UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)


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





For the
quarterly period ended September 30, 2010





or





 ̈           TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THESECURITIES EXCHANGE ACT OF
1934





For
      the transition period from
                To





Commission
      File Number :
                001-33593





Zhongpin Inc.(Exact
      name of registrant as specified in its
charter)





Delaware
                
                54-2100419(State
      or other jurisdiction of incorporation or organization)
                
                (I.R.S.
      Employer Identification No.)





21 Changshe Road, Changge City, Henan Province,
      People’s Republic of China
                
                461500(Address
      of principal executive offices)
                
                (Zip
      Code)





011 86 10-8286-1788(Registrant’s
      telephone number, including area
code)





Not Applicable(Former
      name, former address and former fiscal year, if changed since last
      report)





Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the 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 ninety (90) days.
 YES x NO
 ̈





Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). YES  ̈ NO  ̈





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 definition 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 x  Non-accelerated
filer  ̈(Do not check if a
smaller reporting company)  Smaller reporting company  ̈





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





As of November 5, 2010,
35,210,595 shares of the registrant’s common stock were
outstanding.








ZHONGPIN
INC.





FORM
10-Q





INDEX





PagePart
      I
                                                                                        
                                                                                        Financial
      InformationItem
      1.
                                                                                        
                                                                                        Unaudited
      Financial Statements:
                                                                                        1Consolidated
      Balance Sheets as of September 30, 2010 (unaudited) and December
      31, 2009
                                                                                        2Consolidated
      Statements of Operations and Comprehensive Income (unaudited) for the
      three-month and nine-month periods ended September 30, 2010 and
      2009
                                                                                        3Consolidated
      Statements of Cash Flows (unaudited) for the nine-month periods ended
      September 30, 2010 and 2009
                                                                                        4Notes
      to Consolidated Financial Statements (unaudited)
                                                                                        6Item
      2.
                                                                                        
                                                                                        Management’s
      Discussion and Analysis of Financial Condition and
      Results of
      Operations
                                                                                        19Item
      3.
                                                                                        
                                                                                        Quantitative
      and Qualitative Disclosures About Market Risk
                                                                                        37Item
      4.
                                                                                        
                                                                                        Controls
      and Procedures
                                                                                        38Part
      II
                                                                                        
                                                                                        Other
      InformationItem
      1.
                                                                                        
                                                                                        Legal
      Proceedings
                                                                                        39Item
      1A.
                                                                                        
                                                                                        Risk
      Factors
                                                                                        39Item
      2.
                                                                                        
                                                                                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                                                        39Item
      3.
                                                                                        
                                                                                        Defaults
      Upon Senior Securities
                                                                                        39Item
      4.
                                                                                        
                                                                                        (Removed
      and Reserved)
                                                                                        39Item
      5.
                                                                                        
                                                                                        Other
      Information
                                                                                        39Item
      6.
                                                                                        
                                                                                        Exhibits
                                                                                        39Signatures
                                                                                        40










ZHONGPIN
INC.





Part
I - Financial Information





Item
1. Financial Statements





The accompanying unaudited consolidated
balance sheets, statements of operations and comprehensive income, and
statements of cash flows and the related notes thereto, have been prepared in
accordance with generally accepted accounting principles in the United States of
America (“GAAP”) for interim financial information and in conjunction with the
rules and regulations of the Securities and Exchange Commission (“SEC”).
Accordingly, they do not include all of the disclosures required by GAAP for
complete financial statements. The financial statements reflect all adjustments,
consisting only of normal, recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation for the interim
periods.





The accompanying financial statements
should be read in conjunction with the notes to the aforementioned financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations and the financial statements and notes thereto included in
our Annual Report on Form 10-K for the year ended December 31,
2009.





The results of operations for the
three-month and nine-month periods ended September 30, 2010 are not necessarily
indicative of the results to be expected for the entire fiscal year or any other
period.


1





ZHONGPIN
INC.


CONSOLIDATED
BALANCE SHEETS


(Amounts
in U.S. dollars)




September30,2010
                    
                    
                    December31,2009(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                    
                    $
                    62,385,936
                    
                    
                    $
                    68,982,259Restricted
      cash
                    
                    
                    36,583,432
                    
                    
                    
                    14,490,575Bank
      notes receivable
                    
                    
                    15,770,412
                    
                    
                    
                    7,997,172Accounts
      receivable, net of allowance for doubtful accounts of $2,003,665 and
      $1,132,038
                    
                    
                    36,613,343
                    
                    
                    
                    20,419,797Other
      receivables, net of allowance for doubtful accounts of $182,070 and
      $290,436
                    
                    
                    992,259
                    
                    
                    
                    652,523Purchase
      deposits
                    
                    
                    5,896,280
                    
                    
                    
                    5,653,192Inventories
                    
                    
                    43,404,693
                    
                    
                    
                    33,859,420Prepaid
      expenses
                    
                    
                    689,446
                    
                    
                    
                    186,030Allowance
      receivable
                    
                    
                    4,496,235
                    
                    
                    
                    —VAT
      recoverable
                    
                    
                    19,326,587
                    
                    
                    
                    14,064,185Deferred
      tax assets
                    
                    
                    261,009
                    
                    
                    
                    256,151Other
      current assets
                    
                    
                    479,358
                    
                    
                    
                    120,709Total
      current assets
                    
                    
                    226,898,990
                    
                    
                    
                    166,682,013Long-term
      investment
                    
                    
                    447,688
                    
                    
                    
                    —Property
      and equipment (net)
                    
                    
                    290,770,601
                    
                    
                    
                    189,588,904Deposits
      for purchase of land use rights
                    
                    
                    32,380,195
                    
                    
                    
                    8,718,740Construction
      in progress
                    
                    
                    15,251,058
                    
                    
                    
                    70,192,150Land
      use rights
                    
                    
                    61,786,093
                    
                    
                    
                    61,128,431Deferred
      charges
                    
                    
                    24,641
                    
                    
                    
                    39,855Other
      non-current assets
                    
                    
                    1,419,916
                    
                    
                    
                    1,761,709Total
      assets
                    
                    $
                    628,979,182
                    
                    
                    $
                    498,111,802LIABILITIES
      AND EQUITYCurrent
      liabilitiesShort-term
      loans
                    
                    $
                    100,035,421
                    
                    
                    $
                    84,661,697Bank
      notes payable
                    
                    
                    40,311,292
                    
                    
                    
                    9,560,353Long-term
      loans - current portion
                    
                    
                    17,754,720
                    
                    
                    
                    4,539,215Capital
      lease obligation - current portion
                    
                    
                    7,065,251
                    
                    
                    
                    7,480,098Accounts
      payable
                    
                    
                    9,144,114
                    
                    
                    
                    9,260,750Other
      payables
                    
                    
                    15,213,466
                    
                    
                    
                    12,882,316Accrued
      liabilities
                    
                    
                    7,689,462
                    
                    
                    
                    7,377,850Deposits
      from customers
                    
                    
                    6,691,614
                    
                    
                    
                    5,335,907Tax
      payable
                    
                    
                    1,258,319
                    
                    
                    
                    1,918,057Total
      current liabilities
                    
                    
                    205,163,659
                    
                    
                    
                    143,016,243Deferred
      tax liabilities
                    
                    
                    252,648
                    
                    
                    
                    247,945Deposits
      from customers - long-term portion
                    
                    
                    1,973,594
                    
                    
                    
                    1,987,579Capital
      lease obligation - long-term portion
                    
                    
                    6,805,525
                    
                    
                    
                    11,104,435Long-term
      loans
                    
                    
                    69,349,687
                    
                    
                    
                    44,912,744Total
      liabilities
                    
                    
                    283,545,113
                    
                    
                    
                    201,268,946EquityCommon
      stock: par value $0.001; 100,000,000 authorized; 34,725,104 and
      34,662,314 shares issued and outstanding
                    
                    
                    34,725
                    
                    
                    
                    34,662Additional
      paid in capital
                    
                    
                    168,122,427
                    
                    
                    
                    166,169,902Retained
      earnings
                    
                    
                    151,996,075
                    
                    
                    
                    111,699,375Accumulated
      other comprehensive income
                    
                    
                    25,280,842
                    
                    
                    
                    18,938,917Total
      equity
                    
                    
                    345,434,069
                    
                    
                    
                    296,842,856Total
      liabilities and equity
                    
                    $
                    628,979,182
                    
                    
                    $
                    498,111,802




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


2


ZHONGPIN
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


(Amount
in U.S. dollars) (Unaudited)





Three Months Ended
                  September30,
                
                
                Nine Months Ended
                  September30,2010
                
                
                2009
                
                
                2010
                
                
                2009RevenuesSales
      revenues
                
                $
                241,076,067
                
                
                $
                194,851,183
                
                
                $
                660,433,565
                
                
                $
                510,547,733Cost
      of sales
                
                
                (213,796,787
                )
                
                
                (171,143,879
                )
                
                
                (582,901,503
                )
                
                
                (448,729,105
                )Gross
      profit
                
                
                27,279,280
                
                
                
                23,707,304
                
                
                
                77,532,062
                
                
                
                61,818,628Operating
      expensesGeneral
      and administrative expenses
                
                
                (6,072,211
                )
                
                
                (4,481,072
                )
                
                
                (17,821,820
                )
                
                
                (13,329,063
                )Selling
      expenses
                
                
                (5,384,108
                )
                
                
                (3,768,061
                )
                
                
                (14,359,608
                )
                
                
                (9,348,419
                )Research
      & development expenses
                
                
                (20,581
                )
                
                
                22,383
                
                
                
                (97,304
                )
                
                
                (2,968
                )Gain
      on disposal of a subsidiary
                
                
                —
                
                
                
                57
                
                
                
                —
                
                
                
                654,143Amortization
      of loss from sale-leaseback transaction
                
                
                —
                
                
                
                (16,669
                )
                
                
                —
                
                
                
                (49,998
                )Impairment
      loss
                
                
                (2,745
                )
                
                
                —
                
                
                
                (1,010,192
                )
                
                
                —Total
      operating expenses
                
                
                (11,479,645
                )
                
                
                (8,243,362
                )
                
                
                (33,288,924
                )
                
                
                (22,076,305
                )Income
      from operations
                
                
                15,799,635
                
                
                
                15,463,942
                
                
                
                44,243,138
                
                
                
                39,742,323Other
      income (expense)Interest
      income (expense), net
                
                
                (2,400,733
                )
                
                
                (1,740,306
                )
                
                
                (5,736,583
                )
                
                
                (4,503,801
                )Other
      income (expense), net
                
                
                1,236,809
                
                
                
                106,236
                
                
                
                1,906,336
                
                
                
                397,586Government
      subsidies
                
                
                966,771
                
                
                
                6,981
                
                
                
                2,836,852
                
                
                
                229,389Total
      other income (expense)
                
                
                (197,153
                )
                
                
                (1,627,089
                )
                
                
                (993,395
                )
                
                
                (3,876,826
                )Net
      income before taxes
                
                
                15,602,482
                
                
                
                13,836,853
                
                
                
                43,249,743
                
                
                
                35,865,497Provision
      for income taxes
                
                
                (921,691
                )
                
                
                (602,142
                )
                
                
                (2,953,044
                )
                
                
                (2,166,038
                )Net
      income after taxes
                
                $
                14,680,791
                
                
                $
                13,234,711
                
                
                $
                40,296,699
                
                
                $
                33,699,459Foreign
      currency translation adjustment
                
                $
                4,563,655
                
                
                $
                95,942
                
                
                $
                6,341,925
                
                
                $
                (167,205
                )Comprehensive
      income
                
                $
                19,244,446
                
                
                $
                13,330,653
                
                
                $
                46,638,624
                
                
                $
                33,532,254Basic
      earnings per common share
                
                $
                0.42
                
                
                $
                0.44
                
                
                $
                1.16
                
                
                $
                1.13Diluted
      earnings per common share
                
                $
                0.42
                
                
                $
                0.44
                
                
                $
                1.14
                
                
                $
                1.12Basic
      weighted average shares outstanding
                
                
                34,725,104
                
                
                
                29,744,291
                
                
                
                34,751,158
                
                
                
                29,711,018Diluted
      weighted average shares outstanding
                
                
                35,328,199
                
                
                
                30,217,697
                
                
                
                35,262,433
                
                
                
                30,026,153





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


3





ZHONGPIN
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Amount
in U.S. dollars) (Unaudited)




NineMonthsEndedSeptember30,2010
                
                
                2009Cash
      flows from operating activities:Net
      income
                
                $
                40,296,699
                
                
                $
                33,699,459Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
                
                
                9,812,528
                
                
                
                6,031,646Amortization
      of intangible assets
                
                
                973,253
                
                
                
                700,336Provision
      for allowance for bad debt
                
                
                724,816
                
                
                
                (159,649
                )Staff
      welfare amortization
                
                
                (276,501
                )
                
                
                —Impairment
      loss
                
                
                1,010,199
                
                
                
                —Other
      income
                
                
                (1,091,875
                )
                
                
                (105,734
                )Gain
      on disposal of a subsidiary
                
                
                —
                
                
                
                (649,726
                )Stock-based
      compensation expense
                
                
                1,739,238
                
                
                
                1,206,486Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                (16,397,025
                )
                
                
                (6,087,329
                )Other
      receivables
                
                
                (210,161
                )
                
                
                1,109,764Purchase
      deposits
                
                
                (133,747
                )
                
                
                (3,353,892
                )Prepaid
      expense
                
                
                (493,142
                )
                
                
                118,728Inventories
                
                
                (8,764,421
                )
                
                
                (15,233,775
                )Allowance
      receivables
                
                
                (4,426,220
                )
                
                
                —VAT
      recoverable
                
                
                (5,928,053
                )
                
                
                (5,310,123
                )Other
      current assets
                
                
                18,554
                
                
                
                (34,419
                )Deferred
      charges
                
                
                15,721
                
                
                
                54,635Accounts
      payable
                
                
                (287,734
                )
                
                
                1,520,789Other
      payables
                
                
                2,069,661
                
                
                
                6,787,710Accrued
      liabilities
                
                
                1,445,644
                
                
                
                1,083,418Taxes
      payable
                
                
                (685,278
                )
                
                
                (147,615
                )Deposits
      from clients
                
                
                1,234,965
                
                
                
                943,127Deposits
      from clients - Long-term portion
                
                
                (50,880
                )
                
                
                —Net
      cash provided by operating activities
                
                
                20,596,241
                
                
                
                22,173,836Cash
      flows from investing activities:Deposits
      for purchase of land use rights
                
                
                (23,130,206
                )
                
                
                (7,128,875
                )Construction
      in progress
                
                
                (40,765,205
                )
                
                
                (43,576,794
                )Additions
      to property and equipment
                
                
                (9,750,903
                )
                
                
                (8,610,134
                )Additions
      to land use rights
                
                
                (479,304
                )
                
                
                (17,093,428
                )Proceeds
      on disposal of fixed assets
                
                
                131,028
                
                
                
                111,548Increase
      in restricted cash
                
                
                (21,478,265
                )
                
                
                (8,532,020
                )Investment
      in a non-controlling entity
                
                
                (440,716
                )
                
                
                —Proceeds
      from disposal of a subsidiary
                
                
                —
                
                
                
                1,226,289Net
      cash used in investing activities
                
                
                (95,913,571
                )
                
                
                (83,603,414
                )





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


4





NineMonthsEndedSeptember30,2010
                    
                    
                    2009Cash
      flows from financing activities:Proceeds
      from (repayment of) bank notes, net
                    
                    
                    22,590,704
                    
                    
                    
                    2,563,194Proceeds
      from (repayment of) short-term loans, net
                    
                    
                    10,318,909
                    
                    
                    
                    28,964,439Proceeds
      from long-term loans
                    
                    
                    49,733,983
                    
                    
                    
                    14,641,258Repayment
      of long-term loans
                    
                    
                    (10,356,569
                    )
                    
                    
                    (75,855
                    )Repayment
      of capital lease obligation
                    
                    
                    (4,987,359
                    )
                    
                    
                    (1,081,270
                    )Proceeds
      from exercised warrants
                    
                    
                    213,350
                    
                    
                    
                    1,411,200Net
      cash provided by financing activities
                    
                    
                    67,513,018
                    
                    
                    
                    46,422,966Effects
      of rate changes on cash
                    
                    
                    1,207,989
                    
                    
                    
                    (48,229
                    )Decrease
      in cash and cash equivalents
                    
                    
                    (6,596,323
                    )
                    
                    
                    (15,054,841
                    )Cash
      and cash equivalents, beginning of period
                    
                    
                    68,982,259
                    
                    
                    
                    41,857,166Cash
      and cash equivalents, end of period
                    
                    $
                    62,385,936
                    
                    
                    $
                    26,802,325Supplemental
      disclosures of cash flow information:Cash
      paid for interest
                    
                    $
                    6,443,505
                    
                    
                    $
                    5,311,058Cash
      paid for income taxes
                    
                    $
                    2,898,394
                    
                    
                    $
                    2,663,578





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


5


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




1.
            ORGANIZATION
      AND NATURE OF OPERATIONS




Zhongpin
Inc. (the “Company”) was established under the laws of the State of Delaware on
February 4, 2003.  The Company is a public holding company holding equity
interests in its subsidiaries outside the U.S.  Its operating subsidiaries
are located in the People’s Republic of China (the “PRC”) and focus on two
business divisions: pork and pork products, and vegetables and fruits. The pork
and pork products division is involved primarily in the processing of live hogs
into fresh, frozen and processed pork products which are sold domestically to
branded stores, food retailers, food service distributors, restaurants, hotel
chains and non-commercial food service establishments, such as schools,
governments, healthcare facilities, the military and other food processors, as
well as to certain international markets in a limited scope.  The
vegetables and fruits segment is involved primarily in the processing of frozen
vegetables and fruits that are sold to the Company’s branded stores and
food retailers.





