western Europe. These include risks associated with, among others, the
      political, economic and legal environment and foreign currency exchange.
      The Companys results may be adversely affected by changes in the
      political and social conditions in the PRC, and by changes in governmental
      policies with respect to laws and regulations, anti-inflationary measures,
      currency conversion, remittances abroad, and rates and methods of
      taxation, among other things.

F-8



---

| |     |                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (e) | Lease prepayments                                                                                                                                                                                
| |     |                                                                                                                                                                                                  
| |     | Lease prepayments represent the cost of land use rights
      in the PRC. Land use rights are carried at cost and amortized on a
      straight-line basis over the period of rights of 50 years.
| |     |                                                                                                                                                                                                  
| | (f) | Property, plant and
equipment                                                                                                                                                                    

Plant and equipment are carried at
cost less accumulated depreciation. Depreciation is provided over their
estimated useful lives, using the straight-line method. Estimated useful lives
of the plant and equipment are as follows:

| | Buildings               | 40 years
| | ----------------------- | --------
| | Machinery and equipment | 10 years
| | Motor vehicles          | 10 years
| | Office equipment        | 5 years 

| |     | The cost and related accumulated depreciation of assets
      sold or otherwise retired are eliminated from the accounts and any gain or
      loss is included in the statement of income. The cost of maintenance and
      repairs is charged to income as incurred, whereas significant renewals and
      betterments are capitalized.                                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (g) | Accounting for the Impairment of Long-Lived
      Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | The long-lived assets held and used by the Company are
      reviewed for impairment whenever events or changes in circumstances
      indicate that the carrying amount of assets may not be recoverable. It is
      reasonably possible that these assets could become impaired as a result of
      technology or other industry changes. Determination of recoverability of
      assets to be held and used is by comparing the carrying amount of an asset
      to future net undiscounted cash flows to be generated by the
  assets.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | If such assets are considered to be impaired, the
      impairment to be recognized is measured by the amount by which the
      carrying amount of the assets exceeds the fair value of the assets. Assets
      to be disposed of are reported at the lower of the carrying amount or fair
      value less costs to sell. During the reporting years, there was no
      impairment loss.                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (h) | Construction in progress                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | Construction in progress represents direct costs of
      construction or acquisition and design fees incurred. Capitalization of
      these costs ceases and the construction in progress is transferred to
      plant and equipment when substantially all the activities necessary to
      prepare the assets for their intended use are completed. No depreciation
      is provided until it is completed and ready for intended use.                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (i) | Investment securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | The Company classifies its equity securities into trading
      or available-for-sale. Trading securities are bought and held principally
      for the purpose of selling them in the near term. All securities not
      included in trading securities are classified as
  available-for-sale.                                                                                                                                                                                                                                             

F-9

---

| |     | Trading and available-for-sale securities are recorded at
      fair value. Unrealized holding gains and losses on trading securities are
      included in the net income. Unrealized holding gains and losses, net of
      the related tax effect, on available for sale securities are excluded from
      net income and are reported as a separate component of other comprehensive
      income until realized. Realized gains and losses from the sale of
      available-for-sale securities are determined on a specific-identification
      basis.                                                                                                                                                                                                                                                                                                                                                        
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | A decline in the market value of any available-for-sale
      security below cost that is deemed to be other-than-temporary results in a
      reduction in carrying amount to fair value. The impairment is charged as
      an expense to the statement of income and comprehensive income and a new
      cost basis for the security is established. To determine whether
      impairment is other-than-temporary, the Company considers whether it has
      the ability and intent to hold the investment until a market price
      recovery and considers whether evidence indicating the cost of the
      investment is recoverable outweighs evidence to the contrary. Evidence
      considered in this assessment includes the reasons for the impairment, the
      severity and duration of the impairment, changes in value subsequent to
      year end, and forecasted performance of the investee.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | Premiums and discounts are amortized or accreted over the
      life of the related available-for-sale security as an adjustment to yield
      using the effective-interest method. Dividend and interest income are
      recognized when earned.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (j) | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | Inventories consisting of finished goods and raw
      materials are stated at the lower of cost or market value. Finished goods
      are comprised of direct materials, direct labor and an appropriate
      proportion of overhead.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (k) | Trade receivables                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | Trade receivables are recognized and carried at the
      original invoice amount less allowance for any uncollectible amounts. An
      estimate for doubtful accounts is made when collection of the full amount
      is no longer probable. Bad debts are written off as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (l) | Customer deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | Customer deposits were received from customers in
      connection with orders of products to be delivered in future
    periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (m) | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | The Company considers all highly liquid investments
      purchased with original maturities of three months or less to be cash
      equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (n) | Advertising                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | All advertising costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (o) | Shipping and handling                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | All shipping and handling are expensed as
  incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (p) | Research and development                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

All research and development costs are
expensed as incurred.

F-10

---

| | (q) | Retirement benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | Retirement benefits in the form of contributions under
      defined contribution retirement plans to the relevant authorities are
      charged to the consolidated statement of income as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (r) | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | The Company uses the accrual method of accounting to
      determine and report its taxable reduction of income taxes for the year in
      which they are available. The Company has implemented Statement of
      Financial Accounting Standards (SFAS) No. 109, Accounting for Income
      Taxes. Income tax liabilities computed according to the United States and
      Peoples Republic of China (PRC) tax laws are provided for the tax effects
      of transactions reported in the financial statements and consists of taxes
      currently due plus deferred taxes related primarily to differences between
      the basis of fixed assets and intangible assets for financial and tax
      reporting. The deferred tax assets and liabilities represent the future
      tax return consequences of those differences, which will be either taxable
      or deductible when the assets and liabilities are recovered or settled.
      Deferred taxes also are recognized for operating losses that are available
      to offset future income taxes. A valuation allowance is created to
      evaluate deferred tax assets if it is more likely than not that these
      items will either expire before the Company is able to realize that tax
      benefit, or that future realization is uncertain.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | Effective January 1, 2008, PRC government implemented a
      new 25% tax rate across the board for all enterprises regardless of
      whether domestic or foreign enterprise without any tax holiday which is
      defined as "two-year exemption followed by three-year half exemption"
      hitherto enjoyed by tax payers. As a result of the new tax law of a
      standard 15% tax rate, tax holidays terminated as of December 31, 2007.
      However, PRC government has established a set of transition rules to allow
      enterprises already started tax holidays before January 1, 2008, to
      continue enjoying the tax holidays until being fully utilized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     | The Company is subject to United States Tax according to
      Internal Revenue Code Sections 951 and 957. Corporate income tax is
      imposed on progressive rates in the range of:
-                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |      | Taxable Income |             
| | ---- | -------------- | ------------
| | Rate | Over           | But Not Over
| | 15%  | 0              | 50,000      
| | 25%  | 50,000         | 75,000      
| | 34%  | 75,000         | 100,000     
| | 39%  | 100,000        | 335,000     
| | 34%  | 335,000        | 10,000,000  
| | 35%  | 10,000,000     | 15,000,000  
| | 38%  | 15,000,000     | 18,333,333  
| | 35%  | 18,333,333     | -           

Based on the consolidated net income
for the year ended December 31, 2008, the Company shall not be subject to income
tax.