The
Company holds a 100% interest in Falcon Link Investment Limited, a company
organized under the laws of the British Virgin Islands (“Falcon”), through which
the Company holds a 100% interest in its China-based subsidiaries, each of which
was organized under the laws of the PRC.  The Company’s China-based
subsidiaries include the following:





Name
                                                    
                                                    Date of
                                                      Incorporation
                                                    
                                                    Registered
                                                      Capital
                                                    
                                                    Percentage
                                                      ofOwnershipHenan
      Zhongpin Food Company Limited
                                                    
                                                    May 20,
      2005
                                                    
                                                    $
      137,300,000
                                                    
                                                    100%Henan
      Zhongpin Food Share CompanyLimited
      (“Henan Zhongpin”)
                                                    
                                                    Jan.
      20, 2000
                                                    
                                                    1,000,000,000RMB
                                                      ($146,492,243)
                                                    
                                                    100%(1)Henan
      Zhongpin Import and Export Trading Company Limited
                                                    
                                                    Aug.
      11, 2004
                                                    
                                                    5,060,000
      RMB
                                                      ($611,111)
                                                    
                                                    100%Zhumadian
      Zhongpin Food Company Limited
                                                    
                                                    June
      7, 2006
                                                    
                                                    60,000,000
      RMB
                                                      ($8,585,399)
                                                    
                                                    100%Anyang
      Zhongpin Food Company Limited
                                                    
                                                    Aug.
      21, 2006
                                                    
                                                    34,800,000
      RMB
                                                      ($5,094,422)
                                                    
                                                    100%Henan
      Zhongpin Fresh Food Logistics Company Limited
                                                    
                                                    Sept.
      14, 2006
                                                    
                                                    1,500,000
      RMB
                                                      ($189,665)
                                                    
                                                    100%Deyang
      Zhongpin Food Company Limited
                                                    
                                                    Sept.
      25, 2006
                                                    
                                                    15,000,000
      RMB
                                                      ($1,893,652)
                                                    
                                                    100%Henan
      Zhongpin Business Development Company Limited
                                                    
                                                    Sept.
      27, 2006
                                                    
                                                    5,000,000
      RMB
                                                      ($632,215)
                                                    
                                                    100%Heilongjiang
      Zhongpin Food Company Limited (“Heilongjiang Zhongpin”)
                                                    
                                                    Oct.
      17, 2006
                                                    
                                                    1,000,000
      RMB
                                                      ($126,406)
                                                    
                                                    100%(2)Luoyang
      Zhongpin Food CompanyLimited
      (“Luoyang Zhongpin”)
                                                    
                                                    Jan.18,
      2007
                                                    
                                                    60,000,000
      RMB
                                                      ($8,783,487)
                                                    
                                                    100%Yongcheng
      Zhongpin Food Company Limited
                                                    
                                                    Mar.
      1, 2007
                                                    
                                                    60,000,000
      RMB
                                                      ($8,783,487)
                                                    
                                                    100%




6


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Name
                              
                              Date of
                                Incorporation
                              
                              Registered
                                Capital
                              
                              Percentage
                                ofOwnershipTianjin
      Zhongpin Food Company Limited
                              
                              Sept.
      14, 2007
                              
                              100,000,000
      RMB
                                (
      $14,639,145 )
                              
                              100%Hengshui Zhongpin
      Food Company Limited
                              
                              Nov.
      17, 2008
                              
                              1,000,000
      RMB
                                ($146,428)
                              
                              100%Jilin
      Zhongpin Food Company Limited
                              
                              Dec.
      11, 2008
                              
                              1,000,000
      RMB
                                ($145,688)
                              
                              100%Henan
      Zhongpin Agriculture and Animal Husbandry Industry Development Company
      Limited
                              
                              Dec.
      26, 2008
                              
                              10,000,000
      RMB
                                ($1,461,796)
                              
                              100%Taizhou
      Zhongpin Food Company Limited
                              
                              May
      12, 2010
                              
                              50,000,000 RMB
                                ($7,362,794)
                              
                              100%Changchun
      Zhongpin Food Company Limited
                              
                              Aug.
      6, 2010
                              
                              5,000,000 RMB
                                ($738,225)
                              
                              100%





(1)           Includes
a 1.7% ownership interest of another six stockholders with respect to which
Henan Zhongpin Food
Company Limited is entitled to all economic benefits and the right to vote
pursuant to the terms of a trust agreement with such stockholders.




(2)           Includes
a 10% ownership interest of another stockholder with respect to which Henan
Zhongpin is entitled to all economic benefits and the right to vote pursuant to
the terms of a trust agreement with such stockholder.





2.
          SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES




Consolidation
and Basis of Presentation





The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated during
the process of consolidation. The consolidated financial statements were
prepared in accordance with GAAP.





Use
of Estimates





The
preparation of unaudited interim condensed consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the unaudited interim condensed
consolidated financial statements and the reported amounts of revenue and
expenses during the period reported. Actual results could materially differ from
those estimates.





Certain
accounting principles require subjective and complex judgments to be used in the
preparation of financial statements. Accordingly, a different financial
presentation could result depending on the judgments, estimates, or assumptions
that are used. Such estimates and assumptions include, but are not specifically
limited to, those required in the valuation of long-lived assets, allowance for
doubtful accounts, reserves for inventory obsolescence, valuation allowances for
value added tax (“VAT”) recoverable, and determination of stock based
compensation.





Foreign
Currency Translations and Transactions





RMB, the national currency of the PRC,
is the primary currency of the economic environment in which the
Company’s China-based subsidiaries are operating. The United States dollar
(“U.S. dollar”) is the functional currency used by the Company and Falcon to
record all of their activities. The Company uses the U.S. dollar for financial
reporting purposes.


7


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





The Company translates assets and
liabilities into U.S. dollars using the middle rate published by the People’s
Bank of China as of the balance sheet date. The consolidated statement of income
is translated at average rates during the reporting period. Adjustments
resulting from the translation of financial statements from RMB into U.S.
dollars are recorded in stockholders' equity as part of accumulated
comprehensive loss translation adjustments. Gains or losses resulting from
transactions in currencies other than RMB are reflected in income for the
reporting period.





Revenue
Recognition





Revenues generated from the sales of
various meat products and vegetables and fruits are recognized when these
products are delivered to customers in accordance with previously agreed upon
pricing and delivery arrangements, and the collectability of these sales is
reasonably assured. Since the products sold by the Company are primarily
perishable and frozen food products, the right of return is only for a few days
and has been determined to


be
insignificant by the management of the Company. Accordingly, no provision has
been made for returnable goods. Revenues presented on the consolidated
statements of operations and comprehensive income are net of sales
taxes.





Cash
and Cash Equivalents





The Company considers all highly-liquid
investments with maturity of three months or less to be cash equivalents. The
Company maintains its cash accounts at creditworthy financial institutions and
closely monitors the movements of its cash positions.





Restricted
Cash and Bank Notes Payable





Under the terms of the credit
agreements with certain of its lenders, Henan Zhongpin has agreed to maintain
with such lenders in a deposit account an amount of cash that will serve as
collateral for its delivery of bank promissory notes of such lenders as payment
instruments for its procurement purposes. The amount of bank promissory notes of
such lenders that can be delivered by Henan Zhongpin can be up to twice the
amount of such deposits. As such deposits may not be withdrawn by Henan Zhongpin
without restriction, such cash deposits are presented as “restricted cash” on
the consolidated balance sheets.





Bank
Notes Receivable





The Company only accepts notes issued
by banks in the normal course of business as payment for products sold by the
Company. These bank notes receivable have maturity dates of up to 180 days and
bear no interest. The Company can hold the bank notes until the maturity date
and collect the amount from the issuing banks, or the Company can use these bank
notes as a means for payment for goods or services received. The Company accrues
no provision for these bank notes because such bank notes have little risk of
default in the PRC.





Accounts
Receivable





During the normal course of business,
the Company's policy is to ask larger customers to make deposits in reasonable
and meaningful amounts on a case-by-case basis. For certain newly-developed
customers, the Company may extend unsecured credit.





The Company regularly evaluates and
monitors the creditworthiness of each of its customers in accordance with the
prevailing practice in the meat industry and based on general economic
conditions in the PRC. The Company maintains a general policy of providing 100%
allowance for doubtful accounts in an amount equal to the aggregate amount of
those accounts that are not collected within one year plus an amount equal to 5%
of the aggregate amount of accounts receivable less than one year old. After all
attempts to collect a receivable have failed, the receivable is written off
against the allowance. The Company also examines the credit terms of significant
customers regularly and asks for more cash deposits if these customers appear to
have any indicators of delaying their payments to the Company.  Such
deposits are usually applied for the collection of the outstanding accounts
receivable during the year.  With such a practice in place, the Company did
not have any specific allowance for doubtful accounts provided against specific
customers at September 30, 2010 and December 31, 2009,
respectively.


8


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)




The
following table presents allowance activities in accounts
receivable.





September30,2010
                  
                  
                  December31,2009Beginning
      balance
                  
                  $
                  1,132,038
                  
                  
                  $
                  1,215,901Additions
      charged to (reduction in) expense
                  
                  
                  871,627
                  
                  
                  
                  (83,863
                  )Ending
      balance
                  
                  $
                  2,003,665
                  
                  
                  $
                  1,132,038





Inventories





Inventories are stated at the lower of
cost or the market based on the weighted average method. Production cost
components include the purchase cost of live hogs, direct labor, depreciation,
packaging material, utility expense and other manufacturing overhead. By using a
systematic costing system, the production cost is allocated to various products
at the stage of work-in-progress and finished goods, respectively. Net
realizable value is the estimated selling price in the ordinary course of
business, less estimated costs to complete and dispose. The Company regularly
inspects the shelf life of prepared foods and, if necessary, writes down their
carrying value based on their salability and expiration dates into cost of goods
sold.





Property,
Plant and Equipment





Property, plant and equipment are
recorded at cost and are stated net of accumulated depreciation. Depreciation
expense is determined using the straight-line method over the estimated useful
lives of the assets, as follows:





Estimated Useful
                        EconomicLifePlants
      and buildings
                      
                      5-30
      yearsMachinery
      and equipment
                      
                      5-20
      yearsOffice
      furniture and equipment
                      
                      3-5
      yearsVehicles
                      
                      5
      years





Maintenance and repairs are charged
directly to expense as incurred, whereas improvements and renewals are generally
capitalized in their respective property accounts. When an item is retired or
otherwise disposed of, the cost and applicable accumulated depreciation are
removed and the resulting gain or loss is recognized and reflected as a line
item before operating income (loss).





Land
Use Rights





The Chinese government owns all of the
parcels of land on which the Company's plants are built. In the PRC, land use
rights for commercial purposes are granted by the PRC government typically for a
term of 40-50 years. The Company is required to pay a lump sum of money to the
State Land and Resource Ministry of the applicable locality to acquire such
rights. In accordance with the provision of Statement of Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification 350, Intangibles –Goodwill and Other, the
Company capitalizes the lump sum of money paid and amortizes these land use
rights by using the straight line method over the term of the land use license
granted by the applicable governmental authority.


9


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Construction
in Progress and Interest Capitalization





Construction in progress is stated at
cost. The cost accumulation process starts from the time the construction
project is set-up and ends at the time the project has been put into service and
all regulatory permits and approvals have been received. The Company borrows
bank loans from time to time for these construction projects. The interest costs
incurred for these construction projects have been capitalized during the
construction process.





Impairment
of Long-Lived Assets





The
Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable through the estimated undiscounted cash flows expected to result
from the use and eventual disposition of that asset.  Whenever any such
impairment exists, an impairment loss will be recognized for the amount by which
the carrying value exceeds the fair value.





Fair
Value of Financial Instruments





The
carrying amount of cash and cash equivalents, accounts receivable, other
receivables, advance to vendor, accounts payable and accrued liabilities,
capital lease obligations and short-term and long-term loans are reasonable
estimates of their fair value because of the short maturity of these items. The
fair value of amounts due from/to related parties and stockholders are a
reasonable estimate of their fair value as the amounts will be collected and
paid off in a period less than one year. The carrying amounts of capital lease
obligations approximate their fair value based on the Company’s current
incremental borrowing rates for similar types of arrangements. Long-term debt
approximates fair value since the bank term loans are fixed rate instruments and
bear interest at the rate dictated and published by the People's Bank of China.
The current rates published by the People’s Bank of China approximate the
interest rates of the loans outstanding.





Shipping
and Handling Cost





All shipping and handling fees are
included in selling expenses.





Value
Added Tax





All China-based enterprises are subject
to a VAT imposed by the PRC government on their domestic product sales. The
output VAT is charged to customers who purchase goods from the Company and the
input VAT is paid when the Company purchases goods from its vendors. Input VAT
rates are 13% for most of the purchasing activities conducted by the Company.
Output VAT rate is 13% for chilled pork products, frozen pork products and
vegetable and fruit products, and 17% for prepared meat products. The input VAT
can be offset against the output VAT. The VAT payable or recoverable balance
presented on the consolidated balance sheets represents either the input VAT
less than or larger than the output VAT. The debit balance represents a credit
against future collections of output VAT instead of a receivable.





Share-Based
Payment





The Company receives employee and
certain non-employee services in exchange for (a) equity instruments of the
Company or (b) liabilities that are based on the fair value of the Company’s
equity instruments or that may be settled by the issuance of such equity
instruments.  The Company accounts for stock options granted using a
fair-value-based method.





Earnings
Per Share





Basic earnings per share includes no
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully-diluted earnings per
share. All of such securities are included in the computation of diluted
earnings per share. The number of shares of common stock underlying the
outstanding stock warrants and options at September 30, 2010 and 2009 were
1,679,490 and 1,805,827, respectively, which were included in the
computation of diluted earnings per share.


10


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Government
Subsidies





The Company's subsidiaries in the PRC
receive government subsidies from local Chinese government agencies in
accordance with relevant Chinese government policies. In general, the Company
presents the government subsidies received as part of other income unless the
subsidies received are earmarked to compensate a specific expense, which have
been accounted for by offsetting the specific expense, such as research and
development expense or interest expenses. The information relating to government
subsidies received and recognized is presented in Note 11.