The Company accounts for income tax
using an asset and liability approach and allows for recognition of deferred 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 realization is
  uncertain.

F-11

---

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (s) | Statutory reserves                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | Statutory reserves are referring to the amount
      appropriated from the net income in accordance with laws or regulations,
      which can be used to recover losses and increase capital, as approved, and
      are to be used to expand production or operations.                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (t) | Foreign currency translation                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | The accompanying financial statements are presented in
      United States dollars. The functional currency of the Company is the
      Renminbi (RMB). The financial statements are translated into United States
      dollars from RMB at year-end exchange rates as to assets and liabilities
      and average exchange rates as to revenues and expenses. Capital accounts
      are translated at their historical exchange rates when the capital
      transactions occurred.

| |                                        | 2008   | 2007  
| | -------------------------------------- | ------ | ------
| | Year end RMB : US$ exchange rate       | 6.8542 | 7.3141
| | Average yearly RMB : US$ exchange rate | 6.9622 | 7.6172

| |     | The RMB is not freely convertible into foreign currency
      and all foreign exchange transactions must take place through authorized
      institutions. No representation is made that the RMB amounts could have
      been, or could be, converted into US$ at the rates used in
    translation.                                                                                                                                                                                                                                        
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (u) | 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.                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (v) | Earnings per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Basic earnings per share is computed
by dividing net income by the weighted average number of ordinary shares
outstanding during the period. Diluted earnings per share is computed by
dividing net income by the sum of the weighted average number of ordinary shares
outstanding and dilutive potential ordinary shares during the years. During the
years ended 2008 and 2007, no dilutive potential ordinary shares were issued.

F-12

---

| |     | The Company computes earnings per
share (EPS) in accordance with Statement of Financial Accounting Standards No. 128, Earnings per share (SFAS
      No. 128), and SEC Staff Accounting Bulletin No. 98 (SAB 98). SFAS No.
      128 requires companies with complex capital structures to present basic
      and diluted EPS. Basic EPS is measured as the income or loss available to
      common shareholders divided by the weighted average common shares
      outstanding for the period. Diluted EPS is similar to basic EPS but
      presents the dilutive effect on a per share basis of potential common
      shares (e.g., convertible securities, options, and warrants) as if they
      had been converted at the beginning of the periods presented, or issuance
      date, if later. Potential common shares that have an anti-dilutive effect
      (i.e., those that increase income per share or decrease loss per share)
      are excluded from the calculation of diluted EPS.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (w) | Commitments and contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | Liabilities for loss contingencies arising from claims,
      assessments, litigation, fines and penalties and other sources are
      recorded when it is probable that a liability has been incurred and the
      amount of the assessment can be reasonably estimated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (x) | Comprehensive income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | Comprehensive income is defined to include all changes in
      equity except those resulting from investments by owners and distributions
      to owners. Among other disclosures, all items that are required to be
      recognized under current accounting standards as components of
      comprehensive income are required to be reported in a financial statement
      that is presented with the same prominence as other financial statements.
      The Companys current component of other comprehensive income is the
      foreign currency translation adjustment.                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (y) | Recent accounting pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | In March 2008, the FASB issued SFAS No. 161, "Disclosures
      about Derivative Instruments and Hedging Activities, an amendment of FASB
      Statement No. 133" ("SFAS 161"). SFAS 161 applies to all derivative
      instruments and related hedged items accounted for under SFAS No. 133,
      "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
      133"). SFAS 161 requires entities to provide greater transparency about
      (a) how and why an entity uses derivative instruments, (b) how derivative
      instruments and related hedged items are accounted for under SFAS 133 and
      its related interpretations, and (c) how derivative instruments and
      related hedged items affect an entity's financial position, results of
      operations and cash flows. SFAS 161 is effective for financial statements
      issued for fiscal years and interim periods beginning after November 15,
      2008.                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | In May 2008, the FASB issued SFAS No. 162, "The Hierarchy
      of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162
      identifies the sources of accounting principles and the framework for
      selecting the principles used in the preparation of financial statements
      of nongovernmental entities that are presented in conformity with
      generally accepted accounting principles (the GAAP hierarchy). Statement
      162 will become effective 60 days following the SEC's approval of the
      Public Company Accounting Oversight Board amendments to AU Section 411,
      "The Meaning of Present Fairly in Conformity With Generally Accepted
      Accounting Principles."                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | In May 2008, the FASB issued FSP Accounting Principles
      Board ("APB") 14-1 "Accounting for Convertible Debt Instruments That May
      Be Settled in Cash upon Conversion (Including Partial Cash Settlement)"
      ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of certain convertible
      debt instruments that may be settled in cash (or other assets) on
      conversion to separately account for the liability (debt) and equity
      (conversion option) components of the instrument in a manner that reflects
the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for
fiscal years beginning after December 15, 2008 on a retroactive basis.                                                                                                                                                                                                                                                                                                                    

F-13

---

In September 2008, FASB issued FSP No.
133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain
Guarantees, an amendment of FASB Statement No. 133 and FASB Interpretation No.
45; and Clarification of the Effective Date of FASB Statement No. 161. This FSP
is intended to improve disclosures about credit derivatives by requiring more
information about the potential adverse effects of changes in credit risk on the
financial position, financial performance, and cash flows of the sellers of
credit derivatives. The provisions of the FSP that amend Statement 133 and FIN
45 are effective for reporting periods (annual or interim) ending after November
15, 2008.

This FSP amends FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, to
require disclosures by sellers of credit derivatives, including credit
derivatives embedded in hybrid instruments. This FSP also amends FASB
Interpretation (FIN) No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others, to require an additional disclosure about the current status of the
payment/performance risk of a guarantee. The provisions of the FSP that amend
Statement 133 and FIN 45 are effective for reporting periods (annual or interim)
ending after November 15, 2008.

Finally, this FSP clarifies the
effective date in FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities. The disclosures required by Statement
161 should be provided for any reporting period (annual or quarterly interim)
beginning after November 15, 2008. For example, an entity with a March 31 fiscal
year-end should provide the disclosures for its fourth quarter interim period
ending March 31, 2009, in its 2009 annual financial statements. This
clarification of the effective date of Statement 161 is effective upon issuance
of the FSP.

The Company is currently evaluating
the potential impact, if any, of the adoption of the above recent accounting
pronouncements on its consolidated results of operations and financial
condition.

|3. | RESTRICTED CASH                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Restricted Cash represents interest bearing deposits
      placed with banks to secure banking facilities in the form of loans and
      notes payable. The restriction of funds is based on time. The funds that
      collateralize loans are held for 60 days in savings account that pay
      interest at the prescribed national daily savings account rate. For funds
      that underline notes payable, the cash is deposited in six month time
      deposits that pay interest at the national time deposit rate.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4. | TRADE ACCOUNTS
RECEIVABLE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| |                                      |   | 2008       |   |   | 2007       |  
| | ------------------------------------ | - | ---------- | - | - | ---------- | -
| | Trade accounts receivable            | $ | 25,421,293 |   | $ | 33,031,997 |  
| | Less:Allowance for doubtful accounts |   | (127,967   | ) |   | (172,309   | )
| |                                      |   |            |   |   |            |  
| |                                      | $ | 25,293,326 |   | $ | 32,859,688 |  

F-14

---

| | Allowance for Bad Debt:         |   | 2008    |   |   | 2007    |  
| | ------------------------------- | - | ------- | - | - | ------- | -
| | Beginning Balance               | $ | 172,309 |   | $ | 226,881 |  
| | Additions to Allowance          |   |         |   |   | -       |  
| | Less:Bad
      debt written-off |   | (44,342 | ) |   | (54,572 | )
| |                                 | $ | 127,967 |   | $ | 172,309 |  

The Company offers credit terms of
between 30 to 60 days to most of their international distributors as well as
domestic supermarkets and wholesalers, and between 0 to 15 days for most of
their agents.

|5. | OTHER RECEIVABLES                                                    
|-- | ---------------------------------------------------------------------
|   |                                                                      
|   | Other receivables consisted of the following as of
      December 31:

| |                                                    |   | 2008      |  |   | 2007      | 
| | -------------------------------------------------- | - | --------- |  | - | --------- | 
| | Advances to suppliers                              | $ | 663,302   |  | $ | 2,858,351 | 
| | Advances to Employees for job/travel disbursements |   | 3,160,886 |  |   | 3,027,007 | 
| | Amount due by a non-related enterprise             |   | 1,278,501 |  |   | 1,063,932 | 
| | Other non-related receivables                      |   | 5,030     |  |   | 451,183   | 
| | Business taxes prepayment                          |   | -         |  |   | 21,876    | 
| | Sundry deposits                                    |   | -         |  |   | 130,627   | 
| |                                                    | $ | 5,107,719 |  | $ | 7,552,976 | 

|6. | INVENTORIES                                                    
|-- | ---------------------------------------------------------------
|   |                                                                
|   | Inventories consisted of the following as of December
      31:

| |                 |   | 2008       |  |   | 2007       | 
| | --------------- | - | ---------- |  | - | ---------- | 
| | Raw materials   | $ | 9,636,050  |  | $ | 5,278,484  | 
| | Work in Process |   | 1,143,766  |  |   | 4,828,790  | 
| | Finished goods  |   | 14,048,106 |  |   | 7,796,070  | 
| |                 | $ | 24,827,922 |  | $ | 17,903,344 | 

|7. | PROPERTY, PLANT, AND EQUIPMENT                                                    
|-- | ----------------------------------------------------------------------------------
|   |                                                                                   
|   | Property, plant, and equipment consisted of the following
      as of December 31:

| |                                    |   | 2008       |  |   | 2007       | 
| | ---------------------------------- | - | ---------- |  | - | ---------- | 
| | At cost:                           |   |            |  |   |            | 
| | Buildings                          | $ | 27,798,849 |  | $ | 15,547,205 | 
| | Landscaping,
      plant, and tree |   | 2,752,101  |  |   | 2,784,136  | 
| | Machinery and equipment            |   | 7,229,512  |  |   | 5,732,776  | 
| | Office equipment                   |   | 859,818    |  |   | 28,520     | 
| | Motor vehicles                     |   | 39,824     |  |   | 658,547    | 
| |                                    | $ | 38,680,104 |  | $ | 24,751,184 | 

F-15

---

| | Less:accumulated depreciation |   |            |   |   |            |  
| | ----------------------------- | - | ---------- | - | - | ---------- | -
| | Buildings                     |   | (1,192,855 | ) |   | (698,732   | )
| | Machinery and equipment       |   | (2,628,710 | ) |   | (1,954,257 | )
| | Office equipment              |   | (414,478   | ) |   | (15,643    | )
| | Motor vehicles                |   | (24,992    | ) |   | (318,468   | )
| |                               |   | (4,261,035 | ) |   | (2,987,100 | )
| |                               |   |            |   |   |            |  
| | Construction in Progress      |   | 5,782,617  |   |   | 2,258,097  |  
| |                               | $ | 40,201,686 |   | $ | 24,022,181 |  

Construction in progress mainly
comprises capital expenditures for construction of the Companys new corporate
campus, including offices, factories and staff dormitories. Capital commitments
for the construction are immaterial for the three years above.

Landscaping, plant and tree is chestnut
trees investment in the development of agricultural operations, which have not
been the significant source of the raw materials needed for the Companys
operations to date.

|8. | LAND USE RIGHTS, NET                                               
|-- | -------------------------------------------------------------------
|   |                                                                    
|   | Land use rights consisted of the following as of December
      31:

| |                                     |   | 2008      |   |   | 2007      |  
| | ----------------------------------- | - | --------- | - | - | --------- | -
| | Land use rights, at cost            | $ | 4,236,266 |   | $ | 3,173,931 |  
| | Less:Accumulated
      amortization |   | (285,339  | ) |   | (126,910  | )
| |                                     | $ | 3,950,927 |   | $ | 3,047,021 |  

|   |                                                                                                                                                                 
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | Land use rights represent the prepaid land use right. The
      PRC government owns the land on which the Companys corporate campus is
      being constructed.
|   |                                                                                                                                                                 
|9. | SHORT-TERM DEBTS                                                                                                                                                
|   |                                                                                                                                                                 
|   | Short-term debts consisted of the following as of
      December 31:                                                                                            

|                                                                           |   | 2008      |   | 2007   
|-------------------------------------------------------------------------- | - | --------- | - | -------
|Loans from Junan County Construction Bank,                                 |   |           |   |        
|
    Interest rate at 6.264% per annum due 8/31/2007                      | $ | -         | $ | 410.167
|
    Interest rate at 6.264% per annum due 9/7/2007                       |   | -         |   | 343,173
|
    Interest rate at 7.776% per annum due 12/18/2007                     |   | -         |   | 261,139
|
    Interest rate at 7.776% per annum due 12/18/2007                     |   | -         |   | 355,478
|
    Interest rate at 8.541% per annum due 3/5/2008                       |   | -         |   | 355,478
|
    Interest rate at 8.892% per annum due 7/23/2008                      |   | -         |   | 328,133
|
    Interest rate at 6.314% per annum due 9/17/2008                      |   | -         |   | 256,696
|
    Interest rate at 6.264% per annum due between 1/10/2007 and 9/7/2007 |   | -         |   | -      
|
    Interest rate at 7.452% per annum due 2/24/2009                      |   | 102,127   |   | -      
|
    Interest rate at 10.452% per annum due 1/22/2009                     |   | 1,575,676 |   | -      
|
    Interest rate at 7.236% per annum due 2/3/2009                       |   | 116,717   |   | -      