Research
and Development Expenses





Research and development costs are
expensed as incurred. Gross research and development expenses for new product
development and improvements of existing products by the Company incurred for
the three-month periods ended September 30, 2010 and 2009 were $253,000 and
$472,000, respectively, and for the nine-month periods ended September 30,
2010 and 2009 were $2,410,000 and $1,490,000, respectively. Research and
development costs are mainly utilized to purchase equipment for the research and
development department.





Comprehensive
Income (Loss)





The Company adopted FASB Accounting
Standards Codification 220, Comprehensive Income, which
establishes standards for reporting and presentation of comprehensive income
(loss) and its components in a full set of general-purpose financial statements.
The Company has chosen to report comprehensive income (loss) in the statements
of operations and comprehensive income.  Comprehensive income (loss) is
comprised of net income and all changes to stockholders' equity except those due
to investments by owners and distributions to owners.





Recently
Adopted Accounting Pronouncements





Adoption of FASB ASU 2010-13





In April
2010, the FASB issued ASU No. 2010-13, "Compensation—Stock Compensation (Topic
718): Effect of Denominating the Exercise Price of a Share-Based Payment Award
in the Currency of the Market in Which the Underlying Equity Security Trades,"
which addresses the classification of a share-based payment award with an
exercise price denominated in the currency of a market in which the underlying
equity security trades. Topic 718 is amended to clarify that a share-based
payment award with an exercise price denominated in the currency of a market in
which a substantial portion of the entity’s equity securities trades shall not
be considered to contain a market, performance, or service condition. Therefore,
such an award is not to be classified as a liability if it otherwise qualifies
as equity classification. The amendments in this ASU should be applied
by recording a cumulative-effect adjustment to the opening balance of retained
earnings. The cumulative-effect adjustment should be calculated for all awards
outstanding as of the beginning of the fiscal year in which the amendments are
initially applied, as if the amendments had been applied consistently since the
inception of the award. ASU 2010-13 is effective for interim and annual periods
beginning on or after December 15, 2010 and is not expected to have a material
impact on the Company’s consolidated financial position or results of
operations.


11


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




3.
            INVENTORIES




Inventories
at September 30, 2010 and December 31, 2009 consisted of the
following:




September30,2010
                    
                    
                    December31,2009(Unaudited)Raw
      materials
                    
                    $
                    5,544,642
                    
                    
                    $
                    4,941,774Low
      value consumables and packing materials
                    
                    
                    1,215,609
                    
                    
                    
                    961,009Work
      in progress
                    
                    
                    3,171,642
                    
                    
                    
                    3,020,589Finished
      goods
                    
                    
                    33,472,800
                    
                    
                    
                    24,936,048Total
                    
                    $
                    43,404,693
                    
                    
                    $
                    33,859,420




4.
            PROPERTY,
      PLANT AND EQUIPMENT




A summary
of property, plant and equipment at September 30, 2010 and December 31, 2009 is
as follows:





September30, 2010
                    
                    
                    December 31, 2009(Unaudited)Plants
      and buildings
                    
                    $
                    211,469,034
                    
                    
                    $
                    130,399,711Machinery
      and equipment
                    
                    
                    95,745,925
                    
                    
                    
                    68,060,172Office
      furniture and equipment
                    
                    
                    3,758,899
                    
                    
                    
                    2,658,598Vehicles
                    
                    
                    3,490,122
                    
                    
                    
                    3,144,368Accumulated
      depreciation and amortization
                    
                    
                    (23,693,379
                    )
                    
                    
                    (14,673,945
                    )Total
                    
                    $
                    290,770,601
                    
                    
                    $
                    189,588,904




The
depreciation and amortization expenses for the three-month periods ended
September 30, 2010 and 2009 were $3,719,439 and $2,559,398, respectively,
and for the nine-month periods ended September 30, 2010 and 2009 were $9,812,528
and $6,731,982, respectively.




Property,
plant and equipment under the sale-leaseback agreement at cost at September 30,
2010 and December 31, 2009 was as follows:




September30,2010
                    
                    
                    December31,2009(Unaudited)Plants
      and buildings
                    
                    $
                    695,679
                    
                    
                    $
                    707,433Machinery
      and equipment
                    
                    
                    25,651,535
                    
                    
                    
                    26,239,328Office
      furniture and equipment
                    
                    
                    33,059
                    
                    
                    
                    28,937Vehicles
                    
                    
                    4,065
                    
                    
                    
                    3,939Accumulated
      depreciation
                    
                    
                    (1,726,452
                    )
                    
                    
                    (631,251
                    )Total
                    
                    $
                    24,657,886
                    
                    
                    $
                    26,348,386




12




ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




The
deferred losses included in the property and equipment balance were
$3,121,094 and $4,149,415 at September 30, 2010 and December 31, 2009,
respectively, and would be amortized over the lease term. Of the
depreciation expenses, $1,089,785 and $1,066,360 were amortization of
deferred loss and depreciation expense from assets under capital lease,
respectively, for the nine months ended September 30, 2010; $49,998 and $272,046
were amortization of deferred loss and depreciation expense from assets under
capital lease, respectively, for the nine months ended September 30,
2009.




5.
            LAND
      USE RIGHTS




The Company’s
land use rights at September 30, 2010 and December 31, 2009 are as
follows:




September30,2010
                    
                    
                    December31,2009(Unaudited)Land
      use rights
                    
                    $
                    65,102,068
                    
                    
                    $
                    63,412,436Accumulated
      amortization
                    
                    
                    (3,315,975
                    )
                    
                    
                    (2,284,005
                    )Total
                    
                    $
                    61,786,093
                    
                    
                    $
                    61,128,431




The
amortization expenses for the three-month periods ended September 30, 2010 and
2009 were $324,305 and $299,860, respectively, and for the nine-month
periods ended September 30, 2010 and 2009 were $973,354 and $700,336,
respectively.




6.
            CONSTRUCTION
      IN PROGRESS




Construction
in progress at September 30, 2010 and December 31, 2009 consisted of the
following:




ConstructionProject
                            
                            Date or
                              Estimated Date
                              PutinService(1)
                            
                            September30,2010
                            
                            
                            December31,2009Production
      line for prepared pork in Changge industrial park
                            
                            January
      2010
                            
                            $
                            —
                            
                            
                            $
                            75,203Production
      facility for prepared pork products in Changge industrial
    park
                            
                            March
      2010
                            
                            
                            —
                            
                            
                            
                            17,145,694Water
      solution station in Changge industrial park
                            
                            April
      2010
                            
                            
                            —
                            
                            
                            
                            64,439Dormitories
      and other infrastructure in Changge industrial park
                            
                            April
      2010
                            
                            
                            —
                            
                            
                            
                            2,844,349Production
      facility for food oil in Changge industrial park
                            
                            April
      2010
                            
                            
                            —
                            
                            
                            
                            4,515,099Production  facility
      for chilled and frozen pork in Tianjin
                            
                            April
      2010
                            
                            
                            —
                            
                            
                            
                            38,100,295Zhengzhou
      office
                            
                            May
      2010
                            
                            
                            36,502
                            
                            
                            
                            12,390Distribution
      center in Zhumadian
                            
                            July
      2010
                            
                            
                            —
                            
                            
                            
                            3,611,201Facility
      upgrade and distribution center in Anyang
                            
                            August
      2010
                            
                            
                            —
                            
                            
                            
                            2,958,320Distribution
      center in Luoyang
                            
                            September
      2010
                            
                            
                            —
                            
                            
                            
                            743,973Replacement
      and maintenance in Changge industrial park
                            
                            December
      2010
                            
                            
                            295,063
                            
                            
                            
                            121,187Information
      system
                            
                            January
      2011
                            
                            
                            441,224
                            
                            
                            
                            —




13





ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





ConstructionProject
                        
                        Date or
                          Estimated Date
                          PutinService(1)
                        
                        September30,2010
                        
                        
                        December31,2009Distribution
      center in Changge
                        
                        February
      2011
                        
                        
                        14,350,719
                        
                        
                        
                        —Production  facility
      for chilled and frozen pork in Taizhou
                        
                        September
      2011
                        
                        
                        82,078
                        
                        
                        
                        —Production  facility
      for chilled and frozen pork in Changchun
                        
                        November
      2011
                        
                        
                        45,472
                        
                        
                        
                        —Total
                        
                        
                        
                        $
                        15,251,058
                        
                        
                        $
                        70,192,150





Estimated
cost to complete current construction in process is $3.3 million, which does not
include non-contracted budgets approved by management to construct production
facilities for the Taizhou and Changchun subsidiaries. For the three and
nine months ended September 30, 2010, the amount of interest capitalized is
$7,000 and $273,000, respectively.





(1)
            Represents
      date all regulatory permits and approvals are received and project is
      placed in service. In certain cases, construction of a project may be
      substantially completed and the project may be operational during a
      testing period prior to such date.




7.
            SHORT-TERM
      BANK LOANS




Short-term
bank loans are due within one year. Of the $100.0 million aggregate principal
amount of short-term bank loans at September 30, 2010, loans in the principal
amount of $16.2 million were secured by the Company’s plants located primarily
in Henan province, loans in the aggregate principal amount of $25.4 million were
guaranteed by the Company’s subsidiaries, and loans in the aggregate principal
amount of $16.4 million were guaranteed by Henan Huanghe Enterprises Group Co.,
Ltd., an unaffiliated third party (“Huanghe Group”). These loans bear interest
at prevailing lending rates in the PRC ranging from 4.78 % to 5.76% per
annum.




8.
            LONG-TERM
      BANK LOANS




Amounts
outstanding under the Company’s long-term debt arrangements at September 30,
2010 and December 31, 2009 were as follows:




Bank
                  
                  September30,2010
                  
                  
                  December31,2009(Unaudited)China
      Construction Bank
                  
                  $
                  13,430,631
                  
                  
                  $
                  7,322,574China
      Minsheng Bank
                  
                  
                  —
                  
                  
                  
                  7,322,574Agriculture
      Bank of China
                  
                  
                  47,604,125
                  
                  
                  
                  10,251,605Rabobank
      Nederland Shanghai
                  
                  
                  8,953,754
                  
                  
                  
                  11,716,118China
      CITIC Bank
                  
                  
                  —
                  
                  
                  
                  4,393,544Canadian
      Government Transfer Loan
                  
                  
                  1,416,264
                  
                  
                  
                  1,489,099China
      Merchants Bank
                  
                  
                  14,176,776
                  
                  
                  
                  6,956,445Changge
      Old Town
                  
                  
                  1,522,857
                  
                  
                  
                  —Current
      portion
                  
                  
                  (17,754,720
                  )
                  
                  
                  (4,539,215
                  )Total
      long-term portion
                  
                  $
                  69,349,687
                  
                  
                  $
                  44,912,744




14


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





In
September 2010, Henan Zhongpin entered into a loan agreement with Agriculture
Bank of China pursuant to which Henan Zhongpin borrowed RMB 75 million ($11.2
million). All amounts borrowed under the loan agreement bear interest at a
floating rate that is based on the prime rate published by the People’s Bank of
China for loans with the same or similar terms on the drawdown date (5.76% per
annum on September 30, 2010) and are payable in installments on March 18, 2012,
2013 and 2014 and December 27, 2014.  Borrowings under the loan
agreement are guaranteed by Yongcheng Zhongpin Food Company
Limited.




In June
2010, in connection with the purchase of a piece of land from Changge Old Town,
Henan Zhongpin entered into an agreement with Changge Old Town, which provided
that instead of accepting payment of the purchase price of RMB 10.2 million
($1.5 million), Changge Old Town extended a loan to Henan Zhongpin with a
principal amount equal to the purchase price and bearing interest at the rate of
7.00% per annum payable on the date of the agreement and each anniversary
thereafter.  Such loan does not have a fixed term and the principal amount
of the loan should be repaid by Henan Zhongpin upon six months prior written
notice of Changge Old Town.


In June
2010, Henan Zhongpin entered into a loan agreement with China Construction Bank
pursuant to which Henan Zhongpin borrowed RMB 40 million ($6.0 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (4.86% per annum on
September 30, 2010) and are payable on June 29, 2013.  Borrowings under the
loan agreement are guaranteed by the land use right, property and plant of Henan
Zhongpin.





In March
2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of
China pursuant to which Henan Zhongpin borrowed RMB 53 million
($7.9 million). All amounts borrowed under the loan agreement bear interest
at a floating rate that is based on the prime rate published by the People’s
Bank of China for loans with the same or similar terms on the drawdown date
(5.76% per annum on September 30, 2010) and are payable in installments on
March 18, 2012, 2013 and 2014 and December 27, 2014.  Borrowings under
the loan agreement are guaranteed by the land use right, property and plant of
Luoyang Zhongpin.





In March
2010, Henan Zhongpin entered into a loan agreement with China Merchants Bank
pursuant to which Henan Zhongpin borrowed RMB 47.5 million ($7.1 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.76% per annum on
September 30, 2010) and are payable on November 26, 2014.  Borrowings under
the loan agreement are guaranteed by Luoyang Zhongpin.





In
February 2010, Henan Zhongpin entered into a loan agreement with Agriculture
Bank of China pursuant to which Henan Zhongpin borrowed RMB 71 million
($10.6 million). All amounts borrowed under the loan agreement bear
interest at a floating rate that is based on the prime rate published by the
People’s Bank of China for loans with the same or similar terms on the drawdown
date (5.40% per annum on September 30, 2010) and are payable on February 3,
2013.  Borrowings under the loan agreement are guaranteed by the land use
right, property and plant of Luoyang Zhongpin.





In
December 2009, Henan Zhongpin entered into a loan agreement with Agriculture
Bank of China pursuant to which Henan Zhongpin borrowed RMB 70 million ($10.4
million). All amounts borrowed under the loan agreement bear interest at a
floating rate that is based on the prime rate published by the People’s Bank of
China for loans with the same or similar terms on the drawdown date (5.76% per
annum on September 30, 2010) and are payable on December 27, 2014.
 Borrowings under the loan agreement are guaranteed by the land use right,
property and plant of Luoyang Zhongpin.





In
November 2009, Henan Zhongpin entered into a loan agreement with China Merchants
Bank pursuant to which Henan Zhongpin borrowed RMB 47.5 million ($7.1 million).
All amounts borrowed under the loan agreement bear interest at a floating rate
that is based on the prime rate published by the People’s Bank of China for
loans with the same or similar terms on the drawdown date (5.76% per annum on
September 30, 2010) and are payable on November 26, 2014.  Borrowings under
the loan agreement are guaranteed by Luoyang Zhongpin.





In June
2009, Henan Zhongpin entered into a loan agreement with China Construction Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.5 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.40% per annum on
September 30, 2010) and are payable on June 10, 2011.  Borrowings under the
loan agreement are guaranteed by the land use right, property and plant of Henan
Zhongpin.


15


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





In May
2009, Henan Zhongpin entered into a loan agreement with China Minsheng Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.4 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.40% per annum on
September 30, 2010) and are payable on May 6, 2011. Borrowings under the loan
agreement are guaranteed by the Company’s wholly-owned subsidiary, Yongcheng
Zhongpin Food Company Limited. In the third quarter of 2010, Henan Zhongpin paid
back all loans and terminated the loan agreement with China Minsheng Bank
without any extra cost.





In May
2008, Henan Zhongpin entered into a credit agreement with Rabobank Nederland
Shanghai Branch that provided for a three-year term loan of up to RMB 80 million
($11.9 million).  On June 10, 2008, the first 50% of the long-term loan was
funded by the bank.  The remaining 50% of the long-term loan was drawn down
by Henan Zhongpin on July 10, 2008.  Amounts currently outstanding under
the long-term loan bear interest at the rate published by the People’s Bank of
China for loans with the same or similar terms (5.40% per annum on September 30,
2010). The accrued interest on this loan is payable on a quarterly basis. Of the
outstanding principal under the long-term loan, 25% is payable 24 months after
the first drawdown date (June 10, 2008), 37.5% is payable 30 months after the
first drawdown date and the balance is payable 36 months after the first
drawdown date.  Henan Zhongpin repaid $2.9 million of the loan on June 10,
2010 and $9.0 million remained outstanding as of September 30,
2010.





Borrowings
under the term loan agreement are guaranteed by the Company’s subsidiaries,
Anyang Zhongpin Food Co., Ltd. and Zhumadian Zhongpin Food Co., Ltd., are
secured by mortgages on the Company’s prepared pork production facilities
located in Changge City, Henan province and are subject to various financial and
non-financial covenants, including a debt-to-net-worth ratio, a debt-to-EBITDA
ratio, an interest coverage ratio, a required minimum tangible net worth,
restrictions on investments in fixed assets and financial assets, on
inter-company indebtedness and on consolidated contingent liabilities and a
requirement that a minimum percentage of Henan Zhongpin’s consolidated EBITDA be
generated by Henan Zhongpin and the guarantors.  Henan Zhongpin also is
prohibited from paying dividends in an amount in excess of 50% of its retained
earnings during the term of the credit facility. We are in compliance with both
the financial and non-financial covenants.





In May
2002, Henan Zhongpin entered into a loan agreement with Bank of Communications,
Zhengzhou Branch, which is the intermediary bank for a 40-year term loan in the
amount of $2,504,969 from the Canadian government.  Under the terms of the
loan agreement, 58% of the principal amount ($1,452,882) of this loan bears
interest at the fixed rate of 6.02% per annum and remaining principal amount of
this loan is interest free.  The loan is repayable in a fixed amount of
$145,671, which includes both principal and interest, that is payable on a
semi-annual basis through May 15, 2042.  Borrowings under the loan
agreement are guaranteed by the Financing Department, Henan
province.




9.
            EQUITY
      TRANSACTIONS




For the
three-month periods ended September 30, 2010 and 2009, the stock-based
compensation expenses were $663,602 and $452,452, respectively, and for the
nine-month periods ended September 30, 2010 and 2009, the stock-based
compensation expenses were $1,736,024 and $1,206,486,
respectively.




16


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


10.
              EARNINGS
      PER SHARE
  The
following table shows the computation of basic and diluted net earnings per
share for the periods indicated:
  ThreeMonthsEnded
                      September30,
                    
                    
                    NineMonthsEnded
                      September30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Numerator:
                    
                    (Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)Net
      income attributable to common shareholders
                    
                    $
                    14,680,791
                    
                    
                    $
                    13,234,711
                    
                    
                    $
                    40,296,699
                    
                    
                    $
                    33,699,458


Denominator:Weighted
      average number of common shares outstanding
    – basic
                    
                    
                    34,725,104
                    
                    
                    
                    29,744,291
                    
                    
                    
                    34,751,158
                    
                    
                    
                    29,711,018Dilutive
      effect of stock options
                    
                    
                    603,095
                    
                    
                    
                    473,406
                    
                    
                    
                    511,275
                    
                    
                    
                    315,135Weighted
      average number of common shares outstanding – diluted
                    
                    
                    35,328,199
                    
                    
                    
                    30,217,697
                    
                    
                    
                    35,262,433
                    
                    
                    
                    30,026,153Basic
      earnings per share
                    
                    $
                    0.42
                    
                    
                    $
                    0.44
                    
                    
                    $
                    1.16
                    
                    
                    $
                    1.13Diluted
      earnings per share
                    
                    $
                    0.42
                    
                    
                    $
                    0.44
                    
                    
                    $
                    1.14
                    
                    
                    $
                    1.12




11.
            GOVERNMENT
      SUBSIDIES




The
central and local government provided Henan Zhongpin with various subsidies to
encourage its research and development activities, building new facilities using
information technology, building cold chain logistic and distribution networks,
and for other contributions to the local community, such as increasing
employment opportunities. The government subsidies are generally classified as
earmarked (such as research and development activities) or non-earmarked. The
interest subsidies were earmarked to offset the Company’s interest expenses
incurred in relation to the construction of its fruit and vegetable production
facility. All subsidies were accounted for based on evidence that cash has been
received and the earmarked activities have taken place. In accordance with
internationally prevailing practice, subsidies earmarked for research and
development activities were first offset against relevant research and
development expenses incurred, and interest subsidies were offset against the
relevant interest expense incurred. Non-earmarked subsidies are generally
recognized as other income.




Government
subsidies received by the Company during the three-month and nine-month periods
ended September 30, 2010 and 2009 were as follows:




ThreeMonthsEnded
                  September30,
                
                
                NineMonthsEnded
                  September30,2010
                
                
                2009
                
                
                2010
                
                
                2009Deferred
      subsidies opening balance:Interest
      subsidies
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —Earmarked
      subsidies
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Non-earmarked
      subsidies
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —Subsidies
      received:Interest
      subsidies
                
                $
                —
                
                
                $
                146,402
                
                
                $
                307,045
                
                
                $
                537,170Earmarked
      subsidies
                
                
                —
                
                
                
                48,305
                
                
                
                —
                
                
                
                92,212Non-earmarked
      subsidies
                
                
                966,771
                
                
                
                6,982
                
                
                
                2,836,852
                
                
                
                229,389Total
                
                $
                966,771
                
                
                $
                201,689
                
                
                $
                3,143,897
                
                
                $
                858,771Subsidies
      recognized:Interest
      subsidies
                
                $
                —
                
                
                $
                146,402
                
                
                $
                307,045
                
                
                $
                537,170Earmarked
      subsidies
                
                
                —
                
                
                
                48,305
                
                
                
                —
                
                
                
                92,212Non-earmarked
      subsidies
                
                
                966,771
                
                
                
                6,982
                
                
                
                2,836,852
                
                
                
                229,389Total
                
                $
                966,771
                
                
                $
                201,689
                
                
                $
                3,143,897
                
                
                $
                858,771Deferred
      subsidies year ending balance:Interest
      subsidies
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —Earmarked
      subsidies
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Non-earmarked
      subsidies
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —




17


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Subsidies
received and other income recognized are translated at the average exchange
rate. The beginning and ending balances are translated at the period-end
exchange rates.





12.
            SEGMENT
      REPORTING




The
Company operates in only one segment: meat production. The Company’s vegetables
and fruits operations, both financially and operationally, do not represent a
significant enough portion of its business to constitute a separate segment.
However, the Company’s product lines are divided into two divisions: pork and
pork products, and vegetables and fruits.




The pork
and pork products division is involved primarily in the processing of live hogs
into fresh, frozen and processed pork products. The pork and pork products
division markets its products domestically to branded stores and to food
retailers, food service distributors, restaurant operators and
noncommercial foodservice establishments, such as schools, hotel chains,
healthcare facilities, the military and other food processors, as well as in
certain international markets on a limited basis.




The
vegetables and fruits division is involved primarily in the processing of fresh
vegetables and fruits. The Company contracts with more than 100 farms in Henan
province and nearby areas to produce high-quality vegetable varieties and fruits
suitable for export purposes. The proximity of the contracted farms to
operations ensures freshness from harvest to processing. The Company contracts
with those farms to grow more than 34 categories of vegetables and fruits,
including asparagus, sweet corn, broccoli, mushrooms, lima beans and
strawberries.




Sales by Division
                      (U.S.
      dollars in millions)ThreeMonthsEnded
                      September30,
                    
                    
                    NineMonthsEnded
                      September30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)Pork
      and Pork Products:Chilled
      pork
                    
                    $
                    130.6
                    
                    
                    $
                    107.9
                    
                    
                    $
                    359.7
                    
                    
                    $
                    277.6Frozen
      pork
                    
                    
                    67.4
                    
                    
                    
                    60.6
                    
                    
                    
                    176.0
                    
                    
                    
                    159.6Prepared
      pork products
                    
                    
                    38.6
                    
                    
                    
                    22.5
                    
                    
                    
                    111.7
                    
                    
                    
                    64.8Vegetables
      and Fruits
                    
                    
                    4.5
                    
                    
                    
                    3.9
                    
                    
                    
                    13.0
                    
                    
                    
                    8.5Total
                    
                    $
                    241.1
                    
                    
                    $
                    194.9
                    
                    
                    $
                    660.4
                    
                    
                    $
                    510.5Cost
      of Sales:Pork
      products
                    
                    $
                    210.2
                    
                    
                    $
                    167.9
                    
                    
                    $
                    572.1
                    
                    
                    $
                    441.6Vegetables
      and fruits
                    
                    $
                    3.6
                    
                    
                    $
                    3.3
                    
                    
                    $
                    10.8
                    
                    
                    $
                    7.1Gross
      Profit Margin:Pork
      products
                    
                    
                    11.2
                    %
                    
                    
                    12.1
                    %
                    
                    
                    11.6
                    %
                    
                    
                    12.0
                    %Vegetables
      and fruits
                    
                    
                    20.0
                    %
                    
                    
                    15.4
                    %
                    
                    
                    16.9
                    %
                    
                    
                    16.5
                    %




18


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




Disclosure
Regarding Forward-Looking Statements




The
statements contained in this Report with respect to our financial condition,
results of operations and business that are not historical facts are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). We intend such forward-looking statements
to be covered by the safe harbor provisions for forward-looking statements
contained in Section 21E of the Exchange Act. Forward-looking statements can be
identified by the use of forward-looking terminology, such as “estimates,”
“projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the
negative thereof or other variations thereon, or by discussions of strategy
that involve risks and uncertainties. Management wishes to caution the reader of
the forward-looking statements that any such statements that are contained in
this Report reflect our current beliefs with respect to future events and
involve known and unknown risks, uncertainties and other factors, including, but
not limited to, economic, competitive, regulatory, technological, key employee,
and general business factors affecting our operations, markets, growth,
services, products, licenses and other factors discussed in our other filings
with the Securities and Exchange Commission, and that these statements are only
estimates or predictions. No assurances can be given regarding the achievement
of future results, as actual results may differ materially as a result of risks
facing our company, and actual events may differ from the assumptions underlying
the statements that have been made regarding anticipated events.




These
forward-looking statements are subject to numerous assumptions, risks and
uncertainties that may cause our actual results to be materially different from
any future results expressed or implied by us in those statements. Some of these
risks are described in “Risk Factors” in Item 1A of our Annual Report on
Form 10-K for the year ended December 31, 2009 and in Part II, Item 1A of this
Report.




These
risk factors should be considered in connection with any subsequent written or
oral forward-looking statements that we or persons acting on our behalf may
issue. All written and oral forward looking statements made in connection with
this Report that are attributable to our company or persons acting on our behalf
are expressly qualified in their entirety by these cautionary statements. Given
these uncertainties, we caution investors not to unduly rely on our
forward-looking statements. We do not undertake any obligation to review or
confirm analysts’ expectations or estimates or to release publicly any revisions
to any forward-looking statements to reflect events or circumstances after the
date of this Report or to reflect the occurrence of unanticipated events.
Further, the information about our intentions contained in this Report is a
statement of our intention as of the date of this Report and is based upon,
among other things, the existing regulatory environment, industry conditions,
market conditions and prices, the economy in general and our assumptions as of
such date. We may change our intentions, at any time and without notice, based
upon any changes in such factors, in our assumptions or otherwise.




Overview




We are
principally engaged in the meat and food processing and distribution business in
the PRC. Currently, we have 13 processing plants located in Henan, Jilin
and Sichuan provinces and in Tianjin in the PRC. Our total production capacity
for chilled pork and frozen pork is approximately 1,566 metric tons per day,
based on an eight-hour working day, or approximately 563,760 metric tons on an
annual basis. We also have production capacity for prepared meats of
approximately 250 metric tons per eight-hour day, or approximately 90,000 metric
tons on an annual basis, and for fruits and vegetables of approximately 83.3
metric tons per eight-hour day, or approximately 30,000 metric tons on an annual
basis. In addition, we have annual production capacity for food oil (pork oil)
of approximately 20,000 metric tons. We use state-of-the-art equipment in all of
our slaughterhouses and processing facilities.




In
December 2009, the PRC Ministry of Commerce issued the Hog Slaughtering
Industry Development Guidelines (applicable for 2010-2015). The guidelines state
that the government will control the number of slaughterhouses in China and
specifically that there should be no more than four slaughterhouses in cities
with a population of 5 million or more.


19




In June
2010, the China Meat Association (“CMA”) announced the China Meat Industry
Development Strategy Report (applicable for 2011-2015). In that report, CMA
provided a development roadmap and targets for the meat industry for the coming
five years:




Ø
            By
      2015, to decrease sales of room temperature pork to below 50% of total
      pork sales in cities at or above county level in
    China;




Ø
            By 2015,
      to increase sales of chilled pork from 10% to around 30% of total pork
      sales in China;




Ø
            By 2015,
      to decrease outstanding licenses for slaughterhouses from more than 21,000
      to around 3,000 in China; and




Ø
            To
      build pork and pork products production bases in north China, north-east
      China, east China and south-west
China.




The
report  indicates to us and other companies with strong
brand recognition in China's meat industry, high standard facilities,
high quality products, strict quality control systems and cold chain logistics
capabilities, that there is an opportunity to consolidate and integrate the
industry.




Government
and consumers take food safety as one of their top priorities. With the Chinese
government's support, the consolidation of the industry is accelerating. We
believe the government targets stated above can be achieved in the next five
years.




Our
growth strategy will include consideration of opportunities to expand our
production capacity in these strategic areas in response to the suggestions in
the report. We plan to build new facilities for chilled and frozen pork, as well
as new facilities for prepared pork products and cold chain logistic
distribution centers. We may also explore opportunities to acquire companies
with strong regional brand recognition, that produce prepared pork
products, and with high quality facilities. We expect that these new facilities,
together with our existing ones, will help us to build “Zhongpin” into a
stronger, national brand, increase our market share, revenue and net profit and
more importantly, strengthen our ability to consolidate the meat industry in
China.




We will
be investing approximately $61.5 million to build a slaughtering and processing
plant, low temperature prepared pork plant, logistics center, and research and
development center in Nong'an county, Changchun, Jilin province of China. This
facility will have a production capacity of approximately 70,000 metric tons for
chilled pork, 25,000 metric tons for frozen pork, and 30,000 metric tons for
prepared pork products. The construction work started in September 2010. We
expect to put the new facility for chilled and frozen pork into operation in the
fourth quarter of 2011 and the new facility for prepared pork products into
operation in the third quarter of 2012.




We will
be investing approximately $63.0 million to build a production facility,
warehouse and distribution center in Taizhou, Jiangsu province. This facility
will have a production capacity of approximately 100,000 metric tons for chilled
and frozen pork, of which 80% will be for chilled pork including easy-to-cook
products and 20% for frozen pork, and 30,000 metric tons for prepared pork
products. The construction work started in October 2010. We expect to put the
new facility for chilled and frozen pork into operation in the third quarter of
2011 and the new facility for prepared pork products into operation in the first
quarter of 2012.




We put
the new facility in Tianjin with a production capacity of approximately 100,000
metric tons for chilled and frozen pork into operation in January 2010. The
construction of phase two of the facility, with a production capacity of
approximately 36,000 metric tons for prepared pork products started in
October 2010. We expect to put it into operation in the second quarter of
2011.




The
expansion project of our facility in Anyang completed in August 2010 as we
planned. After expansion, Anyang facility’s pre-cooling room and equipment has
improved, and its annual capacity has increased from 63,000 metric tons to
85,000 metric tons.




20




Our
products are sold under the “Zhongpin” brand name. At September 30, 2010,
our customers included approximately 31 international or domestic fast food
companies in the PRC, 57 processing factories and 1,693 school
cafeterias, factory canteens, army posts and national departments.  As of
that date, we also sold directly to 3,285 retail outlets, including
supermarkets, within the PRC.




We have
established distribution networks in 20 provinces and four cities with special
legal status in the North, East, South and South Midland regions of the
PRC, and also have formed strategic business alliances with leading
supermarket chains and the catering industry in the PRC. In addition, we export
products to Europe, Hong Kong and other selected countries in Asia.