F-16

---

|                                                                                      |  |           |  |          
|------------------------------------------------------------------------------------- |  | --------- |  | ---------
|Loan from Junan
    County Agriculture Bank,                                          |  |           |  |          
| Interest rate at 10.251% per annum due 1/11/2008                                    |  | -         |  | 231,061  
| Interest rate at 10.557% per annum due 1/11/2008                                    |  | -         |  | 345,907  
| Interest rate at 11.016% per annum due 2/21/2008                                    |  | -         |  | 191,411  
|                                                                                      |  |           |  |          
|                                                                                      |  |           |  |          
|                                                                                      |  |           |  |          
|                                                                                      |  |           |  |          
|                                                                                      |  | 2008      |  | 2007     
| Interest rate at 11.169% per annum due 6/7/2008                                     |  | -         |  | 123,050  
| Interest rate at 11.169% per annum due 6/7/2008                                     |  | -         |  | 41,017   
| Interest rate at 11.169% per annum due 6/29/2008                                    |  | -         |  | 347,274  
| Interest rate at 11.169% per annum due 6/29/2008                                    |  | -         |  | 109,378  
| Interest rate at 11.169% per annum due 7/3/2008                                     |  | -         |  | 505,872  
| Interest rate at 7.884% per annum due 7/18/2008                                     |  | -         |  | 273,444  
| Interest rate at 11.628% per annum due 7/25/2008                                    |  | -         |  | 191,411  
| Interest rate at 11.628% per annum due 8/1/2008                                     |  | -         |  | 82,033   
| Interest rate at 12.393% per annum due 10/30/2008                                   |  | -         |  | 410,167  
| Interest rate at 12.393% per annum due 11/11/2008                                   |  | -         |  | 239,264  
| Interest rate at 12.393% per annum due 11/14/2008                                   |  | -         |  | 205,083  
| Interest rate at 12.393% per annum due 11/14/2008                                   |  | -         |  | 199,614  
| Interest rate at 12.393% per annum due 11/22/2008                                   |  | -         |  | 410,167  
| Interest rate at 12.393% per annum due 11/29/2008                                   |  | -         |  | 287,117  
| Interest rate at 12.393% per annum due 12/4/2008                                    |  | -         |  | 410,167  
| Interest rate at 12.393% per annum due 12/13/2008                                   |  | -         |  | 410,167  
| Interest rate at 7.65% to 10.404% per annum due between 1/10/2007 and
    12/5/2007 |  | -         |  | -        
| Interest rate at
    12.699% per annum due 8/6/2009                                 |  | 583,584   |  | -        
| Interest rate at 12.699% per annum due 8/18/2009                                    |  | 656,532   |  | -        
| Interest rate at
    12.699% per annum due 8/18/2009                                |  | 364,740   |  | -        
| Interest rate at 10.577% per annum due 3/27/2009                                    |  | 1,458,959 |  | -        
|                                                                                      |  |           |  |          
|Loan from Junan
    County Industrial and Commercial Bank,                            |  |           |  |          
| Interest rate at 6.120% per annum due 1/11/2007                                     |  | -         |  | 546,889  
| Interest rate at 8.424% per annum due 3/7/2007                                      |  | -         |  | 806,661  
| Interest rate at 6.120% per annum due 11/10/2007                                    |  | -         |  | 136,722  
| Interest rate at 8.073% per annum due 12/7/2007                                     |  | -         |  | 1,278,353
| Interest rate at 7.956% per annum due 1/18/2008                                     |  | -         |  | 478,528  
| Interest rate at 7.956% per annum due 1/18/2008                                     |  | -         |  | 546,889  
| Interest rate at 6.9545% per annum due 2/8/2008                                     |  | -         |  | 604,299  
| Interest rate at 6.570% per annum due 2/8/2008                                      |  | -         |  | 546,889  
| Interest rate at 7.956% per annum due 3/5//2008                                     |  | -         |  | 1,367,222
| Interest rate at 8.892% per annum due 3/7/2008                                      |  | -         |  | 410,167  
| Interest rate at 6.12% per annum due 6/30/2008                                      |  | -         |  | 706,766  
| Interest rate at 7.290% per annum due 6/30/2008                                     |  | -         |  | 232,428  

F-17

---

|                                                                                        |  |           |  |          
|--------------------------------------------------------------------------------------- |  | --------- |  | ---------
|Interest rate
    at 3.5% to 6.12% per annum due between 1/11/2007 and 12/10/2007      |  | -         |  | -        
|Interest rate
    at 6.120% per annum due 1/10/2009                                    |  | 145,896   |  | -        
|Interest rate
    at 8.541% per annum due 3/4/2009                                     |  | 393,919   |  | -        
|Interest rate
    at 3.1725% per annum due 2/19/2009                                   |  | 240,035   |  | -        
|Interest rate
    at 3.1725% per annum due 2/19/2009                                   |  | 118,161   |  | -        
|Interest rate
    at 10.1825% per annum due 2/26/2009                                  |  | 120,762   |  | -        
|                                                                                        |  |           |  |          
|                                                                                        |  | 2008      |  | 2007     
|Interest rate
    at 10.1825% per annum due 3/5/2009                                   |  | 173,670   |  |          
|                                                                                        |  |           |  |          
|Loan from Junan County Merchants Bank,                                                  |  |           |  |          
|Interest rate
    at 6.210% per annum due 3/13/2008 -                                  |  |           |  | 1,367,222
|                                                                                        |  |           |  |          
|Loan from Junan County Agricultural
    Financial Institution,                          |  |           |  |          
|Interest rate
    at 9.750% per annum due 5/20/2008                                    |  | -         |  | 25,977   
|Interest rate
    at 12.420% per annum due 6/20/2008                                   |  | -         |  | 68,361   
|Interest rate
    at 10.935% per annum due 10/1/2008                                   |  | -         |  | 2,597,722
|Interest rate
    at 9.765% per annum due between 1/13/2007 and 5/22/2007              |  | -         |  | -        
|Interest rate
    at 9.765% per annum  due between 1/13/2007 and 5/22/2007             |  | -         |  | -        
|                                                                                        |  |           |  |          
|Loan from Linyi Commercial Bank,                                                        |  |           |  |          
|Interest rate
    at 10.71% per annum due 2/6/2008                                     |  | -         |  | 615,250  
|Interest rate
    at 10.71% per annum due 2/9/2008                                     |  | -         |  | 497,221  
|Interest rate
    at 13.73% per annum due                                              |  | -         |  | 136,722  
|Interest rate
    at 9.765% to 10.4715% per annum  due between 1/9/2007 and 11/29/2007 |  | -         |  | -        
|Interest rate
    at 13.073% per annum due 1/5/2009                                    |  | 685,711   |  | -        
|Interest rate
    at 13.073% per annum due 1/5/2009                                    |  | 656,532   |  |          
|Interest rate
    at 8.539% per annum due 3/27/2009                                    |  | 1,458,959 |  |          
|Interest rate
    at 8.539% per annum due 3/27/2009                                    |  | 141,885   |  |          
|                                                                                        |  |           |  |          
|Loan from Junan Agricultural Development
    Bank,                                      |  |           |  |          
|Interest rate
    at 7.290% per annum due 9/26/2008                                    |  | -         |  | 1,367,222
|Interest rates
    at 5.3625% to 6.435% per annum due between 7/19/2007 and 9/4/2007   |  | -         |  | -        
|                                                                                        |  |           |  |          
|Loan from Beijing Miyun County Shilipu
    Rural Financial Institution,                 |  |           |  |          
|Interest rates
    at 7.56% to 9.18% per annum  due between 3/30/2007 and 5/27/2007    |  | -         |  | -        
|Interest rates
    at 8.539% per annum due 9/30/2009                                   |  | 2,772,023 |  | -        
|                                                                                        |  |           |  |          
|Loan from China Agricultural Bank, Miyun                                                |  |           |  |          
|Interest rate
    at 7.02% per annum due 7/18/2007                                     |  | -         |  | -        
|                                                                                        |  |           |  |          