As of
September 30, 2010, we had 7,105 employees, of whom 5,383 were
operating personnel, 1,265 were sales personnel, 108 were research and
development personnel and 349 were administrative personnel.




Critical
Accounting Policies




Unless
otherwise noted, all translations from RMB to U.S. dollars were made at the
middle rate published by the People’s Bank of China, or the middle rate, as of
September 30, 2010, which was RMB6.7011 to $1.00. We make no representation
that the RMB amounts referred to in this Quarterly Report on Form 10-Q could
have been or could be converted into U.S. dollars at any particular rate or at
all. On November 5 , 2010, the middle rate was RMB6.6610 to
$1.00.




Our
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles.  The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses.  We evaluate, on an on-going basis, our estimates for
reasonableness as changes occur in our business environment.  We base
our estimates on experience, the use of independent third-party specialists, and
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources.  Actual results may differ from these estimates under
different assumptions or conditions.




Critical
accounting policies are defined as those that are reflective of significant
judgments, estimates and uncertainties, and potentially result in materially
different results under different assumptions and conditions.  We
believe the following are our critical accounting policies:




Revenue
Recognition.  Revenues generated from the sale of various meat
products and vegetables and fruits are recognized when these products are
delivered to customers in accordance with previously-agreed-upon pricing and
delivery arrangements, and the collectability of these sales is reasonably
assured.  Since the products sold by us are primarily perishable and
frozen food products, the right of return is only for a few days and has been
determined to be insignificant by our management.  Accordingly, no
provision has been made for returnable goods.  Revenues presented on
our consolidated income statements are net of sales taxes.




Accounts
Receivable. During the normal course of business, our policy is to
ask larger customers to make deposits in reasonable and meaningful amounts on a
case-by-case basis.  For certain newly-developed customers, we may
extend unsecured credit.




We
regularly evaluate and monitor the creditworthiness of each of our customers in
accordance with the prevailing practice in the meat industry and based on
general economic conditions in the PRC.  If any particular customer appears
to be delaying or deferring payments for our products, we generally request a
deposit from, or an increase in the deposits of, such
customer.  Such deposits are typically applied against the outstanding
accounts receivable of the applicable customer during the year.  As a
result, we did not have a bad debt allowance provided against any specific
customer at September 30, 2010.




We
maintain a general policy of providing 100% allowance for doubtful accounts in
an amount equal to the aggregate amount of those accounts that are not collected
within one year plus an amount equal to 5% of the aggregate amount of accounts
receivable less than one year old.  After all attempts to collect a
receivable have failed, the receivable is written off against the
allowance.


21


Inventories. Inventories are stated at the lower of cost or the market based on
the weighted average method. Production cost components include the purchase
cost of live hogs, direct labor, depreciation, packaging material, utility
expense and other manufacturing overhead. By using a systematic costing system,
the production cost is allocated to various products at the stage of
work-in-progress and finished goods, respectively. Net realizable value is the
estimated selling price in the ordinary course of business, less estimated costs
to complete and dispose. We regularly inspect the shelf life of prepared foods
and, if necessary, write down their carrying value based on their salability and
expiration dates into cost of goods sold.




Property,Plant, and
Equipment.  Property, plant, and equipment are recorded at cost and
are stated net of accumulated depreciation.  Depreciation expense is
determined using the straight-line method over the estimated useful lives of the
assets as follows:




Estimated LifePlants
      and buildings
                5-30
      yearsMachinery
      and equipment
                5-20
      yearsOffice
      furniture and equipment
                3-5
      yearsVehicles
                5
      years




Maintenance
and repairs are charged directly to expense as incurred, whereas improvements
and renewals are generally capitalized in their respective property accounts.
 When an asset is retired or otherwise disposed of, the cost and applicable
accumulated depreciation are removed and the resulting gain or loss is
recognized and reflected as a line item before operating income
(loss).




Results
of Operations




In 2010,
we continued to focus on the implementation of our strategic plan to sustain the
growth we have experienced since becoming a U.S. public company in 2006. Over
the next 12 months, we expect to continue to expand our distribution channel and
develop new markets. Through our aggressive marketing campaign, we also expect
to increase our brand awareness and customer loyalty. We also intend to further
streamline our supply chain management to further advance and extend our
unified, safe and efficient cold-chain logistics system. We also have invested
in employee training and development to help sustain our rapid and healthy
growth while maintaining a satisfactory profit margin.




Since the
end of the second quarter of 2010 to date, hog and pork prices have
increased approximately 20% primarily because (i) the government stepped into
the market and built up frozen pork reserves in the first half of the year to
stabilize the price and protect the interests of hog breeding farmers; (ii) the
drought in south-west China and flood in south, north-east and other regions in
China increased the price of agriculture products, including pork, (iii)
the cost of raising hogs has increased and (iv) a better balance of supply
and demand has been achieved




The
Chinese government maintains a national frozen pork reserve, for which it buys
in the pork market and sells into the same pork market. The government’s primary
objective is to maintain an adequate national reserve and to maintain the
stability of hog and pork prices within a varying price range in the national
market. The government outsources hog slaughtering and frozen storage services
to qualified companies and provides financial subsidies to those service
providers. The frozen pork reserves normally are preserved for 12 months, then
sold. We are a service provider for both hog slaughtering and frozen pork
storage. When pork consumption was expected to increase during the Chinese New
Year period in early 2010 and some of the reserve was soon to reach the end of
its 12 month holding period, the government sold some of the national pork
reserve into the market. Zhongpin and other companies bought portions of that
released frozen pork reserve from the government. Because the pork price can
decline somewhat after the government sells into the market, which happened in
this case, the government paid us an allowance for the difference between our
purchase price for the frozen pork from the national reserve and the subsequent
lower price in the market.


23


We expect
that hog prices will continue to increase by 10% from September 30, 2010
till year end and remain at a higher level during 2011.




Comparison of Three Months EndedSeptember30, 2010and 2009




Revenue. Total revenue
increased from $194.9 million for the three months ended September 30, 2009 to
$241.1 million for the three months ended September 30, 2010, which
represented an increase of $46.2 million, or approximately 24%. The
increase in revenues during the third quarter of 2010 was primarily
due to increased sales volume in our meat and meat products divisions resulting
from the effects of the continuing increases in the number of our retail
channels, geographic expansion, and increased sales to chain restaurants, food
service providers, and wholesalers and distributors in the PRC. Also the
increase in revenues was due to the increase in pork price in the third quarter
of 2010. The following table presents our sales by product division for the
three months ended September 30, 2010 and 2009.




Sales by Division
                                  (unaudited)ThreeMonthsEnded
                                  September30,2010
                                
                                
                                ThreeMonthsEnded
                                  September30,2009Metric
                                  Tons
                                
                                
                                Sales
                                  Revenues
                                  (inmillions)
                                
                                
                                Average
                                  Price/
                                  Metric
                                  Ton
                                
                                
                                Metric
                                  Tons
                                
                                
                                Sales
                                  Revenues
                                  (inmillions)
                                
                                
                                Average
                                  Price/
                                  Metric
                                  TonPork
      and Pork ProductsChilled
      pork
                                
                                
                                61,897
                                
                                
                                $
                                130.6
                                
                                
                                $
                                2,110
                                
                                
                                
                                58,182
                                
                                
                                $
                                107.9
                                
                                
                                $
                                1,855Frozen
      pork
                                
                                
                                38,431
                                
                                
                                
                                67.4
                                
                                
                                
                                1,754
                                
                                
                                
                                34,967
                                
                                
                                
                                60.6
                                
                                
                                
                                1,733Prepared
      pork products
                                
                                
                                19,052
                                
                                
                                
                                38.6
                                
                                
                                
                                2,026
                                
                                
                                
                                10,086
                                
                                
                                
                                22.5
                                
                                
                                
                                2,231Vegetables
      and Fruits
                                
                                
                                6,495
                                
                                
                                
                                4.5
                                
                                
                                
                                693
                                
                                
                                
                                5,735
                                
                                
                                
                                3.9
                                
                                
                                
                                680Total
                                
                                
                                125,875
                                
                                
                                $
                                241.1
                                
                                
                                $
                                1,915
                                
                                
                                
                                108,970
                                
                                
                                $
                                194.9
                                
                                
                                $
                                1,789




The pork
market in China is highly fragmented and in the markets in which we
sell our products, no single supplier has a significant impact on
the market price of pork or related pork products. We have been pricing our
products based on the value of our brand, the quality of our products, hog
prices in the applicable period and pricing trends for similar products in the
regions in which we operate.




In the
third quarter of 2010, we increased our sales of chilled pork products by
approximately $22.7 million over the amount of our sales of such products
in the third quarter of 2009. As shown in the table above, our average
price during the third quarter of 2010 was approximately $2,110 per metric ton
for chilled pork, compared to $1,855 during the third quarter of 2009, an
increase of 14%.  The number of metric tons of chilled pork sold during the
third quarter of 2010 increased by 3,715, or 6% from the third quarter of 2009.
 Our total revenue increased primarily due to the increase in pork price
due to a balanced supply and demand in the market, and also due to successful
capacity expansion, increased sales to existing customers, and increased volume
of sales of our products as we entered new geographic markets, expanded our
points of sales and acquired new customers.





In the
third quarter of 2010, we increased our sales of frozen pork products by
approximately $6.8 million over the amount of our sales of such products in the
third quarter of 2009. Our average price during the third quarter of 2010 was
approximately $1,754 per metric ton for frozen pork compared to $1,733 during
the third quarter of 2009, an increase of 1%.  The number of metric tons of
frozen pork sold during the third quarter of 2010 increased by 3,464, or 10%
from the third quarter of 2009.  Our total revenue increased primarily due
to successful capacity expansion, increased sales to existing customers, and
increased volume of sales of our products as we entered new geographic markets,
expanded our points of sales, and acquired new customers, and partially due to
the slight increase in average price in the third quarter of 2010 as a result of
market fluctuations and product mix.


24


In the
third quarter of 2010, we increased our sales of prepared pork products by
approximately $16.1 million over the amount of our sales of such products in the
third quarter of 2009. Our average price during the third quarter of 2010 was
approximately $2,026 per metric ton for prepared pork products compared to
$2,231 during the third quarter of 2009, a decrease of 9%. The number of metric
tons of prepared pork products sold during the third quarter of 2010 increased
by 8,966, or 89% from the third quarter of 2009.  This product division is
becoming more important to our business as customers increasingly demand
prepared pork products and are willing to pay higher average prices for the
convenience of such products. We plan to gradually increase sales from prepared
pork products by building up our brand recognition and expanding our capacities
for this division.





The sales
of pork and vegetable products are closely related to the particular regional
markets in which our distribution channels are located. Therefore, the increase
in metric tons sold for the third quarter of 2010 was partly
attributable to our success in expanding our distribution channels. The
following table shows the changes in our distribution channels:




Numbers of Stores and Cities Generating Sales Volume
                        (unaudited)September 30,
                      
                      
                      Net
                      
                      
                      Percentage2010
                      
                      
                      2009
                      
                      
                      Change
                      
                      
                      ofChangeShowcase
      stores
                      
                      
                      154
                      
                      
                      
                      141
                      
                      
                      
                      13
                      
                      
                      
                      9
                      %Branded
      stores
                      
                      
                      1,057
                      
                      
                      
                      996
                      
                      
                      
                      61
                      
                      
                      
                      6
                      %Supermarket
      counters
                      
                      
                      2,074
                      
                      
                      
                      2,041
                      
                      
                      
                      33
                      
                      
                      
                      2
                      %Total
                      
                      
                      3,285
                      
                      
                      
                      3,178
                      
                      
                      
                      107
                      
                      
                      
                      3
                      %First-tier
      cities
                      
                      
                      29
                      
                      
                      
                      29
                      
                      
                      
                      —
                      
                      
                      
                      0
                      %Second-tier
      cities
                      
                      
                      128
                      
                      
                      
                      117
                      
                      
                      
                      11
                      
                      
                      
                      9
                      %Third-tier
      cities
                      
                      
                      415
                      
                      
                      
                      368
                      
                      
                      
                      47
                      
                      
                      
                      13
                      %Total
      cities
                      
                      
                      572
                      
                      
                      
                      514
                      
                      
                      
                      58
                      
                      
                      
                      11
                      %




The
expansion in our distribution channels and geographical coverage has been a
significant factor in the increase in our sales volume. The following table
shows our revenues by distribution channel for the third quarter of
2010 and 2009, respectively.




Sales by Distribution Channel
                      (Dollars in millions)
                      (unaudited)Threemonthsended
                      September30,
                    
                    
                    Net
                    
                    
                    Percentage2010
                    
                    
                    2009
                    
                    
                    Change
                    
                    
                    ofChangeRetail
      channels
                    
                    $
                    92.1
                    
                    
                    $
                    76.7
                    
                    
                    $
                    15.4
                    
                    
                    
                    20
                    %Wholesalers
      and distributors
                    
                    
                    79.1
                    
                    
                    
                    60.2
                    
                    
                    
                    18.9
                    
                    
                    
                    31
                    %Restaurants
      and food services
                    
                    
                    66.1
                    
                    
                    
                    55.6
                    
                    
                    
                    10.5
                    
                    
                    
                    19
                    %Export
                    
                    
                    3.8
                    
                    
                    
                    2.4
                    
                    
                    
                    1.4
                    
                    
                    
                    58
                    %Total
                    
                    $
                    241.1
                    
                    
                    $
                    194.9
                    
                    
                    $
                    46.2
                    
                    
                    
                    24
                    %


25


The
increase in sales to different distribution channels was mainly due to the
following factors: (i) our production capacity has increased since our Tianjin
production facilities commenced production in early 2010, our pork oil facility
commenced production in April 2010, and the expansion of our Anyang production
facilities was completed in August 2010; (ii) we have built up our brand image
and recognition through advertisements on China Central TV and local television
and through product promotions; (iii) we have increased the number of stores and
other channels through which we sell our products and we have improved the
efficiency of these stores; and (iv) we believe consumers are placing increased
importance on food safety and are willing to pay higher prices for safe food
products, such as our products. As presented in the table above, our most
significant revenue increases were generated from our wholesalers and
distributors and our retail channels.  Retail channels are the highest
gross profit margin channels and are the channels through which we build up our
brand recognition in the market.  Our Zhongpin logo and brand name are
prominently displayed in each of the retail stores and supermarket counters that
sell our products.




Cost of Sales.Our cost of
sales increased from $171.1 million for the three months ended September 30,
2009 to $213.8 million for the three months ended September 30, 2010, which
represented an increase of $42.7 million, or approximately 25%. Our cost of
sales primarily includes our costs of raw materials, labor costs and overhead.
Of our total cost of sales, our cost of raw materials typically accounts for
approximately 96%, our overhead typically accounts for 2.5% and our labor costs
typically accounts for 1.5%, with slight variations from period to period. All
of our meat products are derived from the same raw materials, which are live
hogs. Our vegetable and fruit products are purchased from farmers located close
to our processing facility in Changge City, Henan province. As a result, the
purchasing costs of live hogs and vegetables and fruits represent substantially
all of our costs of raw materials. The increase in our cost of sales was
consistent with our increase in sales revenue.




Cost of Sales by Division
                          (unaudited)Three Months Ended
                          September 30, 2010
                        
                        
                        Three Months Ended
                          September 30, 2009Metric
                          Tons
                        
                        
                        Cost of
                          Sales
                          (in millions)
                        
                        
                        Average
                          Price/
                          Metric
                          Ton
                        
                        
                        Metric
                          Tons
                        
                        
                        Cost of
                          Sales
                          (in millions)
                        
                        
                        Average
                          Price/
                          Metric
                          TonPork
      and Pork ProductsChilled
      pork
                        
                        
                        61,897
                        
                        
                        $
                        117.0
                        
                        
                        $
                        1,890
                        
                        
                        
                        58,182
                        
                        
                        $
                        95.6
                        
                        
                        $
                        1,643Frozen
      pork
                        
                        
                        38,431
                        
                        
                        
                        62.0
                        
                        
                        
                        1,613
                        
                        
                        
                        34,967
                        
                        
                        
                        55.1
                        
                        
                        
                        1,576Prepared
      pork products
                        
                        
                        19,052
                        
                        
                        
                        31.2
                        
                        
                        
                        1,638
                        
                        
                        
                        10,086
                        
                        
                        
                        17.1
                        
                        
                        
                        1,695Vegetables
      and Fruits
                        
                        
                        6,495
                        
                        
                        
                        3.6
                        
                        
                        
                        554
                        
                        
                        
                        5,735
                        
                        
                        
                        3.3
                        
                        
                        
                        575Total
                        
                        
                        125,875
                        
                        
                        $
                        213.8
                        
                        
                        $
                        1,699
                        
                        
                        
                        108,970
                        
                        
                        $
                        171.1
                        
                        
                        $
                        1,570




Our gross
profit margin (gross profit divided by sales revenue) decreased from 12.2% for
the three months ended September 30, 2009 to 11.3% for the three months ended
September 30, 2010.  The decrease in our gross margin during the
third quarter of 2010 was primarily due to (i) the
percentage increase in pork prices being less than the percentage increase in
hog prices, which is the main part of cost of sales, (ii) we are not able
to adjust the selling price of our frozen and prepared pork products as
frequently as we can for our chilled pork products, so in this quarter,
while hog prices increased, the margins of prepared and frozen products grew
smaller, and (iii) our strategic decision to take steps to increase our market
share and utilization rate of our production capacity at a time when our
production capacity increased due to the opening of new production facilities.
 As a result, our gross profit margin was lower than the level we would
expect to achieve once we fully integrate our new production facilities and
expand into new regional markets for our products.  We intend to adjust our
production levels and product mix and the percentages of our sales through our
different sales channels in the coming quarters to increase our gross profit
margin.




General and Administrative
Expenses.
General and administrative expenses increased from $4.5 million for the
three months ended September 30, 2009 to $6.1 million for the three
months ended September 30, 2010, which represented an increase of $1.6
million, or approximately 36%. As a percentage of revenues, general and
administrative expenses increased from 2.3% for the three months ended September
30, 2009 to 2.5% for the three months ended September 30,
2010.


26


The increase in
general and administrative expenses during the three months ended
September 30, 2010 was primarily the result of a $0.5 million increase
in bad debt provision and a $0.5 million increase in depreciation.




Selling Expenses.Selling expenses
increased from $3.8 million for the three months ended September 30, 2009 to
$5.4 million for the three months ended September 30, 2010, which represented an
increase of $1.6 million, or approximately 42%. The increase
in selling expenses was primarily the result of our increased sales of pork
and pork products and was primarily due to a $1.0 million increase in
advertising cost and a $0.4 million increase in salaries. As a
percentage of revenues, selling expenses increased from 1.9% for the three
months ended September 30, 2009 to 2.2% for the three months ended
September 30, 2010.




Interest Expense(net of interest incomeand interest
capitalization). Interest expense net of
interest income increased from $1.7 million for the three months ended
September 30, 2009 to $2.4 million for the three months ended
September 30, 2010, which represented an increase of $0.7 million, or
approximately 41%. The increase in interest expense was primarily the result of
an increase of $35.7 million in long-term bank loans and an increase of $3.2
million in short-term bank loans.




Other Incomeand Government Subsidies. Other
income and government subsidies increased from $0.1 million for the three months
ended September 30, 2009 to $2.2 million for the three months ended
September 30, 2010, which represented an increase of $2.1 million. This increase
was primarily the result of an increase of $1.0 million in government subsidies
and an increase of $1.1 million in other income, which is due to the reversal of
a tax payable accrued from the sale-leaseback transactions in the year ended
December 31, 2009 due to the government policy changes.  The changes in
government subsidies are discussed in Note 11 of Notes to Consolidated
Financial Statements.




Income Taxes. The effective
tax rate in the PRC on income generated from the sale of prepared products is
25% and there is no income tax on income generated from the sale of raw
products, including raw meat products and raw fruits and vegetable products. The
increase of $0.3 million in the provision for income taxes for the three
months ended September 30, 2010 over the three months ended
September 30, 2009 resulted from the increase in revenue from prepared
meat products.




Comparison ofNineMonths EndedSeptember30, 2010and 2009




Revenue. Total revenue
increased from $510.5 million for the nine months ended September 30,
2009 to $660.4 million for the nine months ended September 30, 2010, which
represented an increase of $149.9 million, or approximately 29%. The increase in
revenues during the first nine months of 2010 was primarily due to
increased sales volume in our meat and meat products divisions resulting from
the effects of the continuing increases in the number of our retail channels,
geographic expansion and increased sales to chain restaurants, food service
providers and wholesalers and distributors in the PRC.  The following table
presents certain information regarding our sales by product division for the
nine months ended September 30, 2010 and 2009.


27





Sales by Division
                          (unaudited)NineMonthsEnded
                          September30,2010
                        
                        
                        NineMonthsEnded
                          September30,2009Metric
                          Tons
                        
                        
                        Sales
                          Revenues
                          (inmillions)
                        
                        
                        Average
                          Price/
                          Metric
                          Ton
                        
                        
                        Metric
                          Tons
                        
                        
                        Sales
                          Revenues
                          (inmillions)
                        
                        
                        Average
                          Price/
                          Metric
                          TonPork
      and Pork ProductsChilled
      pork
                        
                        
                        197,515
                        
                        
                        $
                        359.7
                        
                        
                        $
                        1,821
                        
                        
                        
                        153,767
                        
                        
                        $
                        277.6
                        
                        
                        $
                        1,805Frozen
      pork
                        
                        
                        110,360
                        
                        
                        
                        176.0
                        
                        
                        
                        1,595
                        
                        
                        
                        95,274
                        
                        
                        
                        159.6
                        
                        
                        
                        1,675Prepared
      pork products
                        
                        
                        53,846
                        
                        
                        
                        111.7
                        
                        
                        
                        2,074
                        
                        
                        
                        29,806
                        
                        
                        
                        64.8
                        
                        
                        
                        2,174Vegetables
      and Fruits
                        
                        
                        15,787
                        
                        
                        
                        13.0
                        
                        
                        
                        823
                        
                        
                        
                        11,111
                        
                        
                        
                        8.5
                        
                        
                        
                        765Total
                        
                        
                        377,508
                        
                        
                        $
                        660.4
                        
                        
                        $
                        1,749
                        
                        
                        
                        289,958
                        
                        
                        $
                        510.5
                        
                        
                        $
                        1,761




The pork
market in China is highly fragmented and in the markets in which we
sell our products no single supplier has a significant impact on
the market price of pork or related pork products. We have been pricing our
products based on the value of our brand, the quality of our products, hog
prices in the applicable period and pricing trends for similar products in the
regions in which we operate.




In the
first nine months of 2010, we increased our sales of chilled pork products
by approximately $82.1 million over the amount of our sales of such
products in the first nine months of 2009. As shown in the table above, our
average price during the first nine months of 2010 was approximately $1,821 per
metric ton for chilled pork, compared to $1,805 during the first nine months of
2009, an increase of 1%.  The number of metric tons of chilled pork sold
during the first nine months of 2010 increased by 43,748, or 28% from the first
nine months of 2009.  Our total revenue increased primarily due to
successful capacity expansion, increased sales to existing customers, and
significantly increased volume of sales of our products as we entered new
geographic markets, expanded our points of sales and acquired new customers, and
partially due to the slight increase in average price in the first nine months
of 2010 as a result of market fluctuations.





In the
first nine months of 2010, we increased our sales of frozen pork products by
approximately $16.4 million over the amount of our sales of such products in the
first nine months of 2009. Our average price during the first nine months of
2010 was approximately $1,595 per metric ton for frozen pork compared to $1,675
during the first nine months of 2009, a decrease of 5%.  The number of
metric tons of frozen pork sold during the first nine months of 2010 increased
by 15,086, or 16% from the first nine months of 2009.  Despite the decrease
in average price in the first nine months of 2010 as a result of market
fluctuations, our total revenue still increased due to successful capacity
expansion, increased sales to existing customers, and significantly increased
volume of sales of our products as we entered new geographic markets, expanded
our points of sales and acquired new customers.





In the
first nine months of 2010, we increased our sales of prepared pork products by
approximately $46.9 million over the amount of our sales of such products in the
first nine months of 2009. Our average price during the first nine months of
2010 was approximately $2,074 per metric ton for prepared pork products compared
to $2,174 during the first nine months of 2009, a decrease of 5%. The number of
metric tons of prepared pork products sold during the first nine months of 2010
increased by 24,040, or 81% from the first nine months of 2009.  This
product division is becoming more important to our business as customers
increasingly demand prepared pork products and are willing to pay higher average
prices for the convenience of such products.. We plan to gradually increase
sales from prepared pork products by building up our brand recognition and
expanding our capacities for this division.





The
following table shows our revenues by distribution channel for the first nine
months of 2010 and 2009, respectively.




Sales by Distribution Channel
                        (Dollars in millions)
                        (unaudited)NineMonthsEnded
                        September30,
                      
                      
                      Net
                      
                      
                      Percentage2010
                      
                      
                      2009
                      
                      
                      Change
                      
                      
                      of ChangeRetail
      channels
                      
                      $
                      262.3
                      
                      
                      $
                      216.1
                      
                      
                      $
                      46.2
                      
                      
                      
                      21
                      %Wholesalers
      and distributors
                      
                      
                      208.9
                      
                      
                      
                      152.3
                      
                      
                      
                      56.6
                      
                      
                      
                      37
                      %Restaurants
      and food services
                      
                      
                      182.3
                      
                      
                      
                      137.6
                      
                      
                      
                      44.7
                      
                      
                      
                      32
                      %Export
                      
                      
                      6.9
                      
                      
                      
                      4.5
                      
                      
                      
                      2.4
                      
                      
                      
                      53
                      %Total
                      
                      $
                      660.4
                      
                      
                      $
                      510.5
                      
                      
                      $
                      149.9
                      
                      
                      
                      29
                      %




28


The
increase in sales to different distribution channels was mainly due to the
following factors: (i) our production capacity has increased since our Tianjin
production facilities commenced production in early 2010, our pork oil facility
commenced production in April 2010, and the expansion of our Anyang production
facilities was completed in August 2010; (ii) we have built up our brand image
and recognition through advertisements on China Central TV and local television
and by product promotions; (iii) we have increased the number of stores and
other channels through which we sell our products and we have improved the
efficiency of these stores; and (iv) we believe consumers are placing
increased importance on food safety and are willing to pay higher prices for
safe food products, such as our products.




During
the nine months ended September 30, 2010, revenues from export sales
increased to $6.9 million, which represented an increase of $2.4
million, or approximately 53%, as compared with the nine months ended
September 30, 2009.




Cost of Sales.Our cost of
sales increased from $448.7 million for the nine months ended
September 30, 2009 to $582.9 million for the nine months
ended September 30, 2010, which represented an increase of $134.2 million,
or approximately 30%. Our cost of sales primarily includes our costs of raw
materials, labor costs and overhead. Of our total cost of sales, our cost of raw
materials typically accounts for approximately 96%, our overhead typically
accounts for 2.5% and our labor costs typically accounts for 1.5%, with slight
variations from period to period. All of our meat products are derived from the
same raw materials, which are live hogs. Our vegetable and fruit products are
purchased from farmers located close to our processing facility in Changge City,
Henan province. As a result, the purchasing costs of live hogs and vegetables
and fruits represent substantially all of our costs of raw materials. The
increase in our cost of sales was consistent with our increase in sales
revenue.




Cost of Sales by Division
                          (unaudited)NineMonthsEndedSeptember30,2010
                        
                        
                        NineMonthsEndedSeptember30,2009Metric
                          Tons
                        
                        
                        Costof
                          Sales
                          (inmillions)
                        
                        
                        Average
                          Price/
                          MetricTon
                        
                        
                        Metric
                          Tons
                        
                        
                        Costof
                          Sales
                          (inmillions)
                        
                        
                        Average
                          Price/
                          MetricTonPork
      and Pork ProductsChilled
      pork
                        
                        
                        197,515
                        
                        
                        $
                        320.3
                        
                        
                        $
                        1,622
                        
                        
                        
                        153,767
                        
                        
                        $
                        246.8
                        
                        
                        $
                        1,605Frozen
      pork
                        
                        
                        110,360
                        
                        
                        
                        162.2
                        
                        
                        
                        1,470
                        
                        
                        
                        95,274
                        
                        
                        
                        146.2
                        
                        
                        
                        1,535Prepared
      pork products
                        
                        
                        53,846
                        
                        
                        
                        89.6
                        
                        
                        
                        1,664
                        
                        
                        
                        29,806
                        
                        
                        
                        48.6
                        
                        
                        
                        1,631Vegetables
      and Fruits
                        
                        
                        15,787
                        
                        
                        
                        10.8
                        
                        
                        
                        684
                        
                        
                        
                        11,111
                        
                        
                        
                        7.1
                        
                        
                        
                        639Total
                        
                        
                        377,508
                        
                        
                        $
                        582.9
                        
                        
                        $
                        1,544
                        
                        
                        
                        289,958
                        
                        
                        $
                        448.7
                        
                        
                        $
                        1,547




Our gross
profit margin (gross profit divided by sales revenue) decreased from 12.1% for
the nine months ended September 30, 2009 to 11.7% for the nine months ended
September 30, 2010. The decrease in our gross margin during the first nine
months of 2010 was primarily due to (i) the percentage increase in
pork prices being less than the percentage increase in hog prices in the
nine months ended September 30, 2010, which is the main part of cost of sales,
(ii) we are not able to adjust the selling price of our frozen and prepared pork
products as frequently as we can for our chilled pork products, so in the
nine months ended September 30, 2010, while hog prices increased, the margins of
prepared and frozen products grew smaller, and (iii) our strategic decision to
take steps to increase our market share and utilization rate of our production
capacity at a time when our production capacity increased due to the opening of
new production facilities.  As a result, our gross profit margin was lower
than the level we would expect to achieve once we fully integrate our new
production facilities and expand into new regional markets for our products.
 We intend to adjust our production levels and product mix and the
percentages of our sales through our different sales channels in the coming
quarters to increase our gross profit margin.


29


General and Administrative
Expenses. General and administrative expenses increased from $13.3
million for the nine months ended September 30, 2009 to $17.8 million
for the nine months ended September 30, 2010, which represented
an increase of $4.5 million, or approximately 34%.   As a
percentage of revenues, general and administrative expenses increased from 2.6%
for the nine months ended September 30, 2009 to 2.7% for the nine
months ended September 30, 2010.




The
increase in general and administrative expenses during the nine months
ended September 30, 2010 was primarily the result of a $0.6 million
increase in salary expense due to the expansion of our business, which required
us to hire more employees. Also the increase was the result of a $1.3 million
increase in depreciation, a $0.6 million increase in training expenses and a
$0.9 million increase in bad debt provision due to a higher accounts
receivable balance due to a higher volume of sales.




Selling Expenses.Selling
expenses increased from $9.3 million for the nine months ended
September 30, 2009 to $14.4 million for the nine months ended
September 30, 2010, which represented an increase of $5.1 million, or
approximately 55%. The increase in selling expenses was primarily due to
the increase in sales of pork and pork products and was primarily due to a $2.5
million increase in advertising and promotional fees, a $1.1 million increase in
salaries and a $0.9 million increase in transportation fees. As a percentage of
revenues, selling expenses increased from 1.8% for the
nine months ended September 30, 2009 to 2.2% for the nine months ended
September 30, 2010.




Impairment Loss. Impairment
loss for the nine months ended September 30, 2010 is $1.0 million, compared to
nil for the nine months ended September 30, 2009. The increase is due to the
write-off of the value added tax (“VAT”) recoverable from the Heilongjiang
facility. We terminated the lease of that facility at the end of 2008. We
determined that the recoverability of the VAT is not likely because there has
been no operation in Heilongjiang Zhongpin Food Company Limited since the
termination of the lease.