F-18

---

|                                                                   |   |            |   |           
|------------------------------------------------------------------ | - | ---------- | - | ----------
|Loan
    from China Agricultural Bank, Luotian Branch              |   |            |   |           
|                                                                   |   |            |   |           
| Interest rate at 7.722% per annum due 8/30/2008                  |   | -          |   | 1,039,089 
| Interest rates at 7.605% to 7.95% per due 6/30/2007 and 9/5/2007 |   | -          |   | -         
|                                                                   |   |            |   |           
|                                                                   |   | 2008       |   | 2007      
| Interest rate at 7.47% per annum due 9/7/2009                    |   | 817,017    |   | -         
| Interest rate at 7.47% per annum
    due 9/7/2009                |   | 291,792    |   | -         
|                                                                   |   |            |   |           
|Bank of
    Beijing                                                |   |            |   |           
| Interest rate at 7.722% per annum
    due 7/28/2009              |   | 291,792    |   | -         
|                                                                   |   |            |   |           
|Bank of
    China, Junan Branch,                                   |   |            |   |           
| Interest rate at 7.500% per annum
    due 5/19/2009              |   | 4,014      |   | 9,815     
|                                                                   |   |            |   |           
|United
    Commercial Bank, China Branch                           |   |            |   |           
| Interest rate at 5.494% per annum
    due 1/14/2009              |   | 1,156,955  |   | -         
|                                                                   |   |            |   |           
|International Trust Co., Ltd.,                                     |   |            |   |           
| Interest rate at 7.839% per annum due 5/19/2009                  |   | -          |   | 1,367,222 
|                                                                   |   |            |   |           
|Credit
    Union, Junan                                            |   |            |   |           
| Interest rate at 8.5837% per annum
    due 1/7/2009              |   | 43,769     |   | -         
| Interest rate at 8.5837% per annum due 1/12/2009                 |   | 43,769     |   | -         
|                                                                   |   |            |   |           
|International Trust and Investment Co., Ltd.                       |   |            |   |           
| Interest rate at 0.67% per annum due 6/13/2008                   |   | -          |   | -         
|                                                                   | $ | 14,414,996 | $ | 24,077,504
|                                                                   |   |            |   |           

The short-term loans, which are denominated in the functional
currency Renminbi (RMB), were primarily obtained for general working capital.

All overdue loans were extended by its financial institution.

10. NOTES PAYABLE

Notes payable consisted of the following as of December 31:

|                                                           |   | 2008 |   | 2007     
|---------------------------------------------------------- | - | ---- | - | ---------
|                                                           |   |      |   |          
|Notes to Industrial and Commercial Bank,                   |   |      |   |          
|Bank
    commission charge at 3.99% due December 20, 2007 | $ | -    | $ | 546,889  
|Bank
    commission charge at 3.99% due December 12, 2007 |   | -    |   | 1,093,778
|Bank
    commission charge at 3.99% due December 18, 2007 |   | -    |   | 1,093,778
|                                                           |   |      |   |          

F-19

---

|                                                          |   |           |   |          
|--------------------------------------------------------- | - | --------- | - | ---------
|Bank
    commission charge at 3.744% due June 1, 2007    |   | -         |   | -        
|                                                          |   |           |   |          
|Notes to Linyi Commercial Bank,                           |   |           |   |          
|Bank
    commission charge at 2.85%, due May 20, 2007    |   | -         |   | -        
|                                                          |   |           |   |          
|Notes to Junan County Construction Bank,                  |   |           |   |          
|Bank
    commission charge at 4%, due 1/12/2009          |   | 554,405   |   | -        
|                                                          |   |           |   |          
|Notes to Junan County Agriculture Bank,                   |   |           |   |          
|Bank
    commission charge at 4%, due 1/16/2009          |   | 277,202   |   | -        
|                                                          |   |           |   |          
|Loan to Jinan Branch, Shenzhen Development
    Bank,      |   |           |   |          
|Bank charge
    commission charge at 3.96%, due 2/6/2009 |   | 4,376,878 |   | -        
|                                                          | $ | 5,208,485 | $ | 2,734,444

All overdue notes were extended by its
financial institution.

|11. | ACCRUED EXPENSES AND OTHER PAYABLE                                                     
|--- | ---------------------------------------------------------------------------------------
|    |                                                                                        
|    | Accrued expenses and other payables consisted of the
      following as of December 31:

| |                                  |   | 2008       |  |   | 2007       | 
| | -------------------------------- | - | ---------- |  | - | ---------- | 
| | Accrued salaries and wages       | $ | 605,471    |  | $ | 302,356    | 
| | Accrued utility expenses         |   | 481,678    |  |   | 515,092    | 
| | Accrued interest expenses        |   | -          |  |   | -          | 
| | Accrued transportation expenses  |   | 1,103,112  |  |   | 371,839    | 
| | Other accruals                   |   | -          |  |   | 2,848,985  | 
| | Business and other taxes         |   | 1,979,650  |  |   | -          | 
| | Purchases disbursements payables |   | 6,018,057  |  |   | 12,359,109 | 
| | Interest Payable                 |   | -          |  |   | 180,696    | 
| | Accrued staff welfare            |   | 103,269    |  |   | 206,031    | 
| |                                  |   |            |  |   |            | 
| |                                  | $ | 10,291,237 |  | $ | 16,784,108 | 