Interest Expense(net of interest incomeand interest
capitalization). Interest expense net of
interest income increased from $4.5 million for the nine months ended
September 30, 2009 to $5.7 million for the nine months ended
September 30, 2010, which represented an increase of $1.2 million, or
approximately 27%. The increase in interest expense was primarily the result of
an increase of $35.7 million in long-term bank loans and an increase of $3.2
million in short-term bank loans.




Other Incomeand Government Subsidies.
Other income and government subsidies increased from $0.6 million for the nine
months ended September 30, 2009 to $4.7 million for the
nine months ended September 30, 2010, which represented an increase of
$4.1 million. This increase was primarily the result of an increase of $2.6
million in government subsidies and an increase of $1.1 million in other income,
which is due to the reversal of a tax payable accrued from the
sale-leaseback transactions in the year ended December 31, 2009 due to the
government policy changes.




Income Taxes. The effective
tax rate in the PRC on income generated from the sale of prepared products is
25% and there is no income tax on income generated from the sale of raw
products, including raw meat products and raw fruits and vegetable products. The
increase of $0.8 million in the provision for income taxes for
the nine months ended September 30, 2010 over the nine months
ended September 30, 2009 resulted from the increase in revenue from
prepared meat products.




Segment
Information




Under
generally accepted accounting principles in the United States, we operate in
only one segment: meat production.  Our fruits and vegetables operations,
both financially and operationally, do not represent a significant enough
portion of our business to constitute a separate segment.  However, our
product lines have been divided into two divisions: pork and pork products, and
vegetables and fruits.




Our pork
and pork products division is involved primarily in the processing of live hogs
into fresh, frozen and processed pork products. Our pork and pork products
division markets its products domestically to our branded stores, food
retailers, food service distributors, restaurant operators and
noncommercial foodservice establishments, such as schools, hotel chains,
healthcare facilities, the military and other food processors, as well as to
international markets.


30


Our
vegetables and fruits division is involved primarily in the processing of fresh
vegetables and fruits. We contract with more than 100 farms in Henan province
and nearby areas to produce high-quality vegetable varieties and fruits suitable
for export. The proximity of the contracted farms to our operations ensures
freshness from harvest to processing. We contract to grow more than 34
categories of vegetables and fruits, including asparagus, sweet corn, broccoli,
mushrooms, lima beans, strawberries and capsicum.




The
following tables show our sales volume and the production volume in metric tons
by product division for the three-month and nine-month periods ended September
30, 2010 and 2009.




Sales by Division
                  (in metric tons)ThreeMonthsEnded
                  September30,
                
                
                NineMonthsEnded
                  September30,2010
                
                
                2009
                
                
                2010
                
                
                2009(Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)Pork
      and Pork ProductsChilled
      pork
                
                
                61,897
                
                
                
                58,182
                
                
                
                197,515
                
                
                
                153,767Frozen
      pork
                
                
                38,431
                
                
                
                34,967
                
                
                
                110,360
                
                
                
                95,274Prepared
      pork products
                
                
                19,052
                
                
                
                10,086
                
                
                
                53,846
                
                
                
                29,806Vegetable
      and Fruits
                
                
                6,495
                
                
                
                5,735
                
                
                
                15,787
                
                
                
                11,111Total
                
                
                125,875
                
                
                
                108,970
                
                
                
                377,508
                
                
                
                289,958





Production by Division
                      (in metric tons)ThreeMonthsEnded
                      September30,
                    
                    
                    NineMonthsEnded
                      September30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)Pork
      and Pork ProductsChilled
      pork
                    
                    
                    61,835
                    
                    
                    
                    57,840
                    
                    
                    
                    197,252
                    
                    
                    
                    153,678Frozen
      pork
                    
                    
                    37,071
                    
                    
                    
                    36,793
                    
                    
                    
                    122,864
                    
                    
                    
                    107,038Prepared
      pork products
                    
                    
                    19,793
                    
                    
                    
                    9,654
                    
                    
                    
                    54,167
                    
                    
                    
                    31,026Vegetable
      and Fruits
                    
                    
                    6,229
                    
                    
                    
                    6,637
                    
                    
                    
                    14,803
                    
                    
                    
                    12,143Total
                    
                    
                    124,928
                    
                    
                    
                    110,924
                    
                    
                    
                    389,086
                    
                    
                    
                    303,885




Additional
Operating Data




In
assessing our existing operations and planning our future growth and the
development of our business, management considers, among other factors, our
revenue growth and growth in sales volume by market segment, as well as our
sales by distribution channel and geographic market coverage.


31


The
following table sets forth information with respect to the number of products we
offered, the number of stores in our retail network and the number of provinces
and cities in the PRC in which we offered and sold our products at September 30,
2010 and December 31, 2009, 2008 and 2007.




December 31,September 30, 2010
                
                
                2009
                
                
                2008
                
                
                2007Number
      of products
                
                
                417
                
                
                
                392
                
                
                
                314
                
                
                
                270Number
      of retail stores
                
                
                3,285
                
                
                
                3,205
                
                
                
                3,061
                
                
                
                2,939Expansion
      of Market CoverageNumber
      of provinces
                
                
                24
                
                
                
                24
                
                
                
                24
                
                
                
                24Number
      of first-tier cities
                
                
                29
                
                
                
                29
                
                
                
                29
                
                
                
                29Number
      of second-tier cities
                
                
                128
                
                
                
                120
                
                
                
                106
                
                
                
                93Number
      of third-tier cities
                
                
                415
                
                
                
                383
                
                
                
                324
                
                
                
                287




Liquidity
and Capital Resources




At
September 30, 2010 and December 31, 2009, we had cash and cash equivalents of
$62.4 million and $69.0 million, respectively. At September 30, 2010, we
had working capital of approximately $21.7 million.




We have
established and implemented corporate policies to manage our cash flows
generated by our operating activities.  We have established strict credit
policies to manage the credit we give to our customers, and we give different
credit terms to different types of customers in different sales channels.
 For supermarket customers, the credit terms are generally two to four
weeks.  For showcase stores and branded stores, the credit terms are
generally cash sales within one week.  For food distributors, the credit
terms are generally two weeks.  For restaurants and non-commercial
customers, the credit terms are from one week to one month.  These credit
terms are subject to negotiation if requested by our customers, but any
adjustment must be approved by designated management.  In general, we ask
for credit terms from our suppliers.  We generally pay for the hogs we
purchase within one week after the hogs pass our health and quality
examinations.




For the
nine months ended September 30, 2010, net cash provided by operating
activities was $20.6 million, which represented a decrease of $1.6 million
as compared to the net cash provided by operating activities of $22.2 million
for the same period of 2009.  The decrease was primarily due to a $14.0
million decrease in cash flow from operating assets and liabilities, which
was partly offset by a $6.6 million increase in net income and a
$5.9 million increase in non-cash items.  Of the non-cash items,
depreciation and amortization accounted for $4.1 million of change due to
the fact that more plants, equipment and machinery were put into
use.




Cash flow
from changes in operating assets and liabilities decreased approximately
$14.0 million, as compared to the negative cash flow of $18.5 million from
changes in operating assets and liabilities for the same period of the prior
year. Of the $14.0 million decrease, $10.4 million was attributable to
the change of cash flow from accounts receivable due to the fact that the volume
of sales in the nine months ended September 30, 2010 was significantly
higher compared to the same period of the prior year, and $4.4 million was
attributable to the change on allowance receivable. The central government
granted us this amount of allowance because we helped the government in building
government reserves last year. We expected to receive this allowance when the
government finishes certain procedures during the fourth quarter of this
year.




Net cash
used in investing activities was $95.9 million for the nine months ended
September 30, 2010, which represented an increase of $12.3
million as compared to the net cash of $83.6 million used by investing
activities for the same period of the prior year. We spent
$12.9 million more on restricted cash so that we can issue bank
notes and use these notes to pay to suppliers, $16.6 million less on land
use rights and $16.0 million more on purchase deposit for land use rights during
the first nine months of 2010 compared to the same period of
2009.


32


Net cash
provided by financing activities was $67.5 million during the nine months ended
September 30, 2010, an increase of $21.1 million compared to the net cash
provided by financing activities of $46.4 million for the same period of the
prior year.  We had net proceeds of $10.3 million
for short-term bank loans and received $39.4 million in net proceeds
from long-term bank loans during the current period. We optimized our balance
sheet by borrowing more long-term bank loans and less short-term
loans.




At
September 30, 2010, Henan Zhongpin had short-term and long-term bank and
governmental loans in the aggregate amount of $187.1 million with interest rates
ranging from 4.78% to 5.76% per annum, as shown below.




Bank
                                                      
                                                      Maximum
                                                        Credit
                                                        Availability
                                                      
                                                      
                                                      Amount
                                                        Borrowed
                                                      
                                                      
                                                      InterestRate
                                                      
                                                      MaturityDateShort-term
      LoansIndustrial
      and Commercial Bank of China
                                                      
                                                      $
                                                      22,384,385
                                                      
                                                      
                                                      $
                                                      4,476,877
                                                      
                                                      
                                                      
                                                      4.86
                                                      %
                                                      12/15/2010China
      Everbright Bank
                                                      
                                                      
                                                      7,461,462
                                                      
                                                      
                                                      
                                                      —Bank
      of Luoyang
                                                      
                                                      
                                                      4,476,877
                                                      
                                                      
                                                      
                                                      4,476,877
                                                      
                                                      
                                                      
                                                      5.31
                                                      %
                                                      01/17/2011Bank
      of Communications
                                                      
                                                      
                                                      5,969,169
                                                      
                                                      
                                                      
                                                      —China
      Construction Bank
                                                      
                                                      
                                                      29,845,846
                                                      
                                                      
                                                      
                                                      7,461,462
                                                      
                                                      
                                                      
                                                      5.04
                                                      %
                                                      07/25/2011China
      CITIC Bank
                                                      
                                                      
                                                      46,261,062
                                                      
                                                      
                                                      
                                                      4,476,877
                                                      
                                                      
                                                      
                                                      5.31
                                                      %
                                                      01/19/20114,476,877
                                                      
                                                      
                                                      
                                                      5.31
                                                      %
                                                      06/25/2011Agriculture
      Development Bank of China
                                                      
                                                      
                                                      104,460,462
                                                      
                                                      
                                                      
                                                      6,282,157
                                                      
                                                      
                                                      
                                                      4.86
                                                      %
                                                      12/27/20109,252,212
                                                      
                                                      
                                                      
                                                      5.31
                                                      %
                                                      12/30/20106,969,005
                                                      
                                                      
                                                      
                                                      5.31
                                                      %
                                                      12/28/20107,364,463
                                                      
                                                      
                                                      
                                                      5.31
                                                      %
                                                      07/08/20112,984,585
                                                      
                                                      
                                                      
                                                      5.31
                                                      %
                                                      09/28/2011Shanghai
      Pudong development Bank of China
                                                      
                                                      
                                                      17,907,508
                                                      
                                                      
                                                      
                                                      —China
      Minsheng Bank
                                                      
                                                      
                                                      7,461,462
                                                      
                                                      
                                                      
                                                      —Bank
      of China
                                                      
                                                      
                                                      14,922,923
                                                      
                                                      
                                                      
                                                      —China
      Merchants Bank
                                                      
                                                      
                                                      41,784,185
                                                      
                                                      
                                                      
                                                      4,476,877
                                                      
                                                      
                                                      
                                                      5.31
                                                      %
                                                      08/31/20114,476,877
                                                      
                                                      
                                                      
                                                      5.31
                                                      %
                                                      02/01/20116,715,314
                                                      
                                                      
                                                      
                                                      5.31
                                                      %
                                                      07/30/20112,238,438
                                                      
                                                      
                                                      
                                                      5.31
                                                      %
                                                      08/10/2011Guangdong
      Development Bank
                                                      
                                                      
                                                      10,446,046
                                                      
                                                      
                                                      
                                                      —Xuchang
      Commercial Bank
                                                      
                                                      
                                                      4,476,877
                                                      
                                                      
                                                      
                                                      2,984,585
                                                      
                                                      
                                                      
                                                      4.78
                                                      %
                                                      05/11/2011Rabobank
      Nederland
                                                      
                                                      
                                                      14,922,923
                                                      
                                                      
                                                      
                                                      2,984,585
                                                      
                                                      
                                                      
                                                      5.31
                                                      %
                                                      05/28/2010Zhongyuan
      Trust Co., Ltd.
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      17,907,508
                                                      
                                                      
                                                      
                                                      5.04
                                                      %
                                                      03/31/2011




33





Bank
                                                            
                                                            Maximum
                                                              Credit
                                                              Availability
                                                            
                                                            
                                                            Amount
                                                              Borrowed
                                                            
                                                            
                                                            InterestRate
                                                            
                                                            MaturityDateCity
      Finance –short-term
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            29,845
                                                            
                                                            
                                                            
                                                            0.00
                                                            %
                                                            ExtendableTotal
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            100,035,421Long-term
      Loan - Current portionCanadian
      Government Transfer Loan
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            145,670
                                                            
                                                            
                                                            
                                                            6.02
                                                            %
                                                            11/15/2010China
      Construction Bank
                                                            
                                                            
                                                            29,845,846
                                                            
                                                            
                                                            
                                                            7,461,462
                                                            
                                                            
                                                            
                                                            5.40
                                                            %
                                                            06/10/2011Rabobank
      Nederland
                                                            
                                                            
                                                            14,922,923
                                                            
                                                            
                                                            
                                                            2,984,585
                                                            
                                                            
                                                            
                                                            5.40
                                                            %
                                                            06/15/20115,969,169
                                                            
                                                            
                                                            
                                                            5.40
                                                            %
                                                            07/09/2011Agriculture
      Bank of China
                                                            
                                                            
                                                            119,383,385
                                                            
                                                            
                                                            
                                                            1,193,834
                                                            
                                                            
                                                            
                                                            5.76
                                                            %
                                                            03/18/2011Total
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            17,754,720Long-term
      LoansChina
      Construction Bank
                                                            
                                                            
                                                            29,845,846
                                                            
                                                            
                                                            
                                                            5,969,169
                                                            
                                                            
                                                            
                                                            4.86
                                                            %
                                                            06/29/2013Agriculture
      Bank of China
                                                            
                                                            
                                                            119,383,385
                                                            
                                                            
                                                            
                                                            1,492,293
                                                            
                                                            
                                                            
                                                            5.76
                                                            %
                                                            03/18/2012746,146
                                                            
                                                            
                                                            
                                                            5.76
                                                            %
                                                            09/17/201210,595,275
                                                            
                                                            
                                                            
                                                            5.40
                                                            %
                                                            02/03/20131,492,293
                                                            
                                                            
                                                            
                                                            5.76
                                                            %
                                                            03/18/2013746,146
                                                            
                                                            
                                                            
                                                            5.76
                                                            %
                                                            09/17/20131,492,293
                                                            
                                                            
                                                            
                                                            5.76
                                                            %
                                                            03/18/20149,699,900
                                                            
                                                            
                                                            
                                                            5.76
                                                            %
                                                            12/17/201412,684,484
                                                            
                                                            
                                                            
                                                            5.76
                                                            %
                                                            12/27/20147,461,462
                                                            
                                                            
                                                            
                                                            5.76
                                                            %
                                                            07/11/2015China
      Merchants Bank
                                                            
                                                            
                                                            37,307,308
                                                            
                                                            
                                                            
                                                            14,176,776
                                                            
                                                            
                                                            
                                                            5.76
                                                            %
                                                            11/26/2014Changge
      Old Town
                                                            
                                                            
                                                            1,522,857
                                                            
                                                            
                                                            
                                                            1,522,857
                                                            
                                                            
                                                            
                                                            7.00
                                                            %
                                                            ExtendableCanadian
      Government Transfer Loan
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            1,270,593
                                                            
                                                            
                                                            
                                                            *
                                                            
                                                            05/15/2042Total
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            69,349,687





* 17% of
the principal amount of this loan bears interest at the rate of 6.02% per annum
and the remaining principal amount of this loan is interest free.  All
repayments are applied first to the interest-bearing portion of this
loan.