|12. | LONG-TERM DEBTS                                                    
|--- | -------------------------------------------------------------------
|    |                                                                    
|    | Long-term debts consisted of the following as of December
      31:

|                                                    |   | 2008 |   | 2007
|--------------------------------------------------- | - | ---- | - | ----
|Loan from Bank of China, Junan
    Branch,          |   |      |   |     
|Interest rates
    at 0.67% per annum due5/19/2009 | $ | -    | $ | -   

|                                                           |   |         |   |        
|---------------------------------------------------------- | - | ------- | - | -------
|Loan from
    Agricultural Development Luotian Government, |   |         |   |        
| Interest rates at 0.67% per annum due - 12/11/2010       |   |         |   | 102,542
| Interest rates at 2.10% per annum due 12/11/2011         |   | 25,532  |   | -      
|                                                           |   |         |   |        
|Loan from United
    Commercial Bank, China Branch         |   |         |   |        
| Interest rates at 5.494% per annum due 1/14/2011         |   | 551,443 |   | -      
|                                                           |   |         |   |        
|Less: Current
    maturities of long-term debts            |   | -       |   | -      
|                                                           |   |         |   |        
|                                                           | $ | 576,975 | $ | 102,542
|                                                           |   |         |   |        

F-20

---

|13. | MINORITY INTERESTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | This represents the 19.8% equity of Shangdong Lorain held
      by a state-owned interest, Shandong Economic Development Investment
      Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|14. | CAPITALIZATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Dating back to May 3, 2007, the Company underwent a
      reverse-merger and a concurrent financing transaction that resulted in
      24,923,178 shares of outstanding common stock that remained unchanged
      until through December 31, 2007. During the course of 2008, several
      holders of warrants issued in connection with the financing transaction
      exercised their rights to purchase shares at the prescribed exercise
      price. The holders of the warrants exercised the right to purchase a total
      of 360,207; however, because the holders did not pay in cash for the
      warrants, 110,752 of those shares were cancelled as consideration in lieu
      of the warrant holders paying in cash. Ultimately, 249,455 of new shares
      were issued to those who exercised their warrant. The Company also made an
      adjustment to it outstanding share count for rounding errors as result of
      the split and reverse splits made at the time of the reverse merger. The
      number of shares in the adjustment was an addition of seven shares. The
      Company believes the adjustment of seven shares is immaterial to both
      prior and current earnings per share calculation. As detailed in the table
      below, the total number of outstanding shares at December 31, 2008 was
      25,172,640.

F-21

---

| |                      |  |            |  |   |              |  |   | Additional | 
| | -------------------- |  | ---------- |  | - | ------------ |  | - | ---------- | 
| |                      |  | Number of  |  |   | Common Stock |  |   | Paid-in    | 
| | Type of
      Shares |  | Shares     |  |   | Capital      |  |   | Capital    | 
| |                      |  |            |  |   |              |  |   |            | 
| | Free Trading Shares  |  | 8,406,244  |  | $ | 8,406        |  | $ | 17,340,648 | 
| | Restricted Shares    |  | 16,766,396 |  |   | 16,766       |  |   | 6,846,371  | 
| |                      |  | 25,172,640 |  | $ | 25,172       |  | $ | 24,187,019 | 

|15. | INCOME TAXES
|--- | ------------

All of the Groups income before income
taxes and related tax expenses are from PRC sources. In accordance with the
relevant tax laws and regulations of PRC, the corporation income tax rate is
33%. However, also in accordance with the relevant taxation laws in the PRC,
some of the subsidiaries of the Group are eligible for tax exemption. In
particular, from the time that a company has its first profitable tax year, the
company is exempt from corporate income tax for its first two year and is then
entitled to a 50% tax reduction for the succeeding three year. Actual income tax
expenses reported in the consolidated statements of income and comprehensive
income differ from the amounts computed by applying the PRC statutory income tax
rate of 33% to income before income tax for the period from August 4, 2006 (date
of incorporation) to December 31, 2008 for the following reasons: -

| |                                     |   | 2008       |   |   | 2007       |  
| | ----------------------------------- | - | ---------- | - | - | ---------- | -
| | Income before tax                   | $ | 18,680,832 |   | $ | 12,595,196 |  
| |                                     |   |            |   |   |            |  
| | Tax at the income tax rate          |   | 4,670,208  |   |   | 3,778,559  |  
| | Effect of tax exemption granted     |   | (1,666,943 | ) |   | (1,643,643 | )
| | Income tax                          | $ | 3,003,265  |   | $ | 2,134,916  |  
| |                                     |   |            |   |   |            |  
| | Per Share Effect of Tax Exemption   |   |            |   |   |            |  
| |                                     |   | 2008       |   |   | 2007       |  
| | Effect of tax exemption granted     | $ | 1,666,943  |   | $ | 1,643,643  |  
| |                                     |   |            |   |   |            |  
| | Weighted-Average Shares Outstanding |   | 25,172,640 |   |   | 24,923,178 |  
| | Per share effect                    | $ | 0.0662     |   | $ | 0.0659     |  

Effective January 1, 2008, PRC
government implements a new 25% tax rate across the board for all enterprises
regardless of whether domestic or foreign enterprise without any tax holiday
which is defined as two-year exemption followed by three-year half exemption
hitherto enjoyed by tax payers. As a result of the new tax law of a standard 15%
tax rate, tax holidays terminated as of December 31, 2007. However, PRC
government has established a set of transition rules to allow enterprises
already started tax holidays before January 1, 2008, to continue enjoying the
tax holidays until being fully utilized.

Based on the background of each
constituent of our group, the income tax rates applicable to the four
constituents for 2007, 2008 and 2009 are depicted in the following table.

F-22

---

| |                 |  |      |  |  |      |  |  |      | 
| | --------------- |  | ---- |  |  | ---- |  |  | ---- | 
| | Income Tax Rate |  | 2007 |  |  | 2008 |  |  | 2009 | 
| | Junan Hongran   |  | 15%  |  |  | 15%  |  |  | 25%  | 

| | Luotian Lorain   |  | 0%  |  |  | 15% |  |  | 15% | 
| | ---------------- |  | --- |  |  | --- |  |  | --- | 
| | Beijing Lorain   |  | 0%  |  |  | 0%  |  |  | 15% | 
| | Shangdong Lorain |  | 30% |  |  | 25% |  |  | 25% | 

|16. | SALES BY PRODUCT TYPE
|--- | ---------------------

Sales by categories of product
consisted of the following as of December 31:

| | Category         |   | 2008        |  |   | 2007       | 
| | ---------------- | - | ----------- |  | - | ---------- | 
| | Chestnut         | $ | 83,027,719  |  | $ | 45,799,404 | 
| | Convenience food |   | 25,736,534  |  |   | 15,288,515 | 
| | FCB food         |   | 23,596,064  |  |   | 21,007,044 | 
| | Total            | $ | 132,360,317 |  | $ | 82,094,963 | 

Revenue by geography consisted of the
following as of December 31:

| | Country                  |   | 2008        |  |   | 2007       | 
| | ------------------------ | - | ----------- |  | - | ---------- | 
| | Australia                | $ | -           |  | $ | 18,710     | 
| | Belgium                  |   | 1,893,467   |  |   | 2,040,636  | 
| | Canada                   |   | -           |  |   | 14,112     | 
| | China                    |   | 91,442,654  |  |   | 48,566,474 | 
| | France                   |   | 1,579,449   |  |   | 284,101    | 
| | Germany                  |   | 722,436     |  |   | 44,527     | 
| | Holland                  |   | 346,140     |  |   | 586,379    | 
| | Hong Kong                |   | 189,790     |  |   | 71,860     | 
| | Japan                    |   | 21,764,764  |  |   | 17,077,937 | 
| | Kuwait                   |   | -           |  |   | 364,893    | 
| | Malaysia                 |   | 1,395,654   |  |   | 1,569,794  | 
| | Mexico                   |   | -           |  |   | -          | 
| | Saudi Arabia             |   | 32,961      |  |   | 684,321    | 
| | Singapore                |   | 1,054,239   |  |   | 2,442,038  | 
| | South Korea              |   | 8,338,475   |  |   | 5,174,079  | 
| | Taiwan                   |   | 331,723     |  |   | 57,819     | 
| | United Arab Emirates     |   | -           |  |   | 239,565    | 
| | United Kingdom           |   | 2,775,230   |  |   | 1,793,707  | 
| | United States of America |   | 493,335     |  |   | 1,064,011  | 
| | Other                    |   | -           |  |   | -          | 
| | Total                    | $ | 132,360,317 |  | $ | 82,094,963 | 

F-23

---

EXHIBIT INDEX

|Exhibit No. | **Description**                                                                                                                                                                                                                                                                                                                       
|----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                                                                                                                                                                                                                                                                                                                                       
|2.1         | Share Exchange Agreement, dated May 3, 2007,
      among the registrant, International Lorain Holding, Inc. and its
      stockholders. Incorporated by reference to Exhibit 2.1 to the registrants
      current report on Form 8-K filed on May 9, 2007 in commission file number
      0-31619.                                   
|            |                                                                                                                                                                                                                                                                                                                                       
|3.1         | Restated Certificate of Incorporation of the
      registrant as filed with the Secretary of State of Delaware. Incorporated
      by reference to Exhibit 3.1 to the registrants current on Form 8-K filed
      on May 9, 2007 in commission file number 0-31619.                                                                  
|            |                                                                                                                                                                                                                                                                                                                                       
|3.2         | Bylaws of the registrant, adopted on March 31,
      2000. Incorporated by reference to Exhibit 3.2 to the registrants
      Registration Statement on Form 10SB12G filed October 19, 2001, in
      commission file 0-31619.                                                                                                        
|            |                                                                                                                                                                                                                                                                                                                                       
|4.1         | Certificate of Designation of Series A Voting
      Convertible Preferred Stock of the registrant as filed with the Secretary
      of State of Delaware on April 9, 2007. Incorporated by reference to
      Exhibit 4.1 to the registrants current report on Form 8-K filed on May 9,
      2007 in commission file number 0-31619.
|            |                                                                                                                                                                                                                                                                                                                                       
|4.2         | Certificate of Designation of Series B Voting
      Convertible Preferred Stock of registrant as filed with the Secretary of
      State of Delaware on April 30, 2007. Incorporated by reference to Exhibit
      4.2 to the registrants current report on Form 8-K filed on May 9, 2007 in
      commission file number 0-31619.   
|            |                                                                                                                                                                                                                                                                                                                                       
|4.3         | Option Agreement, dated May 3, 2007, between
      Mr. Hisashi Akazawa and Mr. Si Chen. Incorporated by reference to Exhibit
      4.3 to the registrants current report on Form 8-K filed on May 9, 2007 in
      commission file number 0-31619.                                                                                   
|            |                                                                                                                                                                                                                                                                                                                                       
|4.4         | Form of Registration Rights Agreement, dated
      May 3, 2007. Incorporated by reference to Exhibit to the registrants
      current report on Form 8-K filed on May 9, 2007 in commission file number
      0-31619.                                                                                                               
|            |                                                                                                                                                                                                                                                                                                                                       
|4.5         | Form of Common Stock Purchase Warrants issued
      to investors, dated May 3, 2007. Incorporated by reference to Exhibit 4.5
      to the registrants current report on Form 8-K filed on May 9, 2007 in
      commission file number 0-31619.                                                                                      
|            |                                                                                                                                                                                                                                                                                                                                       
|4.6         | Form of Common Stock Purchase Warrants issued
      to Sterne Agee & Leach, Inc. and its designee, dated May 3, 2007.
      Incorporated by reference to Exhibit 4.5 to the registrants current
      report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.                                                     

|     |                                                                                                                                                                                                                                                                                                                                                                   
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 | Form of the Securities Purchase Agreement,
      dated May 3, 2007, by and among the registrant and the investors named
      therein, and joined by Mr. Akazawa and Mr. Chen as to certain sections.
      Incorporated by reference to Exhibit 10.1 to the registrants current
      report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
|     |                                                                                                                                                                                                                                                                                                                                                                   
|10.2 | Make Good Escrow Agreement, dated May 3, 2007,
      by and among the registrant, Sterne Agee & Leach, Inc., Mr. Hisashi
      Akazawa, Mr. Si Chen and Securities Transfer Corporation. Incorporated by
      reference to Exhibit 10.2 to the registrants current report on Form 8-K
      filed on May 9, 2007 in commission file number 0-31619.             
|     |                                                                                                                                                                                                                                                                                                                                                                   
|10.3 | Closing Escrow Agreement, dated May 3, 2007, by
      and among the registrant, Sterne Agee & Leach, Inc. and Thelen Reid
      Brown Raysman & Steiner LLP. Incorporated by reference to Exhibit 10.3
      to the registrants current report on Form 8-K filed on May 9, 2007 in
      commission file number 0-31619.                                         
|     |                                                                                                                                                                                                                                                                                                                                                                   
|10.4 | Cancellation and Escrow Agreement, dated May 3,
      2007, by and among the registrant, Halter Financial Investments, L.P.,
      Halter Financial Group, L.P. and Security Transfer Corporation.
      Incorporated by reference to Exhibit 10.4 to the registrants current
      report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.   