Of our
outstanding short-term loans at September 30, 2010, $16.2 million aggregate
principal amount of loans was secured by our land and plants located in the PRC
and $16.4 million aggregate principal amount of loans was guaranteed by Henan
Huanghe Enterprises Group Co., Ltd., a group corporation based in Henan province
that is not affiliated with our company or with any of our subsidiaries
(“Huanghe Group”).





In
September 2010, Henan Zhongpin entered into a loan agreement with Agriculture
Bank of China pursuant to which Henan Zhongpin borrowed RMB 75 million ($11.2
million). All amounts borrowed under the loan agreement bear interest at a
floating rate that is based on the prime rate published by the People’s Bank of
China for loans with the same or similar terms on the drawdown date (5.76% per
annum on September 30, 2010) and are payable in installments on March 18, 2012,
2013 and 2014 and December 27, 2014.  Borrowings under the loan
agreement are guaranteed by Yongcheng Zhongpin Food Company
Limited.




In June
2010, in connection with the purchase of a piece of land from Changge Old Town,
Henan Zhongpin entered into an agreement with Changge Old Town, which provided
that instead of accepting payment of the purchase price of RMB 10.2 million
($1.5 million), Changge Old Town extended a loan to Henan Zhongpin with a
principal amount equal to the purchase price and bearing interest at the rate of
7.00% per annum payable on the date of the agreement and each anniversary
thereafter.  Such loan does not have a fixed term and the principal amount
of the loan should be repaid by Henan Zhongpin upon six months prior written
notice of Changge Old Town.


34


In June
2010, Henan Zhongpin entered into a loan agreement with China Construction Bank
pursuant to which Henan Zhongpin borrowed RMB 40 million ($6.0 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (4.86% per annum on
September 30, 2010) and are payable on June 29, 2013.  Borrowings under the
loan agreement are guaranteed by the land use right, property and plant of Henan
Zhongpin.





In March
2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of
China pursuant to which Henan Zhongpin borrowed RMB 53 million
($7.9 million). All amounts borrowed under the loan agreement bear interest
at a floating rate that is based on the prime rate published by the People’s
Bank of China for loans with the same or similar terms on the drawdown date
(5.76% per annum on September 30, 2010) and are payable in installments on
March 18, 2012, 2013 and 2014 and December 27, 2014. Borrowings under the
loan agreement are guaranteed by the land use right, property and plant of
Luoyang Zhongpin.





In March
2010, Henan Zhongpin entered into a loan agreement with China Merchants Bank
pursuant to which Henan Zhongpin borrowed RMB 47.5 million ($7.1 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.76% per annum on
September 30, 2010) and are payable on November 26, 2014.  Borrowings under
the loan agreement are guaranteed by Luoyang Zhongpin.





In
February 2010, Henan Zhongpin entered into a loan agreement with Agriculture
Bank of China pursuant to which Henan Zhongpin borrowed RMB 71 million
($10.6 million). All amounts borrowed under the loan agreement bear
interest at a floating rate that is based on the prime rate published by the
People’s Bank of China for loans with the same or similar terms on the drawdown
date (5.40% per annum on September 30, 2010) and are payable on February 3,
2013.  Borrowings under the loan agreement are guaranteed by the land use
right, property and plant of Luoyang Zhongpin.





In
December 2009, Henan Zhongpin entered into a loan agreement with Agriculture
Bank of China pursuant to which Henan Zhongpin borrowed RMB 70 million ($10.4
million). All amounts borrowed under the loan agreement bear interest at a
floating rate that is based on the prime rate published by the People’s Bank of
China for loans with the same or similar terms on the drawdown date (5.76% per
annum on September 30, 2010) and are payable on December 27, 2014. Borrowings
under the loan agreement are guaranteed by the land use right, property and
plant of Luoyang Zhongpin.





In
November 2009, Henan Zhongpin entered into a loan agreement with China Merchants
Bank pursuant to which Henan Zhongpin borrowed RMB 47.5 million
($7.1 million). All amounts borrowed under the loan agreement bear interest
at a floating rate that is based on the prime rate published by the People’s
Bank of China for loans with the same or similar terms on the drawdown date
(5.76% per annum on September 30, 2010) and are payable on November 26, 2014.
 Borrowings under the loan agreement are guaranteed by Luoyang
Zhongpin.





In
November 2009, Henan Zhongpin entered into a sale-leaseback agreement with CMB
Financial Leasing Co., Ltd. (“CMB Leasing”) pursuant to which we sold to CMB
Leasing equipment with a book net value of $8.3 million for $5.9 million and
leased such equipment back. The lease payments for this equipment are paid on a
monthly basis over a three-year period and consist of a fixed payment based upon
a 36-month amortization of the purchase price plus an interest component that is
based upon the rate announced from time to time by the People’s Bank of China
for three-year loans.  At September 30, 2010, the monthly rental fee under
the agreement was $528,049, which included an interest component calculated at
the rate of 4.91% per annum. Henan Zhongpin has the right at the end of the
lease term to repurchase all of the equipment for a nominal purchase
price.




In
November 2009, our subsidiary Luoyang Zhongpin Food Co., Ltd. entered into a
sale-leaseback agreement with CMB Leasing pursuant to which we sold to CMB
Leasing equipment with a book net value of $6.8 million for $4.4 million and
leased such equipment back. The lease payments for this equipment are paid on a
monthly basis over a three-year period and consist of a fixed payment based
upon a 36-month amortization of the purchase price plus an interest component
that is based upon the rate announced from time to time by the People’s Bank of
China for three-year loans.  At September 30, 2010, the monthly rental fee
under the agreement was $396,037, which included an interest component
calculated at the rate of 4.91% per annum. Henan Zhongpin has the right at the
end of the lease term to repurchase all of the equipment for a nominal purchase
price.


35





In
November 2009, our subsidiary Zhumadian Zhongpin Food Co., Ltd. entered into a
sale-leaseback agreement with De Lage Landen (China) Co., Ltd. (“De Lage
Landen”) pursuant to which we sold to De Lage Landen equipment with a book net
value of $5.9 million for $6.0 million and leased such equipment back. The lease
payments for this equipment are paid on a monthly basis over a three-year period
and consist of a fixed payment based upon a 36-month amortization of the
purchase price plus an interest component that is based upon the rate announced
from time to time by the People’s Bank of China for three-year loans.  At
September 30, 2010, the monthly rental fee under the agreement was $176,482,
which included an interest component calculated at the rate of 5.31% per annum.
Henan Zhongpin has the right at the end of the lease term to repurchase all of
the equipment for a nominal purchase price.





In June
2010, Henan Zhongpin entered into a mutual guarantee agreement with
Huanghe Group. Under the new agreement, Henan Zhongpin agreed to guarantee
bank loans of Huanghe Group in an amount up to RMB 150 million ($22.1 million)
and Huanghe Group agreed to guarantee Henan Zhongpin’s bank loans in an amount
up to RMB 150 million ($22.1 million). The agreement will expire in June 2011.
 At the expiration of the agreements, each party will remain obligated
under its guarantee for any loans of the other party that are outstanding on the
date of expiration of the agreements.  At September 30, 2010, Henan
Zhongpin had outstanding guarantees for $16.4 million of Huanghe Group’s bank
loans under the agreements.  All of the bank loans of Huanghe Group
guaranteed by Henan Zhongpin will mature within the next 12 months.





In June
2009, Henan Zhongpin entered into a loan agreement with China Construction Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.5 million).
All amounts borrowed under the loan agreement bear interest at a floating rate
that is based on the prime rate published by the People’s Bank of China for
loans with the same or similar terms on the drawdown date (5.40% per annum on
September 30, 2010) and are payable on June 10, 2011.  Borrowings under the
loan agreement are guaranteed by the land use right, property and plant of Henan
Zhongpin.





In May
2009, Henan Zhongpin entered into a loan agreement with China Minsheng Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.4 million).
All amounts borrowed under the loan agreement bear interest at a floating rate
that is based on the prime rate published by the People’s Bank of China for
loans with the same or similar terms on the drawdown date (5.40% per annum on
September 30, 2010) and are payable on May 6, 2011. Borrowings under the loan
agreement are guaranteed by our wholly-owned subsidiary, Yongcheng Zhongpin Food
Co., Ltd. In the third quarter of 2010, Henan Zhongpin paid back all loans and
terminated the loan agreement with China Minsheng Bank without any extra
cost.





In
November 2008, Henan Zhongpin entered into a sale-leaseback agreement with CMB
Leasing pursuant to which we sold to CMB Leasing equipment with a book net value
of $6.6 million for $4.6 million and leased such equipment back. The lease
payments for this equipment are paid on a monthly basis over a three-year period
and consist of a fixed payment based upon a 36-month amortization of the
purchase price plus an interest component that is based upon the rate announced
from time to time by the People’s Bank of China for three-year loans.  At
September 30, 2010, the monthly rental fee under the agreement was $138,859,
which included an interest component calculated at the rate of 5.40% per annum.
Henan Zhongpin has the right at the end of the lease term to repurchase all of
the equipment for a nominal purchase price.





In May
2008, Henan Zhongpin entered into a credit agreement with Rabobank Nederland
Shanghai Branch that provided for a three-year term loan of up to RMB 80 million
($11.9 million). On June 10, 2008, the first 50% of the long-term loan was
funded by the bank. The remaining 50% of the long-term loan was drawn down by
Henan Zhongpin on July 10, 2008. Amounts currently outstanding under the
long-term loan bear interest at the rate published by the People’s Bank of China
for loans with the same or similar terms (5.40% per annum on September 30,
2010). The accrued interest on this loan is payable on a quarterly basis. Of the
outstanding principal under the long-term loan, 25% is payable 24 months after
the first drawdown date (June 10, 2008), 37.5% is payable 30 months after the
first drawdown date and the balance is payable 36 months after the first
drawdown date. Henan Zhongpin repaid $2.9 million of the loan on June 10, 2010
and $9.0 million remained outstanding as of September 30, 2010.


36


Borrowings
under the term loan agreement are guaranteed by our subsidiaries, Anyang
Zhongpin Food Co., Ltd. and Zhumadian Zhongpin Food Co., Ltd., are secured by
mortgages on our prepared pork production facilities located in Changge City,
Henan province and are subject to various financial and non-financial covenants,
including a debt-to-net-worth ratio, a debt-to-EBITDA ratio, an interest
coverage ratio, a required minimum tangible net worth, restrictions on
investments in fixed assets and financial assets, on inter-company indebtedness
and on consolidated contingent liabilities and a requirement that a minimum
percentage of Henan Zhongpin’s consolidated EBITDA be generated by Henan
Zhongpin and the guarantors. Henan Zhongpin also is prohibited from paying
dividends in an amount in excess of 50% of its retained earnings during the term
of the credit facility. We are in compliance with both the financial and
non-financial covenants.





In May
2002, Henan Zhongpin entered into a loan agreement with Bank of Communications,
Zhengzhou Branch, which is the intermediary bank for a 40-year term loan in the
amount of $2,504,969 from the Canadian government. Under the terms of the loan
agreement, 58% of the principal amount ($1,452,882) of this loan bears interest
at the fixed rate of 6.02% per annum and remaining principal amount of this loan
is interest free. The loan is repayable in a fixed amount of $145,671, which
includes both principal and interest, that is payable on a semi-annual basis
through May 15, 2042. Borrowings under the loan agreement are guaranteed by the
Financing Department, Henan province.





We
believe our existing cash and cash equivalents, together with our available
lines of credit ($341.2 million at September 30, 2010), will be sufficient to
finance our investment in new facilities, operating requirements and anticipated
capital expenditures of approximately $105.8 million over the next 12 months. We
intend to use such funds over the next 12 months to fund our capacity expansion
and the construction of supporting facilities and to supplement our working
capital requirements to enable us to strengthen our market position and
accelerate our growth. We intend to satisfy our short-term debt obligations that
mature over the next 12 months through additional short-term bank loans, in most
cases by rolling the maturing loans into new short-term loans with the same
lenders as we have done in the past. We also we intend to optimize our loan
structure by replacing certain of our short-term indebtedness with additional
long-term debt.





Contractual
Obligations





For
information on our contractual obligations, please refer to Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Contractual Commitments.” as
presented in our Annual Report on Form 10-K for the fiscal year ended December
31, 2009.





Off-Balance
Sheet Arrangements





We do not
have off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.




Inflation
and Seasonality




While demand for our products in
general is relatively high before the Chinese New Year in January or February
each year and lower thereafter, we do not believe our operations have been
materially affected by inflation or seasonality.




Item
3.   Quantitative and Qualitative Disclosures About Market
Risk




Disclosures About Market
Risk. We may be exposed to changes in financial market conditions in the
normal course of business. Market risk generally represents the risk that losses
may occur as a result of movements in interest rates and equity prices. We
currently do not use financial instruments in the normal course of business that
are subject to changes in financial market conditions.


37


Currency Fluctuations and Foreign
Currency Risk. Substantially all of our operations are conducted in the
PRC, with the exception of our export business and limited overseas purchases of
raw materials.  Most of our sales and purchases are conducted within the
PRC in RMB, which is the official currency of the PRC.  As a result, the
effect of the fluctuations of exchange rates is considered minimal to our
business operations.




Substantially all of our revenues and
expenses are denominated in RMB. However, we use the U.S. dollar for financial
reporting purposes. Conversion of RMB into foreign currencies is regulated by
the People’s Bank of China through a unified floating exchange rate system.
Although the PRC government has stated its intention to support the value of
RMB, there can be no assurance that such exchange rate will not again become
volatile or that RMB will not devalue significantly against the U.S. dollar.
Exchange rate fluctuations may adversely affect the value, in U.S. dollar terms,
of our net assets and income derived from our operations in the
PRC.




Interest Rate Risk. We do not
have significant interest rate risk as the interest we pay on substantially all
of our debt obligations is calculated at a fixed rate in accordance with the
terms of such indebtedness.




Credit Risk. We have not
experienced significant credit risk, as most of our customers are long-term
customers with superior payment records. Our receivables are monitored regularly
by our credit managers.




Item
4.   Controls and Procedures




Our management, with the participation
of our chief executive officer and chief financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
“Exchange Act”)) as of the end of the period covered by this report.  Based
on such evaluation, our chief executive officer and chief financial officer
concluded that, as of the end of such period, our disclosure controls and
procedures were effective to ensure that information that we are required to
disclose in reports that we file or submit under the Exchange Act was recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms and accumulated and communicated to our management,
including our chief executive officer and chief financial officer, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.




There were no changes in our internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.


38




Part
II – Other Information




Item
1.   Legal Proceedings




None.




Item
1A.  Risk Factors




During the nine months ended September
30, 2010, there were no material changes to the risk factors previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2009.




Item
2.   Unregistered Sales of Equity Securities and Use of
Proceeds




(a)
            None.




(b)
            Not
      Applicable.




(c)
            None.




Item
3.   Defaults Upon Senior Securities




Not Applicable.




Item
4.   (Removed and Reserved)




Item
5.   Other Information




None.




Item
6.   Exhibits




The exhibits required by this item are
set forth on the Exhibit Index attached hereto.


39


Signatures




Pursuant to the requirements of the
Securities Exchange Act of 1934, we have duly caused this report to be signed on
our behalf by the undersigned thereunto duly authorized.




Date:  November
      9, 2010
              Zhongpin
      Inc.(Company)By:
              /s/ Xianfu ZhuXianfu
      ZhuChief
      Executive OfficerBy:
              /s/ Feng WangFeng
      WangChief
      Financial Officer




40


Exhibit
Index




Exhibit
                Number
              
              Exhibit Title31.1*
              
              Certification
      of our Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2*
              
              Certification
      of our Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1*
              
              Certification
      of our Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2*
              
              Certification
      of our Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.





*           Filed
herewith


41