---

|      |                                                                                                                                                                                                                                                                                                                                                   
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.5  | Employment Agreement, dated March 2, 2005, by
      and between Shandong Green Foodstuff CO., LTD and Si Chen. Incorporated by
      reference to Exhibit 10.5 to the registrants current report on Form 8-K
      filed on May 9, 2007 in commission file number 0-31619.                                                                       
|      |                                                                                                                                                                                                                                                                                                                                                   
|10.6  | Employment Agreement, dated July 2, 2002, by
      and between Shandong Green Foodstuff CO., LTD and Xiandong Zhou.
      Incorporated by reference to Exhibit 10.6 to the registrants current
      report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.                                                                  
|      |                                                                                                                                                                                                                                                                                                                                                   
|10.7  | Employment Agreement, dated November 20, 2007,
      by and between Shandong Green Foodstuff CO., LTD and Jing Thomas Wu.
      Incorporated by reference to Exhibit 10.1 to the Registrants Current
      Report on Form 8-K filed on November 21, 2007 in commission file number
      0-31619.                                                
|      |                                                                                                                                                                                                                                                                                                                                                   
|10.8  | Cooperation Agreement, dated May 18, 2006, by
      and between Beijing Green Foodstuff Co., Ltd. and the Chestnut Cooperation
      of Zhenzhai Village, Gaoling town, Miyun County. Incorporated by reference
      to Exhibit 10.8 to the registrants current report on Form 8-K filed on
      May 9, 2007 in commission file number 0-31619.
|      |                                                                                                                                                                                                                                                                                                                                                   
|10.9  | Equity Transfer Agreement, dated August 15,
      2006, by and between International Lorain Co., Ltd and International
      Lorain Holding, Inc. Incorporated by reference to Exhibit 10.9 to the
      registrants current report on Form 8-K filed on May 9, 2007 in commission
      file number 0-31619.                                    
|      |                                                                                                                                                                                                                                                                                                                                                   
|10.10 | Credit Facility Agreement, dated September 28,
      2006, by and between Beijing Green Foodstuff Co., Ltd. and the Shilibao
      Branch of Beijing Rural Commercial Bank Co., Ltd. Incorporated by
      reference to Exhibit 10.10 to the registrants current report on Form 8-K
      filed on May 9, 2007 in commission file number 0-31619.
|      |                                                                                                                                                                                                                                                                                                                                                   
|10.11 | Sales contract, dated May 13, 2006, by and
      between Shandong Green Foodstuff Co., Ltd. and the Shandong Lu An Import
      & Export Co., Ltd. Incorporated by reference to Exhibit 10.11 to the
      registrants current report on Form 8-K filed on May 9, 2007 in commission
      file number 0-31619.                                  
|      |                                                                                                                                                                                                                                                                                                                                                   
|10.12 | Sales contract, dated September 5, 2006, by and
      between Shandong Green Foodstuff Co., Ltd. and the Shinsei Foods Co., Ltd.
      Incorporated by reference to Exhibit 10.12 to the registrants current
      report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.                                                    

|      |                                                                                                                                                                                                                                                                                                                  
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.13 | Sales Contract, dated September 10, 2006, by
      and between Junan Hongrun Foodstuff Co., Ltd. and the Shinsei Foods Co.,
      Ltd. Incorporated by reference to Exhibit 10.13 to the registrants
      current report on Form 8-K filed on May 9, 2007 in commission file number
      0-31619.             
|      |                                                                                                                                                                                                                                                                                                                  
|10.14 | Financial Advisory Agreement, dated February
      14, 2007, by and between HFG International, Limited and Shandong Green
      Foodstuff Co., Ltd. Incorporated by reference to Exhibit 10.14 to the
      registrants current report on Form 8-K filed on May 9, 2007 in commission
      file number 0-31619.
|      |                                                                                                                                                                                                                                                                                                                  
|10.15 | Consulting Agreement, dated March 8, 2007, by
      and between Heritage Management Consultants, Inc. and International Lorain
      Holding, Inc. Incorporated by reference to Exhibit 10.15 to the
      registrants current report on Form 8-K filed on May 9, 2007 in commission
      file number 0-31619. 
|      |                                                                                                                                                                                                                                                                                                                  
|10.16 | Equity Transfer Agreement dated September 5,
      2006, by and between Junan Hongrun Foodstuff Co., Ltd. and International
      Lorain Holding, Inc.                                                                                                                                                           
|      |                                                                                                                                                                                                                                                                                                                  
|10.17 | Equity Transfer Agreement, dated August 19,
      2006, by and between Lihua Liu, Junxia Wang, Shixiang Wang, Yuan Tian,
      Lantao Li, Yubo Liu, Zhixu Sun, Guangxing Han, Linying Wang, International
      Lvan Co., as transferors and International Lorain Holding, Inc. as
      transferee              
|      |                                                                                                                                                                                                                                                                                                                  
|10.18 | Equity Transfer Agreement, dated August 27,
      2006, by and between Si Chen, Xiaodong Zhou, Shixiang Wang, and
      International Lvan Co., Ltd., as transferors and International Lorain
      Holding, Inc. as transferee                                                                                  
|      |                                                                                                                                                                                                                                                                                                                  
|10.19 | Equity Transfer Agreement, dated August 15,
      2006, by and between International Lvan Co., Ltd. and International Lorain
      Holding, Inc.                                                                                                                                                                 

---

|                |                                                                                                                                                                                                                                                                                                   
|--------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.20           | Employment Agreement, effective September 22,
      2008, by and between American Lorain Corporation and Yilun Alan Jin.
      Incorporated by reference to Exhibit 10.1 to the Registrant's Current
      Report on Form 8-K filed on September 18, 2008 in commission file number
      0-31619.
|                |                                                                                                                                                                                                                                                                                                   
|10.21           | Form of Sales Agreement by and between Shandong
      Lorain Foodstuff Co., Ltd. and Shandong Lvan Import & Export Co., Ltd.                                                                                                                                                                      
|                |                                                                                                                                                                                                                                                                                                   
|14              | Business Ethics Policy and Code of Conduct,
      adopted on April 30, 2007. Incorporated by reference to Exhibit 14 to the
      registrants current report on Form 8-K filed on May 9, 2007 in commission
      file number 0-31619.                                                           
|                |                                                                                                                                                                                                                                                                                                   
|21              | List of subsidiaries of the registrant.
      Incorporated by reference to Exhibit 21 to the registrants current report
      on Form 8-K filed on May 9, 2007 in commission file number 0-31619.                                                                                                
|                |                                                                                                                                                                                                                                                                                                   
|24              | Power of Attorney (included on the signature
      page of this annual report).                                                                                                                                                                                                                   
|                |                                                                                                                                                                                                                                                                                                   
|31.1            | Certification of Chief Executive Officer,
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *                                                                                                                                                                                       
|                |                                                                                                                                                                                                                                                                                                   
|31.2            | Certification of Chief Financial Officer,
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *                                                                                                                                                                                       
|                |                                                                                                                                                                                                                                                                                                   
|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



---